As filed with the Securities and Exchange Commission on November 9, 1998
Registration No. 333-63931
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
Amendment No. 1 to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Metris Master Trust
(Issuer with respect to Offered Securities)
Metris Receivables, Inc.
(Originator of the Trust described herein)
(Exact name of registrant as specified in its charter)
Delaware 41-1810301
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
600 South Highway 169
Suite 300
St. Louis Park, MN 55426
(612) 417-5645
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Jill B. Barclift, Esq.
600 South Highway 169
Suite 1800
St. Louis Park, MN 55426
(612) 525-5090
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
Andrew M. Faulkner, Esq. Renwick Martin, Esq.
Skadden, Arps, Slate, Meagher Brown & Wood LLP
& Flom LLP One World Trade Center
919 Third Avenue 58th Floor
New York, NY 10022 New York, NY 10048
(212) 735-2853 (212) 839-5319
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable on or after the effective date of the Registration
Statement.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |-|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================
TITLE OF EACH
CLASS PROPOSED MAXIMUM
OF SECURITIES TO PROPOSED MAXIMUM AGGREGATE AMOUNT OF
BE AMOUNT TO BE OFFERING PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SECURITY (1) PRICE (1) FEE * (2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Floating Rate
Series 1998-2,
Class A........... $1,000,000 100% $1,000,000 $295
============================================================================================
</TABLE>
(1) Estimated solely for purpose of calculating the registration fee.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 9, 1998
Prospectus
Metris Master Trust
$__________ Floating Rate Asset Backed Securities,
Series 1998-3, Class A
Metris Receivables, Inc. Direct Merchants Credit Card Bank,
Transferor National Association
Servicer
------------------
Each of the Floating Rate Asset Backed Securities, Series 1998-3, Class
A (the "Class A Securities" 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(R) and VISA(R) or other revolving consumer
credit card accounts (the "Accounts"), all monies due or to become due in
payment of such Receivables, the benefit of funds on deposit in certain
accounts, including the Pre-Funding Account, and the benefits of a
Financial Guaranty Insurance Policy (the "Policy") issued by MBIA
Insurance Company ("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 113 herein.
(continued on next page)
Potential investors should consider, among other things, the
information set forth in "Risk Factors" beginning on page 29 herein.
------------------
THE OFFERED SECURITIES REPRESENT INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR RECOURSE OBLIGATIONS OF THE TRANSFEROR,
METRIS COMPANIES INC., DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL
ASSOCIATION OR ANY AFFILIATE THEREOF. AN OFFERED SECURITY IS NOT A DEPOSIT
AND NEITHER THE OFFERED SECURITIES NOR THE UNDERLYING ACCOUNTS OR
RECEIVABLES ARE INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================
Price to Underwriting Proceeds to
Public(1) Discount the Transferor(1)(2)
- ----------------------------------------------------------------------------
Per Class A Security... % % %
- ----------------------------------------------------------------------------
Total.................. $ $ $
============================================================================
(1)Plus accrued interest, if any, from , 1998.
(2)Before deduction of expenses estimated to be $ .
The Offered Securities are offered by the Underwriters as described
in "Underwriting," subject to prior sale, when, as and if issued to and
accepted by the Underwriters and subject to approval of certain legal
matters by counsel for the Underwriters. The Underwriters reserve the
right to reject orders in whole or in part. It is expected that the
Offered Securities will be delivered in book-entry form on or about , 1998
through the facilities of The Depository Trust Company, Cedel Bank,
societe anonyme and the Euroclear System.
Chase Securities Inc.
------------------
The date of this Prospectus is , 1998.
(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 , 1998 through ,
1998 at the rate of % per annum above the arithmetic mean of the London
interbank offered quotations for one-month United States dollar deposits
("LIBOR") as determined by the Trustee on , 1998, and with respect to each
Interest Accrual Period (as defined herein) thereafter, at a rate of % per
annum above LIBOR as determined by the Trustee on the related LIBOR
Determination Date (as defined herein). Interest with respect to the
Securities will be paid on , 1998 and on the th day of each month
thereafter (or, if any such th day is not a business day, the next
succeeding business day) (each, a "Distribution Date"). Principal with
respect to the Class A Securities is scheduled to be distributed on the
Distribution Date (the "Expected Final Payment Date"), but may be
distributed earlier or later under certain circumstances described herein.
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."
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 June 30, 1998 and for the
six month periods ending June 30, 1998 and June 30, 1997 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ending June 30,
1998 are hereby incorporated by reference into this Prospectus 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 Securities Exchange Act of 1934, as amended, 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 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."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus. Certain
capitalized terms used herein are defined in the "Glossary of Terms"
beginning on page 113 or elsewhere in this Prospectus. Unless the context
requires otherwise, certain capitalized terms, when used in this
Prospectus, relate only to the Securities and not to other securities
which may exist from time to time.
Offered Securities............... $ aggregate principal
amount of Class A Securities 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.......... $ aggregate principal amount
of Class B Securities, which will
initially be retained by the
Transferor, are being issued
concurrently with the Class A
Securities. 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. Concurrently with Series
1998-3, the Trust will issue Series
1998-2 Securities comprised of
$______ aggregate principal amount
of Floating Rate Asset Backed
Securities, Series 1998-2, Class A
and $_____ aggregate principal
amount of Asset Backed Securities,
Series 1998-2, Class B
(collectively, the "Series 1998-2").
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."
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.
Trust............................ Metris Master Trust (the "Trust") was
formed pursuant to the Pooling and
Servicing Agreement, which has been
supplemented by the Supplements
thereto relating to the Previously
Issued Series and will be
supplemented by the Series 1998-3
Supplement relating to the
Securities and the Supplements
applicable to any other Series that
may be issued in the future. See
"The Trust."
As more fully described below and
elsewhere herein, the Trust assets
include the Receivables (the
"Receivables") that arise under
certain MasterCard(R) and VISA(R)1
accounts and may arise under other
revolving consumer credit card
accounts (the "Accounts") and the
proceeds thereof arising under the
Accounts from time to time.
Collections on the Receivables are
deposited into the Collection
Account maintained in the name of
the Trust and allocated on each
business day between Collections on
Finance Charge Receivables ("Finance
Charge Collections") and Collections
received with respect to Principal
Receivables ("Principal
Collections"). Finance Charge
Collections and Principal
Collections are allocated on each
business day among the Transferor
Interest and the respective
interests of the securityholders of
each Series issued and outstanding
from time to time in accordance with
the Pooling and Servicing Agreement
and applicable Supplements. In
general, in accordance with such
allocations and the provisions of
the Pooling and Servicing Agreement
and the applicable Supplements, (i)
Finance Charge Collections and
certain other amounts are applied on
each business day to fund interest
on the securities of any Series then
outstanding, to pay certain fees and
expenses, to cover series default
amounts, to reimburse investor
charge-offs and 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 to the
securityholders of such Series are
paid to the holder of the
Exchangeable Transferor Security or,
with respect to amounts allocated to
any class of securities of such
Series which are not retained by the
Transferor, paid to the
securityholders of any other Series
then outstanding. See "Description
of the Offered Securities--Application
of Collections--Payment of Fees,
Interest and Other Items."
- --------------------
(1) MasterCard(R) and VISA(R) are federally registered servicemarks of
MasterCard International Inc. and VISA USA Incorporated, respectively.
Trust Assets..................... The Trust assets include (i) all
Receivables generated or acquired
from time to time by Direct
Merchants Bank satisfying certain
criteria described herein (see
"Description of the Offered
Securities--Eligible Receivables"),
(ii) all funds to be collected from
Obligors in respect of the
Receivables (which shall not include
fees and charges for insurance and
insurance type products), (iii) the
benefits of a Financial Guarantee
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
Pre-Funding Account and the
Principal Funding Account, (vii)
Recoveries, and (viii) proceeds of
the foregoing. See "Description of
the Offered Securities
--Subordination of the Class B
Securities." 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.
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 "MBIA" in this
Prospectus.
Receivables...................... The Receivables consist of amounts owing
on MasterCard(R) credit cards and
VISA(R)credit cards and may include
amounts owing on other revolving
credit cards (see "Description of
the Offered Securities--Eligible
Receivables"). The Receivables in
the Trust are divided into two
components: Principal Receivables
and Finance Charge Receivables. At
any time, "Finance Charge
Receivables" means all amounts
billed from time to time to the
Obligors on any Account in respect
of Periodic Finance Charges,
overlimit fees, late charges,
returned check fees, annual
membership fees and annual service
charges, if any, transaction
charges, cash advance fees and
similar fees and charges (excluding
fees and charges for insurance and
insurance type products and
interchange fees), plus Recoveries,
investment earnings on amounts
credited to the Excess Funding
Account and Discount Option
Receivables, if any. "Principal
Receivables" equals all other
Eligible Receivables.
All new Receivables arising in the
Accounts are purchased by Metris
from Direct Merchants Bank pursuant
to the Bank Purchase Agreement and
subsequently are purchased by the
Transferor from Metris pursuant to
the Purchase Agreement and
thereafter will be automatically
transferred to the Trust.
Accordingly, the amount of
Receivables fluctuates from day to
day as new Receivables are generated
and as existing Receivables are
collected, charged off as
uncollectible, or otherwise
adjusted.
Collections...................... The Servicer deposits all collections of
Receivables in the Collection
Account ("Collections"). The
Collections on the Receivables
received on any business day are
allocated by the Servicer between
Principal Collections and Finance
Charge Collections in accordance
with the definitions thereof. All
such amounts are then applied in
accordance with the respective
interests of the Securityholders,
the securityholders of any other
Series, and the holder of the
Exchangeable Transferor Security in
the Principal Receivables and in the
Finance Charge Receivables in the
Trust. See "Description of the
Offered Securities--Allocation
Percentages."
Allocation of Trust Assets....... The right to receive payments from the
Trust's assets will be allocated
among the Class A Securityholders'
Interest, the Class B
Securityholders' Interest, the
interest of the securityholders of
the Previously Issued Series and any
other Series issued pursuant to the
Pooling and Servicing Agreement and
applicable Supplements, and the
Transferor Interest. The interest of
the securityholders of any class of
any Series in the assets of the
Trust will be limited to the
securityholders' interest for such
class and Series, and such
securityholders will not have any
recourse against any assets of the
Trust other than those allocated to
such securityholders' interest
pursuant to the Pooling and
Servicing Agreement and any
applicable Supplement. The
Transferor Interest represents the
right to the assets of the Trust not
allocated to the Securityholders'
Interest or the interest of the
securityholders of any other Series
issued pursuant to the Pooling and
Servicing Agreement and applicable
Supplements. The principal amount of
the Transferor Interest will
fluctuate as the amount of Principal
Receivables in the Trust, the
invested amount of each Series
(including the Variable Funding
Securities) and the amounts on
deposit in the Excess Funding
Account and the Pre-Funding Account
change from time to time. See
"Description of the Offered
Securities--General," "--Previously
Issued Series," "--Excess Funding
Account" and "--Pre-Funding
Account."
The Class A Securities will represent
the right to receive payments of
interest on the aggregate
outstanding principal amount of the
Class A Securities at the Class A
Interest Rate, the payment of
principal to the extent of the Class
A Invested Amount (which may be less
than the aggregate unpaid principal
amount of the Class A Securities, in
certain circumstances, if the Series
Default Amount exceeds funds
allocable thereto the Class B
Invested Amount is reduced to zero)
and amounts on deposit in the
Pre-Funding Account allocated to the
Class A Securities. See "Description
of the Offered
Securities--Subordination of the
Class B Securities," "--Pre-Funding
Account," "--Allocation Percentages"
and "--Investor Charge-Offs."
The Class B Securities will represent
the right to receive 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 , 1998 was
comprised of $ of Finance
Charge Receivables and $ of
Principal Receivables. The "Initial
Invested Amount" will be equal to
the sum of (i) an amount equal to
the initial principal balance of the
Class A Securities less the Class A
Percentage on the Closing Date of
the initial deposit to the
Pre-Funding Account, plus the Class
A Percentage of any withdrawals from
the Pre-Funding Account during the
Funding Period in connection with
increases in the aggregate amount of
Principal Receivables in the Trust;
and (ii) an amount equal to the
initial principal balance of the
Class B Securities. The Invested
Amount will, except as otherwise
provided herein, increase up to a
maximum amount of $ (the "Full
Invested Amount") during the Funding
Period, remain fixed at the Full
Invested Amount during the Revolving
Period and decline thereafter during
any Amortization Period or Early
Amortization Period as principal is
paid on the Securities. The Invested
Amount is subject to increase during
the Funding Period to the extent
amounts are withdrawn from the
Pre-Funding Account and paid to the
Transferor in connection with the
addition of Principal Receivables to
the Trust or, at the end of the
Funding Period, deposited in the
Excess Funding Account. During the
Accumulation Period, the Adjusted
Invested Amount will be reduced
concurrently with deposits to the
Principal Funding Account. The
aggregate principal amount of the
Securities, except as otherwise
provided herein, will remain fixed
at the initial amount thereof during
the period beginning on the Closing
Date and ending with the date on
which the first principal payment is
made with respect to the Securities
during any Amortization Period.
During the Controlled Amortization
Period, the Class B Invested Amount
may be reduced and the amount of the
Transferor Interest 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 (except for
Shared Principal Collections used to
make payments to other Series).
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 % per annum above LIBOR
(calculated as described under
"Description of the Offered
Securities--Interest Payments") as
determined on , 1998 for the period
from the Closing Date through , 1998
and on the related LIBOR
Determination Date for each Interest
Accrual Period thereafter (such
rate, as in effect from time to
time, the "Class A Interest Rate").
Interest on the Class A Securities
will be payable on , 1998 and on the
th day of each month thereafter or,
if such day is not a business day,
on the next succeeding business day
(each, a "Distribution Date"), in an
amount equal to (a) with respect to
the Class A Securities, the product
of (i) the actual number of days in
the related Interest Accrual Period
divided by 360, (ii) the Class A
Interest Rate for such Interest
Accrual Period and (iii) the
outstanding principal balance of the
Class A Securities as of the
preceding Record Date (or in the
case of the first Distribution Date,
the initial principal amount of
Class A Securities).
Interest payments on the Class A
Securities on each Distribution Date
will be funded from Available Series
Finance Charge Collections with
respect to the preceding Monthly
Period (or, with respect to the
first Distribution Date, such
Collections from and including the
Closing Date to and including , 1998
plus the amount of the initial
deposit to the Interest Funding
Account to be made on the Closing
Date) and from certain other funds
allocated as set forth in the
Pooling and Servicing Agreement to
the respective Classes of the
Securities and deposited on each
business day during such Monthly
Period in the Interest Funding
Account. See "Description of the
Offered Securities--Interest
Payments."
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.
Funding Period................... During the period from and including the
Closing Date to but excluding the
earlier of (x) the first day for
which the Invested Amount equals the
Full Invested Amount; (y) the first
day on which a Pay Out Event is
deemed to occur; and (z) the first
business day of the _________
Monthly Period (the "Funding
Period"), the Pre-Funded Amount will
be maintained in a trust account to
be established with The Bank of New
York (the "Pre-Funding Account").
The "Pre-Funded Amount" will equal
the amount of the initial deposit to
the Pre-Funding Account, less the
amounts of any increases in the
Invested Amount pursuant to the
Series 1998-3 Supplement in
connection with the increase in the
amount of Receivables in the Trust.
On the Closing Date a cash deposit
will be made to the Pre-Funding
Account such that the Amount of
Principal Receivables plus the
amount of such cash deposit on such
date will at least equal the sum of
the initial outstanding principal
balances of the Class A Securities,
the Class B Securities, and the then
current outstanding principal amount
of the Previously Issued Series.
Funds on deposit in the Pre-Funding
Account will be invested by the
Trustee at the direction of the
Servicer in Cash Equivalents.
During the Funding Period, funds on
deposit in the Pre-Funding Account
will be withdrawn and paid to the
Transferor to the extent of any
increases in the Invested Amount as
a result of the increase in the
amount of Receivables in the Trust.
The Transferor expects that the
funds on deposit in the Pre-Funding
Account will be fully invested in
Receivables by the end of the
_________ Monthly Period. In the
event of the occurrence of a Pay Out
Event during the Funding Period, the
amounts remaining on deposit in the
Pre-Funding Account, will be payable
as principal first to the Class A
Securityholders until the Class A
Invested Amount is paid in full.
Should the Pre-Funded Amount be
greater than zero on the first day
of the __________ Monthly Period,
such amount will be deposited in the
Excess Funding Account and the
Invested Amount will be increased in
an amount equal to such deposit.
Amounts on deposit in the Excess
Funding Account are treated as
assets of the Trust allocated to all
Series then outstanding and the
Exchangeable Transferor Security and
will be applied as described in
"Description of the Offered
Securities--Excess Funding Account."
Revolving Period................. The "Revolving Period" with respect to
the Securities means the period from
and including the Closing Date to,
but excluding, the earlier of (a)
the commencement of the Accumulation
Period and (b) the commencement of
the Early Amortization Period. See
"Description of the Offered
Securities--Pay Out Events" herein
for a discussion of the events which
might lead to the termination of the
Revolving Period prior to the
commencement of the Accumulation
Period. The accumulation period with
respect to the Securities (the
"Accumulation Period") is scheduled
to begin at the close of business on
the last day of the _________
Monthly Period. Subject to the
conditions set forth herein under
"Description of the Offered
Securities--Postponement of
Accumulation Period," the day on
which the Revolving Period ends and
the Accumulation Period begins may
be delayed to no later than the
close of business on the last day of
the _________ Monthly Period. During
the Revolving Period, Principal
Collections otherwise allocable to
the Securityholders (other than any
Shared Principal Collections paid to
the holders of securities of other
Series and any Redirected Principal
Collections) will, subject to
certain limitations, be paid from
the Trust to the holder of the
Exchangeable Transferor Security.
See "Description of the Offered
Securities--Pay Out Events" for a
discussion of the events which might
lead to the termination of the
Revolving Period for the Securities
prior to the end of the ________
Monthly Period.
Principal Payment;
Accumulation Period........... Unless a Pay Out Event shall have
occurred, the Accumulation Period
will begin at the close of business
on the last day of the Revolving
Period and will end on the earliest
to occur of (i) the commencement of
the Early Amortization Period, (ii)
payment of the Invested Amount in
full and (iii) the Termination Date.
With respect to each Monthly Period
during the Accumulation Period,
prior to the payment in full of the
Class A Invested Amount, 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" herein.
Funds on deposit in the Principal
Funding Account will be available to
pay the Class A Securityholders in
respect of the Class A Invested
Amount on the Expected Final Payment
Date. If the aggregate principal
amount of deposits made to the
Principal Funding Account are
insufficient to pay in full the
Class A Invested Amount on the
Expected Final Payment Date, the
Early Amortization Period will
commence as described below, and the
Class A Securityholders will receive
distributions of Class A Principal
and Class A Monthly Interest on each
Distribution Date thereafter until
the Class A Invested Amount is paid
in full.
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,
sequentially, in alphabetical order,
on the Distribution Date following
the Monthly Period in which the
Early Amortization Period commences.
Other Series offered by the Trust may
or may not have accumulation periods
like the Accumulation Period or
amortization periods like the Early
Amortization Period, and such
periods may have different lengths
and begin on different dates than
the Accumulation Period or Early
Amortization Period described
herein. Thus, certain Series may be
in their revolving periods while
others are in periods during which
Principal Collections are
distributed to or accumulated for
such other Series. In addition,
other Series may allocate Principal
Collections based upon different
investor percentages. See
"Description of the Offered
Securities--Exchanges" for a
discussion of the potential terms of
other Series. See "Annex I: Other
Series" for a description of the
terms of the Previously Issued
Series.
Early Amortization Period........ During the Early Amortization Period,
Principal Collections allocable to
the respective Securityholders'
Interest and certain other amounts
(including Shared Principal
Collections from any other Series,
funds on deposit in the Excess
Funding Account and, on the first
Distribution Date with respect to
the Early Amortization Period, funds
on deposit in the Pre-Funding
Account or the Principal Funding
Account) will no longer be
reinvested in the Trust or otherwise
used to maintain the
Securityholders' Interest of such
Series, but instead will be
distributed as principal payments
monthly on each Distribution Date
beginning with the first
Distribution Date following the
Monthly Period in which a Pay Out
Event occurs or is deemed to have
occurred to the Class A
Securityholders in respect of the
Class A Invested Amount and,
following the payment in full of the
Class A Invested Amount, to the
Class B Securityholders in respect
of the Class B Invested Amount 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 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."
Distribution of Available Series
Finance Charge Collections
Allocable to Securityholders.. Available Series Finance Charge Collections
will be applied on each business day
in a Monthly Period in the following
order of priority:
(i) an amount equal to the amount of
Class A Monthly Interest and any
overdue Class A Monthly Interest not
previously deposited in the Interest
Funding Account for such Monthly
Period and interest on any overdue
interest amounts will be deposited
in the Interest Funding Account;
(ii) an amount equal to the 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;
(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;
(vi) 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;
(vii) an amount equal to the excess, if
any, of the amount required to be
retained in a spread account
established for the benefit of the
Insurer over the amount on deposit
in that 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 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."
On each Transfer Date all investment
income (net of investment losses and
expenses) on funds on deposit in the
Pre-Funding Account, the Principal
Funding Account and the Accumulation
Period Reserve Account will be
applied as if such amounts were
Available Series Finance Charge
Collections on the last business day
of the preceding Monthly Period.
Coverage of Interest
Shortfalls from Transferor
Finance Charge Collections.... To the extent that any amounts are on
deposit in the Excess Funding
Account or the Pre-Funding Account
on any business day, the Servicer
will determine the amount (the
"Negative Carry Amount"), if any,
equal to the excess of (x) the
product of (a) the Base Rate and (b)
the product of (i) the sum of the
amounts on deposit in the Excess
Funding Account and the Pre-Funding
Account and (ii) the number of days
elapsed since the previous business
day divided by the actual number of
days in such year over (y) the
aggregate amount of all earnings
since the previous business day
available from the Cash Equivalents
in which funds on deposit in the
Excess Funding Account or the
Pre-Funding Account are invested.
The Servicer will apply an amount
equal to the lesser of (i) the
Series 1998-3 Percentage of the
Finance Charge Collections allocable
to the Exchangeable Transferor
Security ("Transferor Finance Charge
Collections") on such business day
and (ii) the Negative Carry Amount
for such business day in the manner
specified for application of
Available Series Finance Charge
Collections.
Coverage of Interest Shortfalls
from Accumulation Period
Reserve Account............... All amounts in the Principal Funding
Account will be invested at the
direction of the Servicer by the
Trustee in certain Cash Equivalents.
Investment earnings (net of
investment losses and expenses) on
funds on deposit in the Principal
Funding Account (the "Principal
Funding Account Investment
Proceeds") during the Accumulation
Period will be applied on each
Transfer Date to the extent of the
Covered Amount as if such amount
were Available Series Finance Charge
Collections on the last business day
of the preceding Monthly Period. If,
for any Interest Accrual Period, the
Principal Funding Account Investment
Proceeds are less than an amount
equal to, for such Interest Accrual
Period, of the product of (a) a
fraction the numerator of which is
the actual number of days in such
Interest Accrual Period and the
denominator of which is 360, (b) the
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 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 Collections, (x) Excess
Finance Charge Collections, in each
case to the extent applied to the
payment thereof as described in
"Coverage of Interest Shortfalls
from Transferor Finance Charge
Collections" and "Sharing of Excess
Finance Charge Collections,"
respectively, (y) any Redirected
Principal Collections applied with
respect thereto, and (z) any
Principal Funding Account Investment
Proceeds and amounts withdrawn from
the Accumulation Period Reserve
Account to be applied with respect
thereto, then the Class 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 (vi) of "Distribution of
Available Series Finance Charge
Collections Allocable to
Securityholders."
In the event that the Class B Invested
Amount is reduced to zero, the
Trustee will demand 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,
Pre-Funding Account investment
proceeds, if any, 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 Fees 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."
Exchanges........................ The Pooling and Servicing Agreement
provides that the Trustee will issue
two types of securities: (i)
Investor Securities in one or more
Series each of which may have
multiple classes of securities of
which one or more such classes may
be transferable, and (ii) the
Exchangeable Transferor Security.
The Exchangeable Transferor Security
will evidence the Transferor
Interest, will initially be held by
the Transferor, and will be
transferable only as provided in the
Pooling and Servicing Agreement,
including through the issuance of a
Supplemental Security. See
"Description of the Offered
Securities--Exchanges." The
Exchangeable Transferor Security is
not being registered under the
Securities Act. The Pooling and
Servicing Agreement also provides
that, pursuant to any one or more
Supplements, the Transferor may
tender the Exchangeable Transferor
Security or, if provided in the
relevant Supplement, securities
comprising any Series and the
Exchangeable Transferor Security, to
the Trustee in exchange for
securities comprising one or more
new Series and a reissued
Exchangeable Transferor Security.
However, at all times, the interest
in the Principal Receivables in the
Trust and amounts on deposit in the
Excess Funding Account represented
by the Transferor Interest must
equal or exceed the Minimum
Transferor Interest. Under the
Pooling and Servicing Agreement, the
Transferor may define, with
respect to any new Series, the
Principal Terms of such Series. See
"Description of the Offered
Securities--Exchanges." The
Transferor may offer any Series for
sale in transactions either
registered under the Securities Act
or exempt from registration
thereunder, directly, through one or
more underwriters or placement
agents, in fixed-price offerings, in
negotiated transactions or
otherwise. The Transferor currently
intends to offer, from time to time,
additional Series issued by the
Trust.
Under the Pooling and Servicing Agreement,
an Exchange of the Exchangeable
Transferor Security for securities
comprising one or more Series and a
reissued Exchangeable Transferor
Security may occur only upon
delivery to the Trustee of the
following: (i) a Supplement
specifying the Principal Terms of
each Series to be issued in
connection therewith, (ii) a Tax
Opinion, (iii) if required by such
Supplement, the form of Enhancement
and an appropriate Enhancement
agreement with respect thereto, (iv)
written confirmation from each
Rating Agency that the Exchange will
not result in such Rating Agency
reducing or withdrawing its rating
on any then outstanding Series rated
by it, (v) an officer's certificate
of the Transferor stating that,
after giving effect to such
Exchange, (a) the Transferor
Interest would be at least equal to
the Minimum Transferor Interest and
(b) the Retained Interest (as
defined in the Pooling and Servicing
Agreement) would equal or exceed the
Minimum Retained Interest, and (vi)
the existing Exchangeable Transferor
Security and, if applicable, the
existing securities representing the
Series to be exchanged. See
"Description of the Offered
Securities--Exchanges."
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
Securityholders of Series 1998-3
since the issuance of such Paired
Series. If a Pay Out Event occurs
with respect to any such Paired
Series prior to the payment in full
of the Securities, the final payment
of principal to the Securityholders
may be delayed. See "Description of
the Offered Securities--Paired
Series."
Subordination of the Class B
Securities.................... The 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
of the Class B Securities,"
"--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 Invested
Amounts of the Class B Securities
may be reduced on the related
Distribution Date as more fully
described herein in "Description of
the Offered Securities--Redirected
Principal Collections." To the
extent the Class B Invested Amount
is reduced, the percentage of
Finance Charge Collections allocated
to the Class B Securityholders in
subsequent Monthly Periods will be
reduced. Moreover, to the extent the
amount of such reduction in the
Class B Invested Amount is not
reimbursed, the amount of principal
distributable to the Class B
Securityholders 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 of
the Class B Securities,"
"--Redirection of Cash Flows" and
"--Redirected Principal Collections."
Defeasance....................... On the date that the Transferor has
deposited (x) in the Principal
Funding Account an amount equal to
the sum of the outstanding principal
balances of the Class A Securities,
which amount shall be invested in
Cash Equivalents and (y) in the
Accumulation Period Reserve Account
an amount equal to or greater than
the Covered Amount, as estimated by
the Transferor, for the period from
the date of the deposit to the
Principal Funding Account through
the Expected Final Payment Date for
the Offered Securities and the
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 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 on the Policy,
together with interest thereon, have
been paid. The repurchase price will
be equal to the Class A Invested
Amount that would be remaining on
such date after giving effect to any
payments on such date plus accrued
interest which would otherwise
remain unpaid on the Class A
Securities 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............. Under a regulation issued by the U.S.
Department of Labor (the "Plan
Assets Regulation"), the Trust's
assets would not be deemed "plan
assets" of an employee benefit plan
holding an interest in the Class A
Securities if the Class A Securities
qualify as "publicly-offered
securities" within the meaning of
the Plan Assets Regulation. To
qualify as "publicly-offered
securities" within the meaning of
the Plan Assets Regulation, certain
conditions must be met, including
that interests in the Class A
Securities be held by at least 100
persons independent of the
Transferor and each other upon
completion of the public offering
being made hereby. [The Underwriters
expect, although no assurance can be
given, that the Class A Securities
will be held by at least 100 such
persons, and the Transferor
anticipates that the other
conditions of the "publicly-offered
security" exception contained in the
Plan Assets Regulation will be met
with respect to the Class A
Securities.] No monitoring or other
measures will be taken to ensure
that any such conditions will be met
with respect to the Class A
Securities. If the Trust's assets
were deemed to be "plan assets" of
such a plan, there is uncertainty
whether existing exemptions from the
"prohibited transaction" rules of
the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), would apply to all
transactions involving the Trust's
assets. See "Employee Benefit Plan
Considerations."
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.
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 ________, 1998 approximately %
of the Accounts in the Trust Portfolio had been originated within the last
12 months and approximately % of the Accounts in the Trust Portfolio had
been originated within the last 24 months. As a result, the current
portfolio history may not be indicative of the portfolio performance as
the Receivables and Accounts mature. See the "Composition by Account
Age--Trust Portfolio" table in "The Receivables."
Non-Recourse to Metris, the Transferor, Direct Merchants Bank or Affiliates
Thereof
No Securityholder will have recourse for payment of its Securities
to any assets of Metris, the Transferor (other than the Exchangeable
Transferor Security and any Transferor Retained Class, to the extent
described herein), Direct Merchants Bank, or any affiliates thereof.
Consequently, Securityholders must rely solely upon payments on the
Receivables for the payment of principal of and interest on the
Securities. Furthermore, under the Pooling and Servicing Agreement, the
Securityholders have an interest in the Receivables and Collections only
to the extent of the Securityholders' Interest and, to the limited extent
described herein, the Transferor Interest. Should the Class A Securities
not be paid in full on a timely basis, Securityholders may not look to any
assets of any of Metris, the Transferor (other than the Exchangeable
Transferor Security and any Transferor Retained Class, to the extent
described herein), Direct Merchants Bank, the Utah Bank or any affiliates
thereof to satisfy their claims.
Transfer of the Receivables; Insolvency Risk Considerations
Under the Purchase Agreements, Direct Merchants Bank has represented
and warranted to Metris and Metris has represented and warranted to the
Transferor, respectively, that the transfer of Receivables to Metris or
the Transferor, as applicable, is a valid sale and assignment. In
addition, Direct Merchants Bank, Metris and the Transferor have agreed
that if, notwithstanding their intent, the respective sales of Receivables
to Metris and the Transferor, are not treated as sales, the Purchase
Agreements will be deemed to create a security interest in the
Receivables. In a receivership or conservatorship of Direct Merchants Bank
or in a bankruptcy proceeding involving Metris, if the conveyance of the
Receivables is not treated as a sale, but is deemed to create a security
interest in the Receivables, Metris' or the Transferor's interest in the
Receivables may be subject to tax or other governmental liens relating to
Direct Merchants Bank or Metris, respectively, arising before the subject
Receivables came into existence and to certain administrative expenses of
the receivership, conservatorship or bankruptcy proceeding. Direct
Merchants Bank and Metris have taken or will take certain actions required
to perfect the Transferor's interest in the Receivables. If a bankruptcy
trustee for Metris, Metris as debtor-in-possession, or a creditor of
Metris were to take the view that Direct Merchants Bank or Metris and the
Transferor should be substantively consolidated or that the transfer of
the Receivables from Direct Merchants Bank to Metris or from Metris to the
Transferor, respectively, should be recharacterized as a pledge of such
Receivables, then delays in payments on the Offered Securities or (should
the bankruptcy court rule in favor of any such trustee,
debtor-in-possession or creditor) reductions in such payments on such
Securities could result.
A conservator or receiver would have the power under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") to
repudiate contracts of, and to request a stay of up to 90 days of any
judicial action or proceeding involving, Direct Merchants Bank. However,
notwithstanding the insolvency of, or the appointment of a receiver or
conservator for, Direct Merchants Bank, subject to certain qualifications,
a valid perfected security interest of the Trust in the Receivables should
be enforceable (to the extent of the Trust's "actual direct compensatory
damages" (as described below)) and payments to the Trust with respect to
the Receivables (up to the amount of such damages) should not be subject
to an automatic stay of payment or to recovery by such a conservator or
receiver. If, however, the conservator or receiver were to assert that the
security interest was unperfected or unenforceable, or were to require the
Trust to establish its right to those payments by submitting to and
completing the administrative claims procedure established under FIRREA,
or the conservator or receiver were to request a stay of proceedings with
respect to Direct Merchants Bank as provided under FIRREA, delays in
payments to the Trust and on the Securities and possible reductions in the
amount of those payments could occur. In the event of a repudiation of
obligations by a conservator or receiver, FIRREA provides that a claim for
the repudiated obligation is limited to "actual direct compensatory
damages" determined as of the date of the appointment of the conservator
or receiver (which in most cases are expected to include the outstanding
principal on the Securities plus interest accrued thereon to the date of
payment). The FDIC has not adopted a formal policy statement on payment of
principal and interest on collateralized borrowings of banks that are
repudiated. On April 10, 1990, the Resolution Trust Corporation (the
"RTC"), formerly a sister agency of the FDIC, adopted a statement of
policy (the "RTC Policy Statement") with respect to the payment of
interest on collateralized borrowings. The RTC Policy Statement states
that interest on such borrowings will be payable at the contract rate up
to the date of the redemption or payment by the conservator, receiver, or
the trustee of an amount equal to the principal owed plus the contract
rate of interest up to the date of such payment or redemption, plus any
expenses of liquidation if provided for in the contract, to the extent
secured by the collateral. In one case involving the repudiation by the
RTC of certain secured zero-coupon bonds issued by a savings association,
a United States federal district court held that "actual direct
compensatory damages" in the case of a marketable security meant the value
of the repudiated bonds as of the date of repudiation. If that court's
view were applied to determine the Trust's "actual direct compensatory
damages" in the event a conservator or receiver of Direct Merchants Bank
repudiated the Bank Purchase Agreement, the amount paid to Securityholders
could, depending upon circumstances existing on the date of the
repudiation, be less than the principal of the Securities and the interest
accrued thereon to the date of payment. See "Certain Legal Aspects of the
Receivables--Certain Matters Relating to Bankruptcy or Receivership." In
addition, in the event of a Servicer Default, if a conservator or receiver
is appointed for the Servicer, and no Servicer Default other than such
conservatorship or receivership exists, the conservator or receiver may
have the power to prevent either the Trustee or the majority of the
Securityholders from effecting a transfer of servicing to a successor
Servicer.
Although the Pooling and Servicing Agreement provides that the
Transferor will transfer all of its right, title, and interest in and to
the Receivables to the Trust, a court could treat such transactions as an
assignment of collateral as security for the benefit of holders of
securities issued by the Trust. It is possible that the risk of such
treatment may be increased by the retention by the Transferor of the
Exchangeable Transferor Security, the Class 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
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 regulate further the
credit card industry or to reduce finance charges or other fees or charges
applicable to credit card and other consumer revolving loan accounts. Such
laws, as well as any new laws or rulings which may be adopted, may
adversely affect the Servicer's ability to collect on the Receivables or
maintain previous levels of periodic rate finance charges and other fees
and charges with respect to the Accounts. Any failure by the Servicer,
Direct Merchants Bank, or other Credit Card Originators to comply with
such legal requirements also could adversely affect the Trust's ability to
collect the full amount of the Receivables. Although the Transferor will
make certain representations and warranties relating to the validity and
enforceability of the Receivables, the Trustee will not make any
examination of the Receivables or the records relating thereto for the
purpose of establishing the presence or absence of defects or compliance
with such representations and warranties, or for any other purpose. In the
event of a breach of certain representations and warranties, the
Transferor may be obligated to accept the reassignment and transfer of the
entire Trust Portfolio. See "Description of the Offered
Securities--Representations and Warranties" and "Certain Legal Aspects of
the Receivables--Consumer Protection Laws."
Application of federal and state bankruptcy and debtor relief laws
to the obligations represented by the Receivables could adversely affect
the interests of the holders of the Offered Securities in the Receivables,
if such laws result in any Receivables being written off as uncollectible.
See "Description of the Offered Securities--Defaulted Receivables;
Dilution."
Payments and Maturity
The Receivables may be paid at any time and there is no assurance
that there will be additional Receivables created or that any particular
pattern of repayments will occur. A significant decline in the amount of
Receivables generated could result in the occurrence of a Pay Out Event
and the commencement of the Early Amortization Period if, as a result, the
Transferor Interest were reduced below the Minimum Transferor Interest or
amounts in the Pre-Funding Account or the Excess Funding Account result
in significant Negative Carry Amounts. See "Maturity Considerations" and
"Description of the Offered Securities--Pay Out Events" for a discussion
of other Pay Out Events. If a Pay Out Event occurs, the Early Amortization
Period will commence and the average life and maturity of the Offered
Securities may be significantly reduced. There can be no assurance in that
event that the holders of the Offered Securities would be able to reinvest
any accelerated distributions on account of such Offered Securities in
other suitable investments having a comparable yield.
Effect of Addition of Trust Assets on Credit Quality
The Transferor intends to designate, and in some cases will be
obligated to designate, Supplemental Accounts, the Receivables in which
will be conveyed to the Trust. In addition, upon the satisfaction of
certain conditions, the Transferor may elect to automatically designate on
and after a specified date all Additional Accounts, the Receivables in
which will be conveyed to the Trust. Such Supplemental Accounts or
Additional Accounts may include accounts originated using criteria
different from those which were applied to the Accounts existing on the
Closing Date related to the Trust or to previously-designated Supplemental
Accounts or Additional Accounts, because such accounts were originated at
a different date or were purchased or otherwise acquired from one or more
Credit Card Originators. Consequently, there can be no assurance that
Supplemental Accounts or Additional Accounts designated in the future will
be of the same credit quality as previously-designated Accounts. In
addition, such Supplemental Accounts or Additional Accounts may consist of
consumer revolving credit card accounts or other consumer revolving credit
accounts that have different terms or characteristics than the Accounts,
Supplemental Accounts and the Additional Accounts previously included in
the Trust, including lower periodic rate finance charges and other fees
and charges, or different payment rates and higher loss or delinquency
experience, which may have the effect of reducing the average yield on the
portfolio of accounts included in the Trust. The designation of
Supplemental Accounts will be subject to the satisfaction of certain
conditions described herein under "Description of the Offered
Securities--Addition of Trust Assets," including that the Transferor shall
have received written notice from each Rating Agency that such designation
will not cause a Ratings Event to occur; however, there is no mechanism to
assure consistent credit quality from time to time.
Negative Carry
Any amounts deposited in the Excess Funding Account, the Pre-Funding
Account and the Principal Funding Account subsequent to the Closing Date
may result in a reduction of Portfolio Yield to the extent that the Cash
Equivalents in which such amounts are invested earn a rate which is less
than the effective yield from Finance Charge Receivables.
Basis Risk
The Accounts in the Trust generally have finance charges set at a
variable rate above a designated prime rate or other designated index. The
Class A Interest Rate is based on LIBOR. If there is a decline in such
prime rate or other designated index which does not coincide with a
decline in LIBOR, the amount of collections of Finance Charge Receivables
on such Accounts may be reduced, whereas the amounts payable as interest
on such Securities and other amounts required to be funded out of
collections of Finance Charge Receivables with respect to such Series may
not be similarly reduced.
Competition in the Credit Card Industry
The credit card industry is highly competitive and operates in a
legal and regulatory environment increasingly focused on the cost of
services charged for credit cards. As new credit card issuers enter the
market and all issuers seek to expand their share of the market, there is
increased use of advertising, target marketing and pricing competition.
The Trust will be dependent upon the Transferor's continued ability to
purchase new Receivables. If the rate at which new Receivables are
purchased declines significantly and the Transferor is unable to designate
Supplemental Accounts or Additional Accounts, a Pay Out Event could occur,
in which case the Early Amortization Period would commence. In the event
of an early payment of principal on the Securities, Securityholders may
realize a lower yield on their reinvestment of such early payment and may
be required to incur costs associated with reinvesting such early payment.
Social, Technological and Economic Factors
Changes in purchase and payment patterns by Obligors may result from
a variety of social, technological, and economic factors. Social factors
include potential changes in consumers' attitudes toward financing
purchases with debt. Technological factors include new methods of payment,
such as debit cards. Economic factors include the rate of inflation,
unemployment levels and relative interest rates. Cardholders with respect
to the Accounts generally have billing addresses in all 50 states, the
District of Columbia and other United States territories and possessions.
There is no basis, however, to predict whether, or to what extent, social,
technological, or economic factors will affect future use of credit or
repayment patterns.
Book-Entry Registration
Each Class of the Offered Securities initially will be represented
by one or more securities registered in the name of Cede & Co., the
nominee for DTC, and will not be registered in the names of the Security
Owners or their nominees. Unless and until Definitive Securities are
issued, Security Owners will not be recognized by the Trustee as
Securityholders, as that term is used in the Pooling and Servicing
Agreement. Hence, until such time, Security Owners will only be able to
receive payments from, and exercise the rights of Securityholders
indirectly through DTC and its participating organizations and, unless a
Security Owner requests a copy of any such report from the Trustee, will
receive reports and other information provided for under the Pooling and
Servicing Agreement only if, when and to the extent provided to Security
Owners by DTC and its participating organizations. In addition, the
ability of Security Owners to pledge Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in
respect of such Securities, may be limited due to the lack of physical
securities for such Securities. See "Description of the Offered
Securities--Book-Entry Registration" and "--Definitive Securities."
Ability of Servicer to Change Payment Terms
Pursuant to the Pooling and Servicing Agreement, the Transferor will
not be transferring to the Trust the Accounts but only the Receivables
arising in the Accounts. As owner of the Accounts, Direct Merchants Bank
will have the right to determine the annual percentage rates and the fees
which will be applicable from time to time to the Accounts, to alter the
minimum monthly payment required under the Accounts and to change various
other terms with respect to the Accounts. A decrease in the annual
percentage rates or a reduction in fees would decrease the effective yield
on the Accounts and could result in the occurrence of a Pay Out Event with
respect to the Series. An alteration of payment terms may result in fewer
payments on Receivables being made in any month. Under the Bank Purchase
Agreement, Direct Merchants Bank agrees that, unless required by law or
unless it deems it necessary in its sole discretion to maintain on a
competitive basis its credit card business, it will not at any time reduce
the annual percentage rates of the Periodic Finance Charges assessed on
the Receivables or other fees charged on any of the Accounts if, as a
result of any such reduction, either (i) Direct Merchants Bank's
reasonable expectation is that such reduction will cause a Pay Out Event
to occur so long as there are securities of any Series outstanding or (ii)
such reduction is not also applied to any comparable segment of consumer
revolving credit card accounts owned by Direct Merchants Bank that have
characteristics the same as, or substantially similar to, such Accounts.
In addition, the Servicer will have the right to change the terms of
the Contracts relating to the Accounts or its policies and procedures with
respect to the servicing thereof (including the amount or timing of
charge-offs and the Periodic Finance Charges and other fees to be assessed
on the Accounts) if (i) (if the Servicer owns a comparable segment of
consumer revolving credit card accounts) such change is made applicable to
such comparable segment of consumer revolving credit card accounts owned
by the Servicer that have characteristics the same as, or substantially
similar to, the Accounts that are subject to such change and (ii) (if the
Servicer does not own a comparable segment of receivables) it will not
make any such change with the intent to materially benefit the Servicer
over Metris, except as otherwise restricted by any endorsement,
sponsorship or other agreement between the Servicer and an unrelated third
party or by the terms of the Contracts. The Purchase Agreement contains
parallel covenants of Metris. There can be no assurance that changes in
applicable law, changes in the marketplace or prudent business practice
might not result in a determination by the Servicer to take actions which
would change the payment or other Account terms. Except as specified
above, there are no restrictions in the Bank Purchase Agreement or the
Pooling and Servicing Agreement on the ability of the Servicer to change
the terms of the Accounts. While the Servicer has no current intention of
taking actions which would change the payment or other terms of the
Accounts other than in accordance with its customary and usual procedures,
there can be no assurances that changes in the marketplace or prudent
business practice might not result in a determination to do so.
Control
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.
Subject to certain exceptions, the investor securityholders of each Series
may take certain actions, or direct certain actions to be taken, under the
Pooling and Servicing Agreement or the related Supplement. In determining
whether the required percentage of Securityholders have given their
approval or consent, except as otherwise specified, the Class A
Securityholders 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.
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 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 Pre-Funding Account and 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 with respect to any Class of
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.
Pre-Funding Account and the Funding Period
The Invested Amount will be increased during the Funding Period (but
not in excess of the Full Invested Amount) to the extent amounts are (x)
withdrawn from the Pre-Funding Account and paid to the Transferor in
connection with the addition of Receivables to the Trust or (y) deposited
in the Excess Funding Account. It is anticipated that Receivables will be
added to the Trust in an amount necessary to increase the Invested Amount
to an amount equal to the Full Invested Amount by the end of the ________
Monthly Period; however, there can be no assurance that a sufficient
amount of Receivables will be available for such purpose. Should the
Pre-Funded Amount be greater than zero at the end of the Funding Period,
the amounts remaining on deposit in the Pre-Funding Account will be
deposited into the Excess Funding Account. If there is a decline in the
balance of the Receivables during the Funding Period, funds otherwise
payable to the Transferor may be deposited in the Excess Funding Account.
Amounts on deposit in the Excess Funding Account are invested in Cash
Equivalents and are treated as assets of the entire Trust allocated to all
Series then outstanding and to the Exchangeable Transferor Security, and
will be applied as described in "Description of the Offered
Securities--Excess Funding Account." Such funds may be released to holders
of securities of other Series in connection with a reduction of the
principal balance of the securities of such other Series. To the extent
that the net investment income earned on amounts on deposit in the
Pre-Funding Account during the Funding Period or in the Excess Funding
Account is less than the Base Rate, the Servicer will apply Transferor
Finance Charge Collections to the extent available to cover any related
Negative Carry Amount. If Transferor Finance Charge Collections are not
sufficient to cover such Negative Carry Amount, there will be a decline in
the excess of the Portfolio Yield over the Base Rate which could result in
a Pay Out Event. See "--Payments and Maturity" for a discussion of certain
effects of a Pay Out Event.
THE TRUST
The Trust was formed, in accordance with the laws of the State of
Delaware, pursuant to the Pooling and Servicing Agreement. The Trust was
formed for the transactions described herein and similar transactions, as
contemplated by the Pooling and Servicing Agreement, and prior to
formation had no assets or obligations. The Trust has not engaged, and
will not engage, in any business activity, other than as described herein,
but rather will only acquire and hold the Receivables (and related
assets), issue (or cause to be issued) the Securities, the Exchangeable
Transferor Security, and securities representing additional Series and
engage in related activities (including, with respect to any Series,
entering into any Enhancement and Enhancement agreement relating thereto)
and make payments thereon. As a consequence, the Trust is not expected to
have any need for additional capital resources.
METRIS COMPANIES INC.
Metris Companies Inc. ("Metris") is an information-based direct
marketer of consumer credit products, fee-based services and extended
service plans primarily to moderate income consumers. Metris' consumer
credit products are primarily unsecured credit cards issued by its
subsidiary, Direct Merchants Credit Card Bank, National Association
("Direct Merchants Bank"). Metris' customers and prospects include
existing customers of 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 $11.2 million for the first three
months of 1998 and net income of $38.1 million for the year ended December
31, 1997.
Metris is a Delaware corporation incorporated on August 20, 1996.
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. Metris' principal subsidiaries are
Direct Merchants Bank, Metris Direct, Inc. ("Metris Direct"), Metris
Funding Co., Metris Receivables, Inc. and Metris Direct Services, Inc.
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems
can accommodate the date value "2000." Many existing application software
products were designed to only accommodate a two digit date position which
represents the year (e.g., the number "95" is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., "99") is the
maximum date value many systems will be able to accurately process. Metris
has developed plans to address potential problems posed by this
development to assure that Metris is prepared for year 2000. Most of
Metris' existing information systems are less than three years old and
were originally designed for year 2000 compliance. Metris has identified
financial and operational systems that may be impacted by the year 2000
issues and is actively working to address those issues. However, if plans
to deal with year 2000 issues are not completed on a timely basis or are
not fully effective, such issues may have a material adverse effect on
Metris' operations.
In addition, Metris is dependent on databases maintained by FCI and
card and statement generation, among other services, provided by a credit
card processor, First Data Resources, Inc. ("FDR"). Metris has ongoing
meetings with FCI to determine where Metris' and FCI's systems overlap and
to determine what steps are necessary to ensure compliance. Metris has
also been in frequent periodic contact with FDR with respect to FDR's
programs for year 2000. Metris believes that FDR will address year 2000
problems on a timely basis. Although Metris cannot ensure compliance by
all of its vendors on a timely basis, Metris believes that it is taking
appropriate steps to identify exposure to year 2000 problems and to
address them on a timely basis.
THE TRANSFEROR
Metris Receivables, Inc., formerly known as Fingerhut Financial
Services Receivables, Inc. (the "Transferor"), was incorporated under the
laws of the State of Delaware on May 23, 1995. All of its outstanding
capital stock is owned by Metris Direct. The Transferor was organized for
the limited purpose of purchasing, holding, owning and selling receivables
and any activities incidental to and necessary or convenient for the
accomplishment of such purposes, and has no material assets other than
such receivables. Neither Metris Direct, as stockholder of the Transferor,
nor the Transferor's board of directors, intends to change its business
purpose. The Transferor's executive offices are located at 600 South
Highway 169, Suite 300, St. Louis Park, Minnesota 55426. The Transferor's
telephone number is (612) 417-5645.
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Direct Merchants Credit Card Bank, National Association ("Direct
Merchants Bank" or the "Bank"), a wholly owned subsidiary of Metris, is a
special-purpose credit card bank, established under Section 2(c)(2)(F) of
the Bank Holding Company Act of 1956, as amended by the Competitive
Equality Banking Act of 1987, as amended. Direct Merchants Credit Card
Bank, National Association, located in Salt Lake City, Utah (the "Utah
Bank") was chartered as a national banking association on February 14,
1995. On July 13, 1998, the Utah Bank was merged into Interim National
Bank, a national banking association located in Phoenix, Arizona, and an
indirect subsidiary of Metris. The name of the surviving entity was
changed to Direct Merchants Credit Card Bank, National Association. Its
principal executive offices are located in Phoenix, Arizona, with a
mailing address at 6909 East Greenway Parkway, Scottsdale, Arizona 85254,
telephone number (602) 718-4600. Any references to Direct Merchants Credit
Card Bank, National Association, prior to July 13, 1998 are references to
the Utah Bank.
FINGERHUT CORPORATION
Fingerhut Corporation ("Fingerhut"), a wholly owned subsidiary of
FCI, has been in the direct marketing business for over 46 years and is
one of the largest consumer catalog marketers in the United States.
Fingerhut sells a broad range of general merchandise products and services
to moderate income consumers, using catalogs and other direct marketing
solicitations, and had 1997 net sales of approximately $1.8 billion.
Fingerhut makes substantially all of its sales using proprietary private
label credit. As customers make payments and order new products, Fingerhut
enters a variety of payment, behavioral and other data into its database
(the "Fingerhut Database").
The Fingerhut Database. The Fingerhut Database contains information
on more than 31 million individuals, including approximately 8 million
customers who have made a purchase from Fingerhut within the past 24
months. This database contains up to 3,500 potential data items in a
customer record, including names, addresses, behavioral characteristics,
general demographic information and information provided by the customer.
Fingerhut uses information in the Fingerhut Database, along with
sophisticated proprietary credit scoring models, to produce proprietary
credit scores (the "Fingerhut Scores") for Fingerhut Customers. The
Fingerhut Database also includes a "suppress" file (the "Suppress File"),
which contains information on approximately 11.4 million individuals about
whom it has information relating to fraud and other similar indicators of
unacceptably high risk. Fingerhut periodically updates the information in
the Fingerhut Database. Fingerhut does not report its credit information
to the credit bureaus, which means this information is not publicly
available. Direct Merchants Bank currently has agreements to use the
information in the Fingerhut Database for marketing general purpose credit
cards to Fingerhut Customers. These agreements generally expire in 2003,
but may expire earlier upon certain events of default or bankruptcy. In
addition, in the event that a Person or group other than Fingerhut
acquires 25% or more of the voting stock of Metris or Direct Merchants
Bank in a transaction other than the Spin Off during the term of one of
these agreements, Fingerhut or FCI, as the case may be, has the right to
terminate these agreements. Although the Transferor believes that, to the
extent that it is desirable to do so, Direct Merchants Bank will be able
to extend the term of these agreements, there can be no assurance that
Direct Merchants Bank will be able to do so on terms favorable to Direct
Merchants Bank or at all.
DIRECT MERCHANTS BANK'S CREDIT CARD ACTIVITIES
General
The Receivables conveyed to the Trust have been and will be
generated from transactions made by holders of co-branded and other
MasterCard(R) credit card and VISA(R) credit card accounts and, subject to
the satisfaction of the Rating Agency Condition, may also include,
although they do not currently include, receivables generated from
transactions made by holders of other general purpose credit card accounts
originated or acquired by Direct Merchants Bank. Certain data processing,
administrative and other functions associated with the servicing of the
Receivables are performed on behalf of Direct Merchants Bank through FDR,
whose principal executive offices are located in Omaha, Nebraska. See
"--Description of FDR." In addition, the collection and management of
delinquent accounts are performed by Metris Direct. As of March 31, 1998,
Direct Merchants Bank had approximately 2.2 million credit card accounts
and approximately $3.6 billion in managed loans; Fingerhut Customers
represented approximately 40% of the accounts and approximately 40% of the
managed loans.
Growing Credit Card Portfolio by Portfolio Acquisitions
In September 1997, Direct Merchants Bank acquired an approximately
$317 million credit card portfolio consisting of approximately 260,000
accounts from Key Bank USA, National Association, of which approximately
197,000 accounts are active accounts. In addition, in October 1997 Direct
Merchants Bank acquired an approximately $405 million credit card
portfolio consisting of approximately 460,000 accounts from Mercantile
Bank National Association, of which approximately 240,000 accounts are
active accounts. In June 1998, Direct Merchants Bank acquired an
approximately $100 million credit card portfolio consisting of
approximately 42,000 accounts from Huntington National Bank. None of these
accounts has been designated as an Account and while the Transferor does
not in the near future intend to add such accounts to the Accounts
designated to have their Receivables transferred to the Trust, such a
determination may be made in the future.
Direct Merchants Bank also acquired in the first quarter of 1997 a
credit card portfolio from a California based credit union which, as of
August 31, 1997, had approximately 18,500 accounts with balances of
approximately $36 million. Such accounts have been designated as
Supplemental Accounts the Receivables of which have been transferred to
the Trust.
In September 1998, Direct Merchants Bank announced that it had
entered into a definative agreement with PNC Bank Corp. ("PNC") under
which Direct Merchants Bank will acquire a portion of PNC's consumer
credit card portfolio. The sale of the credit card portfolio which has
approximately 534,000 accounts and approximately $1 billion in receivables
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 linking members' credit authorization systems. MasterCard credit
cards are issued as part of the worldwide MasterCard International Inc.
systems, and the transactions creating the receivables through the use of
the credit cards are processed through the MasterCard International Inc.
authorization and settlement systems. The MasterCard(R) credit cards from
which the Accounts were established may be used to purchase goods and
services, to obtain cash advances and to consolidate and transfer account
balances from other credit cards. Cardholders make purchases when using a
credit card to buy goods or services. A cash advance is made when a credit
card is used to obtain cash from a financial institution, an automated
teller machine, or by a draft drawn on an account. Amounts due with
respect to purchases, cash advances and transfers of account balances will
be included in the Receivables. Direct Merchants Bank is also a member of
VISA USA Incorporated. With the first quarter, 1997 acquisition of the
California Credit Union portfolio, Direct Merchants Bank acquired
approximately 20,000 VISA(R) credit card accounts. Beginning in July 1997,
the Bank began originating accounts under the VISA license.
Credit Scoring. Direct Merchants Bank requests a Fingerhut Score for
prospective customers in the Fingerhut Database. Direct Merchants Bank
also requests credit bureau information for all Fingerhut Customers,
including risk scores provided by Fair, Isaacs & Company, a third party
provider of risk scorecards ("FICO scores"). For those Fingerhut Customers
who have FICO scores, Direct Merchants Bank uses the Fingerhut Score to
further segment Fingerhut Customers into narrower ranges within each FICO
score subsegment, allowing it to better evaluate individual credit risk
and to tailor its risk-based pricing accordingly. Additionally, the
Fingerhut Score is used to target individuals who have no, or limited,
credit bureau information and consequently no FICO scores, allowing the
Bank to target Fingerhut Customers who would not typically be solicited by
other credit card issuers.
Direct Merchants Bank has developed a proprietary modeling system
for External Prospects (the "Proprietary Modeling System"). The
Proprietary Modeling System consists of sophisticated models which produce
a credit risk score (a "Proprietary Score") for each prospect. The
Proprietary Score, like the Fingerhut Score, segments External Prospects
into narrower ranges within each FICO score subsegment, allowing Direct
Merchants Bank to better evaluate individual credit risk and to tailor its
risk-based pricing accordingly. Direct Merchants Bank also uses this
segmentation to exclude certain individuals from its marketing
solicitations.
Direct Merchants Bank generates External Prospects from lists
directly obtained from the major credit bureaus based on criteria
established by Direct Merchants Bank. Direct Merchants Bank establishes
the range of FICO scores that it plans to target for a specific campaign,
and receives files from the credit bureaus which contain individual credit
records of the External Prospects who fall within this range. The files
are incorporated into the Proprietary Modeling System, which further
segments External Prospects based upon their Proprietary Scores. The
mailing lists generated from the Proprietary Modeling System are then
checked against the Suppress File and any matching names are excluded.
Direct Merchants Bank currently does not solicit External Prospects who do
not have FICO scores.
Solicitation. Prospects for solicitation include both Fingerhut
Customers and External Prospects. They are contacted on a nationwide basis
generally through pre-screened direct mail and telephone solicitations.
Direct Merchants Bank receives responses to its pre-screened
solicitations, performs fraud screening, verifies name and address
changes, and obtains any information which may be missing from the
application. Applications are then sent to third party data entry
providers, which key the application information and process the
applications based on the criteria provided by Direct Merchants Bank.
Applications are approved, denied or referred to Direct Merchants Bank for
exception processing. Direct Merchants Bank processes exceptions for,
among other things, derogatory credit bureau information and fraud
warnings. Exception applications are processed manually by a credit
analyst based on policies approved by the Bank's credit committee.
Pricing. Direct Merchants Bank's pricing strategy is to price for
the risk associated with its credit card customer. The specific pricing
for a credit card offer is primarily based on the prospect's risk profile
prior to solicitation. Each prospect is evaluated to determine credit
needs, credit risk, and existing credit availability. A customized offer
is developed that includes the most appropriate product, brand, pricing,
and credit line. Direct Merchants Bank currently offers over 100 different
pricing structures on its credit card products, with a range of annual
fees and variable annual percentage rates based on floating rates of
interest, primarily the prime rate. After credit card accounts are opened,
the customer's internal and external credit performance is actively
monitored and their behavior and risk scores are periodically
recalculated. As customers evolve through the credit lifecycle and are
regularly rescored, the lending relationship can evolve to include more
competitive (or more restrictive) pricing and product configurations.
The Adaptive Control System. Direct Merchants Bank uses FDR's
adaptive control system (the "Adaptive Control System") which uses
statistical models and basic account financial information to
automatically and regularly assign credit line increases and decreases to
individual customers, as well as to determine the systematic collection
steps to be taken at the various stages of delinquency. The Adaptive
Control System manages the authorization of each transaction; in addition,
it implements the collections strategies determined by Metris to be used
for non-delinquent accounts that have balances above their assigned credit
line (referred to as "overlimit" accounts).
Credit Lines. Once an account is approved, an initial credit line is
established based on the individual's risk profile using automated
screening and credit scoring techniques. This process results in a
portfolio (excluding portfolio acquisitions) with average credit lines
that are below the industry average due to the higher average risk
elements inherent in Direct Merchants Bank's target market. Direct
Merchants Bank may elect, at any time and without prior notice to the
cardholder, to preclude or restrict further credit card use by the
cardholder, usually as a result of poor payment performance or the Bank's
concern over the creditworthiness of the cardholder. Credit lines are
managed based on the results of the behavioral scoring analysis in
accordance with criteria established by Direct Merchants Bank.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, Direct Merchants
Bank reserves the right to change or terminate certain terms, conditions,
services, or features of the account (including periodic finance charges,
late fees, returned check charges and any other charges or the minimum
payment), subject to the conditions set forth in the account agreement.
Direct Merchants Bank may change its credit standards or screening
criteria and methods at any time.
Servicing, Billing and Payments
Direct Merchants Bank has established a relationship with FDR for
cardholder processing services. FDR is a provider of information
processing and related services including cardholder processing (services
for financial institutions which issue credit cards to cardholders), and
merchant processing (services for financial institutions which make
arrangements with merchants for the acceptance of credit cards as methods
of payment). Applications processing and back office support for mail
inquiries and fraud management are handled internally by Direct Merchants
Bank.
Direct Merchants Bank generally assesses periodic finance charges on
an account if the cardholder has not paid the balance in full from the
previous billing cycle. These finance charges are based upon the average
daily balance outstanding on the account during the monthly billing cycle.
Payments by cardholders on the accounts are processed and applied first to
any billed and unpaid fees, next to billed and unpaid finance charges and
then to billed and unpaid transactions in the order determined by Direct
Merchants Bank. If a payment in full is not received prior to 25 days
after the statement cycle date (the "Payment Date"), finance charges are
imposed on all purchases from the date of the transaction to the statement
cycle date. Finance charges are also imposed on each cash advance from the
day such advance is made until the advance is paid in full. The finance
charge is applied to the average daily balance. The average daily balance
is the sum of the daily unpaid balances of purchases and cash advances on
each day of the monthly billing cycle divided by the number of days in
such monthly billing cycle. Such unpaid balances are determined by
deducting payments and credits, adding any unpaid finance charges and late
charges and adding new purchases, cash advances and other charges, in each
case as of the date of the transaction. For most cardholders, if the
entire balance on the account is paid by the due date, a finance charge is
not imposed.
Direct Merchants Bank generally assesses an annual fee on its
accounts. Direct Merchants Bank may waive the annual membership fees, or a
portion thereof, in connection with the solicitation of new accounts
depending on the credit terms offered, which are determined by the
prospect's risk profile prior to solicitation or when it determines a
waiver to be necessary in order to be competitive. In addition to the
annual fee, Direct Merchants Bank may charge accounts certain other fees
including: (i) a late fee with respect to any unpaid monthly payment if it
does not receive the required minimum monthly payment by the Payment Date,
(ii) a cash advance fee for each cash advance, (iii) a fee with respect to
each check submitted by a cardholder in payment of an account which is not
honored by the cardholder's bank, and (iv) an overlimit charge if, at any
time during the billing cycle, the total amount owed exceeds the
cardholder's credit line by at least $30 due to transaction activity.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, Direct Merchants
Bank reserves the right to change or terminate certain terms, conditions,
services and features of the account (including periodic finance charges,
late fees, returned check charges and any other charges or the minimum
payment), subject to the conditions set forth in the account agreement.
Monthly billing statements are sent to cardholders by FDR on behalf
of Direct Merchants Bank. Direct Merchants Bank uses third party
processors to process certain cardholder payments. When an account is
established, it is assigned a billing cycle. Currently, there are 20
billing cycles and each such cycle has a separate monthly billing date
based on the respective business day the cycle represents in each calendar
month. On a set billing date each month, a statement is sent to all
accounts with an outstanding balance greater than $1.00. Cardholders must
make a minimum monthly payment of the greatest of $10.00, 2.0 percent of
the outstanding balance, the finance charge or the balance of the account
if the balance is less than $10. If the minimum payment is not collected
within 25 days after the statement cycle date, the account is considered
delinquent.
Most merchant transactions by cardholders are authorized online by
FDR. The remaining transactions generally are low dollar amounts,
typically below $50.00.
Description of FDR
FDR provides data processing, credit card reissuance, statementing,
inbound customer service telephone calls and interbank settlement for
Direct Merchants Bank. Direct Merchants Bank believes that its
relationship with FDR allows it to achieve operational efficiencies while
remaining flexible enough to handle additional growth. Furthermore, Direct
Merchants Bank's agreement with FDR allows Direct Merchants Bank to
internalize specific operational functions if Direct Merchants Bank
desires. If FDR were to fail to perform its services for Direct Merchants
Bank or become insolvent, delays in processing and recovery of information
with respect to charges incurred by the respective cardholders could
occur, and the replacement of the services FDR currently provides to
Direct Merchants Bank could be time-consuming. As a result, delays in
payment to Securityholders could occur.
FDR provides computer data processing services primarily to the
bankcard industry. FDR is a subsidiary of First Data Corp.
Delinquency, Collections and Charge-offs
Direct Merchants Bank considers an account delinquent if a payment
due thereunder is not received within 25 days from the closing date of the
statements. Collection procedures are determined with the assistance of
the Adaptive Control System, which continually monitors all delinquent
accounts. The collections function is handled internally primarily through
collection facilities in Tulsa, Oklahoma, and Baltimore, Maryland. The
Tulsa facility employs approximately 300 collection personnel, and the
Baltimore facility employs approximately 400 collection personnel with the
ability to expand to approximately 800 employees. Through these
facilities, customers with delinquent accounts are called as early as the
first day of delinquency and generally within the first week of
delinquency, based upon the customer's behavior score and prior credit
history. Metris Direct's collections department generates letters through
a proprietary letter system when appropriate. Delinquent customers receive
automatic collection letters at various stages in their delinquency, from
5-90 days past due. Metris Direct's collections personnel attempt a
minimum of two contacts in each 30-day delinquency cycle, unless special
arrangements have been made with the customer. Accounts that become 60
days contractually delinquent are closed but not necessarily charged off.
Accounts are charged off and taken as a loss either after formal
notification of bankruptcy or at the end of the month during which they
become contractually 180 days past due. Accounts identified as fraud
losses are immediately reserved for and charged off no later than 90 days
after the last activity. Accounts identified as deceased without a
surviving, contractually liable individual or an estate large enough to
pay the debt in full are charged off immediately upon notification.
Charged-off accounts are referred to Direct Merchants Bank's recovery unit
in Baltimore, Maryland, for coordination of collection efforts to recover
the amounts owed. When appropriate, accounts are placed with external
collection agencies or attorneys.
The Federal Financial Institutions Examination Counsel on June 30,
1998 proposed a revised policy statement on the classification of retail
credit. If adopted, the revised policy statement could establish,
effective January 1, 2001, a uniform charge-off period of 150 days past
due from the contractual date for open-end and closed-end credit,
including credit card receivables. The revised policy statement could
also, effective January 1, 1999, provide guidance for loans affected by
bankruptcy, fraudulent activity, and death; establish standards for
re-aging, extending, deferring, or rewriting of past due accounts; and
broaden the circumstances under which partial payments are recognized as
full payments for purposes of determining that a loan is no longer
delinquent.
Direct Merchants Bank uses FDR's fraud protection system to improve
the rate of early detection of fraudulent activity on a cardholder
account. The system also provides work flow management that is used to
investigate potentially fraudulent transactions and to take prompt
immediate action to reduce further losses. A fraud score is established
based on the details of the authorization request and the previous
behavior pattern of the cardholder. This score is used in the
determination of actions to be taken for potentially fraudulent
transactions.
Direct Merchants Bank reserves the right to cancel charge privileges
at any time, usually as a result of violating the contractual terms
(delinquency, overlimit, etc.) of the credit account. Activity on lost,
stolen, or fraudulent accounts is blocked immediately upon notification by
the cardholder or upon determination by FDR that a card is lost or stolen
or being used fraudulently.
Delinquency and Loss Experience
The following tables set forth the delinquency and loss experience
for each of the periods shown for the portfolio of credit card accounts
serviced by Direct Merchants Bank (the "Direct Merchants Bank Portfolio").
There can be no assurance that the delinquency and loss experience for the
Trust Portfolio will be similar to the historical experience set forth
below because, among other things, economic and financial conditions
affecting the ability of cardholders to make payments may be different
from those that have prevailed during the periods reflected below and many
of the Accounts have been originated in the last twelve months.
<TABLE>
<CAPTION>
Delinquency Experience for the Direct Merchants Bank Portfolio(1)
(Dollars in Thousands)
As of As of As of
June 30, 1998 March 31, 1998 December 31, 1997
-------------------------------------------------------------------------
Percentage Percentage Percentage
of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding (2) 100.0% $2,982,652 100.0% $2,863,430 100.0%
Receivables
Delinquent:
30-59 Days $69,178 2.3% $64,547 2.3%
60-89 Days 50,644 1.7 44,115 1.5
90 or More Days 105,024 3.5 89,601 3.1
------------------------------------------------------------------------
Total $224,846 7.5% $198,263 6.9%
========================================================================
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
As of As of As of
September 30, 1997 June 30, 1997 March 31, 1997
-------------------------------------------------------------------------
Percentage Percentage Percentage
of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables
-------------------------------------------------------------------------
<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>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
As of As of As of
December 31, 1996 September 30, 1996 June 30, 1996
-------------------------------------------------------------------------
Percentage Percentage Percentage
of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables
-------------------------------------------------------------------------
<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 As of As of
March 31, 1996 December 31, 1995 September 30, 1995
-------------------------------------------------------------------------
Percentage Percentage Percentage
of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding (2) $676,974 100.0% $543,619 100.0% $298,920 100.0%
Receivables
Delinquent:
30-59 Days $9,677 1.4% $7,546 1.4% $5,142 1.7%
60-89 Days 5,879 0.9 4,952 0.9 3,039 1.0
90 or More Days 10,046 1.5 8,996 1.7 2,288 0.8
------------------------------------------------------------------------
Total $25,602 3.8% $21,494 4.0% $10,469 3.5%
========================================================================
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
As of
June 30, 1995
-------------------------
Receivables Percentage
of Total
Receivables
-------------------------
Receivables
Outstanding(2) $190,069 100.0%
Receivables
Delinquent:
30-59 Days $320 0.2%
60-89 Days 1 0.0
90 or More Days -- --
------------------------
Total $321 0.2%
========================
- ---------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Key Bank USA, National Association or
Mercantile Bank National Association acquired accounts or the Direct
Merchants Bank's minor secured card portfolio.
(2) The Receivables Outstanding on the accounts consist of all amounts
due from cardholders as posted to the accounts as of the date shown.
<TABLE>
<CAPTION>
Loss Experience for the Direct Merchants Bank Portfolio(1)
(Dollars in Thousands)
Quarter Quarter
Ended Ended Year Quarter Ended Year
--------------------- Ended ------------------------------------------------ Ended
June 30, March 31, Dec. 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
1998 1998 1997 1997 1997 1997 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding(2) $2,957,963 $2,126,677.75 $2,587,665 $2,274,934 $1,939,623 $1,704,489 $1,017,236
Total Gross
Charge-Offs (3) $73,931 $194,506 $61,561 $51,070 $45,522 $36,353 $64,453
Total Gross
Charge-Offs as a
Percentage of
Average
Receivables
Outstanding 2.50% 9.15% 2.38% 2.24% 2.35% 2.13% 6.34%
(Annualized) 10.14% 9.15% 9.44% 8.91% 9.41% 8.65% 6.34%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Quarter Ended
-------------------------------------------- Ended -------------------------------------
Dec. 31, Sept. 31, June 30, March 31 Dec. 31, Dec. 31, Sept. 30, June 30,
1996 1996 1996 1996 1995 1995 1995 1995
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding(2) $1,401,552 $1,185,070 $872,529 $609,792 $242,694 $394,610 $248,788 $84,685
Total Gross
Charge-offs (3) $26,445 $17,042 $12,020 $8,946 $4,046 $3,206 $840 --
Total Gross
Charge-Offs as a
Percentage of
Average
Receivables
Outstanding 1.89% 1.44% 1.38% 1.47% 1.67% 0.81% 0.34% --
(Annualized) 7.51% 5.72% 5.54% 5.90% 2.21% 3.22% 1.34% --
</TABLE>
- ---------------------------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Key Bank USA, National Association,
Mercantile Bank National Association or Huntington BancShares
acquired accounts, or the Direct Merchants Bank's minor secured card
portfolio.
(2) Average Receivables Outstanding is calculated by determining the
daily average of outstanding account balances for each month and
then dividing the sum of such daily averages for such months by the
number of months in such period.
(3) Gross Charge-Offs are Total Principal Charge-Offs before recoveries
and do not include the amount of any reductions in Average
Receivables Outstanding due to fraud, returned goods, customer
disputes or other miscellaneous credit adjustments.
Recoveries
Pursuant to the terms of the Pooling and Servicing Agreement, the
Servicer will be required to transfer all Recoveries to the Trust. In the
event of any sale or other disposition of Receivables in Defaulted
Accounts as provided in the Pooling and Servicing Agreement, Recoveries
will not include amounts received by the purchaser or transferee of such
Receivables but will be limited to amounts received by the Servicer from
the purchaser or transferee. Collections of Recoveries will be treated as
Collections of Finance Charge Receivables.
Yield Considerations
The Portfolio Yield on the Direct Merchants Bank Portfolio is set
forth in the following table. The Portfolio Yields in the table are
calculated and reported on a billed basis. The Portfolio Yields on
Receivables included in the Trust are calculated and reported on a cash
basis. Portfolio Yields calculated on a billed basis may differ from
Portfolio Yields calculated on a cash basis due to (a) a lag between when
finance charges and fees are billed to cardholder accounts and when such
finance charges and fees are collected, (b) finance charges and fees that
are not ultimately collected from the cardholder and (c) growth in the
Direct Merchants Bank Portfolio.
The Portfolio Yield calculated on both a billed and a cash basis
will also be affected by numerous factors, including changes in the
monthly interest rate, variations in the rate of payments and new
borrowings on the Accounts, the amount of the annual membership fee and
other fees, changes in the delinquency and loss rates on the Receivables,
and the percentage of cardholders who pay their balances in full each
month and, except in the case of cash advances, do not incur periodic
finance charges, which may in turn be caused by a variety of factors
including seasonal variations, the availability of other sources of credit
and general economic conditions. See "Maturity Considerations." The
interchange fees are not included in the Trust assets and are not included
in the yield numbers for the Direct Merchants Bank Portfolio in the
following table.
<TABLE>
<CAPTION>
Yield Experience for the Direct Merchants Bank Portfolio(1)
(Dollars in Thousands)
Quarter Ended Quarter Ended
---------------------------------------------------------------------------------- Year Ended
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
1998 1998 1997 1997 1997 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding (2) $2,957,963 $2,587,665 $2,274,934 $1,939,623 $1,704,489 $1,017,236
Total Finance
Charges
and Fees
Billed (3)(4) $181,651 $154,670 $133,870 $124,378 $107,395 $269,298
Average Revenue
Yield 24.91% 23.71% 23.35% 25.72% 25.55% 26.47%
(Annualized)
</TABLE>
Quarter Ended
-------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996
-------------------------------------------------------
Average
Receivables
Outstanding (2) $1,401,552 $1,185,070 $872,529 $609,792
Total Finance
Charges
and Fees
Billed (3)(4) $93,506 $75,252 $58,727 $41,813
Average
Revenue Yield
(Annualized) 26.54% 25.26% 27.07% 27.58%
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Year Quarter Ended
Ended --------------------------------------
Dec. 31, Dec. 31, Sept, 30, June 30,
1995 1995 1995 1995
----------------------------------------------------
Average
Receivables
Outstanding (2) $242,694 $394,610 $248,788 $84,685
Total
Finance
Charges
and Fees
Billed (3)(4) $49,021 $23,071 $21,671 $4,279
Average
Revenue Yield
(Annualized) 26.81% 23.20% 34.56% 20.27%
- ----------------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Key Bank USA, National Association,
Mercantile Bank National Association acquired accounts or the Direct
Merchants Bank's minor secured card portfolio.
(2) Average Receivables Outstanding is calculated by determining the
daily average of outstanding account balances for each month and
then dividing the sum of such daily averages for such months by the
number of months in such period.
(3) Total Finance Charges and Fees Billed include finance charges, cash
advance fees, annual membership fees, late fees, and other charges.
It does not include interchange fee.
(4) Total Finance Charges and Fees Billed are presented net of
adjustments made pursuant to the Bank's normal servicing procedures,
including removal of incorrect or disputed finance charges and
reversal of finance charges accrued on charged-off accounts.
THE RECEIVABLES
The Accounts had, as of , 1998, an average Principal Receivable
balance of $ and an average credit limit of $ . The percentage of the
total Receivable balance to the aggregate total credit limit, as of ,
1998, was percent.
The following tables summarize the Receivables which have been
conveyed to the Trust (the "Trust Portfolio") by various criteria as of
the close of business on ______, 1998. Because the future composition of
the Trust Portfolio may change over time, these tables are not necessarily
indicative of the composition of the Trust Portfolio at any subsequent
time. The Transferor will add to the Trust, in compliance with the
provisions of the Pooling and Servicing Agreement, Receivables in
Additional Accounts and Supplemental Accounts in addition to those
reflected in the tables below.
Composition by Credit Limit
Trust Portfolio
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Credit Limit Range Accounts Accounts Outstanding Outstanding
---------------------------------------------------
$ 0.00 -$ 500.00
$ 500.01 -$1,000.00
$1,000.01 -$1,500.00
$1,500.01 -$3,000.00
$3,000.01 -$5,000.00
$5,000.01 -$10,000.00
$10,000.01 & Greater
----------------------------------------------------
Total
====================================================
Composition by Period of Delinquency
Trust Portfolio
Percentage Percentage
Period of Delinquency of Total of Total
(Days Contractually Number of Number of Receivables Receivables
Delinquent) Accounts Accounts Outstanding Outstanding
----------------------------------------------------
Current
1 -29 Days
30 -59 Days
60 -89 Days
90 -119 Days
120 -149 Days
150 Days or More
--------------------------------------------------
Total
=================================================
Composition by Account Balance
Trust Portfolio
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Account Balance Range Accounts Accounts Outstanding Outstanding
---------------------------------------------------
Credit Balance
No Balance
$ 0.01 -$ 500.00
$ 500.01 -$1,000.00
$1,000.01 -$1,500.00
$1,500.01 -$3,000.00
$3,000.01 -$5,000.00
$5,000.01 & Greater
----------------------------------------------------
Total
====================================================
Composition by Account Age
Trust Portfolio
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Account Age Accounts Accounts Outstanding Outstanding
---------------------------------------------------
Not more than 6 Months
Over 6 Months to 12
Months
Over 12 Months to 24
Months
Over 24 Months
----------------------------------------------------
Total
====================================================
Composition by Geographic Distribution
Trust Portfolio
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Location Accounts Accounts Outstanding Outstanding
- -----------------------------------------------------------------------------
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
District of
Columbia
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Other
----------------------------------------------------------
Total
==========================================================
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 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 sum of the amount on
deposit in the Pre-Funding Account plus the Series 1998-3 Percentage of
the sum of the total amount of Principal Receivables plus amounts on
deposit in the Excess Funding Account being less than (ii) the sum of the
aggregate outstanding principal amounts of the Class A Securities 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, or (g) a reduction in the average of the Portfolio Yields for
any three consecutive Monthly Periods to a rate which is less than the
weighted average of the Base Rates for such three consecutive Monthly
Periods. See "Description of the Offered Securities--Pay Out Events." In
the event of an early payment of principal on the 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" means, with respect to any Monthly Period, the
annualized percentage equivalent of a fraction, the numerator of which is
the sum of the aggregate amount of Available Series Finance Charge
Collections for such Monthly Period (not including the amounts on deposit
in the Payment Reserve Account and Adjustment Payments made by the
Transferor with respect to Adjustment Payments required to be made but not
made in prior Monthly Periods, if any) plus the Principal Funding Account
Investment Proceeds, investment earnings on amounts on deposit in the
Pre-Funding Account and amounts withdrawn from the Accumulation Period
Reserve Account with respect to such Monthly Period calculated on a cash
basis after subtracting the Series Default Amount and the Series 1998-3
Percentage of any Adjustment Payments which the Transferor is required but
fails to make pursuant to the Pooling and Servicing Agreement for such
Monthly Period, and the denominator of which is the average daily Invested
Amount plus the Pre-Funded Amount during the preceding Monthly Period;
provided, however, that Excess Finance Charge Collections applied for the
benefit of the Securityholders may be added to the numerator if the Rating
Agency Condition is satisfied. See "Description of the Offered
Securities--Pay Out Events."
Payment Rates. The following table sets forth the highest and lowest
cardholder monthly payment rates for the Receivables during any month in
the period shown and the average cardholder monthly payment rates for all
months during the period shown, in each case calculated as a percentage of
the previous month's total statement balance. Payment rates shown in the
table are based on amounts which would be deemed payments of Principal
Receivables and Finance Charge Receivables with respect to the Accounts
(total payments).
Cardholder Monthly Payment Rates for the Direct Merchants Bank Portfolio(1)
Quarter Ended
----------- ------------------------------------
June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1997 1997
----------- ------------------------------------
Highest Month 7.2% 6.6% 7.0%
Lowest Month 6.3% 6.0% 6.2%
Monthly Average (2) 6.6% 6.3% 6.6%
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 30, Dec. 30, Sept. 30, June 30,
1997 1997 1996 1996 1996 1996 1995 1995 1995
---------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Highest Month 7.2% 7.6% 7.5% 8.4% 8.8% 8.5% 8.7% 12.7% 64.7%
Lowest Month 6.8% 6.6% 6.8% 6.4% 8.0% 8.0% 7.9% 8.5% 19.7%
Monthly Average 7.0% 7.1% 7.1% 7.5% 8.3% 8.3% 8.3% 10.5% 42.2%
(2)
</TABLE>
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Key Bank USA, National Association or
Mercantile Bank National Association acquired accounts or the Direct
Merchants Bank's minor secured card portfolio.
(2) Monthly Averages shown are expressed as an arithmetic average of the
payment rate for each month for the period indicated.
The amount of collections of Receivables may vary from month to
month due to various factors, including seasonal variations, general
economic conditions, economic and financial conditions affecting the
payment habits of individual cardholders, the Credit Card Originator's
minimum monthly payment requirements, and acts of God. There can be no
assurance that collections with respect to the Trust, and thus the rate at
which the Securityholders could expect to receive payments of principal on
their Securities during the Amortization Period, will be similar to the
historical experience set forth above. If a Pay Out Event occurs, the
average life and maturity of the Offered Securities could be significantly
reduced.
Because the actual payment rate at the end of the Revolving Period
may be less than the payment rate used to determine the Controlled
Accumulation Amount, or a Pay Out Event may occur which would initiate the
Early Amortization Period, there can be no assurance that the actual
number of months elapsed from the date of issuance of the Offered
Securities to the Expected Final Payment Date will equal the expected
number of months for such period. See "Risk Factors--Payments and
Maturity." As described under "Description of the Offered
Securities--Postponement of Accumulation Period," the Servicer may shorten
the Accumulation Period and, in such event, there can be no assurance that
the duration of the Accumulation Period will be sufficient for the
accumulation of all amounts necessary to pay the Class A Invested Amount
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 $__________,
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 fund the Pre-Funding Account to the extent
of the Pre-Funded Amount, to pay the purchase price of Receivables and to
make a deposit to the Interest Funding Account for the payment of Class A
Monthly Interest on the first Distribution Date. 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
(the"Company"). The Company 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, the Company 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. The
Company is not obligated to pay the debts of or claims against CMAC.
The consolidated financial statements of MBIA, a wholly owned
subsidiary of the Company, 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 the
Company for the year ended December 31, 1997 and the consolidated
financial statements of MBIA and its subsidiaries as of June 30, 1998 and
for the six month periods ending June 30, 1998 and June 30, 1997 included
in the Quarterly Report on Form 10-Q of the Company for the period ending
June 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 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 the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, 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 June 30, 1998 December 31, 1997 June 30, 1998
(Audited) (Unaudited) (Audited) (Unaudited)
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Admitted
Assets. . . . $5,256 $6,048 Assets . . $5,988 $6,794
Liabilities . . 3,496 3,962 Liabilities. . 2,624 2,977
Capital and Shareholder's
Surplus . . . 1,760 2,086 Equity. . . . 3,364 3817
</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 rating 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.
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 made 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 any Class of Offered Securities will be entitled
to receive a certificate representing such Security Owner's interest in
such Securities. Until such time, all references herein to actions by
Securityholders of 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 Securityholders of the Class A Securities 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,
Securityholders may hold their Securities through DTC (in the United
States) or Cedel or Euroclear (in Europe), which in turn hold through DTC,
if they are participants of such systems, or indirectly through
organizations that are participants in such systems.
Cede & Co., as nominee for DTC, will hold the global securities.
Cedel and Euroclear will hold omnibus positions on behalf of the Cedel
Participants and the Euroclear Participants, respectively, through
customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective depositaries (collectively, the "Depositaries")
which in turn will hold such positions in customers' securities accounts
in the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities for its Participants ("DTC
Participants") and facilitates the clearance and settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement
of securities. Participants include securities brokers and dealers, banks,
trust companies, clearing corporations, and certain other organizations.
Indirect access to the DTC system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to
DTC and its Participants are on file with the Securities and Exchange
Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants
will occur in the ordinary way in accordance with their applicable rules
and operating procedures.
Cross-market transfers between persons holding directly or
indirectly through DTC in the United States, on the one hand, and directly
or indirectly through Cedel Participants or Euroclear Participants, on the
other, will be effected in DTC in accordance with DTC rules on behalf of
the relevant European international clearing system by its Depositary;
however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with
normal procedures for same-day funds settlement applicable to DTC. Cedel
Participants and Euroclear Participants may not deliver instructions
directly to the Depositaries.
Because of time-zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a DTC Participant
will be made during the subsequent securities settlement processing, dated
the business day following the DTC settlement date, and such credits or
any transactions in such securities settled during such processing will be
reported to the relevant Cedel Participant or Euroclear Participant on
such business day. Cash received in Cedel or Euroclear as a result of
sales of securities by or through a Cedel Participant or a Euroclear
Participant to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
Purchases of Securities under the DTC system must be made by or
through Participants, which will receive a credit for the Securities on
DTC's records. The ownership interest of each actual Security Owner is in
turn to be recorded on the DTC Participants' and Indirect Participants'
records. Security Owners will not receive written confirmation from DTC of
their purchase, but Security Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC Participant or Indirect
Participant through which the Security Owner entered into the transaction.
Transfers of ownership interests in the Securities are to be accomplished
by entries made on the books of DTC Participants acting on behalf of
Security Owners. Security Owners will not receive Securities representing
their ownership interest in Securities, except in the event that use of
the book-entry system for the Securities is discontinued.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of Securities with DTC and their
registration in the name of Cede & Co. effects no change in beneficial
ownership. DTC has no knowledge of the actual Security Owners of the
Securities; DTC's records reflect only the identity of the DTC
Participants to whose accounts such Securities are credited, which may or
may not be the Security Owners. The DTC Participants will remain
responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect Participants, and by DTC
Participants and Indirect Participants to Security Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to
Securities. Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date, which assigns Cede &
Co.'s consenting or voting rights to those Participants to whose accounts
the Securities are credited on the record date (identified in a listing
attached thereto). Principal and interest payments on the Securities will
be made to DTC. DTC's practice is to credit Participants' accounts on the
Distribution Date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive
payment on the Distribution Date. Payments by Participants to Security
Owners will be governed by standing instructions and customary practices,
as is the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility
of such Participant and not of DTC, the Trustee or the Transferor, subject
to any statutory or regulatory requirements as may be in effect from time
to time. Payment of principal and interest to DTC is the responsibility of
the Trustee, disbursement of such payments to Participants shall be the
responsibility of DTC, and disbursement of such payments to the Security
Owners shall be the responsibility of Participants and Indirect
Participants.
DTC may discontinue providing its services as securities depository
with respect to the Securities at any time by giving reasonable notice to
the Transferor or the Trustee. Under such circumstances, in the event that
a successor securities depository is not obtained, Definitive Securities
are required to be printed and delivered. The Transferor may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor securities depository). In that event, Definitive Securities
will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Transferor believes to be
reliable, but the Transferor takes no responsibility for the accuracy
thereof.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws
of Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel
Participants through electronic book-entry changes in accounts of Cedel
Participants, thereby eliminating the need for physical movement of
securities. Transactions may be settled by Cedel in any of 36 currencies,
including United States dollars. Cedel provides to its Cedel Participants,
among other things, services for safekeeping, administration, clearance
and settlement of internationally traded securities and securities lending
and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulations
by the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations and may include the
underwriters of any Series of Securities. Indirect access to Cedel is also
available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
The Euroclear System (the "Euroclear System") was created in 1968 to
hold securities for participants of the Euroclear System ("Euroclear
Participants") and to clear and settle transactions between Euroclear
Participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of securities
and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 34 currencies, including United
States dollars. The Euroclear System includes various other services,
including securities lending and borrowing and interfaces with domestic
markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. The Euroclear System is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company
of New York, (the "Euroclear Operator" or "Euroclear"), under contract
with Euroclear Clearance System, S.C., a Belgian cooperative corporation
(the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear
cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for the Euroclear System
on behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other
professional financial intermediaries and may include the underwriters of
any Series of Securities. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission. Securities clearance accounts and cash
accounts with the Euroclear Operator are governed by the Terms and
Conditions Governing Use of Euroclear and the related Operating Procedures
of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of
securities and cash within the Euroclear System, withdrawal of securities
and cash from the Euroclear System, and receipts of payments with respect
to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
securities to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to Securities held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions
will be subject to tax reporting in accordance with relevant United States
tax laws and regulations. Cedel or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a Securityholder
under the Pooling and Servicing Agreement on behalf of a Cedel Participant
or a Euroclear Participant only in accordance with its relevant rules and
procedures and subject to its Depositary's ability to effect such actions
on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Definitive Securities
The 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 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 Securityholders in accordance with
the procedures set forth herein and in the Pooling and Servicing
Agreement. Interest payments and any principal payments on each
Distribution Date will be made to Securityholders in whose names the
Definitive Securities were registered at the close of business on the
related Record Date. Distributions will be made by check mailed to the
address of such Securityholder as it appears on the register maintained by
the Trustee. The final payment on any Offered Security, however, will be
made only upon presentation and surrender of such Security at the office
or agency specified in the notice of final distribution to
Securityholders. The Trustee will provide such notice to registered
Securityholders mailed not later than the fifth day of the month of such
final distributions.
Definitive Securities will be transferable and exchangeable at the
offices of the transfer agent and registrar, which initially will be the
Trustee (in such capacity, the "Transfer Agent and Registrar"). No service
charge will be imposed for any registration of transfer or exchange, but
the Transfer Agent and Registrar may require payment of a sum sufficient
to cover any tax or other governmental charge imposed in connection
therewith. The Transfer Agent and Registrar will not be required to
register the transfer or exchange of Definitive Securities for the period
from the Record Date preceding the due date for any payment to the
Distribution Date with respect to such Definitive Securities.
Status of the Securities
Upon issuance, the Securities will rank pari passu with all other
outstanding Series.
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 , 1998, and on each Distribution Date
thereafter to Securityholders of each Class in an amount equal to the
product of (i) the actual number of days in the related Interest Accrual
Period divided by 360, (ii) the Class A Interest Rate 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) ___divided by 360
and (c) the Class A Interest Rate, determined on _______, 1998. Interest
payments on the Class A Securities on any Distribution Date will be funded
from Available Series Finance Charge Collections with respect to the
preceding Monthly Period (and with respect to the first Distribution Date,
the amount of the initial deposit to the Interest Funding Account to be
made on the Closing Date) and from certain other funds allocated as set
forth in the Pooling and Servicing Agreement to the respective Classes of
the Securities and deposited on each business day during such Monthly
Period in the Interest Funding Account. 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.
The Class A Securities will bear interest at the rate equal to % per
annum above LIBOR determined as set forth below for the period from the
Closing Date through , 1998 and each Interest Accrual Period thereafter.
The Trustee will determine LIBOR for the period from the Closing
Date through , 1998 on , 1998 and for each Interest Accrual Period
thereafter on the second business day prior to the Distribution Date on
which such Interest Accrual Period commences (each, a "LIBOR Determination
Date"). For purposes of calculating LIBOR, a business day is any day on
which banks in London and New York are open for the transaction of
international business.
"LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for one month (commencing on the first
day of the relevant Interest Accrual Period) which appears on Telerate
Page 3750 as of 11:00 a.m., London time, on the LIBOR Determination Date
for such Interest Accrual Period. If such rate does not appear on Telerate
Page 3750, the rate for such LIBOR Determination Date will be determined
on the basis of the rates at which deposits in United States dollars are
offered by the Reference Banks at approximately 11:00 a.m., London time,
on such LIBOR Determination Date to prime banks in the London interbank
market for a period equal to one month (commencing on the first day of the
relevant Interest Accrual Period). The Trustee will request the principal
London office of each such bank to provide a quotation of its rate. If at
least two such quotations are provided, the rate for such LIBOR
Determination Date will be the arithmetic mean of the quotations. If fewer
than two quotations are provided as requested, the rate for such LIBOR
Determination Date will be the arithmetic mean of the rates quoted by four
major banks in New York City, selected by the Trustee, at approximately
11:00 a.m., New York City time, on that LIBOR Determination Date for loans
in United States dollars to leading European banks for a period equal to
one month (commencing on the first day of the relevant Interest Accrual
Period).
The Class A Interest Rate applicable to the then current and
immediately preceding Interest Accrual Period may be obtained by
telephoning the Trustee at its Corporate Trust Office at
(302) 451-2500.
Interest on the Securities will be calculated on the basis of the
actual number of days in the Interest Accrual Period and a 360 day year.
Principal Payments
During the Revolving Period (the period from and including the
Closing Date to but excluding the earlier of (a) the commencement of the
Accumulation Period and (b) the commencement of the Early Amortization
Period), Principal Collections allocable to the Invested Amount, subject
to certain limitations, including the allocation of any Redirected
Principal Collections with respect to the related Monthly Period to pay
the Class A Required Amount 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 or the
Pre-Funding Account allocated to the Securities with respect to such
Monthly Period, (iii) the aggregate Series Default Amount and the Series
1998-3 Percentage of any unpaid Adjustment Payments paid from Available
Series Finance Charge Collections, Transferor Finance Charge Collections,
Excess Finance Charge Collections, Redirected Principal Collections or
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 Class B
Charge-Offs, (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
Securityholders of each Class of Securities, sequentially, in alphabetical
order, on the Distribution Date following the Monthly Period in which the
Early Amortization Period commences. 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.
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 [ ]%, the provider of the Interest Rate Cap
("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, 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 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 Provider[s]
Each "Interest Rate Cap Provider" will be a third party cap provider
having a senior unsecured debt rating of at least " " by Standard & Poor's
and " " by Moody's, which cap provider or its corporate parent also has a
short term rating from Standard & Poor's of at least " ".
Transfer and Assignment of Receivables
On or about May 30, 1995 (the "Initial Closing Date"), the
Transferor transferred and assigned to the Trust all of its right, title,
and interest in and to the Receivables outstanding as of the Initial
Closing Date, all of the Receivables thereafter created and the proceeds
of all of the foregoing. Prior to such transfer and assignment and
pursuant to the Purchase Agreement, FCI (as predecessor to Metris under
the Purchase Agreement) contributed and sold to the Transferor all its
right, title and interest in and to the Receivables existing as of the
Initial Closing Date, all the Receivables thereafter created and all FCI's
interest in the Bank Purchase Agreement with respect to the Receivables.
Prior to such sale and contribution and pursuant to the Bank Purchase
Agreement, Direct Merchants Bank sold to FCI (as predecessor to Metris
under the Bank Purchase Agreement) all its right, title and interest in
and to the Receivables existing as of the date of such agreement and all
the Receivables arising from time to time thereafter. In connection with
the realignment of FCI's subsidiaries in September 1996, FCI assigned to
Metris all of FCI's rights and Metris assumed all of FCI's obligations
under the Bank Purchase Agreement and the Purchase Agreement.
Direct Merchants Bank for itself and as Servicer has identified in
its computer files that the Receivables are Receivables as defined herein.
Direct Merchants Bank, as initial Servicer, retains and will not deliver
to the Trustee any other records or agreements relating to the
Receivables. The records and agreements relating to the Receivables will
not be segregated from those relating to other accounts and receivables of
Direct Merchants Bank and the physical documentation relating to
Receivables will not be stamped or marked to reflect the transfer of
Receivables to the Trust. The Trustee will have reasonable access to such
records and agreements as required by applicable law or to enforce the
rights of the Securityholders. Direct Merchants Bank has filed one or more
UCC-1 financing statements in accordance with the UCC to perfect the
interest of FCI (as predecessor to Metris) in the Receivables and a UCC-3
financing statement reflecting FCI's assignment of such interest in the
Receivables to Metris. FCI (as predecessor to Metris under the Purchase
Agreement) has filed one or more UCC-1 financing statements in accordance
with the UCC to perfect the Transferor's interest in the Receivables. The
Transferor, in turn, has filed one or more UCC-1 financing statements in
accordance with applicable state law to perfect the Trust's interest in
the Receivables. See "Certain Legal Aspects of the Receivables."
Exchanges
The Pooling and Servicing Agreement provides for the Trustee to
issue two types of securities: (i) Investor Securities in one or more
Series of securities, each of which may have one or more classes of
securities of which one or more such classes may be transferable, and (ii)
the Exchangeable Transferor Security. The Exchangeable Transferor Security
evidences the Transferor Interest, is held by the Transferor, and will be
transferable only as provided in the Pooling and Servicing Agreement. The
Pooling and Servicing Agreement also provides that, pursuant to any one or
more Supplements, the holder of the Exchangeable Transferor Security may
tender the Exchangeable Transferor Security and the securities evidencing
any Series of securities, to the Trustee in exchange for one or more new
Series and a reissued Exchangeable Transferor Security. Under the Pooling
and Servicing Agreement, the holder of the Exchangeable Transferor
Security may define, with respect to any newly issued Series, certain
terms including: (i) its name or designation; (ii) its initial invested
amount (or method for calculating such amount); (iii) its interest rate
(or the method of allocating interest payments or other cash flows to such
Series); (iv) the closing date; (v) the rating agency or agencies, if any,
rating the Series; (vi) the interest payment date or dates and the date or
dates from which interest shall accrue; (vii) the name of the clearing
agency, if any; (viii) the method of allocating Principal Collections for
such Series and the method by which the principal amount of Investor
Securities of such Series will amortize or accrue and the method for
allocating Finance Charge Collections; (ix) the names of any accounts to
be used by such Series and the terms governing the operation of any such
accounts; (x) the percentage used to calculate monthly servicing fees;
(xi) the Minimum Transferor Interest; (xii) the Enhancement provider, if
applicable, and the terms of any Enhancement with respect to such Series;
(xiii) the base rate applicable to such Series; (xiv) the terms on which
the securities of such Series may be repurchased or remarketed to other
investors; (xv) the termination date of such Series; (xvi) any deposit
into any account provided for such Series; (xvii) the number of classes of
such Series and, if more than one class, the rights and priorities of each
such class; (xviii) the fees, if any, to be included in funds available to
securityholders of such Series; (xix) the subordination, if any, of such
new Series with respect to any other Series; (xx) the rights, if any, of
the holder of the Exchangeable Transferor Security that have been
transferred to the holders of such Series, if any; (xxi) the pool factor;
(xxii) the Minimum Aggregate Principal Receivables; (xxiii) whether such
Series will be part of a group or subject to being paired with any other
prefunded Series; (xxiv) whether such Series will be prefunded; and (xxv)
any other relevant terms, including whether or not such Series will be
pledged as collateral for an issuance of any other securities, including
commercial paper (all such terms, the "Principal Terms" of such Series).
None of the Transferor, the Servicer, the Trustee, or the Trust is
required or intends to obtain the consent of any Securityholder to issue
any additional Series or in connection with the determination of the
Principal Terms thereof. However, as a condition of an Exchange, the
holder of the Exchangeable Transferor Security will deliver to the Trustee
written confirmation that the Exchange will not result in any Rating
Agency reducing or withdrawing its rating of any outstanding Series,
including the Offered Securities. The Transferor may offer any Series to
the public or other investors in transactions either registered under the
Securities Act or exempt from registration thereunder, directly, through
one or more underwriters or placement agents, in fixed-price offerings, in
negotiated transactions or otherwise. Any such Series may be issued in
fully registered or book-entry form in minimum denominations determined by
the Transferor. The Transferor currently intends to offer, from time to
time, additional Series.
The Pooling and Servicing Agreement provides that the holder of the
Exchangeable Transferor Security may perform Exchanges and define the
Principal Terms of each Series, including the period during which
amortization of the principal amount thereof is intended to occur, which
period may have a different length and begin on a different date than such
period for any other Series. Accordingly, one or more Series may be in
their amortization periods while other Series are not. Moreover, any
Series may have the benefit of an Enhancement that is available only to
such Series. Under the Pooling and Servicing Agreement, the Trustee will
hold any such form of Enhancement only on behalf of the Series with
respect to which it relates. Likewise, with respect to each such form of
Enhancement, the holder of the Exchangeable Transferor Security may
deliver a different form of Enhancement agreement. The Pooling and
Servicing Agreement also provides that the holder of the Exchangeable
Transferor Security may specify different coupon rates and monthly
servicing fees with respect to each Series (or a particular class within
such Series). Collections allocated to Finance Charge Receivables not used
to pay interest on the securities, the monthly servicing fee, the investor
default amount, or investor charge-offs with respect to any Series will be
allocated as provided in such Enhancement agreement, if applicable. The
holder of the Exchangeable Transferor Security also has the option under
the Pooling and Servicing Agreement to vary between Series the terms upon
which a Series (or a particular class within such Series) may be
repurchased by the Transferor or remarketed to other investors.
Additionally, certain Series may be subordinated to other Series, and
classes within a Series may have different priorities. The Series 1998-3
Supplement does not permit the subordination of the Securities to any
other Series that may be issued by the Trust (except to the limited extent
described herein with respect to Shared Principal Collections and Excess
Finance Charge Collections). There is no limit to the number of Exchanges
that may be performed under the Pooling and Servicing Agreement. The Trust
will terminate only as provided in the Pooling and Servicing Agreement.
Under the Pooling and Servicing Agreement and pursuant to a
Supplement, an Exchange may occur only upon the satisfaction of certain
conditions provided in the Pooling and Servicing Agreement. Under the
Pooling and Servicing Agreement, the holder of the Exchangeable Transferor
Security may perform an Exchange by notifying the Trustee at least five
business days in advance of the date upon which the Exchange is to occur.
Under the Pooling and Servicing Agreement, the notice will state the
designation of any Series to be issued on the date of the Exchange and,
with respect to each such Series: (i) its initial principal amount (or
method for calculating such amount), (ii) its interest rate (or the method
of allocating interest payments or other cash flows to such Series), and
(iii) the provider of the Enhancement, if any, which is expected to
provide credit support with respect to it. The Pooling and Servicing
Agreement provides that on the date of the Exchange the Trustee will
authenticate any such Series only upon delivery to the Trustee of the
following: (i) a Supplement specifying the Principal Terms of such Series,
(ii) an opinion of counsel to the effect that the securities of such
Series will be characterized as indebtedness or as partnership interests
under existing law for federal and applicable state income tax purposes,
and that the issuance of such Series will not materially adversely affect
the federal income tax characterization of any outstanding Series or
result in the trust being subject to tax at the entity level for federal
or applicable state tax purposes (a "Tax Opinion"), (iii) if required by
such Supplement, the form of Enhancement and an appropriate Enhancement
agreement with respect thereto executed by the Transferor and the issuer
of the Enhancement, (iv) written confirmation from each Rating Agency that
the Exchange will not result in such Rating Agency's reducing or
withdrawing its rating on any then outstanding Series rated by it, (v) the
existing Exchangeable Transferor Security and, if applicable, the
securities representing the Series to be exchanged, and (vi) an officer's
certificate of the Transferor stating that, after giving effect to such
Exchange, (a) the Transferor Interest would be at least equal to the
Minimum Transferor Interest and (b) the Retained Interest (as defined in
the Pooling and Servicing Agreement) equals or exceeds the Minimum
Retained Interest.
Under the Pooling and Servicing Agreement, the Transferor may also
exchange the Exchangeable Transferor Security for a newly issued
Exchangeable Transferor Security and a second security (a "Supplemental
Security") the terms of which will be defined in a Supplement upon the
satisfaction of certain conditions provided in the Pooling and Servicing
Agreement.
Representations and Warranties
Pursuant to the Pooling and Servicing Agreement, the Transferor
represents and warrants that, among other things, subject to specified
exceptions and limitations (i) the Transferor is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and
has the corporate power and authority to execute, deliver, and perform its
obligations under the Pooling and Servicing Agreement, the Series 1998-3
Supplement, and the Purchase Agreement, (ii) the Transferor is duly
qualified to do business and in good standing (or is exempt from such
requirement) in any state required in order to conduct its business and
has obtained all necessary licenses and approvals required under federal
and Delaware law, provided, however, that no representation or warranty is
made with respect to any qualifications, licenses or approvals which the
Trustee would have to obtain to do business in any state in which the
Trustee seeks to enforce any Receivable, (iii) the execution and delivery
of the Pooling and Servicing Agreement, the Series 1998-3 Supplement, and
the Purchase Agreement, and the consummation of the transactions provided
for therein, have been duly authorized by the Transferor by all necessary
corporate action on its part, (iv) each of the Pooling and Servicing
Agreement, the Series 1998-3 Supplement, and the Purchase Agreement
constitutes a legal, valid, and binding obligation of the Transferor, and
(v) the transfer of Receivables by it to the Trust under the Pooling and
Servicing Agreement constitutes either a valid transfer and assignment to
the Trust of all right, title, and interest of the Transferor in and to
the Receivables and the proceeds thereof and amounts in any of the
accounts established for the benefit of securityholders free and clear of
any lien of any person claiming through or under the Transferor or any of
its affiliates (except for Permitted Liens and certain rights of the
Transferor) or the grant of a first priority security interest in such
Receivables and the proceeds thereof (including amounts in any of the
accounts established for the benefit of securityholders). In the event of
a breach of any of the representations and warranties described in this
paragraph with respect to any Series, either the Trustee or the holders of
securities evidencing undivided interests in the Trust aggregating more
than 50 percent of the invested amount of such Series, by written notice
to the Transferor (and to the Trustee and the Servicer if given by the
securityholders of such Series), may direct the Transferor to accept
reassignment of an amount of Principal Receivables equal to the invested
amount to be reassigned (as described below) within 60 days of such
notice, or within such longer period specified in such notice. The
Transferor will thereupon be obligated to accept reassignment of such
Receivables on a Distribution Date occurring within such applicable
period. Such reassignment will not be required to be made, however, if at
any time during such applicable period, or such longer period, the
representations and warranties shall then be true and correct in all
material respects. The amount to be deposited by the Transferor for
distribution to securityholders in connection with such reassignment will
be equal to the invested amount for all Series of securities other than
Variable Funding Securities required to be reassigned on the last day of
the Monthly Period preceding the Distribution Date on which the
reassignment is scheduled to be made, and, with respect to the Variable
Funding Securities, the invested amount as of the Distribution Date on
which the reassignment is scheduled to be made, less the amount, if any,
previously allocated for payment of principal to such securityholders on
such Distribution Date, plus an amount equal to all interest accrued but
unpaid on such securities at the applicable interest rate through the last
day of the related Interest Accrual Period, less the amount transferred to
the Distribution Account from the Interest Funding Account in respect of
interest on such securities for the month ending on such last day of the
Monthly Period. The payment of the reassignment deposit amount and the
transfer of all other amounts deposited for the preceding month in the
Distribution Account will be considered a payment in full of the investor
interest for all Series of securities required to be repurchased and will
be distributed upon presentation and surrender of the securities for each
such Series. If the Trustee or 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 Securityholders are materially adversely affected, and such
representation or warranty continues to be incorrect for 60 days after
notice to the Transferor by the Trustee or to the Transferor and the
Trustee by more than 50 percent of the Invested Amount and the
Securityholders' Interest continues to be materially adversely affected
during such period, then the Trustee or 50 percent of the Securityholders'
Interest of any Class may give notice to the Transferor (and to the
Trustee in the latter instance) declaring that a Pay Out Event has
occurred, thereby commencing the Early Amortization Period; provided,
however, that a Pay Out Event will not be deemed to have occurred as
aforesaid if the Transferor has accepted a reassignment of the affected
Receivables during such period in accordance with the Pooling and
Servicing Agreement. See "--Pay Out Events."
It is not required or anticipated that the Trustee will make any
initial or periodic general examination of the Receivables or any records
relating to the Receivables for the purpose of establishing the presence
or absence of defects or compliance with the Transferor's representations
and warranties or for any other purpose. The Servicer, however, will
deliver to the Trustee on or before March 31 of each year an opinion of
counsel with respect to the validity of the security interest of the Trust
in and to the Receivables and certain other components of the Trust.
Certain Covenants
Pursuant to the Pooling and Servicing Agreement, the Transferor
covenants that, among other things, subject to specified exceptions and
limitations, (i) it will take no action to cause any Receivable to be
evidenced by any instruments or to be anything other than an account,
general intangible, or chattel paper, except in connection with the
enforcement or collection of a Receivable, (ii) except for the conveyances
under the Pooling and Servicing Agreement, it will not sell any Receivable
or grant a lien (other than a Permitted Lien) on any Receivable, (iii) in
the event it receives a collection on any Receivables, it will deposit
such collections to the Collection Account within two business days, (iv)
it will notify the Trust promptly after becoming aware of any lien on any
Receivable other than Permitted Liens, (v) it will take all actions
necessary to enforce its rights and claims under the Purchase Agreement,
(vi) it will promptly provide the Trustee any notices, reports or
certificates given or delivered under the Purchase Agreement and (vii)
except as permitted by the Pooling and Servicing Agreement, it will not
commingle its assets with those of Direct Merchants Bank or Metris or any
affiliate thereof.
Eligible Accounts
As of the Initial Closing Date (or, with respect to Additional
Accounts, on the date the Credit Card Originator acquires rights therein,
or, with respect to Supplemental Accounts, as of the date the Receivables
arising in such Accounts are designated for inclusion in the Trust), each
revolving credit consumer credit card account owned by a Credit Card
Originator and having the following characteristics shall be an Eligible
Account (each, an "Eligible Account"): (a) which is payable in United
States dollars, (b) the Obligor on which has provided, as its initial
billing address, an address located in the United States or its
territories or possessions or a United States military address, (c) which
has not been identified by a Credit Card Originator in its computer files
as stolen or lost, (d) which is not at the time of transfer to the Trust
sold or pledged to any other party and which does not have Receivables
which, at the time of transfer to the Trust, are sold or pledged to any
other party (provided that Receivables which were sold or pledged prior to
the Closing Date, but were repurchased free of all liens or where all
liens were released prior to the sale hereunder, shall not be disqualified
under this clause (d)), and (e) the Receivables in which the Credit Card
Originator has not charged off in its customary and usual manner for
charging off Receivables in such Accounts as of the Initial Closing Date
(or, with respect to Additional Accounts, as of the date the Receivables
of such Accounts are first designated for inclusion in the Trust) unless
such Account is subsequently reinstated.
Eligible Receivables
Each Receivable that satisfies each of the following criteria shall
be an Eligible Receivable (each, an "Eligible Receivable"): (a) it arises
under an Account, (b) it is not sold or pledged to any other party, (c) it
constitutes an "account," "chattel paper" or a "general intangible" as
each is defined in Article 9 of the UCC as then in effect in each Relevant
UCC State, (d) it is at the time of its transfer to the Trust the legal,
valid and binding obligation of, or is guaranteed by, a Person who is
competent to enter into a contract and incur debt and is enforceable
against such Person in accordance with its terms, (e) it was created or
acquired in compliance, in all material respects, with all Requirements of
Law applicable to the Credit Card Originator and pursuant to a Contract
that complies, in all material respects, with all Requirements of Law
applicable to the Credit Card Originator (including without limitation,
laws, rules and regulations relating to truth in lending, usury, fair
credit billing, fair credit reporting, equal credit opportunity and fair
debt collection practices), (f) all material consents, licenses, or
authorizations of, or registrations with, any Governmental Authority
required to be obtained or given in connection with the creation of such
Receivable or the execution, delivery, creation, and performance of the
related Contract have been duly obtained or given and are in full force
and effect as of the date of the creation of such Receivables and (g)
immediately prior to giving effect to the sale, the Transferor or the
Trust will have good and marketable title free and clear of all liens and
security interests arising under or through the Transferor (other than
Permitted Liens).
Addition of Trust Assets
During the period from the Initial Closing Date through May 31, 1996
and during the period from June 7, 1996 through November 5, 1996 all
accounts which met the definition of Additional Accounts were
automatically included as Accounts (such accounts, "Automatic Additional
Accounts") from and after the date upon which such Automatic Additional
Accounts were created and all Receivables in such Automatic Additional
Accounts, whether such Receivables were then existing or thereafter
created, were transferred automatically to the Trust upon purchase by the
Transferor. The Transferor has elected to suspend the automatic inclusion
in Accounts of Automatic Additional Accounts until a date (the "Restart
Date") to be identified in writing by the Transferor, at its option, to
the Trustee, the Servicer and each Rating Agency at least ten days prior
to such Restart Date. On and prior to the Restart Date, the Transferor
may, by giving ten business days' notice to the Trustee and each Rating
Agency, but will not be obligated to, designate from time to time
additional credit card accounts ("Supplemental Accounts") to be included
as Accounts. The Transferor has periodically designated Supplemental
Accounts to be included as Accounts and intends, although no assurance can
be given, to continue to designate additional Supplemental Accounts to be
included as Accounts. In addition, prior to the Restart Date, if (i) on
the tenth business day prior to any Determination Date, the Transferor
Interest for the related Monthly Period is less than the Minimum
Transferor Interest, the Transferor is required to designate Supplemental
Accounts to be included as Accounts in a sufficient amount such that the
Transferor Interest as a percentage of the aggregate Principal Receivables
for such Monthly Period after giving effect to such addition is at least
equal to the Minimum Transferor Interest or (ii) on any Record Date, the
aggregate Principal Receivables are less than the Minimum Aggregate
Principal Receivables, the Transferor is required to designate
Supplemental Accounts to be included as Accounts in a sufficient amount
such that the aggregate Principal Receivables will be equal to or greater
than the Minimum Aggregate Principal Receivables. Receivables from such
Supplemental Accounts shall be transferred to the Trust on or before the
tenth business day following such Record Date. On any day on which the
Receivables in Supplemental Accounts are to be transferred to the Trust,
the Receivables in such Accounts shall be included as Eligible Receivables
if they satisfy the requirements of the definition of "Eligible
Receivables."
The Transferor has conveyed, and will continue to convey, to the
Trust all Receivables arising under the Accounts, including all
Supplemental Accounts and Automatic Additional Accounts, from time to time
until the termination of the Trust.
The Transferor agrees that any such transfer of Receivables from
Supplemental Accounts will be subject to the satisfaction of the following
conditions: (i) on or before the fifth business day prior to the Addition
Date with respect to required additions and on or before the twentieth
business day prior to the Addition Date with respect to optional additions
(as applicable, the "Notice Date"), the Transferor shall give the Trustee,
each Rating Agency and the Servicer written notice that such Supplemental
Accounts will be included, which notice will specify the approximate
aggregate amount of the Receivables to be transferred; (ii) on or before
the applicable Addition Date, the Transferor will have delivered to the
Trustee a written assignment (the "Assignment") and the Transferor will
have indicated in its computer files that the Receivables created in
connection with the Supplemental Accounts have been transferred to the
Trust and, within five business days thereafter, the Transferor will have
delivered to the Trustee or the bailee of the Trustee a computer file or
microfiche list containing a true and complete list of all Supplemental
Accounts, identified by account number and the Principal Receivables in
such Supplemental Accounts, as of the Addition Date, which computer file
or microfiche list will be as of the date of such Assignment incorporated
into and made a part of such Assignment; (iii) the Transferor will
represent and warrant that (x) no selection procedure that is materially
adverse to the interests of holders of the Investor Securities was used in
selecting the Supplemental Accounts and (y) as of the applicable Addition
Date, the Transferor is not insolvent and will not be rendered insolvent
upon the transfer of Receivables to the Trust; (iv) the Transferor will
represent and warrant that, as of the Addition Date, the Assignment
constitutes either (x) a valid transfer and assignment to the Trust of all
right, title and interest of the Transferor in and to the Receivables then
existing and thereafter created and arising in connection with the
Accounts and any accounts that meet the definition of Additional Accounts,
and the proceeds thereof or (y) a grant of a security interest (as defined
in the UCC as in effect in the Relevant UCC State) in such property to the
Trust, which is enforceable with respect to the then existing Receivables
of the Supplemental Accounts and the proceeds thereof upon the conveyance
of such Receivables to the Trust, and which will be enforceable with
respect to the Receivables thereafter created in respect of Supplemental
Accounts conveyed on such Addition Date and the proceeds thereof upon such
creation, and (z) if the Assignment constitutes the grant of a security
interest to the Trust in such property, upon the filing of a financing
statement with respect to such Supplemental Accounts and in the case of
the Receivables thereafter created in such Supplemental Accounts and the
proceeds thereof, upon such creation, the Trust will have a first priority
perfected security interest in such property, except for Permitted Liens;
(v) the Transferor will deliver to the Trustee an officer's certificate
confirming the items set forth in clause (ii) above; (vi) the Transferor
will deliver to the Trustee an opinion of counsel with respect to the
Trust's security interest in the Receivables in the Supplemental Accounts
(with a copy to the Rating Agencies); and (vii) the Transferor will have
received written notice from each Rating Agency that the inclusion of such
accounts as Supplemental Accounts will not result in the reduction or
withdrawal of its then existing rating of any class of any Series of
Investor Securities then issued and outstanding and will have delivered
such notice to the Trustee.
On or after the Restart Date, Automatic Additional Accounts will be
deemed to be Accounts the Receivables of which will be designated for
inclusion in the Trust if, unless each Rating Agency otherwise consents,
the following conditions are met: the number of Accounts the Receivables
of which are automatically designated to be included in the Trust since
(x) the first day of the eleventh preceding Monthly Period minus the
number of Accounts of the type described in clause (ii) of the definition
of "Approved Account" which have been added on the initial day of the
addition of such type of Account pursuant to such clause (ii) since the
first day of such eleventh preceding Monthly Period will not exceed 20
percent of the number of Accounts on the first day of such eleventh
preceding Monthly Period, and (y) the first day of the second preceding
Monthly Period minus the number of Accounts of the type described in
clause (ii) of the definition of "Approved Accounts" which have been added
on the initial day of the addition of such type of Account pursuant to
such clause (ii) since the first day of such second preceding Monthly
Period will not exceed 15 percent of the number of Accounts on the first
day of such second preceding Monthly Period. The automatic addition of
Receivables in new Accounts may be subject to additional conditions
specified from time to time by the Rating Agencies.
The Transferor may designate revolving credit consumer credit card
accounts which would otherwise be Additional Accounts as Excluded Accounts
by the Transferor delivering to the Trustee a written notice clearly
identifying such excluded accounts. If such designation is made after the
Trust acquires rights in such Accounts, such designation will only occur
in accordance with the provisions for removals of accounts set forth in
the Pooling and Servicing Agreement.
Collection and Other Servicing Procedures
Pursuant to the Pooling and Servicing Agreement, the Servicer is
responsible for servicing, enforcing, and administering the Receivables
and collecting payments due thereunder in accordance with its customary
and usual servicing procedures and the Credit and Collection Policy.
Servicing functions to be performed by the Servicer with respect to the
Receivables include statement processing and mailing, collecting and
recording payments, investigating payment delinquencies, and communicating
with cardholders. See "Direct Merchants Bank's Credit Card
Activities--Delinquency, Collections and Charge-offs." Managerial
functions to be performed by the Servicer on behalf of the Trust include
maintaining books and records with respect to the foregoing and other
matters pertinent to the Receivables, assisting the Trustee with any
inspections of such books and records by the Trustee pursuant to the
Pooling and Servicing Agreement, preparing and delivering the monthly and
annual statements described in "--Reports to Securityholders," and causing
a firm of independent public accountants to prepare and deliver the annual
reports described in "--Evidence as to Compliance."
Discount Option
Pursuant to the Pooling and Servicing Agreement, the Transferor may
designate a specified fixed or floating percentage (the "Discount
Percentage") (initially zero percent) of the amount of Receivables arising
in the Accounts on and after the date of such designation that would
otherwise be treated as Principal Receivables to be treated as Finance
Charge Receivables (the "Discount Option Receivables"). The circumstances
under which the Transferor may exercise its option to discount Principal
Receivables may include a time when the Portfolio Yield is declining and
Principal Receivables are available in sufficient quantity to allow for
such discounting. The Transferor may, without notice to or consent of the
Securityholders, from time to time, increase (subject to the limitations
described below), reduce or eliminate the Discount Percentage for Discount
Option Receivables arising in the Accounts on and after the date of such
change. The Transferor must provide 15 days' prior written notice to the
Servicer, the Trustee and each Rating Agency of any such increase,
reduction or elimination, and such increase, reduction or elimination will
become effective on the date specified therein only if (a) the Transferor
reasonably believes that such increase, reduction or elimination will not
at the time of its occurrence cause a Pay Out Event, or an event which
with notice or the lapse of time would constitute a Pay Out Event, to
occur with respect to any Series and (b) the Transferor and the Trustee
shall have received written notice from each Rating Agency that such
change will not cause such Rating Agency to reduce or withdraw its then
current rating of the Investor Securities. After the date on which the
Transferor's exercise of its discount option takes effect and with respect
to Receivables generated on and after such date, Collections in an amount
equal to the product of (i) a fraction the numerator of which is the
amount of Discount Option Receivables and the denominator of which is the
amount of all of the Principal Receivables (including Discount Option
Receivables) at the end of the prior date of processing, (ii) Collections
of Principal Receivables, prior to any reduction for Finance Charge
Receivables which are Discount Option Receivables, received on such date
of processing, and (iii) a fraction the numerator of which is the
aggregate amount of Principal Receivables arising on each date of
processing falling on or after the date on which the Transferor exercises
its discount option and the denominator of which is the aggregate
Principal Receivables on such date of processing, will be deemed
Collections of Finance Charge Receivables and will be applied accordingly.
Any such designation would result in an increase in the amount of Finance
Charge Receivables and a corresponding increase in the Portfolio Yield, a
reduction in the amount of Principal Receivables in the Trust and a
reduction in the Transferor Interest and therefore the effect on
Securityholders will be to decrease the likelihood of a Pay Out Event
based upon a reduction of the average Portfolio Yield for any designated
period to a rate below the average Base Rate for such period while
increasing the likelihood that the Transferor will be required to add
Principal Receivables to the Trust and, because of the reduction in the
aggregate amount of Principal Receivables which, if additional Principal
Receivables were not available at such time, could cause the occurrence of
a Pay Out Event. Unless otherwise specified, all references herein to
Principal Receivables or Finance Charge Receivables, or Collections with
respect thereto, are references to such Receivables, or Collections with
respect thereto, as defined above after application of the Discount
Percentage.
Previously Issued Series
The Trust has previously issued the Series 1998-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 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 has established and maintains 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 securities of deposit
of any depository institution or trust company; provided, however, that at
the time of the Trust's investment or contractual commitment to invest
therein, the securities of deposit or short-term deposits of such
depository institution or trust company shall have a credit rating from
Standard & Poor's of A-1+ and from Moody's of P-1; (iii) commercial paper
having, at the time of the Trust's investment or contractual commitment to
invest therein, a rating from Standard & Poor's of A-1+ and from Moody's
of P-1; (iv) banker's acceptances issued by any depository institution or
trust company described in clause (a)(ii) above; and (v) investments in
money market funds rated AAA-m or AAA-mg by Standard & Poor's and Aaa by
Moody's or otherwise approved in writing by Moody's and Standard & Poor's;
(b) time deposits and demand deposits in the name of the Trust or the
Trustee in any depository institution or trust company referred to in
clause (a)(ii) above; (c) securities not represented by an instrument that
are registered in the name of the Trustee or its nominee (which may not be
Metris or an affiliate) upon books maintained for that purpose by or on
behalf of the issuer thereof and identified on books maintained for that
purpose by the Trustee as held for the benefit of the Trust or the
Securityholders, and consisting of (x) shares of an open end diversified
investment company which is registered under the Investment Company Act
which (i) invests its assets exclusively in obligations of or guaranteed
by the United States of America or any instrumentality or agency thereof
having in each instance a final maturity date of less than one year from
their date of purchase or other Cash Equivalents, (ii) seeks to maintain a
constant net asset value per share, (iii) has aggregate net assets of not
less than $100,000,000 on the date of purchase of such shares and (iv)
which each Rating Agency designates in writing will not result in a
withdrawal or downgrading of its then current rating of any Series rated
by it or (y) Eurodollar time deposits of a depository institution or trust
company that are rated A-1+ by Standard & Poor's and P-1 by Moody's;
provided, however, that at the time of the Trust's investment or
contractual commitment to invest therein, the Eurodollar deposits of such
depository institution or trust company shall have a credit rating from
Standard & Poor's of A-1+ and P-1 by Moody's; (d) a guaranteed investment
contract (guaranteed as to timely payment) which each Rating Agency
designates in writing will not result in a withdrawal or downgrading of
its then current rating of any Series rated by it; (e) repurchase
agreements transacted with either (i) an entity subject to the Bankruptcy
Code, provided, however, that (A) the term of the repurchase agreement is
consistent with the requirements with regard to the maturity of Cash
Equivalents specified herein or in the applicable Supplement for the
applicable account or is due on demand, (B) the Trustee or a third party
acting solely as agent for the Trustee has possession of the collateral,
(C) the Trustee on behalf of the Trust has a perfected first priority
security interest in the collateral, (D) the market value of the
collateral is maintained at the requisite collateral percentage of the
obligation in accordance with standards of the Rating Agencies, (E) the
failure to maintain the requisite collateral level will obligate the
Trustee to liquidate the collateral as promptly as practicable upon
instructions from the Servicer, (F) the securities subject to the
repurchase agreement are either obligations of, or fully guaranteed as to
principal and interest by, the United States of America or any
instrumentality or agency thereof, securities of deposit or banker's
acceptances and (G) the securities subject to the repurchase agreement are
free and clear of any third party lien or claim, or (ii) a financial
institution insured by the FDIC, or any broker-dealer with
"retail-customers" that is under the jurisdiction of the Securities
Investors Protection Corporation ("SIPC"), provided, however, that (A) the
market value of the collateral is maintained at the requisite collateral
percentage of the obligation in accordance with the standards of the
Rating Agencies, (B) the Trustee or a third party (with a rating from
Moody's and Standard & Poor's of P-1 and A-1+, respectively) acting solely
as agent for the Trustee has possession of the collateral, (C) the
collateral is free and clear of third party liens and, in the case of an
SIPC broker, was not acquired pursuant to a repurchase or reverse
repurchase agreement and (D) the failure to maintain the requisite
collateral percentage will obligate the Trustee to liquidate the
collateral upon instructions from the Servicer; provided, however, that at
the time of the Trust's investment or contractual commitment to invest in
any repurchase agreement the short-term deposits or commercial paper of
such entity or institution in subclauses (i) and (ii) above shall have a
credit rating of P-1 or A-1+ or their equivalent from each Rating Agency;
and (f) any other investment if each Rating Agency confirms in writing
that such investment will not adversely affect its then current rating of
the Investor Securities (such investments, "Cash Equivalents"). Any
earnings (net of losses and investment expenses) on funds in the Interest
Funding Account and the Principal Account will be paid to the Transferor.
The Servicer has the revocable power to withdraw funds from the Collection
Account, and to instruct the Trustee to make withdrawals and payments from
the Interest Funding Account and the Principal Account, in each case for
the purpose of making deposits and distributions required under the
Pooling and Servicing Agreement, including the deposits and distributions
described in "--Application of Collections." The agent making payments to
the Securityholders (the "Paying Agent") has the revocable power to
withdraw funds from the Distribution Account for the purpose of making
distributions to Securityholders. The Paying Agent initially will be The
Bank of New York.
Principal Funding Account
Pursuant to the Series 1998-3 Supplement, the Servicer will
establish and maintain with a Qualified Institution a principal funding
account as a segregated trust account held for the benefit of the
Securityholders (the "Principal Funding Account"). During the Accumulation
Period, the Trustee at the direction of the Servicer will transfer from
the Principal Account to the Principal Funding Account Collections in
respect of Principal Receivables (other than Redirected Principal
Collections) and Shared Principal Collections from other Series, if any,
allocated to the Securities as described below under "--Application of
Collections."
Funds on deposit in the Principal Funding Account will be invested
by the Trustee at the direction of the Servicer in Cash Equivalents
maturing no later than the following Transfer Date. Investment earnings
(net of investment losses and expenses) on funds on deposit in the
Principal Funding Account (the "Principal Funding Account Investment
Proceeds") during the Accumulation Period will be applied on each Transfer
Date to the extent of the Covered Amount as if such amount were Available
Series Finance Charge Collections on the last business day of the
preceding Monthly Period. If, for any Interest Accrual Period, the
Principal Funding Account Investment Proceeds are less than an amount
equal to the Covered Amount, the amount of such deficiency will be paid
from the Accumulation Period Reserve Account to the extent of the
Available Reserve Account Amount and applied on the applicable Transfer
Date as if such amount were Available Series Finance Charge Collections on
the last business day of the preceding Monthly Period.
Excess Funding Account
The Trustee has established and will maintain in the name of the
Trust, for the benefit of the securityholders of all Series, an "Excess
Funding Account" which is a segregated account established by and
maintained by the Servicer with a Qualified Institution. At any time
during which no Series is in an amortization period (including any
accumulation period or early amortization period), or for a Series in
amortization, the principal account, if any, is fully funded for an
applicable period, and the Transferor Interest does not exceed the Minimum
Transferor Interest, funds (to the extent available therefor as described
herein) otherwise payable to the Transferor will be deposited in the
Excess Funding Account on any business day until the Transferor Interest
is at least equal to the Minimum Transferor Interest. Funds on deposit in
the Excess Funding Account may, at the option of the Transferor, be
withdrawn and paid to the Transferor to the extent that on any day the
Transferor Interest exceeds the Minimum Transferor Interest as a result of
the addition of new Receivables to the Trust. Such deposits in and
withdrawals from the Excess Funding Account may be made on a daily basis.
Any funds on deposit in the Excess Funding Account at the beginning
of an Amortization Period will be deposited in the Principal Account as
part of Class A Principal for any Distribution Date. In the event that
more than one Series begins its accumulation period or amortization period
at the same time, amounts on deposit in the Excess Funding Account will be
paid out to each such Series pro rata based on the aggregate invested
amount of each such Series. In addition, no funds allocated to Investor
Securities will be deposited in the Excess Funding Account during any
amortization period (including any accumulation period or early
amortization period) for any Series until the Principal Funding Account
for such Series for such Distribution Date has been fully funded or the
Investor Securities of such Series have been paid in full.
Funds on deposit in the Excess Funding Account will be invested by
the Trustee at the direction of the Transferor in Cash Equivalents. On
each Distribution Date, all net investment income earned on amounts in the
Excess Funding Account since the preceding Distribution Date will be
withdrawn from the Excess Funding Account and treated as Finance Charge
Collections.
Pre-Funding Account
The Servicer will establish and maintain in the name of the Trustee,
on behalf of the Trust, the Pre-Funding Account. The Pre-Funding Account
will be established and maintained with the trust department of The Bank
of New York. Funds on deposit in the Pre-Funding Account will be withdrawn
and paid to the Transferor to the extent of any increases in the Invested
Amount during the Funding Period as a result of an increase in the amount
of Receivables in the Trust in accordance with the Series 1998-3
Supplement. Following the occurrence of a Pay Out Event during the Funding
Period, the amounts remaining on deposit in the Pre-Funding Account, will
be payable as principal first to the Class A Securityholders until the
Class A Invested Amount is paid in full and then to the Insurer to
reimburse it for draws under the Policy. Should the Pre-Funded Amount be
greater than zero on the first day of the Monthly Period, such amount will
be deposited in the Excess Funding Account. The percentage of the assets
of the Trust represented by amounts on deposit in the Pre-Funding Account
and the percentage of the assets of the Trust represented by amounts on
deposit in the Pre-Funding Account allocated to any Class of the
Securities will not exceed 25 percent. The underwriting standards for
Receivables transferred to the Trust during the period in which the
Pre-Funding Account is funded will be the same as those described in
"Direct Merchants Bank's Credit Card Activities--New Account
Underwriting."
All amounts on deposit in the Pre-Funding Account will be invested
by the Trustee at the direction of the Servicer in Cash Equivalents that
would not require registration of the Trust as an investment company under
the Investment Company Act. On each Transfer Date with respect to the
Funding Period, all investment income (net of investment losses and
expenses) earned on funds on deposit in the Pre-Funding Account since the
preceding Transfer Date will be applied as if such amount were Available
Series Finance Charge Collections on the last business day of the
preceding Monthly Period.
Accumulation Period Reserve Account
Pursuant to the Series 1998-3 Supplement, the Servicer will
establish and maintain with a Qualified Institution an accumulation period
reserve account as a segregated trust account held for the benefit of the
Securityholders 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.
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 all such percentages the "Fixed/Floating
Percentage"). Finance Charge Collections will be allocated on and after the
date on which a Pay Out Event is deemed to occur to the Securityholders'
Interest based on the Fixed/Floating Percentage; 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 the 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 (a) when used with respect to
(i) Principal Collections during the Revolving Period and (ii) Finance
Charge Collections and the amount of
Defaulted Receivables at all times, 100
percent minus the sum of the Floating Percentage and the floating
percentages for all other Series and (b) when used with respect to
Principal Collections during the Amortization Period, 100 percent minus
the sum of the Fixed/Floating Percentage and the allocation percentages
used with respect to Principal Collections for all other Series.
As used herein: (i) the term "Class A Invested Amount" means an
amount equal to (a) the Class A Initial Invested Amount less the Class A
Percentage of the initial deposit to the Pre-Funding Account plus the
Class A Percentage of any withdrawals from the Pre-Funding Account during
the Funding Period in connection with the addition of Receivables to the
Trust and the deposit of the amounts in the Pre-Funding Account at the end
of the Funding Period into the Excess Funding Account, minus (b) the
aggregate amount of principal payments (except principal payments made
from the Pre-Funding Account) made to Class A Securityholders through and
including such date, and minus (c) the aggregate amount of Class A
Charge-Offs for all prior Distribution Dates, equal to the amount by which
the Class A Invested Amount has been reduced to fund the Series Default
Amount and the unpaid Adjustment Payments on all prior Distribution Dates
as described under "--Investor Charge-Offs," and plus (d) the aggregate
amount of Available Series Finance Charge Collections, Transferor Finance
Charge Collections, Excess Finance Charge Collections and Redirected
Principal Collections applied on all prior Distribution Dates for the
purpose of reimbursing amounts deducted pursuant to the foregoing clause
(c), provided, however, that the Class A Invested Amount may not be
reduced below zero; (ii) the term "Class A Adjusted Invested Amount," for
any date of determination, means an amount not less than zero equal to the
then current Class A Invested Amount, minus the sum of the amount then on
deposit in the Principal Account and the Principal Funding Account Balance
on such date; (iii) the term "Class B Invested Amount" 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 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 ____ percent of the Class A Adjusted Invested
Amount; provided, however, that in no event shall the Stated Class B
Amount be less than $______ 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
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 or the Pre-Funding Account on any business day, the Servicer will
determine the Negative Carry Amount, if any. The Servicer will apply an
amount equal to the lesser of (i) the Transferor Finance Charge
Collections on such business day, and (ii) the Negative Carry Amount for
such business day in the manner specified for application of Available
Series Finance Charge Collections.
On each business day the Servicer will determine the Required
Amount. To the extent of any Required Amount, the Servicer will apply all
or a portion of the Excess Finance Charge Collections of other Series with
respect to such business day allocable to the Series 1998-3 Securities in
an amount equal to the remaining Required Amount. Excess Finance Charge
Collections from other Series allocable to the Series 1998-3 Securities
for any business day will be equal to the product of (x) Excess Finance
Charge Collections available from all other Series for such business day
and (y) a fraction, the numerator of which is the Required Amount for such
business day (as reduced by amounts applied pursuant to the preceding
paragraph) and the denominator of which is the aggregate amount of
shortfalls in required amounts or other amounts to be paid from available
Finance Charge Collections for all Series for such business day.
Redirected Principal Collections
On each business day, the Servicer will apply or cause the Trustee
to apply an amount, not to exceed the Class 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.
The Servicer will withdraw the following amounts from the Collection
Account for application on each business day as indicated:
(i) an amount equal to the Transferor Percentage of the
aggregate amount of Principal Collections will be paid to the
Transferor to the extent such funds are not allocated to any series
to cover a negative carry amount;
(ii) an amount equal to the Transferor Percentage of the
aggregate amount of Finance Charge Collections will be paid to the
holder of the Exchangeable Transferor Security to the extent such
funds are not allocated to any Series as set forth in the applicable
Supplement;
(iii) an amount equal to the sum of (a) prior to the
occurrence of a Pay Out Event the Floating Percentage, and on and
after the occurrence of a Pay Out Event the Fixed/Floating
Percentage, of the sum of the aggregate amount of Finance Charge
Collections and the amount of Adjustment Payments made by the
Transferor with respect to Adjustment Payments required to be made
but not made in a prior Monthly Period, (b) certain Transferor
Finance Charge Collections allocable to the Securities and (c)
Excess Finance Charge Collections of other Series allocable to such
Series, will be allocated and paid as described below in "--Payment
of Fees, Interest and Other Items;"
(iv) during the Revolving Period, an amount equal to the
Floating Percentage of Principal Collections (less the amount
thereof which may be applied as Redirected Principal Collections)
will be applied as Shared Principal Collections;
(v) during the Amortization Period, an amount equal to the
Fixed/Floating Percentage of Principal Collections (less the amount
thereof applied as Redirected Principal Collections), any amount on
deposit in the Excess Funding Account and any amount on deposit in
the Pre-Funding Account allocated to the holders of Series 1998-3
Securities, any amounts to be paid in respect of the Series Default
Amount, unpaid Adjustment Payments, Class A Charge-Offs 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 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 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 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;
(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 excess, if any, of the amount
required to be retained in a spread account established for the
benefit of the Insurer over the amount on deposit in that spread
account will be deposited in the Spread Account;
(ix) an amount equal to 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, 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 any Available Series
Finance Charge Collections remaining and the excess, if any, of the
Required Reserve Account Amount over the Available Reserve Account
Amount will be deposited in the Accumulation Period Reserve Account;
(xii) an amount equal to the lesser of any remaining Available
Series Finance Charge Collections and the amount designated by the
Transferor in writing in its instructions to the Trustee to be
deposited in the Payment Reserve Account; and
(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.
On each Transfer Date all investment income (net of investment losses
and expenses) on funds on deposit in the Pre-Funding Account, the Principal
Funding Account and the Accumulation Period Reserve Account will be applied
as if such amounts were Available Series Finance Charge Collections on the
last business day of the preceding Monthly Period.
"Class A Monthly Interest" with respect to any Distribution Date
will equal the product of (i) the Class A Interest Rate for the related
Interest Accrual Period, (ii) the outstanding principal balance of the
Class A Securities at the close of business on the first day of the
related Interest Accrual Period or, with respect to any Distribution Date
related to the Funding Period, the outstanding principal balance of the
Class A Securities at the close of business on the first day of the
related Interest Accrual Period and (iii) a fraction the numerator of
which is the actual number of days in such Interest Accrual Period and the
denominator of which is 360 (or in the case of the initial Distribution
Date, an amount equal to the product of (x) the Class A Initial Invested
Amount, (y) _____ divided by 360 and (z) the Class A Interest Rate for the
initial Interest Accrual Period ).
"Required Amount" means on any business day the amount, if any, by
which the full amount to be paid pursuant to clauses (i)-(vii) above
exceeds the portion of the Available Series Finance Charge Collections and
Transferor Finance Charge Collections, if any, applied to the payment of
the amounts described in such clauses.
"Pre-Funded Amount" for any Distribution Date with respect to the
Funding Period will equal the amount deposited in the Pre-Funding Account
on the Closing Date, less the amount of any increases in the Invested
Amount pursuant to the Series 1998-3 Supplement in connection with the
addition of Receivables to the Trust.
Any amounts remaining on deposit in the Pre-Funding Account at the
end of the Funding Period will be deposited in the Excess Funding Account.
Payment of Principal. On each business day during the Revolving
Period, the Trustee, acting in accordance with instructions from the
Servicer, will treat the amount described in clause (iv) of
"--Allocations" as Shared Principal Collections which will be applied as
described in clause (vi) of "--Allocations." On each Transfer Date during
the Amortization Period, the Trustee, acting in accordance with
instructions from the Servicer, will apply Principal Collections on
deposit in the Principal Account in the following priority:
(i) an amount equal to the Class A Principal will be deposited
on each Transfer Date in the
Principal Funding Account for distribution to the Class A
Securityholders on the Expected
Final Payment Date (with respect to the Accumulation
Period) or distributed to the Class
A Securityholders on each Distribution Date until the Class
A Invested Amount is paid in
full (with respect to the Early Amortization Period); 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, $________; provided, however, that if the
commencement of the Accumulation Period is delayed as described above
under "--Postponement of Accumulation Period," the Controlled Accumulation
Amount may be higher than the amount stated above for each Transfer Date
with respect to the Accumulation Period and will be determined by the
Servicer in accordance with the Pooling and Servicing Agreement based on
the principal payment rates for the Accounts and on the invested amounts
of other Series (other than certain excluded Series) which are scheduled
to be in their revolving periods during the Accumulation Period.
"Accumulation Shortfall" initially means zero and thereafter means,
with respect to any Monthly Period during the Accumulation Period, the
excess, if any, of the Controlled Deposit Amount for the previous Monthly
Period over the amount deposited into the Principal Funding Account with
respect to the Securities for the previous
Monthly Period.
Coverage of Interest Shortfalls
To the extent of any shortfall in the amount of Available Series
Finance Charge Collections due to the accumulation of principal in the
Excess Funding Account or the Pre-Funding Account, the Transferor Finance
Charge Collections will be made available to cover such Negative Carry
Amount.
Finance Charge Collections allocable to any Series in excess of the
amounts necessary to make required payments with respect to such Series
("Excess Finance Charge Collections") will be applied to cover any
shortfalls with respect to amounts payable from Finance Charge Collections
allocable to any other Series, pro rata based upon the amounts of the
shortfalls, if any, with respect to such other Series. Any Excess Finance
Charge Collections remaining after covering shortfalls with respect to all
outstanding Series during a Monthly Period will be paid to the successor
Servicer, if any, to cover certain costs and expenses and then to the
holder of the Exchangeable Transferor Security.
Defaulted Receivables; Dilution
Receivables in Defaulted Accounts are charged off as uncollectible
in accordance with the Servicer's customary and usual Servicing procedures
and the Credit and Collection Policy (a "Defaulted Receivable"). See
"Direct Merchants Bank's Credit Card Activities--Delinquency, Collections
and Charge-offs" and "--Delinquency and Loss Experience." On each business
day, the Servicer will allocate to the Securityholders a portion of all
Defaulted Receivables in an amount (the "Series Default Amount") equal to
(i) on any business day other than a Default Recognition Date, an amount
equal to the product of (a) the Floating Percentage applicable on such
business day and (b) the aggregate principal amount of Defaulted
Receivables identified since the prior reporting date and (ii) on any
Default Recognition Date, an amount equal to the product of (a) the
Default Recognition Percentage applicable on such Default Recognition Date
and (b) the aggregate principal amount of Defaulted Receivables with
respect to such Default Recognition Date.
If on any business day the Servicer adjusts downward the amount of
any Principal Receivable without receiving collections therefor or charging
off such amount as uncollectible (any such downward adjustment, a
"Dilution"), then the amount of the Transferor Interest in the Trust will
be reduced, on a net basis, by the amount of the adjustment on such
business day. In the event the Transferor Interest would be reduced below
the Minimum Transferor Interest, the Transferor will be required to pay to
the Trust the amount of such Dilution (an "Adjustment Payment") out of its
own funds or, to the extent not paid by the Transferor, out of Available
Series Finance Charge Collections, Transferor Finance Charge Collections,
Excess Finance Charge Collections or Redirected Principal Collections
designated for such purpose. To the extent that such amounts are not
sufficient to cover the portion of the unpaid Adjustment Payments allocated
to Series 1998-3, there will be an Investor Charge-Off as described below.
Investor Charge-Offs
If on the second business day preceding each Distribution Date (the
"Determination Date"), the aggregate Series Default Amount and the Series
1998-3 Percentage of unpaid Adjustment Payments, if any, for all business
days in the preceding Monthly Period exceeds the aggregate amount of the
Available Series Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections, Redirected Principal
Collections, Principal Funding Account Investment Proceeds, Pre-Funding
Account investment proceeds and amounts withdrawn from the Accumulation
Period Reserve Account, 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 (vi) 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 MBIA
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 MBIA 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 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 Transferor, the Trustee and the Servicer.
The Policy will irrevocably and unconditionally guarantee payment on
each Distribution Date to the Trustee for the benefit of the Class A
Securityholders the payment of interest on each Distribution Date, the
payment of the Monthly Servicer Fee on each Distribution Date, and the
ultimate payment of principal on the Class A Securities (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, Pre-Funding Account investment proceeds, and the
amounts withdrawn from the Accumulation Period Reserve Account and, if
any, and proceeds of the Interest Rate Cap, 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 demand 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
following receipt by the Insurer of the appropriate notice for payment on
or prior to [12:00 noon], New York City time, on the relevant Distribution
Date.
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
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 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 Payment 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 certificate of the Securityholder that the Order has
been entered with respect to which Order the appeal period has expired
without an appeal having been filed and is not subject to any stay and (C)
an assignment duly executed and delivered by the Securityholder, in such
form as is reasonably required by the Insurer and provided to the
Securityholder by the Insurer, irrevocably assigning to the Insurer all
rights and claims of the 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 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 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 any 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 the 12:00 noon, New York City
time, on a business day; delivery either on a day that is not a business
day or after 12:00 noon, 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. To the extent the
Insurer makes Guaranteed Distributions, either directly or indirectly (as
by paying through the Trustee), to the Class A Securityholders, the
Insurer will be subrogated to the rights of the Class A Securityholders,
with respect to such Guaranteed Distributions, shall be deemed to the
extent of the payments so made to be a registered Class A Securityholder
for purposes of payment and prior to the end of the Amortization Period
shall be reimbursed in accordance with the payment priorities until all
such Guaranteed Distributions by MBIA have been fully reimbursed, provided
that the Class A Securityholders or the Trustee, for the benefit of the
Class A Securityholders, have received the full amount of the Guaranteed
Distributions.
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.
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.
Subject to certain exceptions, the investor securityholders of each Series
may take certain actions, or direct certain actions to be taken, under the
Pooling and Servicing Agreement or the related Supplement.
In the absence of payments under the Policy, 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 balances
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 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 amounts due and owing to the
Insurer and unreimbursed claims on 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
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 claims under the Policy, 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 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 claims under the Policy 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 . Upon the termination of the Trust and the
surrender of the Exchangeable Transferor Security, the Trustee will convey
to the holder of the Exchangeable Transferor Security all right, title and
interest of the Trust in and to the Receivables and other funds of the
Trust (other than funds on deposit in the Distribution Account and other
similar bank accounts of the Trust with respect to any Series).
Pay Out Events
As described above, the Revolving Period will continue until the
commencement of the Accumulation Period, unless a Pay Out Event occurs
prior to such date. A "Pay Out Event" refers to any of the following
events:
(i) failure on the part of the Transferor (a) to make any
payment or deposit on the date required under the Pooling and
Servicing Agreement (or within the applicable grace period which will
not exceed five business days); (b) to perform in all material
respects the Transferor's covenant not to sell, pledge, assign, or
transfer to any person, or grant any unpermitted lien on, any
Receivable; or (c) to observe or perform in any material respect any
other covenants or agreements of the Transferor set forth in the
Pooling and Servicing Agreement, the Purchase Agreement or the Series
1998-3 Supplement, which failure has a material adverse effect on the
Securityholders 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 subparagraph (ii) will not be
deemed to occur thereunder if the Transferor has accepted
reassignment of the related Receivable or all such Receivables, if
applicable, during such period (or such longer period as the Trustee
may specify) in accordance with the provisions thereof;
(iii) certain events of bankruptcy or insolvency relating to
the Transferor, Direct Merchants Bank or Metris;
(iv) any reduction of the average of the Portfolio Yields for
any three consecutive Monthly Periods to a rate which is less than
the weighted average Base Rates for such three consecutive Monthly
Periods;
(v) the Trust shall become subject to regulation by the
Commission as an "investment company" within the meaning of the
Investment Company Act;
(vi) (a) the Transferor Interest shall be less than the
Minimum Transferor Interest, (b) (I) the sum of the amount on
deposit in the Pre-Funding Account plus the Series 1998-3 Percentage
of the sum of the total amount of Principal Receivables plus amounts
on deposit in the Excess Funding Account shall be less than (II) the
sum of the aggregate outstanding principal amounts of the Class A
Securities 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; or
(vii) any Servicer Default (as defined below) shall occur
which would have a material adverse effect on the Securityholders.
In the case of any event described in clause (i), (ii), or (vii)
above, a Pay Out Event will be deemed to have occurred with respect to the
Securities only if, after any applicable grace period, Securityholders
evidencing undivided interests aggregating more than 50 percent of the
Invested Amount, by written notice to the Trustee, the Transferor, the
provider of any interest rate cap provided 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) or (vi), a Pay Out Event with respect only to the
Securities, will be deemed to have occurred without any notice or other
action on the part of the Trustee or the Securityholders or all
securityholders, as appropriate, immediately upon the occurrence of such
event. On the date on which a Pay Out Event is deemed to have occurred,
the Early Amortization Period will commence. In such event, distributions
of principal to the Securityholders will begin on the first Distribution
Date following the month in which such Pay Out Event occurred. If, because
of the occurrence of a Pay Out Event, the Early Amortization Period
begins, Securityholders will begin receiving distributions of principal
earlier than they otherwise would have, which may shorten the average life
and maturity of the Securities.
In addition to the consequences of a Pay Out Event discussed above,
if, pursuant to certain provisions of federal law, the Transferor
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 Series Servicing Fee Percentage and
(iii) the Adjusted Invested Amount as of the beginning of the day on the
first day of such Monthly Period, or, in the case of the first Distribution
Date, the Initial Invested Amount. The Monthly Servicing Fee will be funded
from Finance Charge Collections allocated to the Securityholders' Interest,
and will be paid from the amount so allocated and on deposit in the
Collection Account. See "--Application of Collections--Payment of Fees,
Interest, and Other Items" above. The remainder of the servicing fee will
be allocable to the Transferor Interest and the investor interests of other
Series. Neither the Trust nor the Securityholders will have any obligation
to pay such portion of the servicing fee.
The Servicer will pay from its servicing compensation certain
expenses incurred in connection with servicing the Receivables, including
without limitation payment of the fees and disbursements of the Trustee
and independent certified public accountants and other fees which are not
expressly stated in the Pooling and Servicing Agreement to be payable by
the Trust or the Securityholders other than federal, state, and local
income and franchise taxes, if any, of the Trust.
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 Law in which the
Transferor is a general partner.
The Pooling and Servicing Agreement provides that, except for the
foregoing indemnities, neither the Transferor nor the Servicer nor any of
their respective directors, officers, employees, or agents will be under
any liability to the Trust, the Securityholders, or any other person for
any action taken, or for refraining from taking any action pursuant to the
Pooling and Servicing Agreement. Neither the Transferor nor the Servicer
nor any of their respective directors, officers, employees or agents will
be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith, or gross negligence of the
Transferor, the Servicer, or any such person in the performance of its
duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Pooling and Servicing Agreement
provides that the Servicer is not under any obligation to appear in,
prosecute, or defend any legal action that is not incidental to its
servicing responsibilities under the Pooling and Servicing Agreement and
which in its opinion may expose it to any expense or liability.
Under the Pooling and Servicing Agreement, the Transferor will be
liable directly to an injured party for the entire amount of any losses,
claims, damages or liabilities (other than those incurred by a
Securityholder in the capacity of an investor in the Securities) arising
out of or based on the arrangement created by the Pooling and Servicing
Agreement or the actions of the Servicer taken pursuant to the Pooling and
Servicing Agreement as though the Pooling and Servicing Agreement created
a partnership under the Delaware Uniform Partnership Act in which the
Transferor is a general partner. The Transferor will also pay, indemnify
and hold harmless each Securityholder for any such losses, claims, damages
or liabilities (other than those incurred by a Securityholder in the
capacity of an investor in the Securities) except to the extent that they
arise from any action by any Securityholder. In the event of a Service
Transfer, the successor Servicer will indemnify the Transferor for any
losses, claims, damages and liabilities of the Transferor as described in
this paragraph arising from the actions or omissions of such successor.
Servicer Default
In the event of any Servicer Default (as defined below), either the
Trustee or securityholders representing undivided interests aggregating
more than 50 percent of the aggregate investor interests for all
outstanding Series, by written notice to the Servicer (and to the Trustee
if given by the securityholders), may terminate all of the rights and
obligations of the Servicer as servicer under the Pooling and Servicing
Agreement and in and to the Receivables and the proceeds thereof and the
Trustee may appoint a new Servicer (a "Service Transfer"); provided, that
pursuant to the Series 1998-3 Supplement, the Insurer, 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
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 number of new
Accounts added to the Trust during the related Monthly Period and (m) the
Class A Interest Rate for the Interest Accrual Period.
The Paying Agent will furnish to each person who at any time during
the preceding calendar year was a Securityholder of record a statement
prepared by the Servicer containing the information required to be
contained in the regular monthly report to Securityholders, as set forth
in clauses (a), (b), and (c) above aggregated for such calendar year or
the applicable portion thereof during which such person was a
Securityholder, together with, on or before January 31 of each year,
beginning in 1999, such customary information (consistent with the
treatment of the Securities as debt) as the Servicer or Trustee deems
necessary or desirable for tax reporting purposes.
Following the listing of the Offered Securities on the Luxembourg
Stock Exchange, the Trustee will publish or will cause to be published
following each Distribution Date in a daily newspaper in Luxembourg
(expected to be the Luxemburger Wort) a notice to the effect that the
information set forth in the second preceding paragraph will be available
for review at the main office of the listing agent of the Trust in
Luxembourg, Luxembourg. Following the listing of the Offered Securities on
the Luxembourg Stock Exchange and prior to each Distribution Date with
respect to the Amortization Period, the Luxembourg Stock Exchange will be
advised of the principal amount of the Class A Securities that will be
outstanding after the principal distribution to be made on such
Distribution Date.
Following the listing of the Offered Securities on the Luxembourg
Stock Exchange, notices to Securityholders will be given by publication in
a daily newspaper in Luxembourg, which is expected to be the Luxemburger
Wort. In the event that Definitive Securities are issued, notices to
Securityholders will also be given by mail to the addresses of such
holders as they appear in the security register.
Evidence as to Compliance
The Pooling and Servicing Agreement provides that within 100 days of
the end of each fiscal year the Servicer will cause a firm of independent
public accountants to furnish to the Trustee on an annual basis a report to
the effect that such firm has compared the amounts and percentages set
forth in four of the monthly settlement statements for the Monthly Periods
covered by such report with the computer reports (which may include
personal computer generated reports that summarize data from the computer
reports generated by either the Transferor, the Servicer or FDR which are
used to prepare daily reports) which were the source of such amounts and
percentages and that, on the basis of such comparison, such amounts and
percentages are in agreement, except as shall be set forth in such report.
A copy of such report will be sent by the Trustee to each Securityholder.
The Pooling and Servicing Agreement provides that within 100 days of
the end of each fiscal year, the Servicer will cause a firm of nationally
recognized independent public accountants to furnish a report to the
effect that such firm has applied certain procedures, as agreed upon
between such firm and the Servicer, which would re-perform certain
accounting procedures performed by the Servicer pursuant to certain
documents and records relating to the servicing of the Accounts. Each
report shall set forth the agreed upon procedures performed and the
results of such procedures.
The Pooling and Servicing Agreement also provides for delivery to
the Trustee on an annual basis, within 100 days of the end of the fiscal
year, of a statement signed by an officer of the Servicer to the effect
that the Servicer has, or has caused to be, fully performed its
obligations in all material respects under the Pooling and Servicing
Agreement throughout the preceding year or, if there has been a default in
the performance of any such obligation, specifying the nature and status
of the default. A copy of such statement may be obtained by any
Securityholder upon the submission of a written request therefor addressed
to the Trustee's Corporate Trust Office.
Amendments
The Pooling and Servicing Agreement and the Series 1998-3 Supplement
may be amended by the Transferor, the Servicer and the Trustee, without
the consent of Securityholders, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the
Pooling and Servicing Agreement and the Series 1998-3 Supplement or of
modifying in any manner the rights of such Securityholders; provided that
(i) the Servicer shall have provided an officer's certificate to the
effect that such action will not adversely affect in any material respect
the interests of such Securityholders, (ii) except in the case of any
amendment for the sole purpose of curing any ambiguity or correcting or
supplementing any inconsistent provision of the Pooling and Servicing
Agreement or revising any schedule thereto (other than the list of
Receivables), the Rating Agencies shall have been notified of such
amendment and shall have provided written confirmation that they would not
lower the rating of the Class A Securities 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 the 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 the 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--Recent Legislation"), or to enable all or a portion of the
Trust to qualify and an election to be made for similar treatment under
such comparable subsequent federal income tax provisions as may ultimately
be enacted into law, and (ii) in connection with any such election, to
modify or eliminate existing provisions of the Pooling and Servicing
Agreement and any Supplement relating to the intended federal income tax
treatment of the Securities and the Trust in the absence of the election.
Promptly following the execution of any amendment to the Pooling and
Servicing Agreement 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.
DESCRIPTION OF THE PURCHASE AGREEMENTS
Purchases of Receivables
Bank Purchase Agreement. Pursuant to the Bank Purchase Agreement,
Direct Merchants Bank sells to Metris, all of its right, title and
interest in and to (i) the Receivables existing on the date of such
agreement and thereafter created and arising in connection with the
Accounts and any accounts that meet the definition of Additional Accounts,
including, without limitation, all accounts, general intangibles, chattel
paper and other obligations of any Obligor with respect to the
Receivables, then or thereafter existing, whether or not arising out of or
in connection with the sale or lease of goods or the rendering of
services, but, excluding any accounts that are designated as "excluded
accounts" pursuant to the Bank Purchase Agreement, (ii) all monies and
investments due or to become due with respect thereto (including, without
limitation, the right to any Finance Charge Receivables, including any
recoveries) and (iii) all proceeds of such Receivables.
Purchase Agreement. The Transferor purchases Receivables on an
ongoing basis from Metris pursuant to the Purchase Agreement. Pursuant to
the Purchase Agreement, the Transferor purchases from Metris all
Receivables arising from time to time until the Purchase Termination Date
(as defined below in "--Purchase Termination Date"). On each business day
prior to the Purchase Termination Date, Metris will deliver all of its
Receivables to the Transferor. Pursuant to the Pooling and Servicing
Agreement, such Receivables are thereafter transferred immediately by the
Transferor to the Trust, and the Transferor has assigned its rights in, to
and under the Purchase Agreement and the Bank Purchase Agreement with
respect to such Receivables to the Trust.
Representations and Warranties
Bank Purchase Agreement. In the Bank Purchase Agreement, Direct
Merchants Bank represents and warrants to Metris that, among other things,
(a) Direct Merchants Bank is a national banking association validly
existing and in good standing under the laws of the United States, and has
full corporate power, authority and legal right to execute, deliver and
perform its obligations under the Bank Purchase Agreement, (b) the Bank
Purchase Agreement constitutes a valid and binding obligation of Direct
Merchants Bank, enforceable against Direct Merchants Bank in accordance
with its terms, subject to customary bankruptcy-and equity-related
exceptions, (c) Direct Merchants Bank is the legal and beneficial owner of
all right, title and interest in and to each Receivable conveyed to Metris
pursuant to the Bank Purchase Agreement, and each such Receivable has been
or will be transferred to Metris free and clear of any lien other than
Permitted Liens, (d) Direct Merchants Bank has the full right, power and
authority to transfer the Receivables pursuant to the Bank Purchase
Agreement, (e) the Bank Purchase Agreement constitutes a valid transfer and
assignment to Metris of all right, title and interest of Direct Merchants
Bank in and to the Receivables, all monies due or to become due and all
proceeds related thereto, or an absolute sale of such property and the
proceeds thereof and (f) each Account classified as an "Eligible Account"
by Direct Merchants Bank in any document or report delivered under the Bank
Purchase Agreement will satisfy the requirements contained in the
definition of Eligible Account and each Receivable classified as an
"Eligible Receivable" by Direct Merchants Bank in any document or report
delivered under the Bank Purchase Agreement will satisfy the requirements
contained in the definition of Eligible Receivable.
Purchase Agreement. Pursuant to the Purchase Agreement, Metris
represents and warrants to the Transferor that, among other things,
subject to specified exceptions and limitations, Metris is duly organized,
validly existing, and in good standing under the laws of Delaware, Metris
is duly qualified to do business and in good standing (or is exempt from
such requirement) in any state required in order to conduct its business
and has obtained all necessary licenses and approvals required under
applicable law, and Metris has the requisite corporate power and authority
to perform its obligations under the Purchase Agreement.
Pursuant to the Purchase Agreement, Metris additionally represents
and warrants that, among other things, subject to specified exceptions and
limitations, (i) the execution and delivery of the Purchase Agreement and
the consummation of the transactions provided for in the Purchase
Agreement have been duly authorized by Metris by all necessary corporate
action on its part, (ii) the execution and delivery of the Purchase
Agreement and the performance of the transactions contemplated thereby do
not contravene Metris' charter or by-laws, violate any material provision
of law applicable to it, require any filing (except for filings under the
UCC), registration, consent, or approval under any such law except for
such filings, registrations, consents, or approvals as have already been
obtained and are in full force and effect, (iii) except as described in
the Purchase Agreement, Metris has filed all tax returns required to be
filed and has paid or made adequate provision for the payment of all
taxes, assessments, and other governmental charges due from Metris or is
contesting any such tax, assessment or other governmental charge in good
faith through appropriate proceedings, (iv) there are no proceedings or
investigations pending or, to the best knowledge of Metris, threatened
against Metris before any court, regulatory body, administrative agency,
or other tribunal or governmental instrumentality asserting the invalidity
of the Purchase Agreement, seeking to prevent the consummation of any of
the transactions contemplated by the Purchase Agreement, seeking any
determination or ruling that would materially and adversely affect the
performance by Metris of its obligations thereunder or seeking any
determination or ruling that would materially and adversely affect the
validity or enforceability thereof, (v) Metris has no knowledge of any
fact that should have led it to expect at the time of the classification
of any Receivable as an Eligible Receivable that such Receivable would not
be paid in full when due, and each Receivable classified as an Eligible
Receivable by Metris in any document or report delivered under the
Purchase Agreement satisfies the requirements of eligibility contained in
the definition of Eligible Receivable set forth in the Purchase Agreement,
(vi) the Purchase Agreement constitutes the legal, valid, and binding
obligation of Metris, (vii) Metris is not insolvent, (viii) Metris is not
an "investment company" within the meaning of the Investment Company Act
(or is exempt from all provisions of such Act), (ix) Metris is the legal
and beneficial owner of all right, title and interest in and to each
Receivable conveyed to the Transferor by Metris pursuant to the Purchase
Agreement, and each such Receivable has been or will be transferred to the
Transferor free and clear of any lien other than Permitted Liens and in
compliance in all material respects with all requirements of law
applicable to Metris and (x) the transfer of Receivables by it to the
Transferor under the Purchase Agreement constitutes a valid sale,
transfer, assignment, set-over and conveyance to the Trust of all right,
title and interest of Metris in and to the Receivables whether existing as
of the Initial Closing Date or thereafter created (except for Permitted
Liens).
If certain of the representations or warranties described above are
not true with respect to any Receivable at the time such representation or
warranty was made or any Receivable becomes an Ineligible Receivable, then
Metris will be obligated to pay to the Transferor an amount equal to the
principal amount of such Receivable.
The Pooling and Servicing Agreement (i) requires the Transferor to
make a demand on Metris to repurchase Receivables in such cases where the
Transferor is required under the Pooling and Servicing Agreement to
repurchase Receivables from the Trust and (ii) permits the Transferor to
consent to the sale of Receivables to a third party only in such
circumstances where the Transferor may remove Receivables from the Trust
under the Pooling and Servicing Agreement.
Certain Covenants
Bank Purchase Agreement. It is the intention of Direct Merchants
Bank and Metris that the conveyance of the Receivables by Direct Merchants
Bank to Metris contemplated by the Bank Purchase Agreement be construed as
an absolute sale of the Receivables by Direct Merchants Bank to Metris. It
is not intended that such conveyance be deemed a pledge of the Receivables
by Direct Merchants Bank to Metris to secure a debt or other obligation of
Direct Merchants Bank, but the Bank Purchase Agreement shall also be
deemed to be a security agreement within the meaning of Article 9 of the
UCC and the conveyance provided for in the Bank Purchase Agreement shall
be deemed to be a grant by Direct Merchants Bank to Metris of a "security
interest" within the meaning of Article 9 of the UCC in all of Direct
Merchants Bank's right, title and interest in and to the Receivables.
In the Bank Purchase Agreement, Direct Merchants Bank covenants that,
among other things, except as required by law or as Direct Merchants Bank
may determine to be appropriate and subject to specified exceptions and
limitations, (i) it will take no action to cause any Receivable to be
anything other than an account, general intangible or chattel paper, (ii)
except for the conveyances under the Bank Purchase Agreement, it will not
sell any Receivable or grant a lien (other than a Permitted Lien) on any
Receivable, (iii) except as it deems necessary to maintain its credit card
business on a competitive basis, it will not reduce the annual percentage
rates of the Periodic Finance Charges assessed on the Receivables or other
fees charged on the Accounts if, as a result of any such reduction, either
a Pay Out Event would occur or such reduction is not also applied to any
comparable segment of accounts owned by it similar to the Accounts, (iv) it
will comply with and perform its obligations under the Contracts relating
to the Accounts and the Credit and Collection Policy and that it will not
change the terms of such agreements or policies if any such change would,
in either case, materially and adversely affect the rights of the Trust or
the securityholders, and that it will not enter into any amendment to the
Bank Purchase Agreement that would cause a Ratings Event to occur so long
as any securities under any Series are outstanding, and (v) in the event it
receives a collection on any Receivable, it will pay such collection to the
Transferor as soon as practicable.
Purchase Agreement. It is the intention of Metris and the Transferor
that the conveyance of the Receivables by Metris be construed as an
absolute sale of the Receivables by Metris to the Transferor. It is not
intended that such conveyance be deemed a pledge of the Receivables by
Metris to the Transferor to secure a debt or other obligation of Metris,
but the Purchase Agreement shall also be deemed to be a security agreement
within the meaning of Article 9 of the UCC and the conveyance provided for
in the Purchase Agreement shall be deemed to be a grant by Metris to the
Transferor of a "security interest" within the meaning of Article 9 of the
UCC in all of Metris' right, title and interest in and to the Receivables.
Pursuant to the Purchase Agreement, Metris covenants that, among other
things, subject to specified exceptions and limitations, (i) it will take
no action to cause any Receivable to be anything other than an account,
general intangible or chattel paper, (ii) except for the conveyances under
the Purchase Agreement, it will not sell any Receivable or grant a lien
(other than a Permitted Lien) on any Receivable, (iii) except as it deems
necessary to maintain its credit card business on a competitive basis, it
will not reduce the annual percentage rates of the Periodic Finance
Charges assessed on the Receivables or other fees charged on the Accounts
if, as a result of any such reduction, either a Pay Out Event would occur
or such reduction is not also applied to any comparable segment of
accounts owned by it similar to the Accounts, (iv) it will comply with and
perform its obligations under the Contracts relating to the Accounts and
the Credit and Collection Policy and that it will not change the terms of
such agreements or policies if any such change would, in either case,
materially and adversely affect the rights of the Trust or the
securityholders, and that it will not enter into any amendment to the Bank
Purchase Agreement that would cause a Ratings Event to occur so long as
any securities under any Series are outstanding, (v) in the event it
receives a collection on any Receivable, it will pay such collection to
the Transferor as soon as practicable, (vi) it will not convey or transfer
any Receivable, except as otherwise provided in the Purchase Agreement,
and (vii) it will take all actions reasonably necessary to maintain its
rights under all Contracts to which it is a party.
Purchase Termination Date
Bank Purchase Agreement. If Direct Merchants Bank becomes insolvent,
Metris' obligations under the Bank Purchase Agreement will automatically be
terminated. In addition, if Metris becomes insolvent, or shall become
unable for any reason to purchase Receivables from Direct Merchants Bank in
accordance with the provisions of the Bank Purchase Agreement, Metris'
obligations under the Bank Purchase Agreement as to Direct Merchants Bank
will automatically be terminated.
Purchase Agreement. If Metris becomes insolvent, the Transferor's
obligations under the Purchase Agreement will automatically be terminated.
In addition, if the Transferor becomes insolvent or shall become unable for
any reason to purchase Receivables from Metris in accordance with the
provisions of the Purchase Agreement, the Transferor's obligations under
the Purchase Agreement as to Metris will automatically be terminated. The
date of any such termination will be the "Purchase Termination Date."
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
Transfer of Receivables
The Transferor has represented and warranted in the Pooling and
Servicing Agreement that the transfer of Receivables by it to the Trust
constitutes either a valid transfer and assignment to the Trust of all
right, title, and interest of the Transferor in and to the Receivables,
except for Permitted Liens and the interest of the Transferor as holder of
the Exchangeable Transferor Security and any other Investor Security of
any Series then held by it, or the grant to the Trust of a security
interest in the Receivables. The Transferor has also represented and
warranted in the Pooling and Servicing Agreement that, in the event the
transfer of Receivables by the Transferor to the Trust is deemed to create
a security interest under the UCC, there will exist a valid, subsisting,
and enforceable first priority perfected security interest in such
Receivables created thereafter in favor of the Trust on and after their
creation, subject only to Permitted Liens. For a discussion of the Trust's
rights arising from a breach of these warranties, see "Description of the
Offered Securities--Representations and Warranties."
The Transferor has represented that the Receivables are "accounts,"
"general intangibles" or "chattel paper" as each is defined in Article 9
of the UCC as then in effect in each Relevant UCC State. Both the sale of
accounts and chattel paper and the transfer of accounts and chattel paper
as security for an obligation are treated under Article 9 of the UCC as
creating a security interest therein and are subject to its provisions,
and the filing of an appropriate financing statement will perfect the
security interest of the Trust. If a transfer of general intangibles is
deemed to constitute the creation of a security interest, rather than a
sale, Article 9 of the UCC applies and the filing of one or more
appropriate financing statements is also required in order to perfect the
security interest of the Trust. In order to protect the interests of the
Trust in the Receivables, financing statements covering the Receivables
have been filed under the UCC.
If the transfer of Receivables constituting general intangibles is
deemed to be a sale, then the UCC is not applicable and no further action
is required to protect the Trust's interest from third parties. Although
the priority of future generated general intangibles is not as clear as
the priority of interests governed by the UCC, Direct Merchants Bank,
Metris and the Transferor believe that it would be inconsistent for a
court to afford the Trust less favorable treatment if the transfer of the
Receivables is deemed to be a sale than if it were deemed to be a security
interest and that a court should conclude that a sale of Receivables
consisting of general intangibles would be deemed to have occurred as of
the Initial Closing Date or, as applicable, the relevant date of
designation for inclusion in the Trust.
There are certain limited circumstances under the UCC in which a
prior or subsequent transferee of Receivables coming into existence after
the Initial Closing Date could have an interest in such Receivables with
priority over the Trust's interest. Under the Pooling and Servicing
Agreement, however, the Transferor has represented and warranted that it
transferred the Receivables to the Trust free and clear of the lien of any
third party. In addition, the Transferor has covenanted that it will not
sell, pledge, assign, transfer, or grant any lien (other than a Permitted
Lien) on any Receivable (or any interest therein) other than a Permitted
Lien. A tax or other governmental lien on property of the Transferor
arising prior to the time a Receivable comes into existence may also have
priority over the interest of the Trust in such Receivable. There is a
significant possibility that the Trust may not have a perfected security
interest in any of the Receivables created after the filing of a petition
for relief by or against Metris or the Transferor under the Bankruptcy Code
or after the appointment of a receiver or conservator with respect to
Direct Merchants Bank. Nevertheless, it is anticipated that the Trust will
either own or have a perfected security interest in Receivables existing on
the date of filing a petition by or against Metris or the Transferor under
the Bankruptcy Code or after the date of appointment of a receiver or
conservator with respect to Direct Merchants Bank and will be able to make
payments in respect of principal and interest on the Offered Securities,
although there can be no assurance that any of such payments would be
timely. Because the Trust's interest in the Receivables is dependent upon
the Transferor's interest in the Receivables, which is dependent upon
Metris' or Direct Merchants Bank's interest in the Receivables, any adverse
change in the priority or perfection of the Transferor's or Metris'
security interest would correspondingly affect the Trust's interest in the
affected Receivables. In addition, if a receiver or conservator were
appointed for Direct Merchants Bank, certain administrative expenses of the
receiver or conservator also may have priority over the interest of the
Trust in such Receivables. While Direct Merchants Bank is the Servicer,
certain cash collections on the Receivables may be held by Direct Merchants
Bank and commingled with its funds for brief periods, and if an Insolvency
Event occurs, the Trust may not have a perfected interest in such
commingled collections.
Certain Matters Relating to Bankruptcy or Receivership
The Transferor will not engage in any activities except purchasing
accounts receivable from Metris or any affiliate of Metris, forming
trusts, transferring such accounts receivable to such trusts and engaging
in activities incident to, or necessary or convenient to accomplish, the
foregoing. The Transferor has no intention of filing a voluntary petition
under the United States federal bankruptcy code or any similar applicable
state law so long as the Transferor is solvent and does not reasonably
foresee becoming insolvent.
The voluntary or involuntary application for relief under the
Bankruptcy Code or any similar applicable state law with respect to Metris
should not necessarily result in a similar voluntary application with
respect to the Transferor so long as the Transferor is solvent and does
not reasonably foresee becoming insolvent either by reason of Metris'
insolvency or otherwise. Counsel has advised Metris and the Transferor
that (i) the assets and liabilities of the Transferor would not be
substantively consolidated with the assets and liabilities of Metris in
the event of a petition for relief under the Bankruptcy Code with respect
to Metris and (ii) the sale of Receivables by Metris would constitute a
valid sale and, therefore, such Receivables would not be property of
Metris in the event of the filing of an application for relief by or
against Metris under the Bankruptcy Code. The foregoing conclusions are
reasoned conclusions, based upon various assumptions regarding factual
matters and future events, as to which there necessarily can be no
assurance. If a bankruptcy trustee for Metris, Metris as
debtor-in-possession, or a creditor of Metris were to take the view that
Metris and the Transferor should be substantively consolidated or that the
transfer of the Receivables from Metris to the Transferor should be
recharacterized as a pledge of such Receivables, then delays in payments
on the Offered Securities and the Collateralized Trust Obligations or
(should the bankruptcy court rule in favor of any such trustee,
debtor-in-possession or creditor) reductions in such payments on such
Securities could result.
The Pooling and Servicing Agreement provides that, upon the
bankruptcy or appointment of a receiver for the Transferor, Direct
Merchants Bank or Metris, the Transferor will promptly give notice thereof
to the Trustee, and a Pay Out Event with respect to all Series will occur,
and under the Pooling and Servicing Agreement, no new Principal
Receivables will be transferred to the Trust. Upon the bankruptcy of the
Transferor, unless otherwise instructed within a specified period by the
securityholders representing undivided interests aggregating more than 50
percent of the aggregate invested amount of each Series (and, with respect
to Series 1998-3, the Insurer), the Trustee will proceed to sell, dispose
of, or otherwise liquidate the Receivables in a commercially reasonable
manner and on commercially reasonable terms. The proceeds from the sale of
the Receivables would then be treated by the Trustee as collections on the
Receivables. If the only Pay Out Event to occur is either the insolvency
of the Transferor or the appointment of a bankruptcy trustee or receiver
for the Transferor, the receiver or bankruptcy trustee for the Transferor
may have the power to continue to require the Transferor to transfer new
Principal Receivables to the Trust and to prevent the early sale,
liquidation or disposition of the Receivables and the commencement of the
Early Amortization Period. See "Description of the Offered Securities--Pay
Out Events."
Direct Merchants Bank has represented and warranted to Metris and
Metris has represented and warranted to the Transferor, in the Purchase
Agreements, respectively, that the sale of the Receivables to Metris or
the Transferor, respectively, is a valid sale of the Receivables to Metris
or the Transferor, respectively. In addition, Direct Merchants Bank,
Metris and the Transferor have treated and will treat the transaction
described in the Purchase Agreements as sales of the Receivables to Metris
and the Transferor, respectively, and Metris has taken or will take all
actions that are required under the UCC to perfect Metris' and the
Transferor's ownership interest, respectively, in the Receivables.
Notwithstanding the foregoing, if Metris were to become a debtor in a
bankruptcy case and a creditor or trustee-in-bankruptcy of such debtor or
such debtor itself were to take the position that the sale of Receivables
from Metris to the Transferor, should be recharacterized as a pledge of
such Receivables to secure a borrowing from such debtor, then delays in
payments of collections of Receivables to the Transferor (and therefore to
the Trust and to Securityholders) could occur and (should the court rule
in favor of any such trustee, debtor-in-possession or creditor) reductions
in the amount of such payments could result.
The Federal Deposit Insurance Act ("FDIA"), as amended by FIRREA,
which became effective August 9, 1989, sets forth certain powers that the
FDIC could exercise if it were appointed as conservator or receiver of
Direct Merchants Bank. Among other things, the FDIA grants such a
conservator or receiver the power to repudiate contracts of, and to
request a stay of up to 90 days of any judicial action or proceeding
involving, Direct Merchants Bank.
To the extent that (i) Direct Merchants Bank granted a security
interest in the Receivables to Metris, Metris granted a security interest
in the Receivables to the Transferor and the Transferor granted a security
interest in the Receivables to the Trust, (ii) the interest was validly
perfected before Direct Merchants Bank's insolvency, (iii) each such
interest was not taken or granted in contemplation of Direct Merchants
Bank's insolvency or with the intent to hinder, delay or defraud Direct
Merchants Bank or its creditors, (iv) each of the Purchase Agreements and
the Pooling and Servicing Agreement is continuously a record of Direct
Merchants Bank, and (v) each of the Purchase Agreements and the Pooling
and Servicing Agreement represents a bona fide and arm's length
transaction undertaken for adequate consideration in the ordinary course
of business, such valid perfected security interest of the Trust should be
enforceable (to the extent of the Trust's "actual direct compensatory
damages") notwithstanding the insolvency of, or the appointment of a
receiver or conservator for, Direct Merchants Bank and payments to the
Trust with respect to the Receivables (up to the amount of such damages)
should not be subject to an automatic stay of payment or to recovery by
the FDIC as conservator or receiver of Direct Merchants Bank. If, however,
the FDIC were to assert that the security interest was unperfected or
unenforceable or were to require the Trust to establish its right to those
payments by submitting to and completing the administrative claims
procedure established under FIRREA, or the conservator or receiver were to
request a stay of proceedings with respect to Direct Merchants Bank as
provided under FIRREA, delays in payments to the Trust on the Securities
and possible reductions in the amount of those payments could occur. The
FDIA does not define the terms "actual direct compensatory damages." On
April 10, 1990, the RTC, formerly a sister agency of the FDIC, adopted the
RTC Policy Statement with respect to the payment of interest on
collateralized borrowings. The RTC Policy Statement states that interest
on such borrowings will be payable at the contract rate up to the date of
the redemption or payment by the conservator, receiver, or the trustee of
an amount equal to the principal owed plus the contract rate of interest
up to the date of such payment or redemption, plus any expenses of
liquidation if provided for in the contract, to the extent secured by the
collateral. The FDIC, however, has not adopted a formal policy statement
on payment of "actual direct compensatory damages" with respect to
collateralized borrowings of banks that are repudiated, and may not follow
the approach of the RTC. In addition, in a 1993 case involving zero-coupon
bonds, however, a federal district court held that the RTC was instead
obligated to pay bondholders the fair market value of repudiated bonds as
of the date of repudiation.
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993), cert. denied, 114 S. Ct. 554 (1993), the United States Court of
Appeals for the 10th Circuit suggested that even where a transfer of
accounts from a seller to a buyer constitutes a "true sale," the accounts
would nevertheless constitute property of the seller's bankruptcy estate in
a bankruptcy of the seller. If Metris or the Transferor were to become
subject to a bankruptcy proceeding or if Direct Merchants Bank were to
become subject to a receivership and a court were to follow the 10th
Circuit's reasoning, Securityholders might experience delays in payment or
possibly losses in their investment in the Securities. Counsel to the
Transferor has advised the Transferor that the facts of the Octagon case
are distinguishable from those in the sale transactions between Direct
Merchants Bank and Metris, Metris and the Transferor and the Transferor and
the Trust and that the reasoning of the 10th Circuit appears to be
inconsistent with established precedent and the UCC.
The occurrence of certain events of insolvency, conservatorship or
receivership with respect to the Servicer will result in a Servicer
Default, which Servicer Default, in turn, could result in a Pay Out Event.
If no other Servicer Default other than the commencement of such
bankruptcy or similar event exists, a conservator or receiver of the
Servicer may have the power to prevent the Trustee and the Securityholders
from appointing a successor Servicer.
Consumer Protection Laws
The Accounts and Receivables are subject to numerous federal and
state consumer protection laws that impose requirements related to offering
and extending credit. Any failure by a Credit Card Originator or the
Servicer to comply with such legal requirements also could adversely affect
the Servicer's ability to collect the full amount of the Receivables. The
United States Congress and the states may enact laws and amendments to
existing laws to further regulate consumer credit or to reduce finance
charges or other fees or charges applicable to credit card and other
consumer revolving loan accounts. Such laws, as well as any new laws or
rulings which may be adopted, may adversely affect the Servicer's ability
to collect on the Receivables or maintain previous levels of collections.
The relationship of the Obligor and credit card issuer is
extensively regulated by federal and state consumer protection and related
laws. With respect to credit cards issued by Direct Merchants Bank, the
most significant laws include the federal Truth-in-Lending Act, Fair
Credit Billing Act, Fair Debt Collection Practices Act, Equal Credit
Opportunity Act, Fair Credit Reporting Act, Electronic Funds Transfer Act
and National Bank Act, as well as applicable state laws. Claims may be
brought under these statutes by private consumers as well as federal and
state regulators. These statutes impose disclosure requirements when a
credit card account is advertised, when it is opened, at the end of
monthly billing cycles and at year end and, in addition, prohibit certain
discriminatory practices in extending credit and impose certain
limitations on the type of account related charges that may be assessed.
Federal law requires credit card issuers to disclose to consumers the
interest rates, cardholder fees, grace periods and balance calculation
methods associated with their credit card accounts. In addition,
cardholders are entitled under current laws to have payments and credits
applied to the credit card account promptly, to receive prescribed notices
and to require billing errors to be resolved promptly. Certain laws,
including the laws described above, may limit Direct Merchants Bank's
ability to collect amounts owing with respect to the Receivables
regardless of any act or omission on the part of Direct Merchants Bank.
These laws further provide that in certain cases cardholders cannot be
held liable for, or the cardholder's liability is limited with respect to,
charges to the credit card account that result from unauthorized use of
the credit card.
Additional consumer protection laws may be enacted that would impose
requirements on the making, enforcement and collection of consumer credit
loans. Any new laws or rulings that may be adopted, and existing consumer
protection laws, may adversely affect the ability to collect on the
Receivables. In addition, failure of the Servicer to comply with such
requirements could adversely affect the Servicer's ability to enforce the
Receivables.
Certain jurisdictions may attempt to require out-of-state credit
card issuers to comply with such jurisdictions' consumer protection laws
(including laws limiting the charges imposed by such credit card issuers)
in connection with their operations in such jurisdictions. If it were
determined that out-of-state credit card issuers must comply with a
jurisdiction's laws limiting the charges imposed by credit card issuers,
such actions could have an adverse impact on Direct Merchants Bank's
credit card operations. Application of federal and state bankruptcy and
debtor relief laws (including the Soldiers' and Sailors' Civil Relief Act
of 1940) would affect the interests of the holders of the Securities if
the protection provided to debtors under such laws result in any
Receivables of the Trust being written off as uncollectible.
The Trust may be liable for certain violations of consumer
protection laws that apply to the Receivables transferred to it, either as
assignee from the Transferor with respect to obligations arising before
the transfer or as a party directly responsible for obligations arising
after the transfer. In addition, a cardholder may be entitled to assert
such violations by way of set-off against such cardholder's obligation to
pay the amount of Receivables owing. The Transferor will warrant to the
Trust in the Pooling and Servicing Agreement that all Receivables
transferred to the Trust have been and will be created in compliance with
the requirements of such laws. For discussion of the Trust's rights
arising from the breach of these warranties, see "Description of the
Offered Securities--Representations and Warranties."
Claims and Defenses of Cardholders Against the Trust
The UCC provides that (a) unless an Obligor has made an enforceable
agreement not to assert defenses or claims arising out of a transaction,
the rights of the Trust, as assignee, are subject to all the terms of the
Contract between the Credit Card Originator and such Obligor and any
defense or claim arising therefrom, to rights of set-off and to any other
defense or claim of such Obligor against the Credit Card Originator that
accrues before such Obligor receives notification of the assignment and (b)
any such Obligor is authorized to continue to pay the Credit Card
Originator until (i) the Obligor receives notification, reasonably
identifying the rights assigned, that the amount due or to become due has
been assigned and that payment is to be made to the Trustee or successor
Servicer and (ii) if requested by the Obligors, the Trustee or successor
Servicer has furnished reasonable proof of assignment. No such agreement
not to assert defenses has been entered into and no notice of the
assignment of the Receivables to the Trust will be sent to the cardholders
obligated on the Accounts in connection with the transfer of the
Receivables to the Trust.
Certain Litigation
Metris has developed and implemented compliance functions to monitor
its operations to ensure that Metris complies with all applicable laws.
However, Metris is a party to various legal proceedings resulting from
ordinary business activities relating to the operations of Metris. One of
these actions, in Alabama, seeks damages in an amount that cannot be
ascertained and purports to be a class action, although no class has been
certified. The Alabama case generally alleges a fraudulent sale of credit
protection insurance without consent. Although the Metris subsidiary that
is a party to the Alabama case believes it has substantive legal defenses
to this claim and is prepared to defend this case vigorously, should the
subsidiary's case settle or otherwise be resolved, Metris believes that
the amount, in the aggregate, will not be material to the operations of
Metris. Due to the uncertainties in litigation and other factors, there is
no assurance that Metris will ultimately prevail. Metris believes that it
has meritorious defenses to this action and any adverse decision should
not materially affect the consolidated financial condition of Metris and
its affiliates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General; Scope of Federal Income Tax Opinion
Set forth below is a general discussion of the material United
States federal income tax consequences of the purchase, ownership and
disposition of the Offered Securities which are anticipated to be relevant
to most categories of investors and has been prepared or reviewed by
Skadden, Arps, Slate, Meagher & Flom LLP, special federal income tax
counsel to the Transferor ("Special Tax Counsel"). Special Tax Counsel is
of the opinion that this discussion is correct in all material respects.
As more fully described below, Special Tax Counsel will render its
opinion, subject to the analysis and assumptions contained therein, that
the Offered Securities will be characterized as indebtedness secured by
the Receivables for federal income tax purposes and that the Trust will
not be subject to federal income tax at the entity level. Except as
expressly provided below, Special Tax Counsel will render no other
opinions to the Transferor with respect to the Offered Securities. This
discussion is intended as an explanatory discussion of the possible
effects of the classification of the Offered Securities as indebtedness on
investors generally and of related tax matters affecting investors
generally, but does not purport to furnish information in the level of
detail or with the attention to an investor's specific tax circumstances
that would be provided by an investor's tax advisor. This discussion is
based upon current provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed Treasury regulations
("Treasury Regulations") thereunder, current administrative rulings,
judicial decisions and other applicable authorities in effect as of the
date hereof, all of which are subject to change, possibly with retroactive
effect. There are no cases or Internal Revenue Service ("IRS") rulings on
similar transactions involving instruments issued by a trust with terms
similar to those of the Offered Securities. As a result, there can be no
assurance that the IRS will not challenge the conclusions reached herein,
and no ruling from the IRS has been or will be sought on any of the issues
discussed below. Furthermore, legislative, judicial or administrative
changes may occur, perhaps with retroactive effect, which could affect the
accuracy of the statements and conclusions set forth herein as well as the
tax consequences to Securityholders.
This summary does not address all aspects of federal income taxation
that may be relevant to the Security Owners in light of their personal
investment circumstances nor, except for certain limited discussions of
particular topics, to certain types of holders subject to special treatment
under the federal income tax laws (e.g., financial institutions,
broker-dealers, life insurance companies and tax-exempt organizations).
This information is directed to prospective purchasers who purchase Offered
Securities in the initial distribution thereof, who are citizens or
residents of the United States, including domestic corporations and
partnerships, and who hold the Offered Securities as "capital assets"
within the meaning of Section 1221 of the Code. Taxpayers and preparers of
tax returns (including those filed by any partnership or other entity)
should be aware that under applicable Treasury Regulations a provider of
advice on specific issues of law is not considered an income tax return
preparer unless the advice (i) is given with respect to events that have
occurred at the time the advice is rendered and is not given with respect
to the consequences of contemplated actions, and (ii) is directly relevant
to the determination of an entry on a tax return. Accordingly, taxpayers
should consult their respective tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. EACH PROSPECTIVE
INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF OFFERED SECURITIES SPECIFIC TO SUCH PROSPECTIVE
INVESTOR.
Characterization of the Offered Securities as Indebtedness
The Transferor, the Servicer and each Security Owner will express in
the Pooling and Servicing Agreement the intent that, for federal, state
and local income and franchise tax purposes, the Offered Securities will
be indebtedness secured by the Receivables. The Transferor, by initially
entering into, and the Servicer, by accepting the assignment of, the
Pooling and Servicing Agreement, and each Security Owner, by acquiring an
interest in an Offered Security, will agree to treat the Offered
Securities as indebtedness for federal, state and local income and
franchise tax purposes (except to the extent that different treatment is
explicitly required under state or local tax statutes). However, because
different criteria are used in determining the non-tax accounting
treatment of the transaction, the Transferor will treat the Pooling and
Servicing Agreement, for financial accounting purposes and certain other
non-tax purposes, as effecting a transfer of an ownership interest in the
Receivables and not as creating a debt obligation.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is
secured by the property, is a question of fact, the resolution of which is
based upon the economic substance of the transaction rather than its form
or the manner in which it is labeled. While the IRS and the courts have
set forth several factors to be taken into account in determining whether
the substance of a transaction is a sale of property or a secured
indebtedness for federal income tax purposes, the primary factor in making
this determination is whether the transferee has assumed the risk of loss
or other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Based upon its analysis of such factors,
Special Tax Counsel is of the opinion that the Transferor will be treated
as the owner of the Receivables for federal income tax purposes and,
accordingly, the Class A Securities will be characterized for federal
income tax purposes as indebtedness that is secured by the Receivables.
Furthermore, Special Tax Counsel is of the opinion that the Trust will not
be subject to federal income tax at the entity level.
Although, in some instances, courts have held that a taxpayer is
bound by a particular form it has chosen for a transaction, even if the
substance of the transaction does not accord with its form, Special Tax
Counsel is of the opinion that the rationale of those cases do not apply
to the transaction evidenced by the Offered Securities, because the form
of the transaction, as reflected in the operative provisions of the
documents, either is not inconsistent with the characterization of the
Offered Securities as debt for federal income tax purposes or otherwise
makes the rationale of those cases inapplicable to this situation.
Taxation of Interest Income to Securityholders
The following discussion is based in part upon Treasury Regulations
interpreting the original issue discount ("OID") provisions of Sections
1271 through 1275 of the Code which were adopted as final on January 27,
1994 (the "OID Regulations"). The OID Regulations are, however, subject to
varying interpretations and do not address all issues that could affect
Security Owners.
Stated Interest. It is not expected that any of the Offered
Securities will be issued with OID. Based upon the foregoing opinions, and
assuming that all of the Offered Securities are treated as debt, the
stated interest on Offered Securities will be taxable as ordinary income
for federal income tax purposes when received or accrued in accordance
with a Securityholder's method of tax accounting.
OID. The Offered Securities may be issued at a discount from their
principal amounts, thereby creating the possibility of OID. In a case where
OID exists, all or a portion of the taxable income to be recognized with
respect to the Offered Securities would be includible in income of Security
Owners as OID. Any amount treated as OID would not, however, be includible
again when the interest is actually received. If the yield on a Class of
Offered Securities were not materially different from its coupon, this
treatment would have no significant effect on Security Owners using the
accrual method of accounting. However, cash method Security Owners may be
required to report income with respect to the Offered Securities in advance
of the receipt of cash attributable to such income.
While it is not anticipated that the Offered Securities will be
issued at a discount from their stated principal amount that is greater
than a de minimis amount, under Treasury Regulations the Offered
Securities may nevertheless be deemed to have been issued with OID. This
could be the case, for example, if interest payments are not deemed to be
payments of "qualified stated interest" because (i) no reasonable legal
remedies exist to compel timely payment of such interest payments and (ii)
the Offered Securities do not have terms and conditions that make the
likelihood of late payment (other than a late payment that occurs within a
reasonable grace period) or nonpayment a remote contingency. As a result,
if the OID Regulations were to apply, all of the taxable income to be
recognized with respect to the Offered Securities would be includible in
income as OID but would not be includible again when the interest is
actually received. In addition, the OID Regulations provide that in
determining whether interest is unconditionally payable, the possibility
of nonpayment due to default, insolvency, or similar circumstances is
ignored. Accordingly, the Transferor intends to take the position that
interest payments constitute payments of "qualified stated interest" with
respect to the Offered Securities if they are issued at a price that is
less than a de minimis discount from their stated principal amount.
If the Offered Securities are in fact issued at a greater than de
minimis discount, the following rules will apply. The excess of the
"stated redemption price at maturity" of an Offered Security (generally
equal to its principal amount as of the date of issuance plus all interest
other than "qualified stated interest" payable prior to or at maturity)
over the original issue price (in this case, the initial offering price at
which a substantial amount of the Offered Securities are sold to the
public) will constitute OID. A Security Owner must include OID in income
as interest over the term of the Offered Security under a constant yield
method. In general, OID must be included in income in advance of the
receipt of cash representing that income. In the case of a debt instrument
as to which the repayment of principal may be accelerated as a result of
the prepayment of other obligations securing the debt instrument (a
"Prepayable Instrument"), the periodic accrual of OID is determined by
taking into account both the prepayment assumptions used in pricing the
debt instrument and the prepayment experience. If this provision applies
to the Offered Securities (which is not clear), the amount of OID which
will accrue in any given "accrual period" may either increase or decrease
depending upon the actual prepayment rate. Accordingly, each
Securityholder should consult its tax advisor regarding the impact to such
Securityholder of the OID rules if the Offered Securities are issued with
OID. An Offered Security issued with de minimis OID must include such OID
in income proportionately as principal payments are made on such Offered
Security.
Discount and Premium. A subsequent holder who purchases an Offered
Security at a discount may be subject to the "market discount" rules of
Section 1276 of the Code. These rules provide, in part, for the treatment
of gain attributable to accrued market discount as ordinary income upon
the receipt of partial principal payments or on the sale or other
disposition of the Offered Security, and for the deferral of interest
deductions with respect to debt incurred to acquire or carry the market
discount Offered Security. A Security Owner may, however, elect to include
market discount in gross income as it accrues and, if such election is
made, is not subject to the deferral of interest deductions provision. Any
such election will apply to all debt instruments acquired by the taxpayer
on or after the first day of the first taxable year to which such election
applies. Further, the adjusted tax basis of an Offered Security subject to
such election will be increased to reflect market discount included in
gross income, thereby reducing any gain or increasing any loss on a sale
or taxable disposition.
A subsequent holder who purchases an Offered Security at a premium
may elect to amortize and deduct this premium over the remaining term of
the Offered Security in accordance with rules set forth in Section 171 of
the Code.
Optional Election. As an alternative to the above treatments, accrual
method holders may elect to include in gross income all interest with
respect to an Offered Security, including stated interest, acquisition
discount, OID, de minimis OID, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium, using the constant yield method described above.
Treatment of Losses. OID, if any (in excess of de minimis OID), must
be reported by all Offered Securityholders, and other interest income must
be reported by Offered Securityholders that report income on the accrual
method, as it accrues, whether or not such Offered Securityholder has
received cash equivalent to such income and without giving effect to
delays or reductions in distributions attributable to defaults and
delinquencies on the Receivables, except to the extent it can be
established that such amounts are uncollectible. As a result, if there
were in excess of de minimis OID, the amount of income reported by an
Offered Securityholder in any period could exceed the amount of cash
distributed to such holder in that period. An Offered Securityholder
generally will realize a loss where either principal or previously accrued
interest are determined to be uncollectible with respect to the Offered
Security, although the timing and character of such losses (or reductions
in income) are uncertain, and the deductibility of such losses may be
subject to limitations.
Disposition of Offered Securities
Generally, capital gain or loss will be recognized on a sale or other
taxable disposition of Offered Securities in an amount equal to the
difference between the amount realized (other than amounts attributable to,
and taxable as, accrued interest) and the seller's tax basis in the Offered
Securities. A Security Owner's tax basis in an Offered Security will
generally equal such Security Owner's cost increased by any OID, market
discount and gain previously included by such Security Owner in income with
respect to the Offered Security and decreased by any bond premium
previously amortized and any principal payments previously received by such
Security Owner with respect to the Offered Security. Subject to the market
discount rules of the Code discussed above under "--Taxation of Interest
Income to Securityholders--Discount and Premium", any such gain or loss
will be capital gain or loss if the Offered Security was held as a capital
asset (except, however, with regard to Prepayable Instruments, in which
case in the event of a prepayment or redemption thereof such gain is
ordinary income to the extent of any not yet accrued OID). Capital gain or
loss will be long-term if the Offered Security was held by the holder for
more than one year and otherwise will be short-term. (Under the Taxpayer
Relief Act of 1997 the maximum rates on long-term capital gains will be
reduced further in the year 2001 and thereafter for certain individual
taxpayers who meet specified conditions). Each prospective investor should
consult its tax advisor concerning these tax law changes.)
Information Reporting and Backup Withholding
The Trustee will be required to report annually to the IRS, and to
each Securityholder, the amount of interest paid on the Offered Securities
(and the amount withheld for federal income taxes, if any) for each
calendar year, except as to exempt recipients (generally, corporations,
tax-exempt organizations, qualified pension and profit-sharing trusts,
individual retirement accounts, or nonresident aliens who provide
certification as to their status). Each holder (other than holders who are
not subject to the reporting requirements) will be required to provide,
under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Securityholder fail to provide the required certification, the Trustee
will be required to withhold (or cause to be withheld) 31 percent of the
interest otherwise payable to the holder, and remit the withheld amounts
to the IRS as a credit against the holder's federal income tax liability.
FASIT Legislation
Legislation passed by Congress and signed into law by the President
on August 20, 1996 added Sections 860H through 860L to the Code (the "FASIT
Provisions") which provide for a new type of entity for federal income tax
purposes known as a "financial asset securitization investment trust" (a
"FASIT"). Although the legislation providing for the new FASIT entity
became effective on September 1, 1997, many technical issues are to be
addressed in Treasury Regulations which have not yet been issued. In
general, the FASIT legislation enables trusts such as the Trust to be
treated as a pass-through entity not subject to federal entity-level income
tax (except with respect to certain prohibited transactions) and to issue
securities that would be treated as debt for federal income tax purposes.
Transition rules provided for by the FASIT legislation contemplate that
entities in existence on August 31, 1997 may elect to be taxed under the
FASIT Provisions. However, how such election is made and how outstanding
interests of such entity are to be treated subsequent to the election is
not explained in the FASIT legislation.
Other Possible Characterizations of the Pooling and Servicing Agreement
Although, as described above, it is the opinion of Special Tax
Counsel that the 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
Securityholders would probably be treated as dividends. Such an
entity-level tax could result in reduced distributions to Securityholders
and the Securityholders could be liable for a share of such tax.
Because the Transferor will treat the Offered Securities as
indebtedness for federal income tax purposes, the Trustee will not comply
with the tax reporting requirements that would apply under the foregoing
alternative characterizations of the Offered Securities.
Defeasance
The Securities are subject to Defeasance in certain circumstances.
It is not clear under the existing authorities whether Defeasance would,
for federal income tax purposes, result in a deemed taxable sale or
exchange of the Securities in exchange for the amounts deposited in the
Principal Funding Account and the Accumulation Period Reserve Account as a
result of the Defeasance; however, if such a sale or exchange were deemed
to occur, because of the short time period, the amount required to be
deposited and the nature of the assets in which such amount may be
invested, such a result would not be expected to have a material adverse
effect on a Securityholder for federal income tax purposes,
notwithstanding that, if such a sale or exchange were deemed to occur,
each Securityholder would thereafter be deemed to own its pro rata share
of the assets in which such amount is invested, and would be required to
report its taxable income on such basis.
Tax Consequences to Foreign Investors
As noted above, Special Tax Counsel will render its opinion, subject
to the analysis and assumptions contained therein, that the 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 States by the Foreign
Person, and (ii) in the case of an individual Foreign Person, the
Foreign Person is not present in the United States for 183 days or
more in the taxable year.
(c) If the interest, gain or income on an Offered Security
held by a Foreign Person is effectively connected with the conduct
of a trade or business in the United States by the Foreign Person,
the holder (although exempt from the withholding tax previously
discussed if an appropriate statement is furnished) generally will
be subject to United States federal income tax on the interest, gain
or income at regular federal income tax rates. In addition, if the
Foreign Person is a foreign corporation, it may be subject to a
branch profits tax equal to 30 percent of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable
year, as adjusted for certain items, unless it qualifies for a lower
rate under an applicable tax treaty.
If the IRS were to contend successfully that any of the Offered
Securities are interests in a partnership (not taxable as a corporation),
a Security Owner that is a Foreign Person might be required to file a
United States individual or corporate income tax return and pay tax on its
share of partnership income at regular United States rates including, in
the case of a corporate Security Owner, the branch profits tax (and would
be subject to withholding tax on its share of partnership income). If any
of the Offered Securities were recharacterized as interests in a "publicly
traded partnership" taxable as a corporation, to the extent distributions
on such Offered Securities were treated as dividends, a Foreign Person
would generally be subject to tax (and withholding) on the gross amount of
such dividends at a rate of 30 percent unless reduced or eliminated
pursuant to an applicable income tax treaty.
New Withholding Regulations
On October 6, 1997, the Department of the Treasury issued new
regulations (the "New Regulations") which make certain modifications to
the withholding, backup withholding and information reporting rules
described above. The New Regulations attempt to unify certification
requirements and modify reliance standards. The New Regulations will
generally be effective for payments made after December 31, 1999, subject
to certain transition rules. Prospective investors are urged to consult
their own tax advisors regarding the New Regulations.
CERTAIN STATE TAX CONSEQUENCES
Because of the differences in state tax laws and their applicability
to different investors, it is not possible to summarize the potential
state tax consequences of holding the Offered Securities. ACCORDINGLY,
PURCHASERS OF OFFERED SECURITIES SHOULD CONSULT THEIR RESPECTIVE TAX
ADVISORS REGARDING THE STATE TAX CONSEQUENCES OF PURCHASING ANY CLASS OF
OFFERED SECURITIES.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee
benefit plans (as defined in Section 3(3) of ERISA), (b) plans described
in Section 4975(e)(1) of the Code, including individual retirement
accounts and Keogh Plans, (c) any entities whose underlying assets include
plan assets by reason of a plan's investment in such entities (each of
(a), (b) and (c), a "Plan") and (d) persons who have certain specified
relationships to such Plans ("Parties in Interest" under ERISA and
"Disqualified Persons" under the Code). Moreover, based on the reasoning
of the United States Supreme Court in John Hancock Mutual Life Insurance
Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517 (1993), an insurance
company's general account may be deemed to include assets of the Plans
investing in the general account (e.g., through the purchase of an annuity
contract), and the insurance company might be treated as a Party in
Interest with respect to such Plans by virtue of such investment. ERISA
also imposes certain duties on persons who are fiduciaries of Plans, and
both ERISA and the Code prohibit certain transactions involving "plan
assets" between a Plan and Parties in Interest or Disqualified Persons
with respect to such Plans. Violation of these rules may result in the
imposition of an excise tax or penalty. Thus, a Plan fiduciary considering
an investment in the Offered Securities should consider, among other
things, whether such an investment might constitute or give rise to a
prohibited transaction under ERISA, the Code or any substantially similar
federal, state or local law.
Neither ERISA nor the Code defines the term "plan assets." Under
Section 2510.3-101 of the United States Department of Labor ("DOL")
regulations (the "Plan Assets Regulation"), a Plan's assets may be deemed
to include an interest in the underlying assets of an entity (such as a
trust) for certain purposes, including the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
in such entity. Accordingly, an investment in the Offered Securities by a
Plan might result in the assets of the Trust being deemed to constitute
plan assets, which in turn could have the consequence that certain aspects
of such investment, including the operation of the Trust, might give rise
to or result in prohibited transactions under ERISA and the Code.
Class A Securities
The Plan Assets Regulation contains an exception to the plan asset
rules that provides that if a Plan acquires a "publicly-offered security,"
the issuer of the security is not deemed to hold plan assets, regardless
of the fact that the security might otherwise represent an equity interest
in the issuer. A publicly-offered security is a security that is (i)
freely transferable, (ii) part of a class of securities that is
"widely-held" i.e., owned by 100 or more investors independent of the
issuer and of one another and (iii) either (A) part of a class of
securities registered under Section 12(b) or 12(g) of the Exchange Act or
(B) sold to a Plan as part of an offering of securities to the public
pursuant to an effective registration statement under the Securities Act
and the class of securities of which such security is a part is registered
under the Exchange Act within 120 days (or such later time as may be
allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred. Under
the Plan Assets Regulation, a class of securities will not fail to be
widely-held solely because subsequent to the initial offering the number
of independent investors falls below 100 as a result of events beyond the
control of the issuer.
The Class A Underwriters expect, although no assurance can be given,
that the Class A Securities will be held by at least 100 independent
investors at the conclusion of the offering and the Transferor anticipates
that the other conditions of the Plan Assets Regulation will be met with
respect to the Class A Securities. No monitoring or other measures will be
taken to ensure that any such conditions will be met with respect to the
Class A Securities. If the Trust's assets were deemed to be "plan assets"
of a Plan investor, there is uncertainty whether existing exemptions from
the "prohibited transaction" rules of ERISA, the Code and any
substantially similar federal, state or local law would apply to all
transactions involving the Trust's assets. Accordingly, Plan fiduciaries
should consult with counsel before making a purchase of Class A
Securities.
Special Considerations for Insurance Company General Accounts
It should be noted that the Small Business Job Protection Act of
1996 added new Section 401(c) of ERISA relating to the status of the
assets of insurance company general accounts under ERISA and Section 4975
of the Code. Pursuant to Section 401(c), the DOL is required to issue
final regulations (the "General Account Regulations") with respect to
insurance policies issued on or before December 31, 1998 that are
supported by an insurer's general account. The General Account Regulations
are to provide guidance on which assets held by the insurer constitute
"plan assets" for purposes of the fiduciary responsibility provisions of
ERISA and Section 4975 of the Code. Section 401(c) also provides that,
except in the case of avoidance of the General Account Regulations and
actions brought by the Secretary of Labor relating to certain breaches of
fiduciary duties that also constitute breaches of state or federal
criminal law, until the date that is 18 months after the General Account
Regulations become final, no liability under the fiduciary responsibility
and prohibited transaction provisions of ERISA and Section 4975 of the
Code may result on the basis of a claim that the assets of the general
account of an insurance company constitute the plan assets of any Plan.
The plan asset status of insurance company separate accounts is unaffected
by new Section 401(c) of ERISA, and separate account assets continue to be
treated as the plan assets of any Plan invested in a separate account.
Potential investors that are insurance company general accounts should
consult their legal advisors concerning the effect of the General Account
Regulations on such investment.
As of the date hereof, the DOL has issued proposed regulations
pursuant to Section 401(c) of ERISA. If adopted substantially in the form
in which proposed, the General Account Regulations may not exempt the
assets of an insurance company general account from treatment as "plan
assets" after December 31, 1998.
General Investment Considerations
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code and the potential consequences
of making an investment in the Offered Securities with respect to their
specific circumstances. Moreover, each Plan fiduciary should take into
account, among other considerations, whether the fiduciary has the
authority to make the investment; the composition of the Plan's portfolio
with respect to diversification by type of asset; the Plan's funding
objectives; the tax effects of the investment; and whether under the
general fiduciary standards of investment prudence and diversification an
investment in the Offered Securities is appropriate for the Plan, taking
into account the overall investment policy of the Plan and the composition
of the Plan's investment portfolio.
Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA) are not subject to the provisions of Title I of
ERISA and Section 4975 of the Code. Accordingly, assets of such plans may,
subject to the provisions of any other applicable federal and state law
(including, without limitation, federal or state law which is, to a
material extent, similar to the provisions of Section 406 of ERISA or
Section 4975 of the Code), be invested in any class of Offered Securities
without regard to the ERISA considerations described herein. It should be
noted, however, that any such plan that is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") among the Transferor, Metris and
the Underwriters named below (the "Underwriters"), the Transferor has
agreed to sell to the Underwriters, and each of the Underwriters has
severally agreed to purchase, the principal amount of the Offered
Securities set forth opposite its name:
Amount
Of Class A
Underwriters Securities
Chase Securities Inc. ...................................... $___________
Total................................................. $
============
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 ____% of
the principal amount of the Class A Securities. The Underwriters may
allow, and such dealers may reallow, concessions not in excess of ____% of
the principal amount of the Class A Securities to certain brokers and
dealers. After the initial public offering, the public offering price and
other selling terms may be changed by the 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 specific maximum. Syndicate covering transactions involve
purchases of the Offered Securities in the open market after the
distribution has been completed in order to cover syndicate short
positions. Penalty bids permit 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 of the Financial Services Act 1986 of Great Britain
with respect to anything done by it in relation to the Offered Securities
in, from or otherwise involving the United Kingdom and (c) if that
Underwriter is an authorized person under the Financial Services Act 1986,
it has only promoted and will only promote (as that term is defined in
Regulation 1.02 of the Financial Services (Promotion of Unregulated
Schemes) Regulations 1991) to any person in the United Kingdom the scheme
described herein if that person is of a kind described either in Section
76(2) of the Financial Services Act 1986 or in Regulation 1.04 of the
Financial Services (Promotion of Unregulated Schemes) Regulations 1991.
In the ordinary course of business, several of the Underwriters or
their affiliates have engaged, and may engage in the future, in certain
investment banking or commercial banking transactions with Metris and its
affiliates.
LEGAL MATTERS
Certain legal matters relating to the Offered Securities will be
passed upon for Metris, the Transferor and Direct Merchants Bank by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal
matters relating to the Offered Securities will be passed upon for the
Underwriters by Brown & Wood LLP, New York, New York.
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 Numbers (ISIN) for
the Class A Securities is ; the Common Code numbers for the Class A
Securities is .
The transactions contemplated in this Prospectus were authorized by
resolutions adopted by the Transferor on , 1998 and , 1998.
Copies of the Pooling and Servicing Agreement, the Series 1998-3
Supplement, all other Supplements, the Purchase Agreements and all
amendments thereto, the reports and statements described in "Description
of the Offered Securities--Evidence as to Compliance", each document
listed under "Available Information" and all of the reports referred to
under "Reports to Securityholders" and "Description of the Offered
Securities--Reports to Securityholders" in the Prospectus will be
available free of charge at the office of the listing agent of the Trust
in Luxembourg, whose address is . Financial information regarding
Transferor is included in the consolidated financial statements of
Fingerhut Companies, Inc. in its Annual Report and Form 10-K for the
fiscal year ended , 1997, also available at the office of the listing
agent in Luxembourg. For so long as the Offered Securities are
outstanding, copies of each Annual Report and Form 10-K for subsequent
fiscal years and Form 10-Q for subsequent fiscal quarters will also be
available at the office of the listing agent in Luxembourg.
The Transferor confirms that there has been no material adverse
change in the performance of the Trust since , 1998, the date of the
information with respect to the Trust set forth in "the Receivables."
In the event that Definitive Securities are issued and the rules of
the Luxembourg Stock Exchange require a Luxembourg Transfer Agent, the
Luxembourg Paying Agent will be appointed as a Transfer Agent.
GLOSSARY OF TERMS
The following terms, which are used in this Prospectus, have the
meanings indicated:
"Account" means each revolving credit consumer credit card account
established pursuant to a Contract between a Credit Card Originator and
any Person, which on the Initial Closing Date was an Eligible Account or,
with respect to accounts transferred to the Trust after the Initial
Closing Date, each Additional Account or Supplemental Account. The
definition of Account includes each Transferred Account but does not
include any Accounts containing Ineligible Receivables and reassigned to
the Transferor pursuant to the Pooling and Servicing Agreement. The term
"Account" refers to an Additional Account or Supplemental Account only
from and after the Addition Date with respect thereto, and the term
"Account" refers to any Removed Account only prior to the Removal Date
with respect thereto.
"Accumulation Period" is defined at page 15 in "Prospectus
Summary--Revolving Period."
"Accumulation Period Length" is defined at page 61 in "Description of
the Offered Securities--Postponement of Accumulation Period."
"Accumulation Period Reserve Account" is defined at page 73 in
"Description of the Offered Securities--Accumulation Period Reserve
Account."
"Accumulation Shortfall" is defined at page 84 in "Description of
Offered Securities--Application of Collections--Payment of Principal."
"Adaptive Control System" is defined at page 41 in "Direct Merchants
Bank's Credit Card Activities--New Account Underwriting--The Adaptive
Control System."
"Addition Date" means each date as of which Receivables under
Additional Accounts or Supplemental Accounts are included in the Trust as
Accounts pursuant to the Pooling and Servicing Agreement.
"Additional Account" means (a) for the period from the Initial
Closing Date through the day preceding the Amendment Closing Date, each
revolving credit consumer credit card account owned by a Credit Card
Originator coming into existence after the Initial Closing Date which is an
Approved Account that the Transferor has not elected to exclude from the
Trust after June 7, 1996 and prior to the Amendment Closing Date or (b) on
and after the Amendment Closing Date, each revolving credit consumer credit
card account in which a Credit Card Originator acquires rights that is an
Approved Account and is not an Excluded Account; provided, however, that a
revolving credit consumer credit card account that does not satisfy the
definition of Approved Account on the date of its creation shall be an
Additional Account on the date that it satisfies the definition of Approved
Account. Any such election will be made by the Transferor or the Servicer
providing to the Trustee a written notice thereof clearly identifying such
excluded accounts.
"Adjusted Invested Amount" means, as of any business day, the
Invested Amount minus the sum of the amount then on deposit in the
Principal Account, the amount then on deposit in the Principal Funding
Account and the Series 1998-3 Percentage of the amount then on deposit in
the Excess Funding Account.
"Adjustment Payment" is defined at page 85 in "Description of the
Offered Securities--Defaulted Receivables; Dilution."
"Amendment Closing Date" means July 30, 1998.
"Amortization Period" means the period commencing on the Amortization
Period Commencement Date and continuing until the earlier of (x) the
Invested Amount of the Securities being paid in full or (y) the Termination
Date.
"Amortization Period Commencement Date" means the earlier of the
first day of the Accumulation Period and the date on which a Pay Out Event
occurs or is deemed to have occurred.
"Approved Account" means each (i) Eligible Account that is a
MasterCard(R) or VISA(R) account or (ii) any other revolving credit
consumer credit card account the inclusion in the Trust of which would not
cause a Ratings Event.
"Assignment" is defined at page 68 in "Description of the Offered
Securities--Addition of Trust Assets."
"Automatic Additional Accounts" is defined at page 68 in "Description
of the Offered Securities--Addition of Trust Assets."
"Available Investor Principal Collections" is defined at page 60 in
"Description of the Offered Securities--Principal Payments."
"Available Reserve Account Amount" is defined at page 74 in
"Description of the Offered Securities--Accumulation Period Reserve
Account."
"Available Series Finance Charge Collections" is defined at page 80
in "Description of the Offered Securities--Application of
Collections--Payment of Fees, Interest and Other Items."
"Bank" means Direct Merchants Credit Card Bank, National Association.
"Bank Purchase Agreement" means that certain Amended and Restated
Bank Receivables Purchase Agreement dated as of July 30, 1998 between
Direct Merchants Bank and Metris, as such document may be amended from
time to time in accordance with its terms and, if the context requires,
the prior versions thereof, including the Amending 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 53 in "Maturity Considerations."
"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 72 in "Description of the Offered
Securities--Trust Accounts."
"Cedel" is defined at page 57 in "Description of the Offered
Securities--Book-Entry Registration."
"Cedel Participants" is defined at page 57 in "Description of the
Offered Securities--Book-Entry Registration."
"Class" means any of the Class A Securities or the Class B Securities.
"Class A Adjusted Invested Amount" is defined at page 75 in
"Description of the Offered Securities--Allocation Percentages."
"Class A Charge-Off" is defined at page 86 in "Description of the
Offered Securities--Investor Charge-Offs."
"Class A Fixed/Floating Percentage" is defined at page 75 in
"Description of the Offered Securities--Allocation Percentages."
"Class A Floating Percentage" means, with respect to any business
day, the percentage equivalent of the ratio that the amount of the Class A
Adjusted Invested Amount as of the end of the preceding business day bears
to the greater of (a) the sum of the aggregate amount of Principal
Receivables and amounts on deposit in the Excess Funding Account as of the
end of the preceding business day and (b) the sum of the numerators with
respect to all classes of all Series then outstanding used to calculate
the applicable allocation percentage.
"Class A Initial Invested Amount" means $ .
"Class A Interest Rate" is defined at page 13 in "Prospectus
Summary--Interest."
"Class A Invested Amount" is defined at page 75 in "Description of
the Offered Securities--Allocation Percentages."
"Class A Monthly Interest" is defined at page 82 in "Description of
the Offered Securities--Application of Collections--Payment of Fees,
Interest and Other Items."
"Class A Percentage" means a fraction the numerator of which is the
Class A Initial Invested Amount and the denominator of which is the sum of
the Class A Initial Invested Amount.
"Class A Principal" is defined at page 84 in "Description of the
Offered Securities--Application of Collections--Payment of Principal."
"Class A Required Amount" means for any business day during a Monthly
Period the amount, if any, by which the sum of (i) the Class A Monthly
Interest and any overdue Class A Monthly Interest on the related
Distribution Date (and additional interest thereon), (ii) the Class A
Floating Percentage of the Default Amount for such Monthly Period (to
date), (iii) if Direct Merchants Bank, or an affiliate of Direct Merchants
Bank, is no longer the Servicer, the Class A Floating Percentage of the
Monthly Servicing Fee for the related Monthly Period, (iv) the Class A
Percentage of the Series 1998-3 Percentage of the Adjustment Payment
required to be made by the Transferor but not made on the related Transfer
Date and (v) the amount by which the Class A Invested Amount has been
reduced on prior business days because of unreimbursed Class A Charge-Offs
exceed the Available Series Finance Charge Collections plus any Excess
Finance Charge Collections from other Series and any Transferor Finance
Charge Collections in each case allocated with respect thereto.
"Class A Securities" means the Floating Rate Asset Backed Securities,
Series 1998-3, 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 85 in "Description of the
Offered Securities--Investor Charge-Offs."
"Class B Fixed/Floating Percentage" is defined at page 75 in
"Description of the Offered Securities--Allocation Percentages."
"Class B Floating Percentage" means, with respect to any business
day, the percentage equivalent of the ratio that the amount of the Class B
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 76 in "Description of
the Offered Securities--Allocation Percentages."
"Class B Principal Payment Commencement Date" means the earlier of
(a) during the Amortization Period, the first Distribution Date on which
the Class A Invested Amount is paid in full or, if there are no Principal
Collections allocable to Series 1998-3 remaining after payments have been
made to the Class A Invested Amount on such Distribution Date, the
Distribution Date following the Distribution Date on which the Class A
Invested Amount is paid in full and (b) the Distribution Date following a
sale or repurchase of the Receivables pursuant to the Pooling and
Servicing Agreement.
"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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Account" means an account established by the Servicer for
the purpose of depositing all Collections of Receivables.
"Collections" is defined at page 8 in "Prospectus Summary--Collections."
"Commission" means the Securities and Exchange Commission.
"Company" is defined at page 51 in "Description of MBIA."
"Contract" means an agreement between a Credit Card Originator and
another person for the extension of revolving credit, including pursuant
to a credit card, or revolving credit agreement (but shall not include any
agreement or plan relating to the extension of credit on a closed-end
basis).
"Controlled Accumulation Amount" is defined at page 84 in
"Description of the Offered Securities--Application of Collections--Payment
of Principal."
"Controlled Deposit Amount" is defined at page 52 in "Maturity
Considerations."
"Cooperative" is defined at page 57 in "Description of the Offered
Securities--Book-Entry Registration."
"Covered Amount" is defined at page 74 in "Description of the Offered
Securities--Accumulation Period Reserve Account."
"Credit and Collection Policy" means the written policies and
procedures of the applicable Credit Card Originator relating to the
operation of its consumer revolving credit card business, including,
without limitation, the written policies and procedures for determining
the creditworthiness of credit card customers and relating to the
maintenance of credit card accounts and collection of receivables with
respect thereto, as such policies and procedures may be amended, modified
or otherwise changed from time to time.
"Credit Card Originator" means 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.
"Defaulted Receivable" is defined at page 85 in "Description of the
Offered Securities--Defaulted Receivables; Dilution."
"Defeasance" is defined at page 87 in "Description of the Offered
Securities--Defeasance."
"Definitive Securities" is defined at page 58 in "Description of the
Offered Securities--Definitive Securities."
"Depositaries" is defined at page 55 in "Description of the Offered
Securities--Book-Entry Registration."
"Depository" is defined at page 55 in "Description of the Offered
Securities--General."
"Determination Date" is defined at page 85 in "Description of the
Offered Securities--Investor Charge-Offs."
"Direct Merchants Bank" means Direct Merchants Credit Card Bank,
National Association.
"Direct Merchants Bank Portfolio" is defined at page 44 in "Direct
Merchants Bank's Credit Card Activities--Delinquency and Loss Experience."
"Discount Option Receivables" is defined at page 65 in "Description
of the Offered Securities--Discount Option."
"Discount Percentage" is defined at page 65 in "Description of the
Offered Securities--Discount Option."
"Distribution Account" is defined at page 66 in "Description of the
Offered Securities--Trust Accounts."
"Distribution Date" means , 1998 and the day of each
month thereafter, or if such day is not a business day, the next succeeding
business day.
"DOL" means the U.S. Department of Labor.
"Dollars" means United States dollars.
"DTC" means The Depository Trust Company.
"DTC Participants" is defined at page 56 in "Description of the Offered
Securities--Book-Entry Registration."
"Early Amortization Period" means the period beginning on the
earlier of (a) the day on which a Pay Out Event occurs or is deemed to
have occurred and (b) the Expected Final Payment Date if the Class A
Invested Amount 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 67 in "Description of the Offered
Securities--Eligible Accounts."
"Eligible Receivable" is defined at page 67 in "Description of the
Offered Securities--Eligible Receivables."
"Enhancement" means, with respect to any Series, any letter of
credit, cash collateral account, cash collateral guaranty, guaranty,
collateral invested amount, surety bond, guaranteed rate agreement,
maturity guaranty facility, tax protection agreement, interest rate cap,
interest rate swap, subordination of the rights of one class or one Series
to another, or other contract or agreement for the benefit of the
securityholders of such Series (or securityholders of a class within such
Series as designated in the applicable Supplement).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Euroclear" is defined at page 57 in "Description of the Offered
Securities--Book-Entry Registration."
"Euroclear Operator" is defined at page 57 in "Description of the
Offered Securities--Book-Entry Registration."
"Euroclear Participants" is defined at page 57 in "Description of the
Offered Securities--Book-Entry Registration."
"Euroclear System" is defined at page 57 in "Description of the
Offered Securities--Book-Entry Registration."
"Excess Finance Charge Collections" means any Finance Charge
Collections allocable to any Series in excess of the amounts necessary to
make required payments with respect to such Series.
"Excess Funding Account" is defined at page 72 in "Description of the
Offered Securities--Excess Funding Account."
"Exchange" means any tender by the Transferor to the Trustee of the
Exchangeable Transferor Security, pursuant to any one or more Supplements
or, if provided in the relevant Supplement, securities representing any
Series and the Exchangeable Transferor Security, in exchange for one or
more new Series and a reissued Exchangeable Transferor Security.
"Exchangeable Transferor Security" means the security which evidences
the Transferor Interest.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Account" means on any date of determination (i) during any
period in which accounts are being automatically included as Accounts, any
revolving credit consumer credit card account which has been excluded from
addition to the Trust pursuant to the Pooling and Servicing Agreement or
any revolving credit consumer credit card account which the Transferor has
elected to exclude from the Trust and (ii) during any period following the
suspension of the automatic addition of accounts and prior to a Restart
Date, all revolving credit consumer credit card accounts other than
accounts that were Accounts on the automatic addition suspension date and
Supplemental Accounts previously added during such period.
"Expected Final Payment Date" means the Distribution
Date.
"External Prospects" is defined at page 37 in "Metris Companies Inc."
"FASIT" is defined at page 106 in "Certain Federal Income Tax
Consequences--Recent Legislation."
"FASIT Provisions" is defined at page 106 in "Certain Federal Income
Tax Consequences--Recent Legislation."
"FCI" means Fingerhut Companies, Inc., a Minnesota corporation.
"FDIA" means the Federal Deposit Insurance Act.
"FDIC" means the Federal Deposit Insurance Corporation.
"FDR" means First Data Resources, Inc.
"FICO scores" is defined at page 40 in "Direct Merchants Bank's
Credit Card Activities--New Account Underwriting--Credit Scoring."
"Finance Charge Collections" is defined at page 6 in "Prospectus
Summary--Trust."
"Finance Charge Receivables" is defined at page 8 in "Prospectus
Summary--Receivables."
"Fingerhut" means Fingerhut Corporation, a Minnesota corporation.
"Fingerhut Customers" is defined at page 37 in "Metris Companies Inc."
"Fingerhut Database" is defined at page 38 in "Fingerhut Corporation."
"Fingerhut Scores" is defined at page 38 in "Fingerhut Corporation."
"FIRREA" is defined at page 30 in "Risk Factors--Transfer of the
Receivables; Insolvency Risk Considerations."
"Fixed/Floating Percentage" is defined at page 75 in "Description of
the Offered Securities--Allocation Percentages."
"Floating Percentage" means the sum of the Class A Floating
Percentage and the Class B Floating Percentage.
"Foreign Person" is defined at page 107 in "Certain Federal Income
Tax Consequences--Tax Consequences to Foreign Investors."
"Full Invested Amount" is defined at page 10 in "Prospectus
Summary--Allocation of Trust Assets."
"Funding Period" is defined at page 14 in "Prospectus Summary--Funding
Period."
"General Account Regulations" is defined at page 110 in "Employee
Benefit Plan Considerations--Special Considerations for Insurance Company
General Accounts."
"Global Securities" is defined at page B-1-1 in "Annex II."
"Governmental Authority" means the United States of America, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions
of or pertaining to government.
"Guaranteed Distributions" is defined at page 83 in "Description of the
Offered Securities--The Policy."
"Indirect Participants" is defined at page 56 in "Description of the
Offered Securities--Book-Entry Registration."
"Ineligible Receivable" means any receivable that does not satisfy the
definition of Receivable.
"Initial Closing Date" is defined at page 63 in "Description of the
Offered Securities--Transfer and Assignment of Receivables."
"Initial Invested Amount" is defined at page 10 in "Prospectus
Summary--Allocation of Trust Assets."
"Insolvency Event" is defined at page 89 in "Description of the Offered
Securities--Pay Out Events."
"Insurance Agreement" means the Insurance and Reimbursement
Agreement to be dated as of the Closing Date, among MBIA, the Trustee, the
Servicer and the Transferor.
"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 8 in
"Prospectus Summary--The Policy."
"Interest Funding Account" is defined at page 70 in "Description of the
Offered Securities--Trust Accounts."
"Interest Rate Cap Provider" is defined at page 62 in "Description of
the Offered Securities--Interest Rate Cap Provider[s]."
"Interest Rate Caps" is defined at page 61 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.
"LIBOR" is defined at page 59 in "Description of the Offered
Securities--Interest Payments."
"LIBOR Determination Date" is defined at page 59 in "Description of
the Offered Securities--Interest Payments."
"MasterCard International" means MasterCard International Inc.
"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 , 1998.
"Monthly Servicing Fee" is defined at page 90 in "Description of the
Offered Securities--Servicing Compensation and Payment of Expenses."
"Moody's" means Moody's Investors Service, Inc.
"Negative Carry Amount" is defined at page 21 in "Prospectus
Summary--Coverage of Interest Shortfalls from Transferor Finance Charge
Collections."
"New Regulations" is defined at page 108 in "Certain Federal Income Tax
consequences--New Withholding Regulations."
"Notice Date" is defined at page 68 in "Description of the Offered
Securities--Addition of Trust Assets."
"Obligor" means a person or persons obligated to make payments with
respect to a Receivable arising under an Account pursuant to a Contract.
"Offered Securities" is defined at page 1.
"OID" means original issue discount.
"OID Regulations" is defined at page 104 in "Certain Federal Income
Tax Consequences--Taxation of Interest Income to Securityholders."
"Paired Series" is defined at page 86 in "Description of the Offered
Securities--Paired Series."
"Participants" is defined at page 55 in "Description of the Offered
Securities--General."
"Paying Agent" is defined at page 72 in "Description of the Offered
Securities--Trust Accounts."
"Payment Date" is defined at page 41 in "Direct Merchants Bank's
Credit Card Activities--Servicing, Billing and Payments."
"Payment Reserve Account" is defined at page 70 in "Description of the
Offered Securities--Trust Accounts."
"Pay Out Event" is defined at page 88 in "Description of the Offered
Securities--Pay Out Events."
"Periodic Finance Charge" has, with respect to any Account, the
meaning specified in the Contract applicable to such Account for finance
charges (due to periodic rate) or any similar term.
"Permitted Lien" means with respect to the Receivables: (i) liens in
favor of the Transferor created pursuant to the Purchase Agreement and
assigned to the Trustee pursuant to the Pooling and Servicing Agreement;
(ii) liens in favor of the Trustee pursuant to the Pooling and Servicing
Agreement; and (iii) liens which secure the payment of taxes, assessments
and governmental charges or levies, if such taxes are either (a) not
delinquent or (b) being contested in good faith by appropriate legal or
administrative proceedings and as to which adequate reserves in accordance
with generally accepted accounting principles shall have been established.
"Person" means any legal person, including any individual,
corporation, partnership, joint venture, association, joint stock company,
trust, unincorporated organization, governmental entity or other entity of
similar nature.
"Plan" is defined at page 109 in "Employee Benefit Plan
Considerations."
"Plan Assets Regulation" is defined at page 109 in "Employee Benefit
Plan Considerations."
"Policy" means the Financial Guarantee Insurance Policy issued by MBIA.
"Policy Claim Amount" is defined on page 83 in "Description of the
Offered Securities--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 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 1998-2 Supplement.
"Potential Class A Charge-Off" is defined at page 86 in "Description of
the Offered Securities--Investor Charge-Offs."
"Portfolio Yield" is defined at page 53 in "Maturity Considerations."
"Pre-Funded Amount" is defined at page 14 in "Prospectus
Summary--Funding Period."
"Pre-Funding Account" is defined at page 4 in "Prospectus
Summary--Funding Period."
"Prepayable Instrument" is defined at page 105 in "Certain Federal
Income Tax Consequences--Taxation of Interest Income to Securityholders--OID."
"Previously Issued Series" means the Series 1998-1 Variable Funding
Securities, the Series 1997-3 Asset Backed Certificates, the Series 1997-1
Asset Backed Certificates and the Series 1996-1 Asset Backed Certificates.
"Principal Account" is defined at page 70 in "Description of the
Offered Securities--Trust Accounts."
"Principal Collections" means with respect to any business day
Collections received with respect to Principal Receivables.
"Principal Funding Account" is defined at page 72 in "Description of
the Offered Securities--Principal Funding Account."
"Principal Funding Account Balance" is defined at page 52 in "Maturity
Considerations."
"Principal Funding Account Investment Proceeds" is defined at page 72
in "Description of the Offered Securities--Principal Funding Account."
"Principal Receivables" means for any business day, the aggregate
amount shown on the Servicer's records as amounts payable by Obligors with
respect to Eligible Receivables other than such amounts that are Finance
Charge Receivables or (except as used in the definition of Series Default
Amount) Receivables in Defaulted Accounts and shall include, without
limitation, amounts payable for purchases of goods or services or cash
advances. A Receivable shall be deemed to have been created at the end of
the day on the date of processing of such Receivable. In calculating the
aggregate amount of Principal Receivables on any day, the amount of
Principal Receivables shall be reduced by the aggregate amount of credit
balances in the Accounts on such day.
"Principal Terms" is defined at page 64 in "Description of the Offered
Securities--Exchanges."
"Proprietary Modeling System" is defined at page 40 in "Direct
Merchants Bank's Credit Card Activities--New Account Underwriting--Credit
Scoring."
"Proprietary Score" is defined at page 40 in "Direct Merchants Bank's
Credit Card Activities--New Account Underwriting--Credit Scoring."
"Purchase Agreement" means that certain Amended and Restated
Receivables Purchase Agreement dated as of July 30, 1998 between Metris
and the Transferor, as such documents may be amended from time to time in
accordance with their terms 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 98 in "Description of
the Purchase Agreements--Purchase Termination Date."
"Qualified Institution" is defined at page 70 in "Description of the
Offered Securities--Trust Accounts."
"Qualified Substitute Arrangement" is defined at page 62 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.
"Ratings Event" shall mean, with respect to any class of any
outstanding Series rated by a Rating Agency, a reduction or withdrawal of
the rating of any such class by a Rating Agency.
"Receivable" means all of the indebtedness of any Obligor under an
Account, including the right to receive payment of any interest or finance
charges and other obligations of such Obligors with respect thereto. Each
receivable includes, without limitation, all rights of the Transferor
under the applicable Contract.
"Record Date" means, with respect to any Distribution Date, the
business day preceding such Distribution Date, except that, with respect
to any Definitive Securities, Record Date shall mean the fifth day of the
then current Monthly Period.
"Recoveries" means any amounts received by the Servicer with respect
to Receivables in Accounts that previously became Defaulted Accounts.
"Redirected Principal Collections" is defined at page 78 in
"Description of the Offered Securities--Redirected Principal Collections."
"Reference Banks" means three major banks in the London interbank
market selected by the Servicer.
"Related Person" means an entity that is an affiliate of Metris, any
holder of an Investor Security, any provider of Enhancement, or any person
whose status would violate the conditions for a trustee contained in
Section (4)(i) of Rule 3a-7 under the Investment Company Act.
"Relevant UCC State" means each jurisdiction in which the filing of
a UCC financing statement is necessary to perfect the ownership interest
and security interest of the Transferor pursuant to the Purchase Agreement
or the ownership or security interest of the Trustee.
"Replacement Interest Rate Cap" is defined at page 62 in "Description
of the Offered Securities--The Interest Rate Caps."
"Required Amount" is defined at page 83 in "Description of the
Offered Securities--Application of Collections--Payment of Fees, Interest
and Other Items."
"Required Reserve Account Amount" is defined at page 73 in
"Description of the Offered Securities--Accumulation Period Reserve
Account."
"Requirements of Law" means the certificate of incorporation or
articles of association and by-laws or other organizational or governing
documents of such Person, and any material law, treaty, rule or regulation
or determination of an arbitrator or Governmental Authority, in each case
applicable to or binding upon such Person or to which such Person is
subject.
"Reserve Account Funding Date" is defined at page 73 in "Description
of the Offered Securities--Accumulation Period Reserve Account."
"Restart Date" is defined at page 68 in "Description of the Offered
Securities--Addition of Trust Assets."
"Retained Interest" means, on any date of determination, the sum of
the Transferor Interest and the interest in the Trust represented by any
Transferor Retained Class of investor securities.
"Retained Percentage" means, on any date of determination, the
percentage equivalent of a fraction the numerator of which is the Retained
Interest and the denominator of which is the aggregate amount of Principal
Receivables at the end of the day immediately prior to such date of
determination plus all amounts on deposit in the Excess Funding Account
(but not including investment earnings on such amounts).
"Revolving Period" is defined at page 15 in "Prospectus
Summary--Revolving Period."
"RTC" means the Resolution Trust Corporation.
"RTC Policy Statement" is defined at page 30 in "Risk
Factors-Transfer of the Receivables; Insolvency Risk Considerations."
"Securities" or "Series 1998-3 Securities" means, collectively, the
Class A Securities 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.
"Series" means any series of securities issued by the Trust pursuant
to a Supplement, including the Series 1998-3 Securities.
"Series Default Amount" is defined at page 85 in "Description of the
Offered Securities--Defaulted Receivables; Dilution."
"Series 1996-1 Asset Backed Certificates" means those securities
issued by the Trust pursuant to the Series 1996-1 Supplement dated as of
April 23, 1996.
"Series 1997-1 Asset Backed Certificates" means those securities
issued by the Trust pursuant to the Series 1997-1 Supplement dated as of
May 8, 1997.
"Series 1997-2 Asset Backed Certificates" means those securities
issued by the Trust pursuant to the Series 1997-2 Supplement dated as of
_______, 1997.
"Series 1998-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.
"Series 1998-3" is defined at page 2.
"Series 1998-3 Percentage" means, on any date of determination, the
percentage equivalent of a fraction the numerator of which is the Invested
Amount and the denominator of which is the sum of the Invested Amounts of
all Series then outstanding.
"Series 1998-3 Supplement" means the Supplement, dated as of the
Closing Date, among the Transferor, the Servicer and the Trustee relating
to the Series 1998-3 Securities.
"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 91 in "Description of the Offered
Securities--Servicer Default."
"Servicer" means initially Direct Merchants Bank and thereafter any
Person appointed as successor as provided in the Pooling and Servicing
Agreement.
"Servicer Default" is defined at page 91 in "Description of the Offered
Securities--Servicer Default."
"Servicing Fee Percentage" means 2.00 percent per annum, or for so
long as Direct Merchants Bank is the Servicer, a lesser rate if so
specified in the Supplement.
"Shared Principal Collections" means the amount of Principal
Collections for any business day allocated by the Servicer to the Invested
Amount remaining after covering required deposits or payments to the
Securityholders and any similar amount remaining for any other Series.
"SIPC" is defined at page 71 in "Description of the Offered
Securities--Trust Accounts."
"Special Tax Counsel" means Skadden, Arps, Slate, Meagher & Flom
LLP, counsel to the Transferor or such other counsel reasonably acceptable
to the Trustee.
"Spin Off" is defined on page 37 in "Metris Companies Inc."
"Spread Account" means an account established pursuant to the
Insurance Agreement to reimburse MBIA for any draws on the Policy.
"Spread Account Maximum" means the maximum amount required to be
deposited in the Spread Account pursuant to the Insurance Agreement.
"Standard & Poor's" means Standard & Poor's, a division of The
McGraw-Hill Companies, Inc.
"Stated Class B Amount" is defined at page 76 in "Description of the
Offered Securities--Allocation Percentages."
"Supplement" means any Supplement to the Pooling and Servicing
Agreement.
"Supplemental Accounts" is defined at page 68 in "Description of the
Offered Securities--Addition of Trust Assets."
"Supplemental Security" is defined at page 65 in "Description of the
Offered Securities--Exchanges."
"Suppress File" is defined at page 38 in "Fingerhut Corporation."
"Tax Certificate" is defined at page B-1-3 in "Annex II."
"Tax Opinion" is defined at page 64 in "Description of the Offered
Securities--Exchanges."
"Telerate Page 3750" means the display page currently so designated
on the Dow Jones Telerate Service (or such other page as may replace that
page on that service for the purpose of displaying comparable rates or
prices).
"Termination Date" means the ______ Distribution Date.
"Terms and Conditions" is defined at page 58 in "Description of the
Offered Securities--Book-Entry Registration."
"Transfer Agent and Registrar" is defined at page 59 in "Description
of the Offered Securities--Definitive Securities."
"Transfer Date" is defined at page 75 in "Description of the Offered
Securities--Application of Collections--Allocations."
"Transferor" means Metris Receivables, Inc., a Delaware corporation.
"Transferor Finance Charge Collections" is defined at page 21 in
"Prospectus Summary--Coverage of Interest Shortfalls from Transferor
Finance Charge Collections."
"Transferor Interest" means, on any date of determination, the
aggregate amount of Principal Receivables at the end of the day immediately
prior to such date of determination plus all amounts on deposit in the
Excess Funding Account (but not including investment earnings on such
amounts), minus the aggregate invested amount of all Series at the end of
such day.
"Transferor Percentage" is defined at page 75 in "Description of the
Offered Securities--Allocation Percentages."
"Transferor Retained Class" means any class of Investor Securities
which is retained by the Transferor.
"Transferor Retained Finance Charge Collections" is defined at page
82 in "Description of the Offered Securities--Application of
Collections--Payment of Fees, Interest and Other Items."
"Transferred Account" means an Account with respect to which a new
credit account number has been issued by the applicable Credit Card
Originator under circumstances resulting from a lost or stolen credit card
and not requiring standard application and credit evaluation procedures
under the Credit and Collection Policy.
"Treasury Regulations" is defined at page 103 in "Certain Federal
Income Tax Consequences--General; Scope of Federal Income Tax Opinion."
"Trigger Event" is defined at page 89 in "Description of the Offered
Securities--Pay Out Events."
"Trust" means the Metris Master Trust.
"Trust Accounts" is defined at page 70 in "Description of the Offered
Securities--Trust Accounts."
"Trust Portfolio" is defined at page 48 in "The Receivables."
"Trustee" means The Bank of New York (Delaware), a Delaware banking
corporation.
"Trustee's Corporate Trust Office" means the Trustee's office located
at White Clay Center, Route 273, Newark, Delaware 19711.
"UCC" means the Uniform Commercial Code as amended from time to time
as in effect in the applicable jurisdiction.
"Underwriters" is defined at page 111 in "Underwriting."
"Underwriting Agreement" means the underwriting agreement dated
__________, 1998 among the Transferor, Metris and the Underwriters.
"U.S. Person" is defined at page B-1-3 in "Annex II."
"Utah Bank" is defined at page 38 in "Direct Merchants Credit Card
Bank, National Association."
"Variable Funding Securities" means a series of Securities, in one
or more classes, issued pursuant to the Pooling and Servicing Agreement
and the Variable Funding Series Supplement relating thereto.
"Variable Funding Series Supplement" means the Series 1998-1
Supplement dated as of July 30, 1998 among the Transferor, the Servicer
and the Trustee relating to the Variable Funding Securities.
"Weighted Average Invested Amount" means with respect to any Monthly
Period the weighted average Adjusted Invested Amount based on the Adjusted
Invested Amount outstanding on each business day after giving effect to
all transactions on such business day from but excluding the Default
Recognition Date related to the preceding Monthly Period to and including
the Default Recognition Date with respect to such Monthly Period.
"Weighted Average Principal Receivables" means with respect to any
Monthly Period the weighted average sum of the total amount of Principal
Receivables and the amount on deposit in the Excess Funding Account on
each business day after giving effect to all transactions on such business
day from but excluding the Default Recognition Date related to the
preceding Monthly Period to and including the Default Recognition Date
with respect to such Monthly Period.
ANNEX I
OTHER SERIES
The table below sets forth the principal characteristics of the
Series 1996-1 Asset Backed Certificates, the Series 1997-1 Asset Backed
Certificates, the Series 1997-2 Asset Backed Certificates, 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 Securities. In addition, the
table sets forth the principal characteristics of the Series 1998-3
Securities that are being offered by the Trust concurrently with the
issuance of Series 1998-2, 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.
Series 1996-1
Class A Certificates
Initial Invested Amount...................... $518,000,000
Interest Rate................................ 6.45%
Commencement of Amortization Period.......... First day of August 1998 Monthly
Period
Annual Servicing Fee Percentage.............. 2.00%
Enhancement.................................. Subordination of Class B
Certificates, Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ February 2002 Distribution Date
Series Issuance Date......................... April 23, 1996
Class B Certificates
Initial Invested Amount...................... $87,500,000
Interest Rate................................ 6.80%
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class A
Certificates and Class D
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Class C Certificates
Initial Invested Amount...................... $50,000,000
Interest Rate................................ LIBOR + 0.650%
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class D
Certificates and Class C
Reserve Account
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Class D Certificates
Invested Amount.............................. $44,500,000
Interest Rate................................ None
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Series 1997-1
Class A Certificates
Initial Invested Amount...................... $616,250,000
Interest Rate................................ 6.87%
Commencement of Accumulation Period.......... Last day of March 2001 Monthly
Period or later
date as determined in the
Agreement
Annual Servicing Fee Percentage.............. 2.00%
Enhancement.................................. Subordination of Class B
Certificates, Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ October 2005 Distribution Date
Series Issuance Date......................... May 8, 1997
Class B Certificates
Initial Invested Amount...................... $106,250,000
Interest Rate................................ 7.11%
Commencement of Accumulation Period.......... Last day of March 2001 Monthly
Period or later
date as determined in the
Agreement
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Class C Certificates
Initial Invested Amount...................... $72,250,000
Interest Rate................................ LIBOR + 0.850%
Commencement of Accumulation Period.......... Last day of March 2001 Monthly
Period or later
date as determined in the
Agreement
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class D
Certificates and Class C
Reserve Account
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Class D Certificates
Invested Amount.............................. $55,250,000
Interest Rate................................ None
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Series 1997-2
Class A Certificates
Initial Invested Amount...................... $455,000,000
Interest Rate................................ LIBOR + 0.20%
Commencement of Accumulation Period.......... Last day of October 2001
Monthly Period or later
date as determined in the
Agreement
Annual Servicing Fee Percentage.............. 2.00%
Enhancement.................................. Subordination of Class B
Certificates, Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ May 2006 Distribution Date
Series Issuance Date......................... November 20, 1997
Class B Certificates
Initial Invested Amount...................... $101,500,000
Interest Rate................................ LIBOR + 0.43%
Commencement of Accumulation Period.......... Last day of October 2001
Monthly Period or later
date as determined in the
Agreement
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Class C Certificates
Initial Invested Amount...................... $98,000,000
Interest Rate................................ LIBOR + ____%
Commencement of Accumulation Period.......... Last day of October 2001
Monthly Period or later
date as determined in the
Agreement
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class D
Certificates and Class C
Reserve Account
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Class D Certificates
Invested Amount.............................. $55,250,000
Interest Rate................................ None
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
Series 1998-1
Class A Securities
Invested Amount as of _____, 1998............ $
Expected Invested Amount as of Closing Date
(after application of proceeds).............. $
Maximum Permitted Invested Amount............ $600,000,000
Interest Rate................................ A1/P1 Commercial Paper/LIBOR +
0.75% Blended
Commencement of Amortization Period.......... _________________ (extendible)
Annual Servicing Fee Percentage.............. 2.00%
Enhancement.................................. Subordination of Class B
Securities, Collateralized
Trust Obligations and Class D
Securities
Scheduled Series Termination Date............ _________________ (extendible)
Series Issuance Date......................... July 30, 1998
Class B Securities
Initial Invested Amount...................... $56,376,000
Interest Rate................................ LIBOR + 0.45%
Annual Servicing Fee Percentage.............. Same as above for Class A
Securities
Enhancement.................................. Subordination of Collateralized
Trust Obligations
and Class D Securities
Scheduled Series Termination Date............ Same as above for Class A
Securities
Collateralized Trust Obligations
Initial Invested Amount...................... $96,645,000
Interest Rate................................ LIBOR + 0.85%
Annual Servicing Fee Percentage.............. Same as above for Class A
Securities
Enhancement.................................. Subordination of Class D
Securities
Scheduled Series Termination Date............ Same as above for Class A
Securities
Class D Securities
Invested Amount as of ___________, 1998...... $
Expected Invested Amount as of Closing Date
(after reduction
of Class A Invested Amount).................. $
Maximum Permitted Invested Amount............
Interest Rate................................ None
Annual Servicing Fee Percentage.............. Same as above for Class A
Securities
Scheduled Series Termination Date............ Same as above for Class A
Securities
Series 1998-B
Class A Securities
Invested Amount as of _____, 1998............ $
Expected Invested Amount as of Closing Date
(after application of proceeds).............. $
Maximum Permitted Invested Amount............ $103,500,000
Interest Rate................................ A1/P1 Commercial Paper/LIBOR + [
]% Blended
Commencement of Amortization Period.......... the earlier of the first
Distribution Date following
the Monthly Period during
which the Series 1996-1
Funding Date occurs and the
Pay Out Commencement Date or
if there is any Extension,
the earlier of the date
specified as such in the
most recent Extension Notice
and the Pay Out Commencement
Date. (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...................... $
Interest Rate................................ LIBOR +
Commencement of Amortization Period..........
Annual Servicing Fee Percentage..............
Enhancement.................................. Subordination of Class B
Securities, Policy (as
defined herein)
Scheduled Series Termination Date............ _________________
Series Issuance Date......................... November ___, 1998
Class B Securities
Initial Invested Amount...................... $[ ]
Interest Rate................................ LIBOR + [ ]%
Annual Servicing Fee Percentage.............. Same as above for Class A
Securities
Scheduled Series Termination Date............ Same as above for Class A
Securities
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 1998-2 (the "Global
Securities"), will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), Cedel or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Securities will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result,
Cedel and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold such
positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional Eurobonds,
except that there will be not temporary global security and no "look-up"
or restricted period. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global
security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in the same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's
and seller's accounts are located to ensure that settlement can be made on
the desired value date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to
conventional credit card security issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in
same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC
Participant to the accounts of a Cedel Participant or a Euroclear
Participant, the purchaser will send instructions to Cedel or Euroclear
through a Cedel Participant or Euroclear Participant at least one business
day prior to settlement. Cedel or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the
settlement date, on the basis of actual days elapsed and a 360 day year.
Payment will then be made by the respective Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance
with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The Global Securities credit will appear the next
day (European time) and the cash debit will be back-valued to, and the
interest on the Global Securities will accrue from, the value date (which
would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Cedel or Euroclear cash debit will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing
lines of credit, as they would for any settlement occurring within Cedel
or Euroclear. Under this approach, they may take on credit exposure to
Cedel or Euroclear until the Global Securities are credited to their
accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not
to pre-position funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Cedel Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities
were credited to their accounts. However, interest on the Global Securities
would accrue from the value date. Therefore, in many cases the investment
income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each Cedel Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
Participants a cross-market transaction will settle no differently than a
trade between two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in
which Global Securities are to be transferred by the respective clearing
system, through the respective Depositary, to a DTC Participant. The
seller will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. In these cases, Cedel or Euroclear will instruct their
respective Depositary, as appropriate, to deliver the bonds to the DTC
Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date on the basis of actual
days elapsed and a 360 day year. The payment will then be reflected in the
account of the Cedel Participant or Euroclear Participant the following
day, and receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would be back-valued to the value date
(which would be the preceding day, when settlement occurred in New York).
Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft charges incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants
or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through Cedel or Euroclear for one day (until
the purchase side of the day trade is reflected in their Cedel or
Euroclear accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would
give the Global Securities sufficient time to be reflected in their
Cedel or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale
to the Cedel Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30 percent U.S. withholding tax that
generally applies to payments of interest (including original issue
discount) on registered debt issued by U.S. Persons, unless (i) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between such beneficial owner and the U.S. entity required
to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 864(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10 percent shareholder (within the
meaning of Section 871(h)(3)(B) of the Code) of the Trust or the
Transferor. If the information shown on Form W-8 or the Tax Certificate
changes, a new Form W-8 or Tax Certificate, as the case may be, must be
filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain
an exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Security Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing
Form 1001 (Ownership, Exemption or Reduced Rate Security). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed
by the Security Owner or such Security Owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Security Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
Security Owner's agent, files by submitting the appropriate form to the
person through whom it holds (the clearing agency, in the case of persons
holding directly on the books of the clearing agency). Form W-8 and Form
1001 are effective for three calendar years and Form 4224 is effective for
one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws
of the United States, any state thereof or the District of Columbia
(unless, in the case of a partnership, Treasury Regulations provide
otherwise), (iii) an estate the income of which is includible in gross
income for United States tax purposes, regardless of its source or (iv) a
trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States Persons who
have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
Regulations, certain trusts in existence on August 20, 1996, and treated
as U.S. Persons under the Code, and applicable Treasury Regulations
thereunder prior to such date, that elect to continue to be treated as
U.S. Persons under the Code or applicable Treasury Regulations thereunder
will also be considered a U.S. Person. This summary does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult
their own tax advisors for specific tax advice concerning their holding
and disposing of the Global Securities.
PRINCIPAL OFFICE OF
METRIS RECEIVABLES, INC.
600 South Highway 169
Suite 300
St. Louis Park, Minnesota 55426
SERVICER
for the Trust
Direct Merchants Credit Card Bank, National Association
6909 East Greenway Parkway
Scottsdale, Arizona 85254
TRUSTEE
The Bank of New York (Delaware)
White Clay Center
Route 273
Newark, Delaware 19711
PAYING AGENTS AND TRANSFER AGENTS
The Bank of New York
White Clay Center
Route 273
Newark, Delaware 19711
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
- ---------------------------------- ----------------------------------
- ---------------------------------- ----------------------------------
No dealer, salesman or other
person has been authorized to give Metris Master Trust
information or to make any
representations other than those
contained or incorporated by
reference in this Prospectus in $__________ Floating Rate
connection with the offer Aset Backed
made by this Prospectus and, if Securities
given or made, such information or Series 1998-2, Class A
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 Metris
solicitation. Receivables, Inc.
Transferor
------------------
TABLE OF CONTENTS
Page
Reports to Securityholders............3
Available Information.................3 Direct Merchants Credit
Incorporation of Certain Card Bank, National
Documents By Reference.............3 Association
Other Information.....................4 Servicer
Prospectus Summary....................5
Risk Factors.........................29
The Trust............................37 PROSPECTUS
Metris Companies Inc.................37
The Transferor.......................38
Direct Merchants Credit Card
Bank, National Association.......38
Fingerhut Corporation................38
Direct Merchants Bank's Credit
Card Activities...................39
The Receivables......................48
Maturity Considerations..............52
Use of Proceeds......................54
Description of the Offered
Securities........................54
Description of the Purchase
Agreements........................95
Certain Legal Aspects of the
Receivables.......................98
Certain Federal Income Tax
Consequences.....................102
Certain State Tax Consequences......108
Employee Benefit Plan
Considerations...................109 , 1998
Underwriting........................111
Legal Matters.......................112
Glossary of Terms...................113
- ------------------------------------ ----------------------------------
- ------------------------------------ ----------------------------------
PART II
Item 14. Other Expenses of Issuance and Distribution
Registration Fee..........................................................$295
Printing and Engraving.......................................................*
Trustee's Fees...............................................................*
Legal Fees and Expenses......................................................*
Blue Sky Fees and Expenses...................................................*
Accountants' Fees and Expenses...............................................*
Rating Agency Fees...........................................................*
Miscellaneous Fees.....................................................______*
Total.......................................................$
- ----------
* To be supplied by amendment.
Item 15. Indemnification of Directors and Officers
The Registrant's certificate of incorporation and by-laws provide
for the indemnification of the directors, officers, employees, and agents
of the Registrant to the full extent that may be permitted by Delaware law
from time to time. Certain provisions of the Registrant's certificate of
incorporation protect the Registrant's directors against personal
liability for monetary damages resulting from breaches of their fiduciary
duty of care; however, the Registrant's directors remain liable for
breaches of their duty of loyalty to the Registrant, as well as for acts
or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, transactions from which a director derives
improper personal benefit and liability under section 174 of the Delaware
General Corporation Law, which makes directors personally liable for
unlawful dividends or unlawful stock repurchases or redemptions in certain
circumstances and expressly sets forth a negligence standard with respect
to such liability.
Under Section 145 of the Delaware General Corporation Law,
directors, officers, employees, and other individuals may be indemnified
against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative, or investigative
(other than a "derivative action" by or in the right of the corporation)
if they acted in good faith and in a manner they reasonably believed to be
in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. A similar standard of care is
applicable in the case of a derivative action, except that indemnification
only extends to expenses (including attorneys' fees) incurred in
connection with defense or settlement of such an action and Delaware law
requires court approval before there can be any indemnification of
expenses where the person seeking indemnification has been found liable to
the corporation.
The Registrant's parent corporation currently maintains a policy
insuring, subject to certain exceptions, its directors and officers and
the director and officers of its subsidiaries against liabilities which
may be incurred by such persons acting in such capacities.
Item 16. Exhibits and Financial Statements
Exhibits
1 --Form of Underwriting Agreement.*
3(a) --Amended and Restated Certificate of
Incorporation of Metris Receivables, Inc.
(incorporated herein by reference to
Registration Statement No. 333-23045).
3(b) --By-laws of Metris Receivables, Inc.
(incorporated herein by reference to
Registration Statement No. 33-99514).
4(a) --Amended and Restated Pooling and Servicing
Agreement, dated as of July 30, 1998 among
the Transferor, the Servicer and the
Trustee.**
4(b) --Form of Series 1998-3 Supplement.*
4(c) --Amended and Restated Bank Receivables Purchase
Agreement dated as of July 30, 1998 between
Direct Merchants Bank and Metris.**
4(d) --Amended and Restated Receivables Purchase
Agreement dated as of July 30, 1988 between
Metris and the Transferor.**
4(e) --Form of Policy.*
5 --Opinion of Skadden, Arps, Slate, Meagher &
Flom LLP with respect to legality.*
8 --Opinion of Skadden, Arps, Slate, Meagher &
Flom LLP with respect to tax matters.*
24(a) --Consent of Skadden, Arps, Slate, Meagher &
Flom LLP (Contained in Exhibits 5 and 8).*
24(b) --Consent of PricewaterhouseCoopers LLP.
25 --Powers of Attorney
- ----------
* To be filed by amendment.
** Previously filed.
b. Financial Statements
Inapplicable
Item 17. Undertakings
The undersigned registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement securities in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 14 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrants will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(d) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(e) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Trust's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and
has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
state of Minnesota, city of St. Louis Park, on November 9, 1998.
METRIS RECEIVABLES, INC.
By: /s/ Paul T. Runice
------------------
Paul T. Runice
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities indicated on November 9, 1998.
SIGNATURE TITLE
/s/ Paul T. Runice Vice President and (Principal Executive
- ----------------------- Treasurer Officer)
Paul T. Runice
/s/ Paul T. Runice Vice President and (Principal Financial
- ----------------------- Treasurer Officer)
Paul T. Runice
/s/ Jean C. Benson Controller (Principal Accounting
- ----------------------- Officer)
Jean C. Benson
/s/ Jean C. Benson Director
- -----------------------
Jean C. Benson
/s/ Paul T. Runice Director
- -----------------------
Paul T. Runice
/s/ Jeffrey Grosklags Director
- -----------------------
Jeffrey Grosklags
* Director
- -----------------------
James B. O'Neill
* Director
- -----------------------
Ruth K. Lavalle
By: */s/ Paul T. Runice
- -----------------------
Paul T. Runice
Attorney-in-fact
EXHIBIT INDEX
EXHIBIT
NO.
1 --Form of Underwriting Agreement.*
3(a) --Amended and Restated Certificate of Incorporation of Metris
Receivables, Inc. (incorporated herein by reference to
Registration Statement No. 333-23045).
3(b) --By-laws of Metris Receivables, Inc.
4(a) --Amended and Restated Pooling and Servicing Agreement, dated
as of July 30, 1998 among the Transferor, the Servicer and the
Trustee.**
4(b) --Form of Series 1998-3 Supplement.*
4(c) --Amended and Restated Bank Receivables Purchase Agreement
dated as of July 30, 1998 between Direct Merchants Bank and
Metris.**
4(d) --Amended and Restated Receivables Purchase Agreement dated as
of July 30, 1998 between Metris and the Transferor.**
4(e) --Form of Policy.*
5 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to legality.*
8 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to tax matters.*
24(a) --Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(Contained in Exhibits 5 and 8).*
24(b) --Consent of PricewaterhouseCoopers LLP.
25 --Powers of Attorney.
- --------
* To be filed by Amendment.
** Previously filed.
b. Financial Statements
Inapplicable
Exhibit 24(a)
[PricewaterhouseCoopers Letterhead]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Prospectus and
Registration Statement on Form S-3 of Metris Receivables, Inc. relating to
Metris Master Trust Series 1998-3, of our report dated February 3, 1998,
on our audits of the consolidated financial statements of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997. We also consent
to the reference to our firm under the caption "Experts".
/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
November 6, 1998
Exhibit 25
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does
hereby constitute and appoint Paul T. Runice his true and lawful
attorney-in-fact and agent with full power of substitution, for him on his
behalf to sign, execute and file the Registration Statement on Form S-3 on
behalf of Metris Receivables, Inc. (the "Company"), including exhibits,
(the "Registration Statement") relating to the proposed offering by the
Company of Series 1998-3 Securities and any or all amendments (including,
without limitation, post-effective amendments and any amendment or
amendments increasing the amount of securities for which registration is
being sought) to such Registration Statement, with all exhibits and any and
all documents required to be filed with respect thereto, with the
Securities and Exchange Commission or any regulatory authority, granting
unto such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all
intents and purposes as he or she might or could do if personally present,
hereby ratifying and confirming all that such attorney-in-fact and agents
may lawfully do or cause to be done.
IN WITNESS WHEREOF, I have hereunto set my hand on and as of
November 9 , 1998.
By: /s/ Jean Benson
---------------------------
Name: Jean Benson
Title: Director
Exhibit 25
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does
hereby constitute and appoint Paul T. Runice his true and lawful
attorney-in-fact and agent with full power of substitution, for him on his
behalf to sign, execute and file the Registration Statement on Form S-3 on
behalf of Metris Receivables, Inc. (the "Company"), including exhibits,
(the "Registration Statement") relating to the proposed offering by the
Company of Series 1998-3 Securities and any or all amendments (including,
without limitation, post-effective amendments and any amendment or
amendments increasing the amount of securities for which registration is
being sought) to such Registration Statement, with all exhibits and any and
all documents required to be filed with respect thereto, with the
Securities and Exchange Commission or any regulatory authority, granting
unto such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all
intents and purposes as he or she might or could do if personally present,
hereby ratifying and confirming all that such attorney-in-fact and agents
may lawfully do or cause to be done.
IN WITNESS WHEREOF, I have hereunto set my hand on and as of
November 9, 1998.
By: /s/ Jeffrey Grosklags
---------------------------
Name: Jeffrey Grosklags
Title: Director
