As filed with the Securities and Exchange Commission on April 9 , 1999
Registration No. 333-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
Metris Master Trust
(Issuer with respect to Offered Securities)
----------------------
Metris Receivables, Inc.
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
----------------------
Delaware 41-1810301
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
600 South Highway 169
Suite 300
St. Louis Park, MN 55426
(612) 417-5645
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Jill B. Barclift, Esq.
600 South Highway 169
Suite 1800
St. Louis Park, MN 55426
(612) 525-5090
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Andrew M. Faulkner, Esq. Renwick Martin, Esq.
Skadden, Arps, Slate, Meagher Brown & Wood LLP
& Flom LLP One World Trade Center
919 Third Avenue 58th Floor
New York, NY 10022 New York, NY 10048
(212) 735-2853 (212) 839-5319
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable on or after the effective date of the Registration
Statement.
If the only securities being registered on this Form are to be
offered pursuant to dividend or interest reinvestment plans, please check
the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=============================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED SECURITY (1) PRICE (1) FEE
- -------------------------------------------------------------------------------------------------------------
Asset Backed
<S> <C> <C> <C> <C>
Securities............ $1,000,000 100% $1,000,000 $278
=============================================================================================================
</TABLE>
(1) Estimated solely for purpose of calculating the registration fee.
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.
- ------------------------------------------------------------------------------
SUBJECT TO COMPLETION DATED , 1999
==============================================================================
FLAG
The information in this prospectus supplement and prospectus is not
complete and may be changed. We cannot sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. Neither this prospectus supplement nor the prospectus is an
offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
Prospectus Supplement to Prospectus, Dated ______________, 1999
METRIS MASTER TRUST
Issuer
Metris Receivables, Inc.
Transferor
Direct Merchants Credit Card Bank, National Association
Servicer
$_________ Class A Floating Rate Asset Backed Securities, Series 1999-___
$_________ Class B Floating Rate Asset Backed Securities, Series 1999-___
Class A Securities Class B Securities
Principal Amount $____________ $____________
Price $______ (___%) $______ (___%)
Underwriters' Commissions $______ (___%) $______ (___%)
Proceeds to the Issuer $______ (___%) $______ (___%)
Interest Rate one-month LIBOR + one-month LIBOR +
___% p.a. ___% p.a.
Interest Payment Dates monthly on the 15th monthly on the 15th
First Interest Payment Dat ___________, 1999 ___________, 1999
Scheduled Principal Payment Date ___________, ____ __________, ____
The Class B Securities are subordinated to the Class A Securities.
These securities are interests in Metris Master Trust, and are backed only
by the assets of the trust. Neither these securities nor the assets of the
Trust are obligations of Metris Receivables, Inc., Metris Companies Inc.,
Direct Merchants Credit Card Bank, National Association or any of their
affiliates, or obligations insured by
the FDIC.
These securities are highly structured. Before you purchase these
securities, be sure you understand the structure and the risks. See "Risk
Factors" beginning on page S-9 of this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of the disclosures in this supplement and the attached
prospectus. Any representation to the Contrary contrary is a criminal
offense.
These securities are offered subject to availability. We have applied to
have these securities listed on the Luxembourg Stock Exchange.
Underwriters of the Class A Securities .
Underwriter of the Class B Securities .
[date of prospectus supplement]
Table of Contents
Page
----
Where to Find Information in These Documents...............................S-3
Summary of Terms...........................................................S-4
Structural Summary.........................................................S-5
Selected Trust Portfolio Summary Data......................................S-8
Risk Factors...............................................................S-9
Potential Early
Repayment or Delayed
Payment due to Reduced
Portfolio Yield...................................................S-9
Limited History of Direct
Merchants Bank, the Trust
and the Trust Portfolio..........................................S-11
Allocations of Charged-Off
Receivables Could Reduce
Payments to Securityholders......................................S-12
Limited Ability to
Resell Securities................................................S-12
Certain Liens Could
Be Given Priority
Over Your Securities.............................................S-12
Insolvency or Bankruptcy
of Metris Receivables, Inc.
Could Result in Accelerated,
Delayed or Reduced Payments
to Securityholders...............................................S-12
Negative Carry............................................................S-14
Issuance of Additional
Series by the Trust
May Affect the Timing
of Payments......................................................S-14
Individual Securityholders
Will Have Limited Control
of Trust Actions.................................................S-14
Class B Bears Additional
Credit Risk......................................................S-14
Direct Merchants Bank's Credit Card Portfolio.............................S-15
General .................................................................S-15
Growing Credit Card Portfolio by Portfolio
Acquisitions.....................................................S-15
Assessment of Fees and Finance and other
Charges..........................................................S-15
Delinquency and Loss Experience ..........................................S-16
Recoveries ...............................................................S-17
The Receivables...........................................................S-17
General .................................................................S-17
Maturity Considerations...................................................S-21
Accumulation Period ......................................................S-21
Early Amortization Period ................................................S-21
Pay Out Events ...........................................................S-22
Payment Rates ............................................................S-22
Receivable Yield Considerations...........................................S-23
Use of Proceeds...........................................................S-24
Description of the Securities.............................................S-24
General .................................................................S-24
Status of the Securities .................................................S-25
Previously Issued Series..................................................S-25
Interest Payments ........................................................S-25
Principal Payments .......................................................S-26
Postponement of Accumulation Period ......................................S-27
Subordination of the Class B Securities...................................S-28
Allocation Percentages ...................................................S-28
Redirected Cash Flows ....................................................S-30
Redirected Principal Collections..........................................S-31
Application of Collections................................................S-32
Coverage of Interest Shortfalls...........................................S-36
Shared Principal Collections .............................................S-37
Defaulted Receivables; Dilution...........................................S-37
Investor Charge-Offs .....................................................S-37
Principal Funding Account ................................................S-38
Accumulation Period Reserve Account ......................................S-38
Paired Series ............................................................S-39
Defeasance................................................................S-39
Final Payment of Principal; Termination...................................S-40
Pay Out Events............................................................S-40
Servicing Compensation and Payment of
Expenses ........................................................S-42
Reports to Securityholders ...............................................S-42
Listing And General Information...........................................S-42
ERISA Considerations......................................................S-43
Class A Securities .......................................................S-43
Class B Securities .......................................................S-43
Consultation with Counsel ................................................S-44
Underwriting..............................................................S-44
Exchange Listing..........................................................S-45
Index of Terms for Prospectus Supplement..................................S-46
ANNEX I..................................................................A-I-1
Where to Find Information in These Documents
The attached prospectus provides general information about Metris Master
Trust, including terms and conditions that are generally applicable to the
securities issued by the trust. The specific terms of Series 1999-___ are
described in this supplement.
This supplement begins with several introductory sections describing your
series and Metris Master Trust in abbreviated form:
o Summary of Terms provides important amounts, dates and other terms of
your series;
o Structural Summary gives a brief introduction of the key structural
features of your series and directions for locating further
information;
o Selected Trust Portfolio Summary Data gives certain financial
information about the assets of the Trust; and
o Risk Factors describes risks that apply to your series.
As you read through these sections, cross-references will direct you
to more detailed descriptions in the attached prospectus and elsewhere in
this supplement. You can also directly reference key topics by looking at
the table of contents pages in this supplement and the attached prospectus.
To understand the structure of these securities, you must read carefully
the attached prospectus and this supplement in their entirety.
Summary of Terms
Trust: Metris Master Trust - "Trust"
Transferor: Metris Receivables, Inc.
Servicer: Direct Merchants Credit Card Bank, National
Association--"Direct
Merchants Bank"
Trustee: The Bank of New York (Delaware)
Pricing Date: _________, ____
Closing Date: _________, ____
Clearance and Settlement: DTC/Cedelbank/Euroclear
Trust Assets: receivables originated in VISA and MasterCard and
co-branded
accounts, including recoveries on charged-off
receivables
<TABLE>
<CAPTION>
<S> <C> <C>
Series Structure: Amount % of Total Series
Class A $___________ __%
Class B $___________ __%
Annual Servicing Fee: ___%
Class A Class B
Anticipated Ratings:*
(Moody's/Standard & Poor's/Fitch IBCA) [Aaa/AAA/AAA] [A2/A/A]
Credit Enhancement: subordination of Class B [_________]
Interest Rate: [1-month LIBOR + ___% p.a.] [1-month LIBOR + ___% p.a.]
Interest Accrual Method: actual/360 actual/360
Interest Payment Dates: monthly ( th) monthly ( th)
Interest Rate Index Reset Date: [2 business days before each [2 business days before each
interest payment date] interest payment date]
First Interest Payment Date: _________, ___ _________, ___
Scheduled Payment Date: _________, ___ _________, ___
Commencement of
[Accumulation][Amortization] Period
(subject to adjustment): _________, ___ N/A
Series 1999-___ Legal Final Maturity: _________, ___ _________, ___
Application for Exchange Listing: Luxembourg Luxembourg
CUSIP Number: ______________ ______________
ISIN: ______________ ______________
Common Code: ______________ ______________
- ------------------------------
* It is a condition to issuance that one of these ratings be obtained.
</TABLE>
Structural Summary
This summary briefly describes certain major structural components of
Series 1999-__. To fully understand the terms of Series 1999-__ you will
need to read both this supplement and the attached prospectus in their
entirety.
The Series 1999-__ Securities
Your securities represent the right to a portion of collections on the
underlying Trust assets. Your securities will also be allocated a portion
of net losses on receivables, if any. Any collections allocated to your
series will be used to make interest or principal payments, to pay a
portion of the fees of Direct Merchants Bank as servicer and to cover net
losses allocated to your series. Any collections allocated to your series
in excess of the amount owed to you or Direct Merchants Bank as servicer
will be shared with other series of securities issued by Metris Master
Trust, or returned to Metris Receivables, Inc. In no case will you receive
more than the principal and interest owed to you under the terms described
in this supplement.
For further information on allocations and payments, see "Description of
the Securities--Allocation Percentages" and "--Application of Collections"
in this supplement. For further information about the receivables
supporting your securities, see "The Receivables" and "Receivable Yield
Considerations" in this supplement. For a more detailed discussion of the
securities, see "Description of the Securities" in this supplement.
Your securities feature credit enhancement by means of the subordination of
other interests, which is intended to protect you from net losses and
shortfalls in cash flow. Credit enhancement is provided to Class A by the
following:
o subordination of Class B and
o [other enhancement].
Credit enhancement is provided to Class B by the following:
o [enhancement].
The effect of subordination is that the more subordinated interests will
absorb any net losses allocated to Series 1999- __, and make up any
shortfalls in cash flow, before the more senior interests are affected. If
the cash flow, any subordinated interest [and any enhancement] do not cover
all net losses allocated to Series 1999-__, your payments of interest and
principal will be reduced and you may suffer a loss of principal.
For a more detailed description of the subordination
provisions of Series 1999-__, see "Description of the
Securities--Subordination of the Class B Securities" in this
supplement. For a discussion of losses, see "Description of
the Securities--Defaulted Receivables; Dilution" and
"Investor Charge-Offs" in this supplement. See "Risk
Factors" in this supplement for more detailed discussions of
the risks of investing in Series 1999-__.
Metris Master Trust
Your series is one of [eight] series issued by Metris Master Trust. Metris
Master Trust is maintained by the trustee for the benefit of:
o Securityholders of Series 1999-__;
o Securityholders of other series issued by
Metris Master Trust;
o providers of credit enhancements for
Series 1999-__ and other series
issued by Metris Master Trust; and
o Metris Receivables, Inc.
For a summary of the terms of the previously issued series,
see "Annex I: Previously Issued Series."
Each series has a claim to a fixed or variable dollar amount of Metris
Master Trust's assets, regardless of the total amount of receivables in the
Trust at any time. Metris Receivables, Inc. holds the remaining claim to
Metris Master Trust's assets, which fluctuates with the total amount of
receivables in the Trust.
For more information on the Metris Master Trust's assets, see "Direct
Merchants Bank's Credit Card Portfolio" and "The Receivables" in this
supplement and "Direct Merchants Bank's Credit Card Activities" and "The
Receivables" in the attached prospectus.
Scheduled Principal Payments and Potential Later
Payments
Metris Master Trust expects to pay the entire principal amount of Class A
in one payment on _________, ____, and the entire principal amount of Class
B in one payment on __________, ____. In order to accumulate the funds to
pay Class A on its scheduled payment date, the Trust will accumulate
principal collections in a principal funding account. The Trust will
deposit funds into the principal funding account during an "accumulation
period." The length of the accumulation period will be as many months as is
expected to be necessary for the accumulation of the Class A payment
amount, but will not be less than one month. The accumulation period will
end on the scheduled payment date for Class A, when the funds on deposit in
the principal funding account will be paid to Class A.
If Class A is not fully repaid on its scheduled payment date, Class A will
begin to amortize by means of monthly payments of all principal collections
allocated to Series 1999- __ until it is fully repaid. After Class A is
fully repaid the Trust will use principal collections on deposit in the
principal funding account allocated to Series 1999-__ to repay Class B. If
Class B is not fully repaid on its scheduled payment date, Class B will
begin to amortize by means of monthly payments of all principal collections
allocated to Series 1999-__ after Class A is fully repaid.
For more information on scheduled principal payments, the accumulation
period and Class B principal payments, see "Maturity Considerations" and
"Description of the Securities-Principal Payments," "-Postponement of the
Accumulation Period" and "-Application of Collection- Payment of Principal"
in this supplement and "Description of the Securities--Principal" and
"--Accumulation Period" in the attached prospectus.
Prior to the commencement of an accumulation or amortization period for
Series 1999-__, principal collections will be paid to Metris Receivables,
Inc. or shared with other series that are amortizing or in an accumulation
period.
Minimum Yield on the Receivables; Possible Early
Principal Repayment of Series 1999-__
Class A or Class B may be repaid earlier than its scheduled principal
repayment date if collections on the underlying receivables, together with
other amounts available for payment to securityholders, are too low. The
minimum amount that must be available for payment to Series 1999-__ in any
month, referred to as the "base rate," is the sum of the interest payable
to Class A, the interest payable to Class B [and the interest payable to
the holder of any other subordinated class], in each case for the related
interest period, plus the servicing fee for the related month. If the
average yield for the Direct Merchants Bank Portfolio for any three
consecutive months is less than the average base rate for the same three
consecutive months, a "pay out event" will occur with respect to Series
1999-__ and the Trust will commence a rapid amortization of Series 1999-__,
and holders of Series 1999-__ securities will receive principal payments
earlier than the scheduled principal repayment date.
Series 1999-__ is also subject to several other pay out events, which could
cause Series 1999-__ to amortize, and which are summarized under the
heading "Description of the Securities--Pay Out Events " in this
supplement. If Series 1999-__ begins to amortize, Class A will receive
monthly payments of principal until it is fully repaid; Class B will then
receive monthly payments of principal until it is fully repaid. In that
event, your securities may be repaid prior to the scheduled payment date.
The final payment of principal and interest will be made no later than
__________, ____, which is the Series 1999-__ final payment date. For more
information on pay out events, the portfolio yield and base rate, early
principal repayment and rapid amortization, see "Maturity Considerations,"
"Description of the Securities--Principal Payments" and "--Pay Out Events"
in this supplement and "Description of the Securities--Principal," "-Early
Amortization Period" and "-- Final Payment of Principal; Termination" in
the attached prospectus.
Tax Status of Class A, Class B and Metris Master Trust
Skadden, Arps, Slate, Meagher & Flom LLP, tax counsel to Metris
Receivables, Inc., is of the opinion that
o under existing law the Class A and
Class B securities will be characterized
as debt for U.S. federal income tax
purposes; and
o that Metris Master Trust will not be an
association or publicly traded
partnership taxable as a corporation for
U.S. federal income tax purposes.
For further information regarding the application of U.S.
federal income tax laws, see "Tax Matters" in the attached
prospectus.
ERISA Considerations
Class A Securities: The underwriters anticipate that the Class A securities
will meet the criteria for treatment as "publicly-offered securities." If
so, subject to important considerations described under "ERISA
Considerations" in this prospectus supplement and in the attached
prospectus, the Class A securities will be eligible for purchase by persons
investing assets of employee benefit plans or individual retirement
accounts.
Class B Securities: Pension plans and other investors
subject to ERISA cannot acquire Class B securities.
Prohibited investors include:
o "employee benefit plans" as defined in
section 3(3) of ERISA;
o any "plan" as defined in section 4975 of
the U.S. Internal Revenue Code; and
o any entity whose underlying assets may be deemed to include
"plan as- sets" under ERISA by reason of any such plan's
investment in the entity, including insurance company
general accounts.
By purchasing any Class B securities, you certify that you are not within
any of those categories.
For further information regarding the application of ERISA, see "ERISA
Considerations" in this supplement and the attached prospectus. Mailing
Address and Telephone Number of Principal Executive Offices
The mailing address of Metris Receivables, Inc. is 600 South
Highway 169, Suite 300, St. Louis Park, Minnesota 55426,
and the telephone number is (612) 525-5020.
Selected Trust Portfolio Summary Data
Geographic Distribution of Receivables in Trust
Portfolio as of [ , 199 ].
[Pie chart]
The chart above shows the geographic distribution of the receivables in the
Trust portfolio among the 50 states. Other than the states specifically
shown in the chart, no state accounts for more than [5]% of receivables in
the Trust portfolio.
Receivables in Trust Portfolio by Age of Account
as of , 199 (months)
[Bar chart]
The chart above shows the percentages of the receivables in the Trust
portfolio arising under accounts within the age brackets shown.
Payment Data
[Line Graph]
The chart above shows the total yield, payment rate and net charge-off rate
for the Direct Merchants Bank portfolio for each month from [ 199 to 199 ].
"Total yield" for any month means the total amount of collected finance
charges and fees, expressed as a percentage of total principal outstanding
receivables of the previous month.
The "payment rate" for any month is the aggregate amount collected on
receivables during the month, including recoveries on previously charged
off receivables, expressed as a percentage of the total outstanding
receivables of the previous month.
The "delinquent receivables" for any month is the amount of receivables
thirty days or more delinquent recorded in the month, expressed as a
percentage of the total outstanding receivables of the previous month.
Risk Factors
You should consider the following risk factors in deciding whether
to purchase the asset backed securities described herein.
Potential Early
Repayment or Delayed
Payment due to Reduced
Portfolio Yield If the average Trust portfolio yield for
Series 1999-__ for any three consecutive
months is less than the average base rate for
the same three consecutive months, a "pay out
event" will occur with respect to Series
1999-__ and the rapid amortization of Series
1999-__ will commence, and holders of Series
1999-__ securities will receive principal
payments earlier than the scheduled principal
repayment date. Moreover, if principal
collections on receivables allocated to other
series are available for application to a
rapid amortization of any outstanding
securities, the period during which that rapid
amortization occurs may be substantially
shortened. Because of the potential for early
repayment if collections on the receivables
fall below the minimum amount, any
circumstances that tend to reduce collections
may increase the risk of early repayment of
Series 1999-__.
Conversely, any reduction in collections may
cause the period during which collections are
accumulated in the principal funding account
for payment of Class A to be longer than
otherwise would have been the case.
The following factors could result in
circumstances that tend to reduce collections:
Direct Merchants Bank May Change the Terms and
Conditions of the Accounts
Direct Merchants Bank will transfer
receivables arising under specified credit
card accounts to Metris Companies Inc. which
will sell those receivables to Metris
Receivables, Inc. which will transfer those
receivables to Metris Master Trust, but Direct
Merchants Bank will continue to own those
accounts. As the owner of those accounts,
Direct Merchants Bank retains the right to
change various terms and conditions of those
accounts, including finance charges and other
fees it charges and the required monthly
minimum payment. Direct Merchants Bank may
change the terms of the accounts to maintain
its competitive position in the credit card
industry. Changes in the terms of the accounts
may reduce the amount of receivables arising
under the accounts, reduce the amount of
collections on those receivables, or otherwise
alter payment patterns.
Direct Merchants Bank has agreed that it will
not reduce the periodic finance charges it
charges on the receivables or other fees on
any account if that action would cause Direct
Merchants Bank to reasonably expect that the
portfolio yield would be less than the base
rate for any series, unless Direct Merchants
Bank is required by law to reduce those
charges or determines that reductions are
necessary to maintain its credit card
business, based on its good faith assessment
of its business competition.
Direct Merchants Bank has agreed that it will
not change the terms of the accounts or its
policies relating to the operation of its
credit card business, including the reduction
of the required minimum monthly payment and
the calculation of the amount or the timing of
finance charges, other fees and charge-offs,
unless it reasonably believes a pay out event
would not occur for any series and takes the
same action on its other substantially similar
accounts, to the extent permitted by those
accounts.
Metris Receivables, Inc. May Add Accounts to
the Trust Portfolio
In addition to the accounts already designated
for Metris Master Trust, Metris Receivables,
Inc. is permitted to designate additional
accounts for the Trust portfolio and to
transfer the receivables in those accounts to
the Trust. If certain conditions are
satisfied, Metris Receivables, Inc. can also
elect to automatically designate additional
accounts for the Trust portfolio and to
transfer the receivables in those accounts to
the Trust. Any new accounts and receivables
may have different terms and conditions than
the accounts and receivables already in the
Trust, such as higher or lower fees or
interest rates, or longer or shorter principal
payment terms. Credit card accounts purchased
by Metris Receivables, Inc. may be included as
additional accounts, if certain conditions are
satisfied. Credit card accounts purchased by
Metris Receivables, Inc. will have been
originated using the account originator's
underwriting criteria, not those of Metris
Receivables, Inc. The account originator's
underwriting criteria may be less or more
stringent than those of Metris Receivables,
Inc. The new accounts and receivables may
produce higher or lower collections or
charge-offs over time than the accounts and
receivables already in the Trust portfolio and
could tend to reduce the amount of collections
allocated to Series 1999-__.
Also, if Metris Receivables, Inc.'s percentage
interest in the accounts of the Trust falls to
a minimum level, currently zero, Metris
Receivables, Inc. will be required to maintain
that level by designating additional accounts
for the Trust portfolio and transferring the
receivables in those accounts to the Trust. If
Metris Receivables, Inc. is required to add
accounts to the Trust portfolio, it may not
have any accounts to be added to the Trust
portfolio. If Metris Receivables, Inc. fails
to add accounts when required, a "pay out
event" will occur and you could receive
payment of principal sooner than expected. See
"Description of the Securities--Addition of
Trust Assets" in the attached prospectus.
Security and Receivables Interest Rate Reset
Terms May Differ
Finance charges on certain of the accounts in
Metris Master Trust accrue at a variable rate
above a designated prime rate or other
designated index. The interest rate of your
security is based on LIBOR. Changes in LIBOR
might not be reflected in the prime rate or
the designated index, resulting in a higher or
lower spread, or difference, between the
amount of collections of finance charge
receivables on the accounts and the amounts of
interest payable on Series 1999-__ and other
amounts required to be funded out of
collections of finance charge receivables.
[Finance charges on certain of the accounts of
the Trust accrue at a fixed rate. If LIBOR
increases, the amounts of interest on your
security and other amounts required to be
funded out of collections of finance charge
receivables will increase, while the amount of
collections of finance charge receivables on
the accounts will remain the same unless and
until the rates on the accounts are reset.]
A decrease in the spread between collections
of finance charge receivables and interest
payments on your security could increase the
risk of early repayment.
Changes to Consumer Protection Laws May Impede
Direct Merchants Bank's Collection Efforts
Federal and state consumer protection laws
regulate the creation and enforcement of
consumer loans, including credit card accounts
and receivables. Changes or additions to those
regulations could make it more difficult for
the servicer of the receivables to collect
payments on the receivables or reduce the
finance charges and other fees that Direct
Merchants Bank can charge on credit card
account balances, resulting in reduced
collections. See "Description of the
Securities--Pay Out Events" in this supplement
and in the attached prospectus.
Receivables that do not comply with consumer
protection laws may not be valid or
enforceable in accordance with their terms
against the obligors on those receivables.
Direct Merchants Bank makes representations
and warranties relating to the validity and
enforceability of the receivables arising
under the accounts in the Trust portfolio.
Subject to certain conditions described under
"Description of the Securities--Representations
and Warranties" in the attached prospectus,
Metris Receivables, Inc. must accept
reassignment of each receivable that does not
comply in all material respects with all
requirements of applicable law. However, we do
not anticipate that the trustee under the
pooling and servicing agreement will make any
examination of the receivables or the related
records for the purpose of determining the
presence or absence of defects, compliance
with representations and warranties, or for
any other purpose. The only remedy if any
representation or warranty is violated, and
the violation continues beyond the period of
time Metris Receivables, Inc. has to correct
the violation, is that Metris Receivables,
Inc. must accept reassignment of the
receivables affected by the violation, subject
to certain conditions described under
"Description of the Securities--Representations
and Warranties" in the attached prospectus.
See also "Certain Legal Aspects of the
Receivables--Consumer Protection Laws" in the
attached prospectus.
If a cardholder sought protection under
federal or state bankruptcy or debtor relief
laws, a court could reduce or discharge
completely the cardholder's obligations to
repay amounts due on its account and, as a
result, the related receivables would be
written off as uncollectible. See "Description
of the Securities--Defaulted Receivables;
Dilution" and "--Investor Charge-Offs" in this
supplement and in the attached prospectus.
Slower Generation of Receivables Could Reduce
Collections
The receivables transferred to Metris Master
Trust may be paid at any time. We cannot
assure the creation of additional receivables
in those accounts or that any particular
pattern of cardholder payments will occur. A
significant decline in the amount of new
receivables generated by the accounts in the
Trust could result in reduced collections on
those receivables. See "Maturity
Considerations" in this supplement.
Limited History of Direct
Merchants Bank, the Trust
and the Trust Portfolio Direct Merchants Bank's predecessor began
originating and servicing credit card accounts
in March 1995. Direct Merchants Bank and its
predecessor have had limited underwriting and
servicing experience, and limited delinquency,
default and loss experience with respect to
the Accounts. See "Direct Merchants Bank's
Credit Card Portfolio" in this supplement and
"Direct Merchants Bank's Credit Card
Activities" in the attached prospectus.
The Trust's and Metris Receivables, Inc. were
formed in May 1995 and have no substantial
assets other than their interests in the
receivables and the proceeds from the
receivables.
The Trust assets consist primarily of
receivables generated from accounts originated
since March 1995. As of September 30, 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" in this supplement.
Allocations of Charged-Off
Receivables Could Reduce
Payments to Securityholders Metris Receivables, Inc. anticipates that it
will write off as uncollectible some portion
of the receivables arising in accounts in the
Trust portfolio. Each class of Series 1999-__
will be allocated a portion of those
charged-off receivables. See "Description of
the Securities--Allocation Percentages" and
"Direct Merchants Bank's Credit Card
Portfolio--Delinquency and Loss Experience" in
this supplement. If the amount of charged-off
receivables allocated to any class of
securities exceeds the amount of other funds
available for reimbursement of those
charge-offs (which could occur if the limited
amount of credit enhancement for those
securities is reduced to zero) the holders of
those securities may not receive the full
amount of principal and interest due to them.
See "Description of the Securities-Redirected
Cash Flows," "-Application of Collections" and
"-Defaulted Receivables; Dilution" and
"-Investor Charge-Offs" in this supplement.
Limited Ability to
Resell Securities The underwriters may assist in resales of the
Class A and Class B securities but they are
not required to do so. A secondary market for
any such securities may not develop. If a
secondary market does develop, it might not
continue or it might not be sufficiently
liquid to allow you to resell any of your
securities.
Certain Liens Could
Be Given Priority
Over Your Securities Direct Merchants Bank accounts for the
transfer of the receivables to Metris
Companies Inc. as a sale. Metris Companies
Inc. accounts for the transfer of the
receivables to Metris Receivables, Inc. as a
sale. Metris Receivables, Inc. accounts for
the transfer of the receivables to the Trust
as a sale. However, a court could conclude
that the Trust holds only a security interest.
Direct Merchants Bank, Metris Companies Inc.
and Metris Receivables, Inc. will take steps
to give the trustee a "first priority
perfected security interest" in the
receivables in the event a court concludes
Metris Receivables, Inc. or Metris Companies
Inc. or Direct Merchants Bank still owns the
receivables. If Direct Merchants Bank became
insolvent and the Federal Deposit Insurance
Corporation were appointed conservator or
receiver of Direct Merchants Bank, the FDIC's
administrative expenses might be paid from the
receivables before the Trust received any
payments on the receivables. If a court
concludes that the transfer to the Trust is
only a grant of a security interest in the
receivables certain liens on Direct Merchants
Bank, Metris Companies Inc. or Metris
Receivables, Inc.'s property arising before
new receivables come into existence may get
paid before the Trust's interest in those
receivables. Those liens include a tax or
government lien or other liens permitted under
the law without the consent of Direct
Merchants Bank, Metris Companies Inc. or
Metris Receivables, Inc. See "Certain Legal
Aspects of the Receivables--Transfer of
Receivables" and "Description of the
Securities-- Representations and Warranties"
in the attached prospectus.
Insolvency or Bankruptcy
of Metris Receivables, Inc.
Could Result in Accelerated,
Delayed or Reduced Payments
to Securityholders Under the Federal Deposit Insurance Act, as
amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the
Trust's security interest in the receivables
arising under the accounts in the trust
portfolio should be respected by the FDIC
where--
o Direct Merchants Bank's transfer of
the receivables to Metris Companies
Inc. is the grant of a valid security
interest in the receivables to Metris
Companies Inc., Metris Companies
Inc.'s transfer of the receivables to
Metris Receivables, Inc. is the grant
of a valid security interest in the
receivables to Metris Receivables,
Inc. and Metris Receivables, Inc.'s
transfer of the receivables to the
Trust is the grant of a valid
security interest in the receivables
to the Trust;
o Direct Merchants Bank becomes
insolvent and the FDIC is appointed
conservator or receiver of Direct
Merchants Bank;
o the security interest (a) is validly
perfected before Direct Merchants
Bank's insolvency and (b) was not
taken in contemplation of Direct
Merchants Bank's insolvency or with
the intent to hinder, delay or
defraud Direct Merchants Bank or its
creditors; and
o purchase agreements between Direct
Merchants Bank and Metris Companies
Inc., and Metris Companies Inc. and
Metris Receivables, Inc., and the
pooling and servicing agreement
establishing the Trust under the
Federal Deposit Insurance Act are
each continuously an official record
of Direct Merchants Bank and
represents a bona fide and arm's
length transaction undertaken for
adequate consideration in the
ordinary course of business.
Under the Federal Deposit Insurance Act,
the FDIC could--
o require The Bank of New York
(Delaware), as trustee for the Trust,
to go through an administrative
claims procedure to establish its
right to payments collected on the
receivables in the Trust;
o request a stay of proceedings with
respect to Direct Merchants Bank; or
o repudiate the pooling and servicing
agreement establishing the Trust and
limit the Trust's resulting claim to
"actual direct compensatory damages"
measured as of the date of
receivership. See "Certain Legal
Aspects of the Receivables--Certain
Matters Relating to Receivership" in
the attached prospectus.
If the FDIC were to take any of those actions
your payments of outstanding principal and
interest could be delayed and possibly
reduced.
If a conservator or receiver were appointed
for Direct Merchants Bank, or in the event of
a bankruptcy of Metris Companies Inc. or
Metris Receivables, Inc., then a "pay out
event" could occur for all outstanding series.
Under the terms of the pooling and servicing
agreement new principal receivables would not
be transferred to the Trust and the trustee
would sell the receivables (unless holders of
more than 50% of the investor interest of each
class of outstanding securities gave the
trustee other instructions). The Trust would
then terminate earlier than was planned and
you could have a loss if the sale of the
receivables produced insufficient net proceeds
to pay you in full.
The conservator, receiver or trustee in
bankruptcy may nonetheless have the power,
regardless of the terms of the pooling and
servicing agreement, (a) to prevent the
beginning of an early amortization period, (b)
to prevent the early sale of the receivables
and termination of the Trust or (c) to require
new principal receivables to continue being
transferred to the Trust. See "Certain Legal
Aspects of the Receivables--Certain Matters
Relating to Receivership" in the attached
prospectus.
Negative Carry Any amounts deposited in the Excess Funding
Account and the Principal Funding Account can
be invested in investments earning a rate less
than the yield from collections of finance
charge receivables, resulting in a reduction
of amounts available to make payments to
securityholders.
Issuance of Additional
Series by the Trust
May Affect the Timing
of Payments Metris Master Trust, as a master trust, may
issue series of securities from time to time.
The Trust may issue additional series with
terms that are different from your series
without the prior review or consent of any
securityholders. It is a condition to the
issuance of each new series that each rating
agency that has rated an outstanding series
confirm in writing that the issuance of the
new series will not result in a reduction or
withdrawal of its rating of any class of any
outstanding series.
However, the terms of a new series could
affect the timing and amounts of payments on
any other outstanding series. See "Description
of the Securities-- Exchanges" in the attached
prospectus.
Individual Securityholders
Will Have Limited Control
of Trust Actions Securityholders of any series or any class
within a series may need the consent or
approval of a specified percentage of the
investor interest of other series or a class
of such other series to take or direct certain
actions, including to require the appointment
of a successor servicer after Direct Merchants
Bank, as servicer, defaults on its obligations
under the pooling and servicing agreement, to
amend the pooling and servicing agreement in
some cases, and to direct a repurchase of all
outstanding series after certain violations of
Metris Receivables, Inc.'s representations and
warranties. The interests of the
securityholders of any such series may not
coincide with yours, making it more difficult
for any particular securityholder to achieve
the desired results from such vote.
Class B Bears Additional
Credit Risk Because Class B is subordinated to Class A,
principal payments to Class B will not begin
until Class A is repaid. Additionally, if
collections of finance charge receivables
allocated to Series 1999-__ are insufficient
to cover amounts due to Class A, the investor
interest for Class B might be reduced. This
would reduce the amount of the collections of
finance charge receivables available to Class
B in future periods and could cause a possible
delay or reduction in principal and interest
payments on Class B. If receivables had to be
sold, the net proceeds of that sale available
to pay principal would be paid first to Class
A and any remaining net proceeds would be paid
to Class B. See "Description of the
Securities-- Subordination of the Class B
Securities" in this supplement.
Direct Merchants Bank's Credit Card Portfolio
Capitalized items are defined in the attached prospectus or in this
supplement. Definitions are indicated by boldface type. Both the attached
prospectus and this supplement contain an index of terms listing the page
numbers where definitions can be found.
General
The receivables (the "Receivables") conveyed or to be conveyed to
the Trust pursuant to a pooling and servicing agreement (as the same may be
amended from time to time, the "Agreement"), among Metris Receivables, Inc.
(the "Transferor"), Direct Merchants Bank, as Servicer of the Receivables,
and The Bank of New York (Delaware), as trustee (the "Trustee"), as
supplemented by the supplement relating to the Securities (the "Series
1999-__ Supplement") (the term "Pooling and Servicing Agreement," unless
the context requires otherwise, refers to the Pooling and Servicing
Agreement as supplemented by the Series 1999-__ Supplement) have been or
will be generated from transactions made by holders of co-branded and other
MasterCard and VISA credit card accounts (the "Accounts") and, subject to
certain conditions, 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. Each Class A [Floating Rate Asset Backed] Security, Series
1999-_ (collectively, the "Class A Securities") and each Class B [Asset
Backed] Security, Series 1999- (collectively, the "Class B Securities" and,
together with the Class A Securities, the "Securities" or the "Series
1999-_ Securities") will represent the right to receive certain payments
from the Metris Master Trust, created pursuant to the Pooling and Servicing
Agreement. As used in this prospectus supplement, the term
"Securityholders" refers to holders of the Securities, the term "Class A
Securityholders" refers to holders of the Class A Securities and the term
"Class B Securityholders" refers to holders of the Class B Securities, and
"Transferor" means Metris Receivables, Inc. As of ___________, ____, Direct
Merchants Bank had approximately ___ million credit card accounts and
approximately ___ billion in managed loans; Fingerhut Customers represented
approximately ___% of the accounts and approximately ___% of the managed
loans.
Growing Credit Card Portfolio by Portfolio Acquisitions
In the first quarter of 1997, Direct Merchants Bank acquired 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. 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. Such accounts
have been designated as Supplemental Accounts the Receivables of which have
been transferred to the Trust.
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. On December 9,
1998, Direct Merchants Bank acquired a portion of the consumer credit card
portfolio of PNC National Bank ("PNC"). The acquired PNC credit card
portfolio had approximately 400,000 accounts and approximately $800 million
in receivables, as of December 9, 1998. 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 as Accounts designated to have their
Receivables transferred to the Trust, such a determination may be made in
the future. Such accounts were originated using criteria different from
those which were applied in originating the Accounts designated on the
Initial Closing Date or to previously-designated Supplemental Accounts
because such accounts were originated at different dates, under different
underwriting criteria and by a different institution. Consequently, there
can be no assurance that Supplemental Accounts designated in the future
from such accounts, if any, will be of the same credit quality as
previously designated Accounts.
Assessment of Fees and Finance and other Charges
A billing statement is sent to cardholders at the end of each
monthly billing cycle in which the account has an outstanding balance
greater than $1.00. Direct Merchants Bank uses third party processors to
process certain cardholder payments. When an account is established, it is
assigned a billing cycle. With minor exceptions, the minimum payment due
each month of each account is equal to the greater of a minimum dollar
amount or a minimum percentage of the outstanding balance shown on the
statement, plus the greater of any amount past due on any amount over the
cardholder's credit line. The Bank may assess a late payment fee, generally
ranging from $__ to $__ for most accounts, if it does not receive the
minimum payment by the payment due date shown on the monthly billing
statement. The Bank may assess a fee on each cash advance equal to the
greater of [ ]% of the amount of such cash advance and $[ ]. The Bank may
assess a returned check fee, generally ranging from $__ to $__ for each
payment check submitted by a cardholder which is not honored by the
cardholder's bank, and an overlimit fee, generally ranging from $__ to $__,
if at any time during the billing cycle purchases or cash advances cause
the total amount owed on the account to exceed the cardholder's credit line
by at least $30. Direct Merchants Bank also generally assesses an annual
fee on its accounts. Unless otherwise arranged between the Bank and the
cardholder, any cash advance fee, late payment fee, returned check fee,
overlimit fee, annual fee or other administrative fee is added to the
account and treated as a purchase.
Periodic finance charges ("Periodic Finance Charges") are not
assessed in most circumstances if the entire balance on the account is paid
by the due date, which is 25 days from the previous cycle billing date (the
"Payment Date"). Periodic Finance Charges are based upon the average daily
balance outstanding on the account during the monthly billing cycle. 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. If a payment in
full is not received prior to 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. These cash advance
finance charges are applied to the average daily balance. Periodic Finance
Charges are applied to the average daily balance.
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.
Delinquency and Loss Experience
The Bank considers an account delinquent if the minimum payment due
thereunder is not received by the Bank on or before the Payment Date.
Efforts to collect delinquent credit card receivables are made
internally primarily through the collection facilities of the Bank. For a
description of the Bank's collection practices and policies, see "Direct
Merchants Bank's Credit Card Activities--Collection of
Delinquent Accounts" in the attached prospectus.
The Bank's policy is to charge off an account at the end of the
month during which the account becomes contractually one hundred eighty
(180) days past due. If the Bank receives notice that a cardholder is the
subject of a bankruptcy proceeding, the Bank charges off such account upon
the earlier of (a) receipt of such notice and (b) the time period set forth
in the previous sentence.
The following tables set forth the delinquency and loss experience
as of the dates and for each of the periods shown for the Direct Merchants
Bank Portfolio. There can be no assurance that the delinquency and loss
experience for the Trust Portfolio will be similar to the historical
experience set forth in the following table 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. In particular, reported loss and delinquency
percentages for the portfolio may be reduced as a result of the addition of
newly originated receivables. Receivables in newly originated accounts
generally have lower delinquency and loss levels than receivables in more
seasoned accounts and the addition of these receivables to a portfolio
increases the outstanding receivables balance for such portfolio which, for
the Direct Merchants Bank Portfolio, is the denominator used to calculate
the percentages set forth below. Whereas all newly originated and newly
acquired accounts become part of the Direct Merchants Bank Portfolio when
originated or acquired, newly originated or acquired accounts do not
automatically become part of the Trust Portfolio but may be added from time
to time at the option of Metris Receivables, Inc.
<TABLE>
<CAPTION>
Delinquency Experience for the Direct Merchants Bank Portfolio
(Dollars in Thousands)
As of _____, As of December 31, As of December 31, As of December 31,
1999 1998 1997 1996
---------------------- ---------------------- ---------------------- -----------------------
Percentage Percentage Percentage Percentage
of Total of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables Receivables Receivables
----------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
Receivables
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding (1) $ 100.00% $ 100.00% $ 100.00% $ 100.00%
Receivables
Delinquent: % % $ % $ %
30-59 Days
60-89 Days
90 or More Days ----------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
Total % % % %
=========== =========== ========== =========== =========== =========== =========== ===========
</TABLE>
- ----------------------
(1) 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)
___ Months Ended Year Ended December 31,
----------------------------------
_____, 1999 1998 1997 1996
----------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Average Receivables Outstanding(1)
Total Gross Charge-Offs(2)
Total Gross Charge-Offs as a Percentage
of Average Receivables Outstanding
(Annualized)
</TABLE>
- ----------------------
(1) Average Receivables Outstanding is calculated by determining the
daily average of outstanding account balances for each month and
then dividing the sum of such daily averages for such months by the
number of months in such period.
(2) Gross Charge-Offs are total principal charge-offs before recoveries
and do not include the amount of any reductions in Average
Receivables Outstanding due to fraud, returned goods, customer
disputes or other miscellaneous credit adjustments.
Recoveries
Pursuant to the terms of the Pooling and Servicing Agreement, the
Bank will be required to transfer to the Trust all of the recoveries on
charged-off accounts in the Bank Portfolio ("Recoveries"). 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. See "-Delinquency and Loss Experience" and
"Direct Merchants Bank's Credit Card Activities--Collection of Delinquent
Accounts" in the attached prospectus.
The Receivables
General
The Receivables conveyed to the Trust arise in Accounts selected by
Metris Receivables, Inc. from the Direct Merchants Bank Portfolio on the
basis of criteria set forth in the Pooling and Servicing Agreement as
applied on or about May 30, 1995 (the "Direct Merchants Initial Closing
Date") and, with respect to Supplemental Accounts, as of the related dates
of their designations (the "Trust Portfolio"). On 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.
Pursuant to the Pooling and Servicing Agreement, Metris
Receivables, Inc. has the right, subject to certain limitations and
conditions set forth therein, to designate from time to time Supplemental
Accounts or Automatic Additional Accounts and to transfer to the Trust all
Receivables of such Supplemental Accounts or Automatic Additional Accounts,
whether such Receivables are then existing or thereafter created. See
"Description of the Securities - Addition of Trust Assets" in the attached
prospectus. 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 Receivable in
such Accounts shall be included as Eligible Receivables if they satisfy the
requirements of the definition of "Eligible Receivables." "Minimum
Transferor Interest" for any period means the product of (a) the sum of (1)
the aggregate Principal Receivables and (2) the amounts on deposit in the
Excess Funding Account and (b) the highest Minimum Transferor Percentage
for any Series. "Minimum Transferor Percentage" means, for Series 1999 -
and each previously issued Series, 0%; provided, however, that in certain
circumstances each such percentage may be increased. "Minimum Aggregate
Principal Receivables" means an amount equal to the sum of the numerators
used to calculate the Investor Percentages with respect to the allocation
of collections of Principal Receivables for each Series then outstanding.
Further, pursuant to the Pooling and Servicing Agreement, Metris
Receivables, Inc. will have the right (subject to certain limitations and
conditions) to designate certain Accounts and to require the Trustee to
reconvey all Receivables in such Accounts (the "Removed Accounts") to
Metris Receivables, Inc., whether such Receivables are then existing or
thereafter created. Throughout the term of the Trust, the Accounts from
which the Receivables arise will be the Accounts designated by Metris
Receivables, Inc. on the Initial Closing Date plus any Supplemental
Accounts and Automatic Additional Accounts minus any Removed Accounts. As
of the Initial Closing Date and, with respect to Receivables in
Supplemental Accounts and Automatic Additional Accounts, as of the related
date of their initial conveyance to the Trust, and on the date any new
Receivables are created, Metris Receivables, Inc. will represent and
warrant to the Trust that the Receivables meet the eligibility requirements
specified in the Pooling and Servicing Agreement. See "Description of the
Securities--Representations and Warranties" and "-Addition of Trust Assets"
in the attached prospectus.
The Receivables in the Trust Portfolio, as of the beginning of the
day on __________, 1999, included approximately $_____ billion of Principal
Receivables and approximately $____ billion of Finance Charge Receivables.
The Accounts had an average Principal Receivable balance of $_______ and an
average credit limit of $_______. The percentage of the aggregate total
Receivable balance to the aggregate total credit limit was approximately
___%. The average age of the Accounts was approximately __ months. As of
the beginning of the day on _______ __, 1999, cardholders whose Accounts
are included in the Trust Portfolio had billing addresses in all 50 states
and the District of Columbia.
The following tables summarize the Trust Portfolio by various
criteria as of the close of business on _______, 1999. 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 following tables summarize the Receivables which have been
conveyed to the Trust Portfolio by various criteria as of the close of
business on , 199 . 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.
<TABLE>
<CAPTION>
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
- ------------------ --------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
$0.00-$500.00..............................
$500.01-$1,000.00..........................
$1,000.01-$1,500.00........................
$1,500.01-$3,000.00........................
$3,000.01-$5,000.00........................
$5,000.01-$10,000.00.......................
$10,000.01 & Greater....................... -------- ---------- ----------- -----------
Total.............................. 100.0% 100.0%
========== =========
</TABLE>
<TABLE>
<CAPTION>
Composition by Period of Delinquency
Trust Portfolio
Percentage Percentage
of Total of Total
Period of Delinquency Number of Number of Receivables Receivables
(Days Contractually Delinquent) Accounts Accounts Outstanding Outstanding
- ------------------------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Current ...................................
1-29 Days..................................
30-59 Days.................................
60-89 Days.................................
90-119 Days................................
120-149 Days...............................
150 Days or More........................... --------- ---------- ----------- -----------
Total.......................... 100.0% 100.0%
========== ============
</TABLE>
<TABLE>
<CAPTION>
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
- ------------------------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Credit Balance...........................
No Balance...............................
$0.01-$500.00............................
$500.01-$1,000.00........................
$1,000.01-$1,500.00......................
$1,500.01-$3,000.00......................
$3,000.01-$5,000.00......................
$5,000.01 & Greater...................... --------- ---------- ----------- -----------
Total.......................... 100.0% 100.0%
========= ============
</TABLE>
<TABLE>
<CAPTION>
Composition by Account Age
Trust Portfolio
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Account Accounts Accounts Outstanding Outstanding
- ------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Not more than 6 Months..................
Over 6 Months to 12 Months..............
Over 12 Months to 24 Months.............
Over 24 Months.......................... --------- ---------- ----------- -----------
Total......................... 100.0% 100.0%
========= ===========
</TABLE>
<TABLE>
<CAPTION>
Composition by Geographic Distribution
Trust Portfolio
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Location Accounts Accounts Outstanding Outstanding
- -------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Alabama ...................................
Alaska.....................................
Arizona ...................................
Arkansas...................................
California.................................
Colorado...................................
Connecticut................................
District of Columbia.......................
Delaware...................................
Florida ...................................
Georgia ...................................
Hawaii.....................................
Idaho......................................
Illinois...................................
Indiana ...................................
Iowa.......................................
Kansas.....................................
Kentucky...................................
Louisiana..................................
Maine......................................
Maryland...................................
Massachusetts..............................
Michigan...................................
Minnesota..................................
Mississippi................................
Missouri...................................
Montana....................................
Nebraska...................................
Nevada.....................................
New Hampshire..............................
New Jersey.................................
New Mexico.................................
New York...................................
North Carolina.............................
North Dakota...............................
Ohio.......................................
Oklahoma...................................
Oregon.....................................
Pennsylvania...............................
Rhode Island...............................
South Carolina.............................
South Dakota...............................
Tennessee..................................
Texas......................................
Utah.......................................
Vermont ...................................
Virginia...................................
Washington.................................
West Virginia..............................
Wisconsin..................................
Wyoming....................................
Other...................................... --------- --------- ----------- ------------
Total............................ 100.0% 100.0%
========= ============
</TABLE>
Maturity Considerations
The Pooling and Servicing Agreement provides that Class A
Securityholders will not receive payments of principal until the _______
Distribution Date (the "Expected Final Payment Date"), or earlier in the
event of a Pay Out Event which results in the commencement of the Early
Amortization Period. The Pooling and Servicing Agreement also provides that
Class B Securityholders will not receive payments of principal until the
earlier of (a) the _______ Distribution Date, (b) in the event of a Pay Out
Event which results in the commencement of the Early Amortization Period,
the Distribution Date following the Distribution Date on which the Class A
Invested Amount is paid in full or (c) the Distribution Date following a
sale or repurchase of the Receivables pursuant to the Pooling and Servicing
Agreement. The Class B Securityholders will not begin to receive payments
of principal until the final principal payment on the Class A Securities
has been made.
Accumulation Period
The accumulation period (the "Accumulation Period") with respect to
the Securities is scheduled to begin at the close of business of the last
day of the _________ Monthly Period. Subject to the conditions set forth
herein under "--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.
Each Monthly Period during the Accumulation Period prior to the
payment of the Class A Invested Amount in full, an amount equal to, for
each Monthly Period, the least of (a) the Available Investor Principal
Collection for such Monthly Period, (b) the "Controlled Deposit Amount" for
such Monthly Period, which is equal to the sum of the Controlled
Accumulation Amount for such Monthly Period and the Accumulation Shortfall,
if any, for such Monthly Period and (c) the Class A Adjusted Invested
Amount will be deposited in the Principal Funding Account until the
principal amount on deposit in the Principal Funding Account (the
"Principal Funding Account Balance") equals the Class A Invested Amount.
After the Class A Invested Amount has been paid in full, or following the
Distribution Date upon which the amount on deposit in the Principal Funding
is first equal to the Class A Invested Amount, Available Investor Principal
Collections, to the extent required, will be distributed to the Class B
Securityholders on each Distribution Date beginning, during the
Accumulation Period, on the Expected Final Payment Date, until the earlier
of the date the Class B Invested Amount has been paid in full and the
Termination Date. After the Class A Invested Amount and the Class B
Invested Amount have each been paid in full, Available Investor Principal
Collections, to the extent required, will be distributed to the [credit
enhancement] on each [Distribution Date] until the earlier of the date the
[credit enhancement] has been paid in full and the Termination Date.
Amounts in the Principal Funding Account are expected to be available to
pay the Class A Invested Amount on the Expected Final Payment Date. If the
amount on deposit in the Principal Funding Account is insufficient to pay
the Class A Invested Amount in full on the Expected Final Payment Date, a
Pay Out Event will occur and 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. After the
payment of the Class A Invested Amount in full, Available Investor
Principal Collections are expected to be available to pay the Class B
Invested Amount on the Expected Final Payment Date. 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. Unless a Pay Out Event has
occurred, the Accumulation Period will end on the earliest to occur of (a)
the commencement of the Early Amortization Period, (b) payment of the
Invested Amount in full and (c) the Termination Date. 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 Securities--Application of Collections - Payment of
Principal" in this supplement.
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 Securities--Exchanges" in the attached
prospectus for a discussion of the potential terms of other Series. See
"Annex I: Previously Issued Series" at the end of this Supplement for a
description of the terms of the Previously Issued Series.
Early Amortization Period
If a Pay Out Event occurs, the Early Amortization Period will
commence and any amounts on deposit in the Principal Funding Account will
be paid to the Class A Securityholders on the Distribution Date in the
month following the commencement of the Early Amortization Period. In
addition, to the extent that the Class A Invested Amount has not been paid
in full, the Class A Securityholders will be entitled to monthly payments
of principal equal to the Available Investor Principal Collections until
the earlier of the date on which the Class A Securities have been paid in
full and the Series 1999- __ Termination Date. After the Class A Securities
have been paid in full and if the Termination Date has not occurred,
Available Investor Principal Collections will be paid to the Class B
Securities on each Distribution Date until the Class B Securities have been
paid in full.
Pay Out Events
A Pay Out Event occurs, either automatically or after specified
notice, upon (a) the failure of the Transferor to make certain payments or
transfers of funds for the benefit of the Securityholders or to observe or
perform in any material respect certain other covenants within the time
periods stated in the Pooling and Servicing Agreement, (b) material
breaches of certain representations, warranties, or covenants of the
Transferor which remain uncured after the grace periods specified in the
Pooling and Servicing Agreement, (c) certain bankruptcy or insolvency
events relating to Metris, the Transferor or Direct Merchants Bank, (d) the
occurrence of a Servicer Default that would have a material adverse effect
on the Securityholders, (e) (w) the Transferor Interest being less than the
Minimum Transferor Interest, (x) (i) the Series 1999- 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 Securities--Pay Out Events" in this Supplement and in
the attached prospectus. 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.
The "Base Rate" means, with respect to any Monthly Period, (i) the
weighted average of the Class A Interest Rate and the Class B Interest Rate
as of the last day of such Monthly Period (weighted based on the Class A
Invested Amount and the Class B 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 "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 1999-__ Percentage of the amount then on deposit in
the Excess Funding Account. 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 Accumulation Period 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 Investment Proceeds and amounts withdrawn from
the Accumulation Period Reserve Account with respect to such Monthly Period
calculated on a cash basis after subtracting the Series Default Amount and
the Series 1999- Percentage of any Adjustment Payments which the Transferor
is required but fails to make pursuant to the Pooling and Servicing
Agreement for such Monthly Period, and the denominator of which is the
average daily Invested Amount during the preceding Monthly Period;
provided, however, that Excess Finance Charge Collections applied for the
benefit of the Securityholders may be added to the numerator if the Rating
Agency Condition is satisfied. See "Description of the Securities--Pay Out
Events."
Payment Rates
The following table sets forth the highest and lowest cardholder
monthly payment rates for the Direct Merchants Bank Portfolio during any
month in the period shown and the average cardholder monthly payment rates
for all months during the periods shown, in each case calculated as a
percentage of total opening monthly account balances during the periods
shown. 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).
<TABLE>
<CAPTION>
Cardholder Monthly Payment Rates for the Direct Merchants Bank Portfolio(1)
___ Months Ended Year Ended December 31,
--------------------- -------------------------------------
_________, 1999 1998 1997 1996
--------------------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Highest Month
Lowest Month
Monthly Average (2)
</TABLE>
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association
or Huntington BancShares acquired accounts or Direct Merchants
Bank's minor secured card portfolio. The above amounts and
percentages include the Key Bank USA, National Association acquired
accounts.
(2) Monthly Averages shown are expressed as an arithmetic average of
the payment rate for each month for the period indicated.
The Bank generally determines the minimum monthly payment with
respect to the accounts by multiplying the combined new balance of
purchases and cash advances, less any disputed amounts, by a minimum
percentage of the outstanding balance. If the amount so calculated is less
than a minimum dollar amount, it is increased to such minimum dollar
amount. The sum of such amount and any past due amounts equals the minimum
payment amount. The minimum payment amount, however, is never more than the
new balance.
There can be no assurance that the cardholder monthly payment rates
in the future will be similar to the historical experience set forth above.
The amount of collections of Receivables may vary from month to month due
to seasonal variations, general economic conditions, payment habits of
individual cardholders, the Credit Card Originator's monthly minimum
payment requirements and acts of God. There can be no assurance that
collections of Principal Receivables with respect to the Trust Portfolio
will be similar to the historical experience set forth above or that
deposits into the Principal Funding Account or the Distribution Account, as
applicable, will be made in accordance with the applicable Controlled
Accumulation Amount. If a Pay Out Event occurs, the average life of the
Securities could be significantly reduced or increased.
Because there may be a slowdown in the payment rate below the
payment rates used to determine the Controlled Accumulation Amounts, 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 Class A Securities and the Class B Securities to
the Expected Final Payment Dates will equal the expected number of months.
As described under "Description of the Securities-Postponement of
Accumulation Period" herein, the Servicer may shorten the Accumulation
Period. There can be no assurance that there will be sufficient time to
accumulate all amounts necessary to pay the Class A Invested Amount and the
Class B Invested Amount on the Expected Final Payment Dates , 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. See "Maturity Considerations" and "Risk Factors" in
this supplement and "Maturity Considerations" in the attached prospectus
herein.
Receivable Yield Considerations
The gross revenues from finance charges and fees billed to accounts
in the Direct Merchants Bank Portfolio for each of the three calendar years
contained in the period ended December 31, 1998 and for the _____-month
period ended ________, 1999, are set forth in the following table. The
historical yield figures in the following tables are calculated and
reported on a billed basis. The Portfolio Yield 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." Revenues vary for each account based on the
type and volume of activity for each account. Because the Trust Portfolio
represents only a portion of the Direct Merchants Bank Portfolio, actual
yield with respect to the Receivables may be different from that set forth
below. See "Direct Merchants Bank's Credit Card Portfolio" and "The
Receivables" herein and "Direct Merchants Bank's Credit Card Activities" in
the attached prospectus. 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)
Months Ended Year Ended December 31,
------------------- ---------------------------------------
____ , 1999 1998 1997 1996
------------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Average Receivables Outstanding (2)
Total Finance Charges and Fees Billed (3)(4)
Average Revenue Yield
(Annualized)
</TABLE>
- ----------------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association
or Huntington BancShares acquired accounts or Direct Merchants
Bank's minor secured card portfolio. The above amounts and
percentages include the Key Bank USA, National Association acquired
accounts.
(2) Average Receivables Outstanding is calculated by determining the
daily average of outstanding account balances for each month and
then dividing the sum of such daily averages for such months by the
number of months in such period.
(3) Total Finance Charges and Fees Billed include finance charges, cash
advance fees, annual membership fees, late fees, and other charges.
It does not include interchange fees.
(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.
Use of Proceeds
Metris Receivables, Inc. will apply the net proceeds from the sale
of the Securities, which is expected to be approximately $________, [(a) to
repay a portion of the principal of the Series 1998-1 Variable Funding
Securities, (b) to pay the purchase price of Receivables and (c) to make a
deposit to the Interest Funding Account for the payment of the Class A
Monthly Interest and Class B Monthly Interest on the first Distribution
Date. Metris Receivables, Inc. will use such balance of the proceeds for
its general corporate purposes.]
Description of the Securities
The Class A Securities and the Class B Securities (the "Offered
Securities") will be issued pursuant to the Pooling and Servicing
Agreement, and the Series 1999-__ Supplement. Pursuant to the Pooling and
Servicing Agreement, Metris Receivables, Inc. and the Trustee may execute
further Supplements in order to issue additional Series. The following
summary of the Offered Securities does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement and the Series 1999-__
Supplement. See "Description of the Securities" in the attached prospectus
for additional information concerning the Securities and the Pooling and
Servicing Agreement.
General
The Offered Securities will represent interests in certain assets
of the Trust, including the right to the applicable allocation 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 and payments of principal on the Expected Final Payment
Date or, to the extent of the Class A Invested Amount, on each Distribution
Date during the Early Amortization Period, funded from collections of
Principal Receivables allocated to Series 1999-__. Each Class B Security
represents the right to receive payments of interest at the Class B
Interest Rate and payments of principal on the ______ Distribution Date,
or, to the extent of the Class B Invested Amount, on each Distribution Date
during the Early Amortization Period following payment in full of the Class
A Invested Amount, funded from collections of Principal Receivables
allocated to Series 1999- .
The Transferor will own the Exchangeable Transferor Security and
the Class B Securities. The Exchangeable Transferor Security represents an
undivided interest in the Trust, including the right to receive certain
payments from the assets of the Trust, including the right to a percentage
(the "Transferor Percentage") of all cardholder payments on the Receivables
in the Trust equal to 100% minus the sum of the applicable Investor
Percentages for all Series of securities then outstanding. See "Description
of the Securities--Certain Matters Regarding the Transferor and the
Servicer" in the attached prospectus. During the Revolving Period, the
amount of the Invested Amount in the Trust will remain constant except
under certain limited circumstances. See "--Defaulted Receivables;
Dilution" and "-Investor Charge-Offs" in this Supplement and "Description
of the Securities-Defaulted Receivables; Dilution" and "-Investor
Charge-Offs" in the attached prospectus. 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 Principal
Receivables are deposited into the Principal Funding Account for
distribution to the Securityholders. During the Early Amortization Period,
the Invested Amount will decline as Principal Receivables are distributed
to the related 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 "Description of the
Securities--Exchanges" in the attached prospectus.
In addition to representing the right to payment from collections
of Finance Charge Receivables and Principal Receivables, each Class A
Security also represents the right to receive payments from the Excess
Funding Account, funds on deposit in the Principal Funding Account and the
[Accumulation Period Reserve Account] and certain investment earnings
thereon, Redirected Principal Collections and Shared Principal Collections
and certain other available amounts (including, under certain
circumstances, amounts on deposit in the Excess Funding Account). In
addition to representing the right to payment from collections of Finance
Charge Receivables and Principal Receivables, each Class B Security also
represents the right to receive payments from the Excess Funding Account,
[Redirected [Credit Enhanced] Principal Collections] and Shared Principal
Collections and certain other available amounts (including, under certain
circumstances, amounts on deposit in the Excess Funding Account). Payments
of interest and principal will be made, to the extent of funds available
therefor, on each Distribution Date on which such amounts are due to
Securityholders in whose names the Securities were registered on the last
business day of the calendar month preceding such Distribution Date (each,
a "Record Date").
Beneficial interests in the Class A Securities will be offered for
purchase in minimum denominations of $1,000 and integral multiples thereof.
Application has been made to list the Securities on the Luxembourg
Stock Exchange. The Trustee will maintain a paying agent in Luxembourg for
so long as the Series 1999-__ Securities are outstanding. The name and
address of the paying agent in Luxembourg are set forth at the end of this
prospectus supplement.
The Offered Securities initially will be represented by securities
registered in the name of Cede & Co., as nominee of The Depository Trust
Company ("DTC"). Unless and until Definitive Securities are issued, all
references herein to actions by Class A Securityholders or Class B
Securityholders shall refer to actions taken by DTC upon instructions from
DTC Participants and all references herein to distributions, notices,
reports and statements to Class A Securityholders or Class B
Securityholders shall refer to distributions, notices, reports and
statements to DTC or Cede & Co., as the registered holder of the Class A
Securities for distribution to Security Owners in accordance with DTC
procedures. Securityholders may hold their Securities through DTC in the
United States ("US") or Cedelbank, societe anonyme ("Cedelbank") or the
Euroclear System ("Euroclear") in Europe 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.
Cedelbank and Euroclear will hold omnibus positions on behalf of the
Cedelbank Customers and the Euroclear Participants, respectively, through
customers' securities accounts in Cedelbank's and Euroclear's names on the
books of their respective Depositories which in turn will hold such
positions in customers' securities accounts in the Depositories' names on
the books of DTC. See "Description of the Securities-General," "--
Book-Entry Registration" and "-- Definitive Securities" in the attached
prospectus.
Status of the Securities
Upon issuance, Series 1999- will rank pari passu with all other
outstanding Series. Payments on the Class B Securities are subordinated to
payments on the Class A Securities as described herein.
Previously Issued Series
The Trust has previously issued Series 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 1999-___ Asset Backed Securities bearing the
rate of interest and having the outstanding principal amount set forth in
"Annex I: Previously Issued Series.]".
Interest Payments
Interest will accrue on the Class A Securities at the Class A
Interest Rate from _______, 1999 (the "Closing Date"). Interest will be
distributed to Class A Securityholders on _______, 1999 and on the __th day
of each following month (or, if such __th day is not a business day, the
next succeeding business day) (each, a "Distribution Date") in an amount
equal to the product of (i) the actual number of days in the related
Interest Accrual Period divided by 360, (ii) the Class A Interest Rate 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 _______, 1999).
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. The "Interest Accrual Period," with
respect to any Distribution Date, will be the period from and including the
previous Distribution Date through the day preceding such Distribution
Date, except the initial Interest Accrual Period will be the period from
and including the Closing Date through ______, 1999. 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.
"Available Series Finance Charge Collections" means, with respect
to any Monthly Period, an amount equal to 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 Collections of Finance Charge Receivables and the amount of overdue
Adjustment Payments or, on and after the date on which a Pay Out Event is
deemed to occur, the Fixed/Floating Percentage of the sum of Collections of
Finance Charge Receivables and the amount of overdue Adjustment Payments,
(b) investment earnings on amounts on deposit in the Collection Account (c)
amounts on deposit in the Accumulation Period Reserve Account, if any, and
(d) with respect to the Closing Date, the amount of the initial deposit by
the Transferor to the Interest Funding Account.
The Class A Securities will bear interest at the rate equal to %
per annum above LIBOR (the "Class A Interest Rate") determined as set forth
below for the period from the Closing Date through , 1999 and each Interest
Accrual Period thereafter. The Class B Securities will bear interest at the
rate equal to % per annum above LIBOR (the "Class B Interest Rate")
determined as set forth below for the period from the Closing Date through
, 1999 and each Interest Accrual Period thereafter.
The Trustee will determine LIBOR for the period from the Closing
Date through , 1999 on , 1999 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).
"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).
"Reference Banks" means four major banks in the London interbank
market selected by the Servicer.
The Class A Interest Rate and the Class B Interest Rate applicable
to the then current and immediately preceding Interest Accrual Period may
be obtained by telephoning the Trustee at its Corporate Trust Office at
(302) 451-2500. The Trustee will cause the Class A Interest Rate and the
Class B Interest Rate as well as the amount of Class A Monthly Interest and
Class B Monthly Interest applicable to an Interest Accrual Period to be
provided to the Luxembourg Stock Exchange as soon as possible after its
determination but in no event later than the first day of such Interest
Accrual Period. Such information will also be included in a statement to
the Securityholders of record prepared by the Servicer. See "Description of
the Securities--Reports to Securityholders" in the attached prospectus.
Principal Payments
On each Distribution Date relating to the period which begins on
the Closing Date and ends at the commencement of the Accumulation Period
or, if earlier, the Early Amortization Period (the "Revolving Period"),
Collections of Principal Receivables allocable to the Invested Amount will,
subject to certain limitations, including the allocation of any Redirected
Principal Collections with respect to the related Monthly Period to pay the
Class A Required Amount and the Class B Required Amount, be treated as
Shared Principal Collections.
On each Distribution Date during the Accumulation Period, the
Trustee will deposit in the Principal Funding Account an amount equal to
the least of (a) Available Investor Principal Collections with respect to
such Monthly Period, (b) the applicable Controlled Deposit Amount and (c)
the Adjusted Invested Amount prior to any such deposit. Amounts in the
Principal Funding Account up to the Class A Invested Amount will be paid to
the Class A Securityholders on the Expected Final Payment Date. After
payment in full of the Class A Invested Amount, amounts remaining in the
Principal Funding Account will be paid to the Class B Securityholders on
the Expected Final Payment Date. After payment in full of the Class A
Invested Amount and the Class B Invested Amount, amounts remaining in the
Principal Funding Account will be paid to the [credit enhancement provider]
on the Expected Final Payment Date. During the Accumulation Period, the
portion of Available Investor Principal Collections not required to be
deposited in the Principal Funding Account will generally be treated as
Shared Principal Collections.
"Available Investor Principal Collections" means, with respect to
any Monthly Period, an amount equal to the sum of (i) an amount equal to
the Fixed/Floating Percentage of all Principal Collections (less the amount
of Redirected Principal Collections) received during such Monthly Period,
(ii) any amount on deposit in the Excess Funding Account allocated to the
Securities with respect to such Monthly Period, (iii) the aggregate Series
Default Amount and the percentage of unpaid Adjustment Payments paid from
Available Series Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections and Redirected Principal
Collections with respect to such Monthly Period allocated to Series 1999-_
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 and (iv) Shared Principal
Collections allocated to the Securities.
On each Distribution Date during the Early Amortization Period, 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
Securities are paid in full and the Termination Date. In addition, if a Pay
Out Event occurs during the Accumulation Period, the Early Amortization
Period will commence and any amount on deposit in the Principal Funding
Account will be paid to the Securityholders of each Class of Securities,
sequentially, in alphabetical order, on the Distribution Date following the
Monthly Period in which the Early Amortization Period commences. After
payment in full of the Class A Invested Amount, the Class B Securityholders
will be entitled to receive Available Investor Principal Collections on
each Distribution Date during the Early Amortization Period until the
earlier of the date the Class B Invested Amount is paid in full and the
Termination Date. After payment in full of the Class B Invested Amount, the
[Credit Enhancement provider] will be entitled to receive Available
Investor Principal Collections on each Distribution Date until the earlier
of the date the [credit enhancement] Invested Amount is paid in full and
the Termination Date. See "--Pay Out Events" below for a discussion of
events which might lead to the commencement of the Early Amortization
Period.
In the event of a sale of the Receivables and an early termination
of the Trust due to a Trigger Event, the breach of certain representations
and warranties, an optional repurchase of the Receivables by the
Transferor, a repurchase of the Receivables in connection with a Servicer
Default or a sale of the Receivables in connection with the Termination
Date (each as described under "--Pay Out Events" and "Final Payment of
Principal; Termination" below and "Description of the Securities-Pay Out
Events," "--Servicer Default," and "--Final Payment of Principal;
Termination in the attached Prospectus"), distributions of principal will
be made to the Securityholders upon surrender of their Securities. The
proceeds of any such sale or repurchase of Receivables will be allocated
first to pay amounts due with respect to the Class A Securities, then to
pay amounts due with respect to the Class B Certificates, then to pay
amounts due with respect to the [credit enhancement] 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 whole months expected to be required to fully fund the Principal
Funding Account no later than the Expected Final Payment Date, based on (a)
the expected monthly collections of Principal Receivables expected to be
distributable to the securityholders of all Series (excluding certain other
Series), 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 (excluding 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 the invested amounts of certain other Series
which are scheduled to be in their revolving periods during the
Accumulation Period and on increases in the principal payment rate
occurring after the Closing Date. The length of the Accumulation Period
will not be determined to be less than one month. If the Accumulation
Period is postponed in accordance with the foregoing, and if a Pay Out
Event occurs after the date originally scheduled as the commencement date
of the Accumulation Period, it is probable that Securityholders would
receive some of their principal later than if the Accumulation Period had
not been so postponed.
Subordination of the Class B Securities
The Class B Securities will be subordinated to the extent necessary
to fund certain payments with respect to the Class A Securities. To the
extent the Class B Invested Amount is reduced, the percentage of Finance
Charge Collections allocated to the Class B Securityholders in subsequent
Monthly Periods will be reduced. Moreover, to the extent the amount of such
reduction in the Class B Invested Amount is not reimbursed, the amount of
principal distributable to the Class B Securityholders will be reduced.
[The [credit enhancement] will be subordinated to the extent
necessary to fund certain payments with respect to the Class A Securities
and the Class B Securities. To the extent the [Credit Enhancement] Invested
Amount is reduced, the percentage of Finance Charge Collections allocated
to the [credit enhancement] in subsequent Monthly Periods will be reduced.
Moreover, to the extent the amount of such reduction in the [Credit
Enhancement] Invested Amount is not reimbursed, the amount of principal
distributable to the [credit enhancement] will be reduced.
If, on any Determination Date, the aggregate Series Default Amount
and the unpaid Adjustment Payments, if any, for each business day in the
preceding Monthly Period exceeds (a) the aggregate amount of Available
Series Finance Charge Collections applied to the payment thereof as
described below in clauses [(iv) and (v)] 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 below in "--Redirected Cash Flows," and (c)
the amount of Redirected Principal Collections allocated with respect
thereto as described below in "--Redirected Principal Collections," the
[Credit Enhancement] (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.
In the event that any such reduction of the [credit enhancement]
would cause the [credit enhancement] to be a negative number, the [credit
enhancement] will be reduced to zero and the Class B Invested Amount will
be reduced by the amount by which the [Credit Enhancement] Invested Amount
would have been reduced below zero, but not more than the sum of the
remaining aggregate Series Default Amount and the remaining unpaid
Adjustment Payments for such Monthly Period. Such reductions of the Class B
Invested Amount will thereafter be reimbursed and the Class B Invested
Amount increased on each business day by the amount, if any, of Available
Series Finance Charge Collections and Excess Finance Charge Collections for
such business day allocated and available for that purpose.
If the Class B Invested Amount is reduced to zero, the Class A
Invested Amount will be reduced by the amount by which the Class B Invested
Amount would have been reduced below zero, but not more than the sum of the
remaining aggregate Series Default Amount and the remaining unpaid
Adjustment Payments for such Monthly Period. Such reductions of the Class A
Invested Amount will thereafter be reimbursed and the Class A Invested
Amount increased on each business day by the amount, if any, of Available
Series Finance Charge Collections and Excess Finance Charge Collections
allocated and available for that purpose. See "--Redirected Cash Flows,"
"--Redirected Principal Collections" and "--Investor Charge-Offs below."
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
credit enhancer's interest,] the interest of the holders of the previously
issued Series, the interest of Metris Receivables, Inc. (the "Transferor
Interest") and the holders of all other Series issued and outstanding from
time to time pursuant to the Pooling and Servicing Agreement and applicable
Supplements all Finance Charge Collections and all Principal Collections
and the amount of all Defaulted Receivables. Finance Charge Collections
will be allocated prior to the commencement of an Early Amortization Period
and the amount of Defaulted Receivables will be allocated at all times, and
Principal Collections will be allocated during the Revolving Period to the
Class A Securityholders' Interest, the Class B Securityholders' Interest
and the [credit enhancer's] Interest, based on the percentage equivalent of
a fraction the numerator of which is the Class A Adjusted Invested Amount,
the Class B Adjusted Invested Amount or the [Credit Enhancement] Invested
Amount, respectively, at the end of the preceding business day and the
denominator of which is the greater of (a) the sum of the aggregate amount
of Principal Receivables and amounts on deposit in the Excess Funding
Account as of the end of the preceding business day and (b) the sum of the
numerators for all classes of all Series then outstanding used to calculate
the applicable allocation percentage (the "Class A Floating Percentage,"
the "Class B Floating Percentage," and the "[Credit Enhancement] Floating
Percentage," respectively; the sum of all such percentages, the "Floating
Percentage"). During the Revolving Period, all Principal Collections
allocable to the Securities will be allocated and paid to the Transferor
(except for Collections applied as Redirected Principal Collections and
Shared Principal Collections paid to the holders of securities of other
Series, if any, and except for funds deposited in the Excess Funding
Account). On any business day on or after an Amortization Period
Commencement Date, Principal Collections will be allocated to the
Securityholders' Interest based on the percentage equivalent of a fraction
the numerator of which is the Class A Invested Amount, the Class B Invested
Amount or the [Credit Enhancement] Invested Amount, respectively, at the
end of the last day of the Revolving Period and the denominator of which is
the greater of (a) the sum of the aggregate amount of Principal Receivables
and the amounts on deposit in the Excess Funding Account at the end of the
preceding business day and (b) the sum of the numerators used to calculate
the allocation percentages with respect to Principal Collections for all
Series (the "Class A Fixed/Floating Percentage," the "Class B
Fixed/Floating Percentage" and the "[Credit Enhancement] Fixed/Floating
Percentage," respectively; the sum of all such percentages the
"Fixed/Floating Percentage"). Finance Charge Collections will be allocated
on and after the date on which a Pay Out Event is deemed to occur to the
Securityholders' Interest based on the Fixed/Floating Percentage. On and
after the date on which a Defeasance occurs with respect to the Securities,
each of the allocation percentages specified above with respect to the
Securities will be zero. See "--Defeasance."
The term "Transferor Percentage" means (a) when used with respect
to (i) Principal Collections during the Revolving Period and (ii) Finance
Charge Collections and the amount of Defaulted Receivables at all times,
100 percent minus the sum of the Floating Percentage and the floating
percentages for all other Series and (b) when used with respect to
Principal Collections during an 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, the term "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.
As used herein, the term "Class A Invested Amount" means an amount
equal to (a) the Class A Initial Invested Amount minus (b) the aggregate
amount of principal payments made to Class A 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 below 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.
As used herein, 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.
As used herein, the term "Class A Initial Invested Amount" means
[$__________].
As used herein, the term "Class B Invested Amount" for any date
means an amount equal to (a) the Class B Initial Invested Amount 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 below under "--Investor Charge-Offs," minus (d) the aggregate
amount of Redirected Class B Principal Collections for which the [Credit
Enhancement] has not been reduced for all prior Distribution Dates, and
plus (e) the aggregate amount of Available Series Finance Charge
Collections, Transferor Finance Charge Collections, Excess Finance Charge
Collections, Redirected [Credit Enhancement] Principal Collections, and
certain other amounts applied on all prior Distribution Dates for the
purpose of reimbursing amounts deducted pursuant to the foregoing clauses
(c) and (d); provided, however, that the Class B Invested Amount may not be
reduced below zero.
As used herein, the term "Class B Adjusted Invested Amount," for
any date of determination, means an amount not less than zero equal to the
then current Class B Invested Amount minus the excess, if any, of the sum
of the amount then on deposit in the Principal Account and the Principal
Funding Account Balance over the Class A Invested Amount on such date of
determination.
As used herein, the term "Class B Initial Invested Amount" means
[$__________].
As used herein, the term "[Credit Enhancement] Invested Amount"
means an amount equal to (a) the initial principal balance of the [Credit
Enhancement], minus (b) the aggregate amount of principal payments made to
[the credit enhancement provider] through and including such date, minus
(c) the aggregate amount of [Credit Enhancement] Charge-Offs for all prior
Distribution Dates, equal to the amount by which the [Credit Enhancement]
Invested Amount has been reduced to fund the Series Default Amount and the
unpaid Adjustment Payments on all prior Distribution Dates as described
below 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 [Credit Enhancement] Invested Amount may not be
reduced below zero.
As used herein, the term "Stated [Credit Enhancement] Invested
Amount" means the greater of (a) zero and (b) a number rounded to the
nearest dollar equal to ____ percent of the ABC Adjusted Invested Amount;
provided, however, that in no event shall the Stated [Credit Enhancement]
Invested Amount be less than $______ except that if the ABC Adjusted
Invested Amount is equal to zero the "Stated [Credit Enhancement] Amount"
will be zero; and provided further that during the Early Amortization
Period the Stated [Credit Enhancement] Invested Amount shall be equal to
the Stated [Credit Enhancement] Invested Amount immediately preceding the
commencement of the Early Amortization Period.
As used herein, "ABC Adjusted Invested Amount" means as of any
business day the sum of the Class A Invested Amount, the Class B Invested
Amount and the [Credit Enhancement] Invested Amount minus the amount then
on deposit in the Principal Funding Account.
As used herein, the term "[Credit Enhancement] Initial Invested
Amount" means [$----------].
As used herein, the term "Invested Amount" means the sum of the
Class A Invested Amount, the Class B Invested Amount
and the [Credit Enhancement] Invested Amount.
As used herein, the "Initial Invested Amount" means the sum of the
Class A Initial Invested Amount, the Class B Initial Invested Amount and
the [Credit Enhancement] Initial Invested Amount
As used herein, "Class A Securityholders' Interest" means the
interest in the assets of the Trust allocated to the Class A
Securityholders.
As used herein, "Class B Securityholders' Interest" means the
interest in the assets of the Trust allocated to the Class B
Securityholders.
As used herein, "[Credit Enhancement] Securityholders' Interest"
means the interest in the assets of the Trust allocated to the [Credit
Enhancement] Securityholders.
As used herein, "Securityholders Interest" means the interest in
the assets of the Trust allocated to the Securityholders.
As a result of the Floating Percentage, Finance Charge Collections
and the portion of Defaulted Receivables allocated to the Securityholders
will change each business day based on the relationship of the Class A
Adjusted Invested Amount, the Class B Adjusted Invested Amount and [Credit
Enhancement] Invested Amount to the total amount of Principal Receivables
and amounts on deposit in the Excess Funding Account on the preceding
business day. The numerator of the allocation percentages of Collections of
Principal Receivables allocable to the Class A Securityholders, the Class B
Securityholders and the [credit enhancement provider], however, will remain
fixed during an Amortization Period. Collections of Principal Receivables
allocable to the Class B Securities are subject to possible redirection for
the benefit of the Class A Securityholders; collections of Principal
Receivables allocable to the [credit enhancement provider] are subject to
possible redirection for the benefit of the Class A Securityholders and the
Class B Securityholders. See "--Redirected Principal Collections" below.
Redirected Cash Flows
On each business day, to the extent that any amounts are on deposit
in the Excess Funding Account, the Servicer will determine the amount (the
"Negative Carry Amount"), if any, equal to the excess of (x) the product of
(a) the Base Rate and (b) the product of (i) the sum of the amounts on
deposit in the Excess Funding Account and (ii) the number of days elapsed
since the previous business day divided by the actual number of days in
such year over (y) the aggregate amount of all earnings since the previous
business day available from the Cash Equivalents in which funds on deposit
in the Excess Funding Account are invested. The Servicer will apply an
amount equal to the lesser of (i) the percentage of the Collections of
Finance Charge Receivables allocable to the Exchangeable Transferor
Security ("Transferor Finance Charge Collections") on such business day and
(ii) the Negative Carry Amount for such business day.
On each Distribution Date, the Servicer will determine the amount
(the "Required Amount"), if any, by which the full amount to be paid
pursuant to clauses (i) - (xi) in "--Application of Collections - Payment
of Fees, Interest and Other Items" exceeds the portion of Available Series
Finance Charge Collections and Transferor Finance Charge Collections, if
any, applied to the payment of the amounts described in such clauses.
"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 1999-__ 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 B Required Amount" means for any business day during a
Monthly Period the amount, if any, by which the sum of (i) the Class B
Monthly Interest and any overdue Class B Monthly Interest on the related
Distribution Date (and additional interest thereon), (ii) the Class B
Floating Percentage of the Default Amount for such Monthly Period (to
date), (iii) if Direct Merchants Bank, or an affiliate of Direct Merchants
Bank, is no longer the Servicer, the Class B Floating Percentage of the
Monthly Servicing Fee for the related Monthly Period, (iv) the Class B
Percentage of the Series 1999-__ Percentage of the Adjustment Payment
required to be made by the Transferor but not made on the related Transfer
Date and (v) the unreimbursed amount by which the Class B Invested Amount
has been reduced on prior business days because of unreimbursed Class B
Charge-Offs and Redirected Class B Principal Collections exceed the
Available Series Finance Charge Collections plus any Excess Finance Charge
Collections from other Series and any Transferor Finance Charge Collections
in each case allocated with respect thereto.
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 1999-_ Securities in
an amount equal to the remaining Required Amount. Excess Finance Charge
Collections from other Series allocable to the Series 1999-_ Securities for
any business day will be equal to the product of (a) Excess Finance Charge
Collections available from all other Series for such business day and (b) 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.
"Excess Finance Charge Collections" means any Collections of
Finance Charges Receivables allocable to any Series in excess of the
amounts necessary to make required payments with respect to such Series.
Redirected Principal Collections
On each business day, the Servicer will apply or cause the Trustee
to apply an amount, not to exceed the [Credit Enhancement] Invested Amount,
equal to the product of (a)(i) during the Revolving Period, the [Credit
Enhancement] Floating Percentage or (ii) during an Amortization Period, the
[Credit Enhancement] 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 [Credit Enhancement] Principal
Collections"):
(a) an amount equal to the sum of (i) the Class A Required
Amount with respect to such business day and (ii) the Class B
Required Amount with respect to such business day will be applied
first to the components of the Class A Required Amount and then to
the components of the Class B Required Amount in the same priority
as such components are applied from Available Series Finance Charge
Collections as described in "--Application of Collections--Payment
of Fees, Interest and Other Items" below; and
(b) any such collections not applied in the foregoing manner
(and therefore not constituting Redirected [Credit Enhancement]
Principal Collections) will, on business days with respect to the
Revolving Period, be applied as Shared Principal Collections and on
business days with respect to an Amortization Period will be
included in Available Investor Principal Collections.
On each business day, the Servicer will apply or cause the Trustee
to apply an amount, not to exceed the Class B Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the Class B Floating
Percentage or (ii) during an Amortization Period, the Class B
Fixed/Floating Percentage and (b) the amount of Principal Collections with
respect to such business day to the following amounts in the following
priority (such collections applied in accordance with clause (a) below are
called "Redirected Class B Principal Collections" and the sum of Redirected
[Credit Enhancement] Principal Collections and Redirected Class B Principal
Collections is 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" below; and
(b) during the Revolving Period, any such collections not
constituting Redirected Principal Collections will be applied as
Shared Principal Collections and during an Amortization Period such
collections 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 an Amortization Period, an amount equal to the
Fixed/Floating Percentage of Principal Collections (less the amount
thereof applied as Redirected Principal Collections), any amount on
deposit in the Excess Funding Account allocated to the holders of
Series 1999-_ Securities, any amounts to be paid in respect of the
Series Default Amount, unpaid Adjustment Payments, Class A
Charge-Offs, Class B Charge-Offs and [Credit Enhancement]
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 clause (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 an
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 "Description of the
Securities--Excess Funding Account" in the attached prospectus.
On each business day the Transferor, at its discretion, will direct
that amounts on deposit in the Accumulation Period Reserve Account will be
retained therein, applied as Available Series Finance Charge Collections or
released to the Transferor.
Payment of Fees, Interest and Other Items. On each business day
during a Monthly Period, the Servicer will determine the sum of (a) prior
to the date on which a Pay Out Event is deemed to occur, the Floating
Percentage of the sum of Finance Charge Collections and the amount of
Adjustment Payments made by the Transferor with respect to Adjustment
Payments required to be made but not made in a prior Monthly Period or, on
and after the date on which a Pay Out Event is deemed to occur, the
Fixed/Floating Percentage of the sum of Finance Charge Collections and the
amount of Adjustment Payments made by the Transferor with respect to
Adjustment Payments required to be made but not made in a prior Monthly
Period and (b) amounts on deposit in the Accumulation Period Reserve
Account, if any, if and to the extent the Transferor designates that such
amounts are to be so applied; provided, that with respect to the Closing
Date the amount of the initial deposit by the Transferor to the Interest
Funding Account will also constitute Available Series Finance Charge
Collections) and will distribute such amount in the following priority:
(i) an amount equal to the lesser of (A) the Available
Series Finance Charge Collections and (B) the excess of (a) the sum
of (1) the Class A Monthly Interest, (2) the amount of any Class A
Monthly Interest previously due but not deposited in the Interest
Funding Account in prior Monthly Periods, and (3) any additional
interest (to the extent permitted by applicable law) at the Class A
Interest Rate with respect to interest amounts that were due but
not paid in a prior Monthly Period over (b) the amount which has
already been deposited in the Interest Funding Account with respect
thereto in the current Monthly Period, will be deposited in the
Interest Funding Account for distribution on the next succeeding
Distribution Date to the Class A Securityholders;
(ii) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) the excess of
(a) the sum of (1) the Class B Monthly Interest, (2) the amount of
any Class B Monthly Interest previously due but not deposited in
the Interest Funding Account in prior Monthly Periods, and (3) any
additional interest (to the extent permitted by applicable law) at
the Class B Interest Rate with respect to interest amounts that
were due but not paid in a prior Monthly Period over (b) the amount
which has already been deposited in the Interest Funding Account
with respect thereto in the current Monthly Period, will be
deposited in the Interest Funding Account for distribution on the
next succeeding Distribution Date to the Class B Securityholders;
(iii) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) the 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;
(iv) 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 an Amortization Period, treated as Available Investor
Principal Collections for the benefit of the Securities;
(v) an amount equal to the Series 1999-_ 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 an 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) 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 an Amortization Period,
be treated as Available Investor Principal Collections for the
benefit of the Securities;
(vii) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) the sum of (1)
the amount of interest which has accrued with respect to the
outstanding aggregate principal amount of the Class B Securities at
the Class B Interest Rate but has not been deposited in the
Interest Funding Account will be deposited in the Interest Funding
Account and (2) any additional interest (to the extent permitted by
applicable law) at the Class B Interest Rate with respect to such
interest amounts that were due but not deposited in the Interest
Funding Account in any previous Monthly Period, will be deposited
in the Interest Funding Account for distribution on the next
succeeding Distribution Date to Class B Securityholders;
(viii) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) the sum of (1)
the amount of interest which has accrued with respect to the
outstanding aggregate principal amount of the [Credit Enhancement]
at the [Credit Enhancement] Interest Rate but has not been
deposited in the Interest Funding Account will be deposited in the
Interest Funding Account, and (2) any additional interest (to the
extent permitted by applicable law) at the [Credit Enhancement]
Interest Rate with respect to such interest amounts that were due
but not deposited in the Interest Funding Account in any previous
Monthly Period, will be deposited in the Interest Funding Account
for distribution on the next succeeding Distribution Date to
[Credit Enhancement] Securityholders;
(ix) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) unreimbursed
Class B Charge-Offs, if any, will be applied to reimburse Class B
Charge-Offs and (w) during the Revolving Period, be treated as
Shared Principal Collections and (x) during an Amortization Period,
be treated as Available Investor Principal Collections for the
benefit of the Securities;
(x) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) unreimbursed
[Credit Enhancement] Charge-Offs, if any, will be applied to
reimburse [Credit Enhancement] Charge-Offs and (w) during the
Revolving Period, be treated as Shared Principal Collections and
(x) during an 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 Accumulation Period 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 Principal Funding Account
and the Accumulation Period Reserve Account will be applied as if such
amounts were Available Series Finance Charge Collections on the last
business day of the preceding Monthly Period.
"Class A Monthly Interest" with respect to any Distribution Date
will equal the product of (i) the Class A Interest Rate for the related
Interest Accrual Period, (ii) the outstanding principal balance of the
Class A Securities at the close of business on the first day of the related
Interest Accrual Period or, with respect to any Distribution Date related
to the Funding Period, the outstanding principal balance of the Class A
Securities at the close of business on the first day of the related
Interest Accrual Period and (iii) a fraction the numerator of which is the
actual number of days in such Interest Accrual Period and the denominator
of which is 360 (or in the case of the initial Distribution Date, an amount
equal to the product of (x) the Class A Initial Invested Amount, (y) _____
divided by 360 and (z) the Class A Interest Rate for the initial Interest
Accrual Period).
"Class B Monthly Interest" with respect to any Distribution Date
will equal the product of (i) the Class B Interest Rate for the related
Interest Accrual Period, (ii) the Class B Invested Amount at the close of
business on the first day of the related Interest Accrual Period or, with
respect to any Distribution Date related to the Funding Period, the
outstanding principal balance of the Class B Securities at the close of
business on the first day of the related Interest Accrual Period and (iii)
a fraction the numerator of which is the actual number of days in such
Interest Accrual Period and the denominator of which is 360 (or in the case
of the initial Distribution Date, an amount equal to the product of (x) the
Class B Initial Invested Amount, (y) _____ divided by 360 and (z) the Class
B Interest Rate for the initial Interest Accrual Period).
"[Credit Enhancement] Monthly Interest" with respect to any
Distribution Date will equal the product of (i) the [Credit Enhancement]
Interest Rate for the related Interest Accrual Period, (ii) the [Credit
Enhancement] Invested Amount at the close of business on the first day of
the related Interest Accrual Period or, with respect to any Distribution
Date related to the Funding Period, the outstanding principal balance of
the [credit enhancement] at the close of business on the first day of the
related Interest Accrual Period and (iii) a fraction the numerator of which
is the actual number of days in the related Interest Accrual Period and the
denominator of which is 360 (or in the case of the initial Distribution
Date, an amount equal to the product of (x) the [Credit Enhancement]
Initial Invested Amount, (y) divided by 360, and (z) the [Credit
Enhancement] Interest Rate for the initial Interest Accrual Period).
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 an
Amortization Period, the Trustee, acting in accordance with instructions
from the Servicer, will apply Principal Collections on deposit in the
Principal Account in the following priority:
(i) an amount equal to the Class A Principal will be
deposited on each Transfer Date in the Principal
Funding Account for distribution to the Class A
Securityholders on the Expected Final Payment Date
(with respect to the Accumulation Period) or
distributed to the Class A Securityholders on each
Distribution Date until the Class A Invested Amount
is paid in full (with respect to the Early
Amortization Period);
(ii) on the Transfer Date related to the Class B
Principal Payment Commencement Date and on each
Transfer Date thereafter, an amount equal to the
Class B Principal will be deposited in the Principal
Funding Account for distribution to the Class B
Securityholders on the Expected Final Payment Date
(with respect to the Accumulation Period) or
distributed to the Class B Securityholders on each
Distribution Date until the Class B Invested Amount
is paid in full (with respect to the Early
Amortization Period);
(iii) on the Transfer Date related to the [Credit
Enhancement] Principal Payment Commencement Date and
on each Transfer Date thereafter, an amount equal to
the [Credit Enhancement] Principal will be deposited
in the Principal Funding Account for distribution to
the [Credit Enhancement] Securityholders on the
Expected Final Payment Date (with respect to the
Accumulation Period) or distributed to the [Credit
Enhancement] Securityholders on each Distribution
Date until the [Credit Enhancement] Invested Amount
is paid in full (with respect to the Early
Amortization Period); and
(iv) on each Transfer Date with respect to the
Accumulation Period, the balance of Available
Investor Principal Collections not applied pursuant
to (i) and (ii) above, if any, may be applied to the
payment of principal to the [credit enhancement
providers] to the extent that the [credit
enhancement provider] exceeds the Stated [Credit
Enhancement] Amount and any remaining excess on each
Transfer Date with respect to the Accumulation
Period and the Early Amortization Period will be
treated as Shared Principal Collections and applied
as described in clause (vi) of "--Allocations."
"Class A Principal" with respect to any Transfer Date relating to
the Accumulation Period or the Early Amortization Period, prior to the
payment in full of the Class A Invested Amount, will equal the least of (i)
the Available Investor Principal Collections on deposit in the Principal
Account with respect to such Transfer Date, (ii) for each Transfer Date
with respect to the Accumulation Period, prior to the payment in full of
the Class A Invested Amount and on or prior to the Expected Final Payment
Date, the applicable Controlled Deposit Amount for such Transfer Date and
(iii) the Class A Adjusted Invested Amount on such Transfer Date.
"Class B Principal" with respect to each Transfer Date relating to
the Accumulation Period or the Early Amortization Period beginning with the
Transfer Date first preceding the Class B Principal Payment Commencement
Date, prior to the payment in full of the Class B Invested Amount, will
equal the least of (i) the Available Investor Principal Collections
remaining on deposit in the Principal Account with respect to such Transfer
Date after application thereof to Class A Principal, if any, (ii) for each
Transfer Date with respect to the Accumulation Period, on or prior to the
Expected Final Payment Date, the applicable Controlled Deposit Amount for
such Transfer Date (minus the Class A Principal with respect to such
Transfer Date) and (iii) the Class B Adjusted Invested Amount on such
Transfer Date.
"[Credit Enhancement] Principal" with respect to each Transfer Date
relating to the Accumulation Period or the Early Amortization Period
beginning with the Transfer Date first preceding the Distribution Date on
which the Class B Invested Amount is deposited in full in the Principal
Funding Account or paid in full, prior to the payment in full of the
[Credit Enhancement] Invested Amount, will equal the least of (i) the
Available Investor Principal Collections remaining on deposit in the
Principal Account with respect to such Transfer Date after applications
thereof to Class A Principal and Class B Principal, if any, (ii) for each
Transfer Date with respect to the Accumulation Period, on or prior to the
Expected Final Payment Date, the applicable Controlled Deposit Amount for
such Transfer Date (minus the Class A Principal and the Class B Principal
with respect to such Transfer Date) and (iii) the [Credit Enhancement]
Adjusted Invested Amount on such Transfer Date.
"Controlled Accumulation Amount" means for any Transfer Date with
respect to the Accumulation Period, prior to the payment in full of the sum
of the Class A Invested Amount, the Class B Invested Amount and the [Credit
Enhancement] 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.
As used herein, "Class B Principal Payment Commencement Date" means
the earlier of (a) (i) with respect to the Accumulation Period, the
Expected Final Payment Date or (ii) during the Early Amortization Period,
the first Distribution Date on which the Class A Invested Amount is paid in
full or, if there are no Principal Collections allocable to Series 1999-__
remaining after payments have been made to the Class A Securities on such
Distribution Date, the next succeeding Distribution Date and (b) the
Distribution Date following a sale or repurchase of the Receivables
pursuant to the Pooling and Servicing Agreement.
As used herein, "[Credit Enhancement] Interest Rate" means the
London interbank offered quotations for one-month United States dollar
deposits plus % per annum or such lesser rate as specified in the Series
1999-__ Supplement.
The term "[Credit Enhancement] Invested Amount" for any date means
an amount equal to (a) the [Credit Enhancement] Initial Invested Amount,
minus (b) the aggregate amount of principal payments made to [credit
enhancement provider] through and including such date, minus (c) the
aggregate amount of [Credit Enhancement] Charge-Offs for all prior
Distribution Dates, equal to the amount by which the [Credit Enhancement]
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 Available Series Finance Charge Collections,
Transferor Finance Charge Collections, Excess Finance Charge Collections,
Redirected Principal Collections, and certain other amounts as may be
available applied on all prior Distribution Dates for the purpose of
reimbursing amounts deducted pursuant to the foregoing clauses (c) and (d),
provided, however, that the [Credit Enhancement] Invested Amount may not be
reduced below zero.
The term "[Credit Enhancement] Adjusted Invested Amount," for any
date of determination, means an amount not less than zero equal to the then
current [Credit Enhancement] Invested Amount minus the excess, if any, of
the sum of the amount then on deposit in the Principal Account and the
Principal Funding Account Balance over the sum of the Class A Invested
Amount and the Class B Invested Amount on such date of determination.
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, 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.
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
(such collections, "Shared Principal Collections"). Any such redirection
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 "-Applications of Collections" above and
"Description of the Offered Securities--Application of Collections" and
- -"Shared Principal Collections" in the attached prospectus.
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. See "Direct Merchants Bank's Credit
Card Activities--Collection of Delinquent Accounts" in the attached
prospectus and "--Delinquency and Loss Experience" in this supplement. On
each business day, the Servicer will allocate to the Securityholders the
Series Default Amount. The term "Series Default Amount" means a portion of
all Defaulted Receivables in an 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 reduces the amount of any
Principal Receivable without receiving collections therefor or charging off
such amount as uncollectible (any such reduction, a "Dilution"), then the
amount of the Transferor Interest in the Trust will be reduced by the
amount of the Dilution 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 1999-_, 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
1999-_ Percentage of unpaid Adjustment Payments, if any, for all business
days in the preceding Monthly Period exceeds the aggregate amount of
Available Series Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections, Redirected Principal
Collections, Principal Funding Account Investment Proceeds and any amounts
withdrawn from the Accumulation Period Reserve Account, and applied with
respect to the Series Default Amount and the Series 1999-_ Percentage of
unpaid Adjustment Payments with respect to such Monthly Period, then the
[Credit Enhancement] 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 1999-_ Percentage of unpaid
Adjustment Payments for such Monthly Period (a "[Credit Enhancement]
Charge-Off"). The [Credit Enhancement] Invested Amount thereafter will be
increased (but not in excess of the unpaid principal balance of the [Credit
Enhancement]) on any business day by the amounts allocated and available
for that purpose as described under clause (x) of "--Application of
Collections--Payment of Fees, Interest and Other Items."
In the event that any such reduction of the [Credit Enhancement]
Invested Amount would cause the [Credit Enhancement] Invested Amount to be
a negative number, the [Credit Enhancement] Invested Amount will be reduced
to zero, and the Class B Invested Amount will be reduced by the aggregate
amount of such excess, but not more than the sum of the remaining aggregate
Series Default Amount and the remaining Series 1999- Percentage of unpaid
Adjustment Payments for such Monthly Period (a "Class B Charge-Off"), which
will have the effect of slowing or reducing the return of principal to the
Class B Securityholders. The Class B Invested Amount will thereafter be
increased (but not in excess of the unpaid principal balance of the Class B
Securities) on any business day by the amounts allocated and available for
that purpose as described under clause (ix) of "--Application of
Collections--Payment of Fees, Interest and Other Items."
In the event that any such reduction of the Class B Invested Amount
would cause the Class B Invested Amount to be a negative number, the Class
B Invested Amount will be reduced to zero, and the Class A Invested Amount
will be reduced by the amount by which the Class B Invested Amount would
have been reduced below zero, but not more than the sum of the remaining
aggregate Series Default Amount and the remaining Series 1999-_ Percentage
of unpaid Adjustment Payments for such Monthly Period (a "Class A Charge-
Off") which will have the effect of slowing or reducing the return of
principal to the Class A Securityholders. The Class A Invested Amount will
thereafter be increased (but not in excess of the unpaid principal balance
of the Class A Securities) on any business day by the amounts allocated and
available for that purpose as described under clause (vi ) of
"--Application of Collections--Payment of Fees, Interest and Other Items."
Principal Funding Account
Pursuant to the Series 1999-_ 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 above 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. During the Accumulation
Period, investment earnings (net of investment losses and expenses) on
funds on deposit in the Principal Funding Account (the "Principal Funding
Investment Proceeds") will be applied on each Transfer Date to the extent
of the Covered Amount as if such amounts 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
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.
Accumulation Period Reserve Account
Pursuant to the Series 1999-_ Supplement, the Servicer will
establish and maintain with a Qualified Institution a segregated Trust
account held for the benefit of the Securityholders (the "Accumulation
Period Reserve Account").The Accumulation Period Reserve Account is
established to assist with the subsequent distribution of interest on the
Class A Securities, the Class B Securities and the [credit enhancement]
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 above
under "--Application of Collections--Payment of Fees, Interest and Other
Items") to increase the amount on deposit in the Accumulation Period
Reserve Account (to the extent such amount is less than the Required
Reserve Account Amount). The "Reserve Account Funding Date" will be the
first day of the third Monthly Period prior to the commencement of the
Accumulation Period, or such earlier date as the Servicer may determine.
The "Required Reserve Account Amount" for any date on or after the Reserve
Account Funding Date will be equal to (a) 0.5 percent of the sum of the
Class A Invested Amount, the Class B Invested Amount and the [credit
enhancement] 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 1999-_.
"Rating Agency Condition" means the notification in writing by each
Rating Agency that a proposed 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.
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 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
day of the preceding Monthly Period in an amount equal to the lesser of (a)
the Available Reserve Account Amount with respect to such Transfer Date and
(b) the excess, if any, of (i) the product of (x) a fraction the numerator
of which is the actual number of days in the related Interest Accrual
Period and the denominator of which is 360, (y) the weighted average of the
Class A Interest Rate, the Class B Interest Rate and the [credit
enhancement] 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
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 to be made 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.
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 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 "Description of the
Securities--Exchanges." There can be no assurance, however, that the terms
of any Paired Series might not have an impact on the timing or amount of
payments received by a Securityholder. In particular, the denominator of
the Fixed/Floating Percentages for the Class A Securities and the Class B
Securities may be increased upon the occurrence of a Pay Out Event with
respect to a Paired Series resulting in a possible reduction of the
percentage of Collections of Principal Receivables and Finance Charge
Receivables allocated to Series 1999-_ if such event required reliance by
Series 1999-_ 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 above."
Defeasance
On the date that the following conditions shall have been
satisfied: (i) the Transferor shall have deposited (x) in the Principal
Funding Account an amount equal to the sum of the outstanding principal
balances of the Class A Securities, the Class B Securities and the [Credit
Enhancement], 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.
Final Payment of Principal; Termination
The Class A Securities, the Class B Securities and the [Credit
Enhancement] will each be subject to optional repurchase by the Transferor
on any Distribution Date if on such Distribution Date the sum of the Class
A Invested Amount, the Class B Invested Amount and the [Credit Enhancement]
Invested Amount would be reduced to an amount less than or equal to 10
percent of the sum of the highest Class A Invested Amount, Class B Invested
Amount and [Credit Enhancement] Invested Amount since the Closing Date, if
certain conditions set forth in the Pooling and Servicing Agreement are
satisfied. The repurchase price will be equal to (i) the unpaid Class A
Invested Amount plus accrued and unpaid interest on the Class A Securities,
(ii) the unpaid Class B Invested Amount plus accrued and unpaid interest on
the Class B Securities, and (iii) the unpaid [Credit Enhancement] Invested
Amount plus accrued and unpaid interest on the [Credit Enhancement], in
each case after giving effect to any payments on such date. In each case,
interest will accrue through the day preceding the Distribution Date on
which the repurchase occurs.
The Securities will be retired on the day following the
Distribution Date on which the final payment of principal is scheduled to
be made to the Securityholders, whether as a result of optional
reassignment to the Transferor or otherwise. Subject to prior termination
as provided above, the Pooling and Servicing Agreement provides that the
final distribution of principal and interest on the Offered Securities will
be made on the Distribution Date (the "Termination Date"), except to the
extent provided below. In the event that the Invested Amount is greater
than zero, exclusive of any Class held by the Transferor, on the
Termination Date, the Trustee will sell or cause to be sold (and apply the
proceeds first to the Class A Securities until paid in full, then to the
Class B Securities until paid in full, and finally to the [Credit
Enhancement] until paid in full, 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 1999-_ Supplement, in an amount up to 110 percent of the Invested
Amount at the close of business on such date (but not more than the total
amount of Receivables allocable to the Securities in accordance with the
Pooling and Servicing Agreement). If the sale contemplated by the preceding
sentence has not occurred by the Termination Date, the affected
Securityholders shall remain entitled to receive proceeds of such sale when
it occurs. The net proceeds of such sale and any collections on the
Receivables, up to an amount equal to the Invested Amount plus accrued
interest due on the Securities, will be paid on the Termination Date first
to Class A Securityholders until the Class A Invested Amount is paid in
full, then to the Class B Securityholders until the Class B Invested Amount
is paid in full, and then to the [credit enhancement] Securityholders until
the [Credit Enhancement] 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 1999_- Supplement, which failure has a material adverse
effect on the Securityholders and which continues unremedied for a
period of 60 days after written notice of such failure, requiring
the same to be remedied, shall have been given to the Transferor by
the Trustee, or to the Transferor and the Trustee by the
Securityholders representing more than 50 percent of the Invested
Amount and continues to materially and adversely affect the
interests of the Securityholders for such period;
(ii) any representation or warranty made by the Transferor
in the Pooling and Servicing Agreement proves to have been
incorrect in any material respect when made, and as a result the
interests of the Securityholders are materially adversely affected,
and such representation or warranty continues to be incorrect for
60 days after notice to the Transferor by the Trustee or to the
Transferor and the Trustee by more than 50 percent of the Invested
Amount and the Securityholders' Interest continues to be materially
adversely affected during such period; provided, however, that a
Pay Out Event pursuant to this clause (ii) will not be deemed to
occur thereunder if the Transferor has accepted reassignment of the
related Receivable or all such Receivables, if applicable, during
such period (or such longer period as the Trustee may specify) in
accordance with the provisions thereof;
(iii) certain events of bankruptcy or insolvency relating to
the Transferor, Direct Merchants Bank or Metris;
(iv) any reduction of the average of the Portfolio Yields
for any three consecutive Monthly Periods to a rate which is less
than the weighted average Base Rates for such three consecutive
Monthly Periods;
(v) the Trust shall become subject to regulation by the SEC
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) Series 1999-_ Percentage of
the sum of the total amount of Principal Receivables plus amounts
on deposit in the Excess Funding Account shall be less than (II)
the sum of the aggregate outstanding principal amounts of the Class
A Securities, the Class B Securities and the [Credit Enhancement],
(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 shall occur which would have a
material adverse effect on the Securityholders.
In the case of any event described in clause (i), (ii), or (vii)
above, a Pay Out Event will be deemed to have occurred with respect to the
Securities only if, after any applicable grace period, the Securityholders
evidencing undivided interests aggregating more than 50 percent of the
Invested Amount, by written notice to the Transferor and the Servicer
declare that a Pay Out Event has occurred with respect to the Securities as
of the date of such notice. In the case of any event described in clause
(iii) or (v) above, a Pay Out Event with respect to all Series then
outstanding, and in the case of any event described in clause (iv) or (vi),
a Pay Out Event with respect only to the Securities, will be deemed to have
occurred without any notice or other action on the part of the Trustee or
the Securityholders or all securityholders, as appropriate, immediately
upon the occurrence of such event. On the date on which a Pay Out Event is
deemed to have occurred, the Early Amortization Period will commence. In
such event, distributions of principal to the Securityholders will begin on
the first Distribution Date following the month in which such Pay Out Event
occurred. If, because of the occurrence of a Pay Out Event, the Early
Amortization Period begins, Securityholders will begin receiving
distributions of principal earlier than they otherwise would have, which
may shorten the average life and maturity of the Securities.
In addition to the consequences of a Pay Out Event discussed above,
if, pursuant to certain provisions of federal law, the Transferor or Metris
voluntarily enters liquidation or a trustee-in-bankruptcy is appointed for
the Transferor or Metris (an "Insolvency Event"), the Transferor will
immediately cease to transfer Principal Receivables to the Trust and
promptly give notice to the Trustee of such event. If an Insolvency Event
occurs or, at any time the Retained Percentage is equal to or less than 2
percent (a "Trigger Event"), the Pooling and Servicing Agreement and the
Trust shall be terminated, and within 15 days of notice to the Trustee, the
Trustee will publish a notice of the Insolvency Event or Trigger Event,
stating that the Trustee intends to sell, dispose of, or otherwise
liquidate the Receivables in a commercially reasonable manner. With respect
to each Series outstanding at such time, (or, if any such Series has more
than one class, of each class of such Series excluding any class or portion
thereof held by the Transferor), unless otherwise instructed within a
specified period by securityholders representing undivided interests
aggregating more than 50 percent of the invested amount of such Series (or
class excluding any class or portion thereof held by the Transferor) and
the holders of any Supplemental Securities or any other interest in the
Exchangeable Transferor Security other than the Transferor, the Trustee
will sell, dispose of, or otherwise liquidate the portion of the
Receivables allocable to the Series that did not vote to continue the Trust
in accordance with the Pooling and Servicing Agreement in a commercially
reasonable manner and on commercially reasonable terms. The proceeds from
the sale, disposition or liquidation of the Receivables will be treated as
collections of the Receivables allocable to such Securityholders and will
be distributed to the applicable Securityholders as provided above in
"--Application of Collections."
If the only Pay Out Event to occur is either the bankruptcy or
insolvency of the Transferor or the appointment of a bankruptcy trustee or
receiver for the Transferor, the bankruptcy trustee or receiver may have
the power to prevent the early sale, liquidation, or disposition of the
Receivables and the commencement of the Early Amortization Period. In
addition, a bankruptcy trustee or receiver may have the power to cause the
early sale of the Receivables and the early retirement of the Securities.
Servicing Compensation and Payment of Expenses
The Servicer's compensation for its servicing activities and
reimbursement for its expenses will take the form of the payment to it of a
servicing fee in an amount for any Monthly Period (the "Monthly Servicing
Fee") equal to the product of (i) a fraction the numerator of which is the
actual number of days in such Monthly Period and the denominator of which
is 365 or 366, (ii) the applicable 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 and "Description of the Securities-Application of
Collections" in the attached prospectus. 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.
"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 Series 1999-__ Supplement.
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.
Reports to Securityholders
On or after each Distribution Date, the Trustee will forward to
each Securityholder of record, a statement prepared by the Servicer setting
forth the items described in "Description of the Securities--Reports to
Securityholders" in the attached prospectus. In addition, such statement
will include (a) the amount, if any, withdrawn from the Principal Funding
Account for such Transfer Date, and (b) the Transferor Interest, if any,
for such Transfer Date. So long as the Securities are listed on the
Luxembourg Stock Exchange, notices to Securityholders will be given by
publication in a daily newspaper in Luxembourg (expected to be the
Luxemburger Wort). In the event that Definitive Securities are issued,
notices to Securityholders will also be given by mail to their addresses as
they appear on the register maintained by the Trustee.
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 and the
Class B 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, Cedelbank and Euroclear. The International
Securities Identification Number (ISIN) for the Class A Securities is and
for the Class B Securities is ; the Common Code number for the Class A
Securities is and for the Class B Securities is .
The transactions contemplated in this prospectus supplement were
authorized by resolutions adopted by Metris Receivables, Inc.'s Board of
Directors on __________, 1999 and on ________, 1999.
Copies of the Pooling and Servicing Agreement, the Series 1999-_
Supplement, the annual report of independent certified public accountants
described in "Description of the Securities -- Evidence as to Compliance"
in the attached prospectus, the documents listed under "Where You Can Find
More Information" and the reports to Securityholders referred to under
"Reports to Securityholders" and "Description of the Securities -- Reports
to Securityholders" in the attached prospectus will be available free of
charge at the office of Banque Generale du Luxembourg S.A. (the "Listing
Agent"), 50 Avenue J.F. Kennedy, L-2951 Luxembourg. Financial information
regarding Transferor is included in the consolidated financial statements
of Metris Companies Inc. in its Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, also available at the office of the Listing
Agent in Luxembourg. For so long as the Securities are outstanding, copies
of each Annual Report on Form 10-K for subsequent fiscal years 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 _______, 199_, the date of the
information with respect to the Trust set forth in this Supplement under
"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.
The Securities, the Pooling and Servicing Agreement and the Series
1999-__ Supplement are governed by the laws of the State of Delaware.
ERISA Considerations
Section 406 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and Section 4975 of the Code prohibit certain pension,
profit sharing or other employee benefit plans, individual retirement
accounts or annuities and employee annuity plans and Keogh plans
(collectively, "Plans") from engaging in certain transactions involving
"plan assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code (collectively, "Parties in Interest")
with respect to the Plan. A violation of these "prohibited transaction"
rules may generate excise tax and other liabilities under ERISA and Section
4975 of the Code for such persons, unless a statutory, regulatory or
administrative exemption is available. Plans that are 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 ERISA requirements.
Class A Securities
A violation of the prohibited transaction rules could occur if the
Class A Securities were to be purchased with assets of any Plan if the
Transferor, the Trustee, any underwriters of such Series or any of their
affiliates were a Party in Interest with respect to such Plan, unless a
statutory, regulatory or administrative exemption is available or an
exemption applies under a regulation (the "Plan Asset Regulation") issued
by the Department of Labor ("DOL"). The Transferor, the Trustee, any
underwriters of a Series and their affiliates are likely to be Parties in
Interest with respect to many Plans. Before purchasing the Class A
Securities, a Plan fiduciary or other Plan investor should consider whether
a prohibited transaction might arise by reason of the relationship between
the Plan and the Transferor, the Trustee, any underwriters of such Series
or any of their affiliates and consult their counsel regarding the purchase
in light of the considerations described below and in the accompanying
prospectus.
Under certain circumstances, the Plan Asset Regulation treats the
assets of an entity in which a Plan holds an equity interest as "plan
assets" of such Plan. Because the Class A Securities will represent
beneficial interests in the Trust, and despite the agreement of the
Transferor and the Security Owners to treat the Class A Securities as debt
instruments, the Class A Securities are likely to be considered equity
interests in the Trust for purposes of the Plan Asset Regulation, with the
result that the assets of the Trust are likely to be treated as "plan
assets" of the investing Plans for purposes of ERISA and Section 4975 of
the Internal Revenue Code of 1986, as amended (the "Code"), unless the
exception for "publicly-offered securities" is applicable as described in
the accompanying prospectus. The Underwriters anticipate that the Class A
Securities will meet the criteria for treatment as "publicly-offered
securities" as described in the accompanying prospectus. No restrictions
will be imposed on the transfer of the Class A Securities. It is expected
that the Class A Securities will be held by at least 100 or more investors
who were independent of the issuer and of one another ("Independent
Investors") at the conclusion of the initial public offering although no
assurance can be given, and no monitoring or other measures will be taken
to ensure, that such condition is met. The Class A Securities will be sold
as part of an offering pursuant to an effective registration statement
under the Securities Act and then will be timely registered under the
Exchange Act.
If the foregoing exception under the Plan Asset Regulation were not
satisfied, transactions involving the Trust and Parties in Interest with
respect to a Plan that purchases or holds Class A Securities might be
prohibited under Section 406 of ERISA and/or Section 4975 of the Code and
result in excise tax and other liabilities under ERISA and Section 4975 of
the Code unless an exemption were available. The five DOL class exemptions
described in the accompanying prospectus may not provide relief for all
transactions involving the assets of the Trust even if they would otherwise
apply to the purchase of a Class A Security by a Plan.
Class B Securities
The Class B Underwriter currently does not expect that the Class B
Securities will be held by at least 100 Independent Investors and,
therefore, does not expect that the Class B Securities will qualify as
publicly-offered securities under the regulation referred to in the
preceding paragraph. Accordingly, the Class B Securities may not be
acquired or held by (a) any employee benefit plan that is subject to ERISA,
(b) any plan or other arrangement (including an individual retirement
account or Keogh plan) that is subject to Section 4975 of the Code, or (c)
any entity whose underlying assets include "plan assets" under the
regulation by reason of any such plan's investment in the entity. By its
acceptance of a Class B Security, each Class B Securityholder will be
deemed to have represented and warranted that it is not and will not be
subject to the foregoing limitation.
Consultation with Counsel
In light of the foregoing, fiduciaries or other persons
contemplating purchasing the Securities on behalf or with "plan assets" of
any Plan should consult their own counsel regarding whether the Trust
assets represented by the Securities would be considered "plan assets," the
consequences that would apply if the Trust's assets were considered "plan
assets," and the possibility of exemptive relief from the prohibited
transaction rules.
Finally, Plan fiduciaries and other Plan investors should consider
the fiduciary standards under ERISA or other applicable law in the context
of the Plan's particular circumstances before authorizing an investment of
a portion of the Plan's assets in the Securities. Accordingly, among other
factors, Plan fiduciaries and other Plan investors should consider whether
the investment (i) satisfies the diversification requirement of ERISA or
other applicable law, (ii) is in accordance with the Plan's governing
instruments, and (iii) is prudent in light of the "Risk Factors" and other
factors discussed in this prospectus supplement.
Underwriting
Subject to the terms and conditions set forth in the Underwriting
Agreement dated __________, 1999 (the "Underwriting Agreement") between
Metris Receivables, Inc. and the underwriters named below (the
"Underwriters"), Metris Receivables, Inc. has agreed to sell to the
Underwriters of the Class A Securities (the "Class A Underwriters") and
the Underwriter of the Class B Securities
(the "Class B Underwriter"), and each of the Underwriters has severally
agreed to purchase, the principal amount of the Class A Securities and the
Class B Securities, as applicable, set forth opposite its name:
Class A Underwriters Principal Amount of
Class A Securities
- --------------- $---------------
Total ______________
Class B Underwriter Principal Amount of
Class B Securities
- --------------- $---------------
Total ______________
The price to public, Underwriters' discounts and commissions, the
concessions that the Underwriters may allow to certain dealers, and the
discounts that such dealers may reallow to certain other dealers, each
expressed as a percentage of the principal amount of the Class A and Class
B Securities, shall be as follows:
<TABLE>
<CAPTION>
Selling
Underwriting concessions,
Price to discount and not to Reallowance
public: commissions: exceed: not to exceed:
-------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Class A Securities (%) (%) (%) (%)
Class B Securities (%) (%) (%) (%)
</TABLE>
After the offering is completed, Metris Receivables, Inc. will receive the
proceeds, after deduction of the underwriting and other expenses, listed
below:
<TABLE>
<CAPTION>
Proceeds to Transferor (as % Underwriting
Proceeds to of the principal amount of the discounts and
Transferor Securities) concessions
----------- ------------------------------ -------------
<S> <C> <C> <C>
Class A Securities ($) (%) ($)
Class B Securities ($) (%) ($)
</TABLE>
After the public offering, the public offering price and other
selling terms may be changed by the Class A Underwriters and Class B
Underwriter, as the case may be. Additional offering expenses are estimated
to be
$-------.
Each Underwriter has represented and agreed that (a) it 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 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 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.
Metris Receivables, Inc. will indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, or
contribute to payments the Underwriters may be required to make in respect
thereof.
The Underwriters may engage in over-allotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids
with respect to the 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 Securities so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Securities in the open market after
the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the 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 Securities
to be higher than they would otherwise be in the absence of such
transactions. Neither the Transferor, the Trust nor any of the Underwriters
represent that the Underwriters will engage in any such transactions nor
that such transactions, once commenced, will not be discontinued without
notice.
In the ordinary course of business, one or more of the Underwriters
or their affiliates have engaged, and may engage in the future, in certain
investment banking or commercial banking transactions with Metris and its
affiliates.
Exchange Listing
We have applied to list the Securities on the Luxembourg Stock
Exchange. We cannot guaranty that the application for the listing will be
accepted. You should consult with Banque Generale du Luxembourg S.A., the
Luxembourg listing agent for the Securities, 50 Avenue J.F. Kennedy, L-2951
Luxembourg, phone number (352) 42421, to determine whether or not the
Securities are listed on the Luxembourg Stock Exchange.
Index of Terms for Prospectus Supplement
Term Page
ABC Adjusted Invested Amount............................................S-30
Accounts................................................................S-15
Accumulation Period.....................................................S-21
Accumulation Period Length..............................................S-27
Accumulation Period Reserve Account.....................................S-38
Accumulation Shortfall............................................S-21, S-36
Adjusted Invested Amount................................................S-22
Adjustment Payment......................................................S-37
Agreement...............................................................S-15
Amortization Period Commencement Date"..................................S-29
Available Investor Principal Collections................................S-27
Available Reserve Account Amount........................................S-39
Available Series Finance Charge Collections.............................S-26
Base Rate...............................................................S-22
Cedelbank...............................................................S-25
Class A Adjusted Invested Amount........................................S-29
Class A Charge-Off......................................................S-38
Class A Fixed/Floating Percentage.......................................S-29
Class A Floating Percentage.............................................S-28
Class A Initial Invested Amount.........................................S-29
Class A Interest Rate...................................................S-26
Class A Invested Amount.................................................S-29
Class A Monthly Interest................................................S-34
Class A Principal.......................................................S-35
Class A Required Amount.................................................S-31
Class A Securities......................................................S-15
Class A Securityholders.................................................S-15
Class A Securityholders' Interest.......................................S-30
Class A Underwriters....................................................S-44
Class B Adjusted Invested Amount........................................S-29
Class B Charge-Off......................................................S-37
Class B Fixed/Floating Percentage.......................................S-29
Class B Floating Percentage.............................................S-28
Class B Initial Invested Amount.........................................S-29
Class B Interest Rate...................................................S-26
Class B Invested Amount.................................................S-29
Class B Monthly Interest................................................S-35
Class B Principal.......................................................S-36
Class B Principal Payment Commencement Date.............................S-36
Class B Required Amount.................................................S-31
Class B Securities......................................................S-15
Class B Securityholders.................................................S-15
Class B Securityholders' Interest.......................................S-30
Class B Underwriter.....................................................S-44
Closing Date............................................................S-25
Code....................................................................S-43
Controlled Accumulation Amount..........................................S-36
Controlled Deposit Amount...............................................S-21
Covered Amount .........................................................S-39
CTO Interest Rate.......................................................S-36
[Credit Enhancement] Invested Amount...................................S-36
[Credit Enhancement] Adjusted Invested Amount...........................S-36
[Credit Enhancement] Charge-Off.........................................S-37
[Credit Enhancement] Fixed/Floating Percentage..........................S-29
[Credit Enhancement] Floating Percentage................................S-28
[Credit Enhancement] Initial Invested Amount............................S-30
[Credit Enhancement] Invested Amount....................................S-29
[Credit Enhancement] Monthly Interest...................................S-35
[Credit Enhancement] Principal..........................................S-36
[Credit Enhancement] Securityholders' Interest..........................S-30
Defeasance..............................................................S-40
Determination Date......................................................S-37
Dilution................................................................S-37
Direct Merchants Initial Closing Date...................................S-17
Distribution Date.......................................................S-25
DOL.....................................................................S-43
DTC.....................................................................S-25
ERISA...................................................................S-43
Euroclear...............................................................S-25
Excess Finance Charge Collections.................................S-31, S-37
Expected Final Payment Date.............................................S-21
Fixed/Floating Percentage...............................................S-29
Floating Percentage.....................................................S-28
Independent Investors...................................................S-43
Initial Invested Amount.................................................S-30
Insolvency Event........................................................S-41
Interest Accrual Period.................................................S-26
Invested Amount.........................................................S-30
LIBOR...................................................................S-26
LIBOR Determination Date................................................S-26
Listing Agent...........................................................S-42
Metris Receivables......................................................S-15
Minimum Aggregate Principal Receivables.................................S-18
Minimum Transferor Interest.............................................S-17
Minimum Transferor Percentage...........................................S-18
Monthly Servicing Fee...................................................S-42
Negative Carry Amount...................................................S-30
Offered Securities......................................................S-24
Paired Series...........................................................S-39
Parties in Interest.....................................................S-43
Pay Out Event...........................................................S-40
Payment Date............................................................S-16
Periodic Finance Charges................................................S-16
Plan Asset Regulation...................................................S-43
Plans...................................................................S-43
PNC.....................................................................S-15
Pooling & Servicing Agreement...........................................S-15
Portfolio Yield.........................................................S-22
Principal Funding Account...............................................S-38
Principal Funding Account Balance.......................................S-21
Principal Funding Investment Proceeds...................................S-38
Rating Agency Condition.................................................S-38
Receivables.............................................................S-15
Record Date.............................................................S-25
Recoveries..............................................................S-17
Redirected Class B Principal Collections................................S-31
Redirected Principal Collections........................................S-31
Redirected [Credit Enhancement] Principal Collections...................S-31
Reference Banks.........................................................S-26
Removed Accounts........................................................S-18
Required Amount.........................................................S-30
Required Reserve Account Amount.........................................S-38
Reserve Account Funding Date............................................S-38
Revolving Period........................................................S-26
Securities..............................................................S-15
Securityholders.........................................................S-15
Securityholders Interest................................................S-30
Series 1999-_ Securities................................................S-15
Series 1999-__ Supplement...............................................S-15
Series Default Amount...................................................S-37
Servicing Fee Percentage................................................S-42
Shared Principal Collections............................................S-37
Stated [Credit Enhancement] Invested Amount.............................S-30
Telerate Page 3750......................................................S-26
Termination Date........................................................S-40
Transfer Date...........................................................S-32
Transferor..............................................................S-15
Transferor Finance Charge Collections...................................S-30
Transferor Interest.....................................................S-28
Transferor Percentage.............................................S-24, S-29
Transferor Retained Finance Charge Collections..........................S-34
Trigger Event...........................................................S-41
Trust Portfolio...................................................S-17, S-18
Trustee.................................................................S-15
Underwriters............................................................S-44
Underwriting Agreement..................................................S-44
US......................................................................S-25
ANNEX I
PREVIOUSLY ISSUED SERIES
The Trust has previously issued seven other Series that the
Transferor anticipates will be outstanding on the Closing Date. The table
below sets forth the principal characteristics of such Series: Series
1996-1, Series 1997-1, Series 1997-2, Series 1998-1, Series 1998-B, Series
1998-2 and Series 1998-3. For more specific information with respect to any
Series, any prospective investor should contact the Servicer at (612)
525-5094. The Servicer will provide, without charge, to any prospective
purchaser of the Securities, a copy of the disclosure documents for any
previous publicly issued Series.
<TABLE>
<CAPTION>
Series 1996-1
Class A Certificates
<S> <C>
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 C 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 C 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 + 1.05%
Commencement of Accumulation Period............. Last day of October 2001 Monthly Period or
later date as determined in the Agreement
Annual Servicing Fee Percentage................. Same as above for Class A Certificates
Enhancement..................................... Subordination of Class D Certificates and
Class C Reserve Account
Scheduled Series Termination Date............... Same as above for Class A Certificates
Class D Certificates
Invested Amount................................. $55,250,000
Interest Rate................................... None
Annual Servicing Fee Percentage................. Same as above for Class A Certificates
Scheduled Series Termination Date............... Same as above for Class A Certificates
Series 1998-1
Class A Securities
Invested Amount as of , 1999......... $
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............. August 20, 2001 (extendible)
Annual Servicing Fee Percentage................. 2.00%
Enhancement..................................... Subordination of Class B Securities,
Collateralized Trust
Obligations and Class D Securities
Scheduled Series Termination Date............... August 20, 2005 (extendible)
Series Issuance Date............................ July 30, 1998
Class B Securities
Initial Invested Amount......................... $56,376,000
Interest Rate................................... LIBOR + 0.45%
Annual Servicing Fee Percentage................. Same as above for Class A Securities
Enhancement..................................... Subordination of Collateralized Trust
Obligations and Class D Securities
Scheduled Series Termination Date............... Same as above for Class A Securities
Collateralized Trust Obligations
Initial Invested Amount......................... $96,645,000
Interest Rate................................... LIBOR + 0.85%
Annual Servicing Fee Percentage................. Same as above for Class A Securities
Enhancement..................................... Subordination of Class D Securities
Scheduled Series Termination Date............... Same as above for Class A Securities
Class D Securities
Invested Amount as of , 1999......... $
Expected Invested Amount as of Closing Date $
(after reduction of Class A Invested Amount).
Maximum Permitted Invested Amount............... $52,350,000
Interest Rate................................... None
Annual Servicing Fee Percentage................. Same as above for Class A Securities
Scheduled Series Termination Date............... Same as above for Class A Securities
Series 1998-B
Class A Securities
Invested Amount as of , 1999......... $
Expected Invested Amount as of Closing Date..... $
Maximum Permitted Invested Amount............... $103,500,000
Interest Rate................................... A1/P1 Commercial Paper/LIBOR + 0.85% Blended
Commencement of Amortization Period............. March 2000 (extendible)
Annual Servicing Fee Percentage................. 2.0%
Enhancement..................................... Subordination of Class B Securities
Scheduled Series Termination Date............... May 2004 (extendible)
Series Issuance Date............................ October 22, 1998
Class B Securities
Initial Invested Amount......................... $34,500,000
Interest Rate................................... None
Annual Servicing Fee Percentage................. Same as above for Class A Securities
Scheduled Series Termination Date............... Same as above for Class A Securities
Series 1998-2
Class A Securities
Initial Invested Amount......................... $500,000,000
Interest Rate................................... LIBOR + 0.55%
Commencement of Accumulation Period............. Last day of April 2000 Monthly Period or later
date as determined in the Agreement
Annual Servicing Fee Percentage................. 2.0%
Enhancement..................................... Subordination of Class B Securities and
Financial Guaranty Insurance Policy
Scheduled Series Termination Date............... October 2004
Series Issuance Date............................ December 4, 1998
Class B Securities
Initial Invested Amount......................... $49,450,550
Interest Rate................................... None
Annual Servicing Fee Percentage................. Same as above for Class A Securities
Scheduled Series Termination Date............... Same as above for Class A Securities
Series 1998-3
Class A Securities
Initial Invested Amount......................... $500,000,000
Interest Rate................................... LIBOR + 0.65%
Commencement of Accumulation Period............. Last day of January 2001 Monthly Period or
later date as determined in the Agreement
Annual Servicing Fee Percentage................. 2.0%
Enhancement..................................... Subordination of Class B Securities and
Financial Guaranty Insurance Policy
Scheduled Series Termination Date............... April 2006
Series Issuance Date............................ December 4, 1998
Class B Securities
Initial Invested Amount......................... $49,450,550
Interest Rate................................... None
Annual Servicing Fee Percentage................. Same as above for Class A Securities
Scheduled Series Termination Date............... Same as above for Class A Securities
</TABLE>
FLAG
The information in this prospectus is not complete and may be changed. We
cannot sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 9, 1999
A security is not a deposit and neither the securities nor the underlying
accounts or receivables are insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
The securities will represent interests in the trusts only and do not
represent interests in or recourse obligations of Metris Receivables, Inc.,
Metris Companies Inc., Direct Merchants Credit Card Bank, National
Association or any affiliate thereof.
This prospectus may be used to offer and sell any series of securities only
if accompanied by the prospectus supplement for that series.
Prospectus
METRIS MASTER TRUST
Issuer
Metris Receivables, Inc.
Transferor
Direct Merchants Credit Card Bank, National Association
Servicer
Asset Backed Securities
--------------------------------------------------------------
The trust -
o may periodically issue asset backed securities in one or more
series with one or more classes; and
o will own -
o receivables in a portfolio of consumer revolving credit card
accounts;
o payments due on those receivables; and
o other property described in this prospectus and in the
prospectus supplement.
The securities -
o will represent interests in the trust and will be paid only from
the assets of the trust;
o offered by this prospectus will be rated in one of the four
highest rating categories by at least one nationally recognized
rating organization;
o may have one or more forms of enhancement; and
o will be issued as part of a designated series which may include
one or more classes of securities and enhancement.
The securityholders -
o will receive interest and principal payments from a varying
percentage of credit card collections.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of the disclosures in this prospectus and the attached
prospectus supplement. Any representation to the contrary is a criminal
offense.
The date of this Prospectus is April 9, 1999
Table of Contents
Overview Of The Information In This
Prospectus And The Prospectus Supplement........................ii
The Trust................................................................2
Direct Merchants Bank's Credit Card Activities...........................2
General .......................................................2
New Account Underwriting........................................3
Acquisition of Credit Card Accounts.............................4
Billing and Payments............................................4
Collection of Delinquent Accounts...............................5
Description of FDR..............................................6
Recoveries .....................................................6
Year 2000 Compliance............................................6
The Receivables..........................................................8
Maturity Considerations..................................................8
Use of Proceeds..........................................................9
Metris Companies Inc....................................................10
Certain Litigation.............................................10
The Transferor..........................................................11
Direct Merchants Credit Card Bank, National
Association....................................................11
Fingerhut Corporation...................................................11
Description of the Securities...........................................13
General ......................................................13
Book-Entry Registration........................................14
Definitive Securities..........................................17
Interest ......................................................18
Principal......................................................18
Revolving Period...............................................19
Controlled Amortization Period.................................19
Principal Amortization Period..................................19
Accumulation Period............................................19
Early Amortization Period......................................20
Discount Option................................................20
Transfer and Assignment of Receivables.........................21
Exchanges......................................................21
Representations and Warranties.................................23
Certain Covenants..............................................25
Eligible Accounts..............................................25
Eligible Receivables...........................................25
Addition of Trust Assets.......................................26
Collection and Other Servicing
Procedures............................................28
Trust Accounts.................................................28
Deposits in Collection Account.................................29
Investor Percentage and Transferor
Percentage............................................30
Application of Collections.....................................30
Shared Principal Collections...................................30
Shared Excess Finance Charge
Collections...........................................31
Excess Funding Account.........................................31
Paired Series..................................................31
Funding Period.................................................32
Defaulted Receivables; Dilution................................32
Investor Charge-Offs...........................................33
Defeasance.....................................................33
Final Payment of Principal;
Termination...........................................34
Pay Out Events.................................................34
Servicing Compensation and Payment
of Expenses...........................................35
Certain Matters Regarding the
Transferor and the Servicer...........................35
Servicer Default...............................................37
Reports to Securityholders.....................................38
Evidence as to Compliance......................................38
Amendments.....................................................39
List of Securityholders........................................39
The Trustee....................................................40
Enhancement.............................................................40
General ......................................................40
Subordination..................................................41
Letter of Credit...............................................41
Cash Collateral Guaranty or Account............................41
Collateral Interest ...........................................41
Surety Bond or Insurance Policy ...............................42
Spread Account ................................................42
Reserve Account................................................42
Description of the Purchase Agreements..................................42
Purchases of Receivables.......................................42
Representations and Warranties.................................43
Certain Covenants..............................................44
Purchase Termination Date......................................45
Security Ratings........................................................46
Certain Legal Aspects of the Receivables................................46
Transfer of Receivables........................................46
Certain Matters Relating to
Receivership..........................................47
Consumer Protection Laws.......................................48
Claims and Defenses of Obligors
Against the Trust.....................................49
Tax Matters.............................................................50
General ......................................................50
Treatment of the Securities as Debt............................50
Taxation of Interest Income of U.S.
Securityholders.......................................51
Sale, Exchange or Retirement of
Securities............................................52
Possible Alternative Characterizations.........................53
Non-U.S. Securityholders.......................................53
Information Reporting and Backup
Withholding...........................................54
FASIT Legislation..............................................54
New Withholding Regulations....................................54
State and Local Taxation.......................................54
Employee Benefit Plan Considerations....................................55
Plan of Distribution....................................................56
Legal Matters...........................................................57
Reports to Securityholders..............................................57
Other Information.......................................................57
Cautionary Notice Regarding Forward-
looking Statements.............................................58
Where Can You Find More Information.....................................59
Index of Terms for the Prospectus.......................................60
ANNEX I .............................................................A-1-1
Overview Of The Information In This Prospectus
And The Prospectus Supplement
We provide information to you about the securities in two separate
documents that progressively provide more detail: (a) this prospectus,
which provides general information, some of which may not apply to a
particular series of securities, including your series, and (b) the
prospectus supplement, which will describe the specific terms of your
series of securities, including:
o the timing and amount of interest and principal payments;
o information about the receivables;
o information about credit enhancement for each offered class;
o credit ratings; and
o the method for selling the securities.
You should rely only on the information provided in this
prospectus and the prospectus supplement, including the
information incorporated by reference. We have not authorized
anyone to provide you with different information.
We include cross-references in this prospectus to captions in
these materials where you can find further related discussions.
The preceding table of contents provides the pages on which these
captions are located.
You can find a listing of the pages where capitalized terms are
defined under the caption "Index of Terms for the Prospectus"
beginning on page 59 in this prospectus.
The Trust
Metris Master Trust (the "Trust") was formed pursuant to a pooling
and servicing agreement in accordance with the laws of the State of
Delaware (the "Pooling and Servicing Agreement") among Metris Receivables,
Inc. as transferor (the "Transferor"), Direct Merchants Credit Card Bank,
National Association (the "Bank"), as servicer (the "Servicer"), and The
Bank of New York (Delaware), as trustee (the "Trustee"), relating to the
Asset Backed Securities (collectively, the "Securities") of one or more
series (each, a "Series") representing interests in the Trust in amounts,
at prices and on terms to be determined at the time of sale and to be set
forth in a supplement to this Prospectus (a "Prospectus Supplement"). The
Trust has not and will not engage in any business activity other than
acquiring and holding Receivables, issuing Series of Securities and the
related security that evidences the Transferor Interest (the "Exchangeable
Transferor Security"), making payments thereon and engaging in related
activities (including, with respect to any Series, obtaining any
Enhancement and entering into an Enhancement agreement relating thereto).
As a consequence, the Trust is not expected to have any need for additional
capital resources other than the assets of 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)* accounts and may arise under other revolving
credit consumer credit card accounts (the "Accounts") and the proceeds
thereof arising under the Accounts from time to time. Collections on the
Receivables are deposited into the Collection Account maintained in the
name of the Trust and allocated on each business day between Collections of
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, (a) Finance Charge Collections and certain other amounts are
applied on each business day to fund interest on the securities of any
Series then outstanding, to pay certain fees and expenses, to cover series
default amounts, to reimburse investor charge-offs and to make required
payments to the Transferor, and (b) 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 may be paid to the holder of the
Exchangeable Transferor Security or paid to the securityholders of any
other Series then outstanding. See "Description of the
Securities--Application of Collections" in this Prospectus and "Description
of the Securities--Application of Collections--Payment of Fees, Interest
and Other Items" in the related Prospectus Supplement.
Direct Merchants Bank's Credit Card Activities
General
The portfolio of credit card accounts serviced by Direct Merchants
Bank (the "Direct Merchants Bank Portfolio") consists of co-branded and
other MasterCard(R) credit card and VISA(R) credit card accounts. The
Receivables which the Bank will convey to the Trust have been and will be
generated from transactions made by holders of co-branded and other
MasterCard(R) and VISA(R) credit card accounts and, subject to certain
conditions, 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. The Bank services these accounts at its facilities in Tulsa,
Oklahoma, Baltimore, Maryland and Scottsdale, Arizona. Certain data
processing, administrative and other functions associated with the
servicing of the Receivables are performed on behalf of Direct Merchants
Bank through First Data Resources, Inc. ("FDR"). See "--Description of
FDR." In addition, the collection and management of delinquent accounts are
performed by Metris Direct.
- ----------------
* MasterCard(R) and VISA(R) are federally registered servicemarks
of MasterCard International Inc. and VISA USA Incorporated,
respectively.
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).
Prospects for solicitation include both existing customers of
Fingerhut Corporation ("Fingerhut") and individuals who are not Fingerhut
Customers for whom credit bureau information is available. 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 the 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.
Direct Merchants Bank is a member of MasterCard International Inc.
("MasterCard International") and of VISA USA., Inc. ("VISA"). MasterCard
International and VISA license their respective marks permitting financial
institutions to issue credit cards to their customers. In addition,
MasterCard International and VISA provide clearing services facilitating
exchange of payments among member institutions and networks linking
members' credit authorization systems.
MasterCard and VISA credit cards are issued as part of the
worldwide MasterCard International and VISA systems, and the transactions
creating the receivables through the use of the credit cards are processed
through the MasterCard International and VISA authorization and settlement
systems.
The MasterCard and VISA 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
merchandise or services. A cash advance is made when a credit card is used
to obtain cash from a financial institution, from 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 requests a Fingerhut Score for prospective
customers in the Fingerhut Database. Direct Merchants Bank also requests
credit bureau information for all existing customers of Fingerhut,
including risk scores provided by Fair, Isaacs & Company, a third party
provider of risk scorecards ("FICO scores"). For those existing customers
of Fingerhut who have FICO scores, Direct Merchants Bank uses the Fingerhut
Score to further segment such 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.
The Bank has developed a proprietary modeling system for
individuals for whom credit bureau information is available (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 such individuals into narrower ranges within each FICO score
subsegment, allowing the Bank to better evaluate individual credit risk and
to tailor its risk-based pricing accordingly. The Bank also uses this
segmentation to exclude certain individuals from its marketing
solicitations.
Direct Merchants Bank solicits individuals who are not Fingerhut
Customers 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 individuals who fall within this range.
The files are incorporated into the Proprietary Modeling System, which
further segments such individuals 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 any individuals who are
not Fingerhut Customers and who do not have FICO scores.
The 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 prospective customer's risk profile prior to
solicitation. Each prospective customer is evaluated to determine credit
needs, credit risk, and existing credit availability. A customized offer is
developed to include 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 credit performance is actively monitored and their risk scores
are periodically recalculated. Over time, the lending relationship can
evolve to include more competitive (or more restrictive) pricing and
product configurations.
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).
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.
Acquisition of Credit Card Accounts
Direct Merchants Bank has made portfolio acquisitions in the past
and such acquisitions are possible in the future. Prior to acquiring a
portfolio, Direct Merchants Bank reviews the historical performance and
seasoning of the portfolio and the policies and practices of the selling
institution, but individual accounts are not requalified by Direct
Merchants Bank. There can be no assurance that credit card accounts so
acquired were originated in a manner consistent with Direct Merchants
Bank's policies as described above under "--New Account Underwriting" or
that the underwriting and qualification of such credit card accounts
conformed to any given standards. The Accounts include credit card accounts
previously acquired by Direct Merchants Bank. Such accounts and any
accounts acquired in the future may become Additional Accounts provided
that, at such time, they constitute Eligible Accounts. See "Description of
the Securities--Addition of Trust Assets."
Billing and Payments
The Accounts have various billing and payment structures,
including varying minimum payment levels and fees. Monthly billing
statements are sent by the Bank to cardholders. The following information
reflects the current billing and payment characteristics of the Accounts.
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 randomly 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 greater of a minimum dollar amount,
or a minimum percentage of the outstanding balance, the finance charge or
the balance of the account if the balance is less than such minimum dollar
amount. If the minimum payment is not collected within 25 days after the
Payment Date, the account is considered delinquent. The Bank generally
determines the minimum monthly payment with respect to the accounts by
multiplying the combined new balance of purchases and cash advances, less
any disputed amounts, by such minimum percentage of the outstanding
balance. If the amount so calculated is less than the minimum dollar
amount, it is increased to such minimum dollar amount. The sum of such
amount and any past due amounts equals the minimum payment amount.
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 ("Periodic Finance Charges"). For most cardholders,
if the entire balance on the account is paid by the due date, no finance
charge is imposed. These finance charges are based upon the average daily
balance outstanding on the account during the monthly billing cycle. 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. 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. These cash advance finance charges are applied to
the average daily balance.
Direct Merchants Bank generally assesses an annual fee on its
accounts. Direct Merchants Bank may waive or lessen the annual membership
fees, in connection with the solicitation of new accounts. 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 the required minimum monthly payment is not received by the Payment
Date, (ii) a fee for cash advances equal to the greater of a percentage of
each cash advance or a minimum dollar amount, (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 for principal and
finance charges, in respect of purchases and cash advances exceeds the
cardholder's credit line by at least a minimum dollar amount.
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.
Most merchant transactions by cardholders are authorized online by
FDR. The remaining transactions generally are low dollar amounts, typically
below $50.00.
Collection of Delinquent Accounts
Direct Merchants Bank considers an account delinquent if the
minimum 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 675 collection
personnel, and the Baltimore facility employs approximately 830 collection
personnel. 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.
Direct Merchants Bank uses FDR's fraud protection system to
improve the rate of early detection of fraudulent activity on a cardholder
account. The system also provides work flow management that is used to
investigate potentially fraudulent transactions and to take prompt
immediate action to reduce further losses. A fraud score is established
based on the details of the authorization request and the previous behavior
pattern of the cardholder. This score is used in the determination of
actions to be taken for potentially fraudulent transactions.
Direct Merchants Bank reserves the right to cancel charge
privileges at any time, usually as a result of violating the contractual
terms (delinquency, overlimit, etc.) of the credit account. Activity on
lost, stolen, or fraudulent accounts is blocked immediately upon
notification by the cardholder or upon determination by FDR that a card is
lost or stolen or being used fraudulently.
Description of FDR
FDR provides data processing, credit card reissuance,
statementing, inbound customer service telephone calls and interbank
settlement for Direct Merchants Bank. 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.
Recoveries
Pursuant to the terms of the Pooling and Servicing Agreement, the
Servicer will be required to transfer all amounts received by the Servicer
with respect to Receivables in Accounts that previously became Defaulted
Accounts to the Trust ("Recoveries"). 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.
Year 2000 Compliance
As the year 2000 approaches, an important business issue has
emerged regarding how existing application software programs and operating
systems can accommodate the date value "2000." Many existing application
software products were designed to only accommodate a two digit date
position which represents the year (e.g., the number "95" is stored on the
system and represents the year 1995). As a result, the year 1999 (i.e.,
"99") is the maximum date value many systems will be able to accurately
process. Metris has developed plans to address potential problems posed by
this development to assure that Metris is prepared for year 2000. Most of
Metris' existing information systems are less than three years old and were
originally designed for year 2000 compliance, but as a cautionary measure
Metris has begun testing such internal systems for year 2000 compliance. In
addition, Metris has created a project team to identify, address, and
monitor internal systems and vendor issues related to year 2000, consistent
with recommendations and guidelines set forth by the Office of the
Comptroller of the Currency (the "Comptroller") and the Federal Financial
Institutions Examination Council. Metris has identified financial and
operational systems that may be impacted by the year 2000 issues and is
actively working to address those issues. However, if plans to deal with
year 2000 issues are not completed on a timely basis or are not fully
effective, such issues may have a material adverse effect on Metris'
operations.
In addition, Metris is dependent on databases maintained by FCI
and card and statement generation, among other services, provided by FDR.
The project team has been working with its material vendors, including FCI
and FDR, to determine the status of each vendor's plans for becoming year
2000 compliant. The project team is striving to obtain test results showing
year 2000 compliance by material vendors in the first quarter of 1999 and
has developed high level contingency plans to address non-compliance by its
material vendors, which may include replacing such vendors. Although Metris
cannot ensure compliance by all of its vendors on a timely basis, Metris
believes that it is taking appropriate steps to identify exposure to year
2000 problems and to address them on a timely basis.
The 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 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 (the "Obligors") 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 certain Amended and
Restated Bank Receivables Purchase Agreement dated as of July 30, 1998
between Direct Merchants Bank and Metris, as such document may be amended
from time to time in accordance with its terms, and, if the context
requires, the prior versions thereof, including the Amended and Restated
Bank Receivables Purchase Agreement dated as of May 26, 1995 (the "Bank
Purchase Agreement," and together with the Purchase Agreement, the
"Purchase Agreements"), 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.
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, any provider of
Enhancement, 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
Securities--Investor Percentage and Transferor Percentage" in this
Prospectus and "Description of the Securities--Allocation Percentages" in
the related Prospectus Supplement.
Maturity Considerations
Unless otherwise specified in the related Prospectus Supplement,
for each Series, following the Revolving Period, Collections of Principal
Receivables are expected to be distributed to the Securityholders of such
Series or any specified Class thereof on each specified Distribution Date
during the Controlled Amortization Period or the Principal Amortization
Period, or are expected to be accumulated for payment to Securityholders of
such Series or any specified Class thereof during the Accumulation Period
and distributed on the date specified in the related Prospectus Supplement
(the "Expected Final Payment Date"); provided, however, that, if the Early
Amortization Period commences, collections of Principal Receivables will be
paid to Securityholders in the manner described herein and in the related
Prospectus Supplement. The related Prospectus Supplement will specify the
date on which the Controlled Amortization Period, the Principal
Amortization Period or the Accumulation Period, as applicable, will
commence, the principal payments expected or available to be received or
accumulated during such Controlled Amortization Period, Principal
Amortization Period or Accumulation Period, or on the Expected Final
Payment Date, as applicable, the manner and priority of principal
accumulations and payments among the Classes of a Series of Securities and
the Pay Out Events which, if any were to occur, would lead to the
commencement of an Early Amortization Period or, if so specified in the
related Prospectus Supplement, an Accumulation Period.
The related Prospectus Supplement will provide certain historical
data relating to payments by cardholders, total charge-offs and other
related information relating to the Direct Merchants Bank Portfolio. There
can be no assurance that future events will be consistent with such
historical data.
The amount of Collections of Receivables may vary from month to
month due to seasonal variations, general economic conditions and payment
habits of individual cardholders. There can be no assurance that
Collections of Principal Receivables with respect to the Trust Portfolio,
and thus the rate at which the related Securityholders could expect to
receive or accumulate payments of principal on their Securities during an
Amortization Period, or on any Expected Final Payment Date, as applicable,
will be similar to any historical experience set forth in a related
Prospectus Supplement. If a Pay Out Event occurs, the average life and
maturity of such Series of Securities could be significantly reduced.
Because, for any Series of Securities, there may be a slowdown in
the payment rate below the payment rate used to determine the amount of
Collections of Principal Receivables scheduled or available to be
distributed or accumulated for later payment to Securityholders or a
specified Class thereof during the Controlled Amortization Period, the
Principal Amortization Period or the Accumulation Period or on the Expected
Final Payment Date, as applicable, or a Pay Out Event may occur which would
initiate the Early Amortization Period or, if so specified in the related
Prospectus Supplement, the Accumulation Period, there can be no assurance
that the actual number of months elapsed from the date of issuance of such
Series of Securities to the final Distribution Date with respect to the
Securities will equal the expected number of months, that yield to maturity
will be as anticipated or that Securityholders will be able to reinvest
funds in an instrument with a comparable interest rate in the event the
Securities are paid sooner than anticipated.
"Amortization Period" shall mean, with respect to any Series, the
period following the Revolving Period for such Series, which shall be the
Accumulation Period, the Early Amortization Period, or other amortization
or accumulation period, in each case as defined with respect to such Series
in the related Supplement.
Use of Proceeds
Unless otherwise specified in the related Prospectus Supplement,
the net proceeds from the sale of each Series of Securities offered hereby
will be paid to the Transferor. The Transferor will use such proceeds for
its general corporate purposes.
Metris Companies Inc.
Metris Companies Inc. ("Metris") is an information-based direct
marketer of consumer credit products and fee-based services primarily to
moderate income consumers. Metris' consumer credit products are primarily
unsecured credit cards issued by its subsidiary, Direct Merchants Credit
Card Bank, National Association ("Direct Merchants Bank" or the "Bank").
Metris' customers and prospects include existing customers of a prior
affiliate, Fingerhut ("Fingerhut Customers"), and individuals who are not
Fingerhut Customers but for whom credit bureau information is available
("External Prospects"). Metris markets its fee-based services, including
debt waiver programs, membership programs and third party insurance, to its
credit card customers, and customers of third parties.
Metris is a Delaware corporation incorporated on August 20, 1996.
Metris became a publicly held company in October 1996 after completing an
initial public offering. Until September 25, 1998, Metris was an indirect
subsidiary of Fingerhut Companies, Inc. ("FCI"). Prior to the initial
public offering, Metris' business was operated as a division of FCI. On
September 25, 1998, FCI distributed its shares in Metris to FCI's
shareholders in a tax free spin off (the "Spin Off"). Metris' principal
subsidiaries are Direct Merchants Bank, Metris Direct, Inc. ("Metris
Direct"), Metris Funding Co., Metris Receivables, Inc. and Metris Direct
Services, Inc.
On November 13, 1998, Metris entered into agreements with
affiliates of the Thomas H. Lee Company (the "Lee Company") to invest $300
million in Metris. The terms of the transaction provided that the Lee
Company investment would convert into 0.8 million shares of Series C
Perpetual Convertible Preferred Stock (the "Series C Preferred") upon
shareholder approval and receipt of notice that there was no regulatory
objection to the transaction. Metris determined that this conversion might
result in a "Change of Control" as defined in certain agreements between
Metris and Fingerhut, which would permit Fingerhut to terminate any or all
of the agreements. Therefore, on December 8, 1998, Metris obtained an
agreement (the "Waiver Agreement") from Fingerhut to waive its right to
terminate the agreements if a Change of Control occurred as a result of the
conversion.
Pursuant to the Waiver Agreement, Metris and Fingerhut amended
certain of their other agreements. The most significant change occurred in
the database access agreement. Metris' exclusive license to use Fingerhut's
customer database to market financial service products will become
non-exclusive after October 31, 2001.
On March 12, 1999, Metris shareholders approved the conversion of
the Lee Company investment into the Series C Preferred. If Metris receives
notice that there is no regulatory objection to the transaction, the
conversion will occur and the Lee Company will own approximately 30% of
Metris on a diluted basis.
Certain Litigation
Metris has developed and implemented compliance functions to
monitor its operations to ensure that it complies with all applicable laws.
However, Metris is a party to various legal proceedings resulting from
ordinary business activities relating to the operations of Metris.
Metris is a party to various legal proceedings resulting from the
ordinary business activities relating to its operations. An action in
Alabama seeks damages in an amount that cannot be ascertained and purports
to be a class action, although no class has been certified. The Alabama
case generally alleges a fraudulent sale of credit protection insurance
without consent. Although the Metris subsidiary that is a party to the
Alabama case believes it has substantive legal defenses to this claim and
is prepared to defend this case vigorously, should the subsidiary's case
settle or otherwise be resolved, Metris believes that the amount, in the
aggregate, will not be material to the operations of Metris. Due to the
uncertainties in litigation and other factors, there is no assurance that
Metris will ultimately prevail. Metris believes that it has meritorious
defenses to this action and any adverse decision should not materially
affect the consolidated financial condition of Metris and its affiliates.
The Transferor
Metris Receivables, Inc., formerly known as Fingerhut Financial
Services Receivables, Inc. (the "Transferor"), was incorporated under the
laws of the State of Delaware on May 23, 1995. All of its outstanding
capital stock is owned by Metris Direct. The Transferor was organized for
the limited purpose of purchasing, holding, owning and selling receivables
and any activities incidental to and necessary or convenient for the
accomplishment of such purposes, and has no material assets other than such
receivables. Neither Metris Direct, as stockholder of the Transferor, nor
the Transferor's board of directors, intends to change its business
purpose. The Transferor's executive offices are located at 600 South
Highway 169, Suite 300, St. Louis Park, Minnesota 55426. The Transferor's
telephone number is (612) 525-5020.
Direct Merchants Credit Card Bank, National Association
Direct Merchants Bank, a wholly owned subsidiary of Metris, is a
special-purpose credit card bank, established under Section 2(c)(2)(F) of
the Bank Holding Company Act of 1956, as amended by the Competitive
Equality Banking Act of 1987, as amended. Direct Merchants Credit Card
Bank, National Association, located in Salt Lake City, Utah (the "Utah
Bank") was chartered as a national banking association on February 14,
1995. On July 13, 1998, the Utah Bank was merged into Interim National
Bank, a national banking association located in Phoenix, Arizona, and an
indirect subsidiary of Metris. The name of the surviving entity was changed
to Direct Merchants Credit Card Bank, National Association. Its principal
executive offices are located in Phoenix, Arizona, with a mailing address
at 6909 East Greenway Parkway, Scottsdale, Arizona 85254, telephone number
(602) 718-4600. Any references to Direct Merchants Credit Card Bank,
National Association, prior to July 13, 1998 are references to the Utah
Bank.
Fingerhut Corporation
Fingerhut, 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
1998 net sales of approximately $[ ] 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").
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 during the term of one of these agreements, Fingerhut or FCI,
as the case may be, has the right to terminate these agreements. As
described above (see "Metris Companies Inc."), in December 1998, Metris and
Fingerhut amended certain of their agreements. Pursuant to an amendment to
the database access agreement, Metris' exclusive license to use Fingerhut's
customer database to market financial service products will become
non-exclusive after October 31, 2001. [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.]
The Fingerhut Database. The Fingerhut Database contains
information on more than [31] million individuals. 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.
On February 11, 1999, FCI announced that it had agreed to be
acquired by Federated Department Stores, Inc. This transaction was
completed on March 18, 1999, and the separate corporate existence of FCI
ceased. Although Metris' agreements with FCI and Fingerhut will not be
terminated by this transaction, Metris cannot predict how this change in
status for FCI may impact the relationship of Metris with FCI and
Fingerhut. In addition, on March 12, 1999, Metris' shareholders approved an
amendment to Metris' Amended and Restated Certificate of Incorporation to
eliminate the detailed restrictions concerning the business activities in
which Metris is permitted to engage. These restrictions were originally
adopted to address certain potential conflicts of interest between FCI and
Metris.
Description of the Securities
The Securities will be issued in Series. Each Series will
represent an interest in the Trust other than the interests represented by
any other Series of Securities issued by the Trust (which may include
Series offered pursuant to this Prospectus) and the Exchangeable Transferor
Security. Each Series will be issued pursuant to the Pooling and Servicing
Agreement among the Transferor, Direct Merchants Bank, as Servicer and the
Trustee, and a supplement (each, a "Supplement") to the Pooling and
Servicing Agreement. The Prospectus Supplement for each Series will
describe any provisions of the Pooling and Servicing Agreement relating to
such Series which may differ materially from the Pooling and Servicing
Agreement filed as an exhibit to the Registration Statement. The following
summaries describe certain provisions common to each Series of Securities
or which may be applicable to any Series of Securities. The summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Pooling and
Servicing Agreement and relevant Supplement.
General
The assets of the Trust will be allocated among the
Securityholders of each Series (the "Investor Interest") and the holder of
the Exchangeable Transferor Security and, in certain circumstances, the
related Enhancement providers. The aggregate principal amount of the
interest of the Securityholders of a Series in the Trust is referred to
herein as the "Invested Amount" and is based on the aggregate amount of the
Principal Receivables in the Trust allocated to such Series. The aggregate
principal amount of the interest of the Transferor in the Trust is referred
to herein as the "Transferor Interest," and is based on the aggregate
amount of Principal Receivables (the "Transferor Amount") in the Trust not
allocated to the Securityholders or any Enhancement provider. The
certificate that evidences the Transferor Interest is referred to herein as
the "Exchangeable Transferor Security."
The 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.
The Transferor currently owns the Exchangeable Transferor
Security. The Exchangeable Transferor Security represents 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." Unless otherwise specified in the related Prospectus Supplement,
during the Revolving Period, following the Funding Period, if any, 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 or charged-off. 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. When a Series is
amortizing, the Invested Amount will decline as Obligor payments of
Principal Receivables are collected and distributed to the related
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 an Amortization Period
for any Series to reflect the reductions in 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 also
reduced as the result of an Exchange. See "--Exchanges."
Each Series of Securities may consist of one or more classes
(each, a "Class"), one or more of which may be senior Securities and one or
more of which may be subordinated Securities. Each Class of a Series will
evidence the right to receive a specified portion of each distribution of
principal or interest or both. The Invested Amount with respect to a Series
with more than one Class will be allocated among the Classes as described
in the related Prospectus Supplement. The Securities of a Class may differ
from Securities of other Classes of the same Series in, among other things,
the amounts allocated to principal payments, maturity date, Security Rate
and the availability of Enhancement. If so specified in the Prospectus
Supplement relating to a Series, a Series of Securities ("Variable Funding
Securities") may be issued pursuant to the Pooling and Servicing Agreement
and a related supplement ("Variable Funding Supplement"), in one or more
classes.
For each Series of Securities, payments of interest and principal
will be made on Distribution Dates specified in the related Prospectus
Supplement to Securityholders in whose names the Securities were registered
on the record dates (each, a "Record Date") specified in the related
Prospectus Supplement. Interest will be distributed to Securityholders in
the amounts, for the periods and on the dates specified in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
Securities of each Series 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. Unless otherwise specified in the related Prospectus
Supplement, with respect to each Series of Securities, beneficial interests
in the 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 Securities. Unless and until Definitive Securities
are issued under the limited circumstances described herein, no owner of a
beneficial interest in the Securities (a "Security Owner") acquiring an
interest in the 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 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 will refer to
distributions, notices, reports and statements to the Depository or its
nominee, as the registered holder of the Securities, for distribution to
Security Owners in accordance with the Depository's procedures. See
"--Book-Entry Registration" and "--Definitive Securities."
If so specified in the Prospectus Supplement relating to a Series,
application will be made to list the Series of Securities of such Series,
or all or a portion of any Class thereof, on the Luxembourg Stock Exchange
or any other specified
exchange.
Book-Entry Registration
Unless otherwise specified in the related Prospectus Supplement,
with respect to each Series of Securities in book-entry form,
Securityholders may hold their Securities through DTC (in the United
States) or Cedelbank 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.
Cedelbank and Euroclear will hold omnibus positions on behalf of the
Cedelbank Customers and the Euroclear Participants, respectively, through
customers' securities accounts in Cedelbank'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 Securities Exchange Act of 1934, as amended (the "Exchange
Act"). DTC holds securities for its participants ("DTC Participants") and
facilitates the clearance and settlement among DTC Participants of
securities transactions, such as transfers and pledges, in deposited
securities through electronic book-entry changes in DTC Participants'
accounts, thereby eliminating the need for physical movement of securities.
DTC 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 DTC Participant, either directly
or indirectly ("Indirect Participants"). The rules applicable to DTC and
its Participants are on file with the Securities and Exchange Commission
(the "SEC").
DTC management is aware that some computer applications and
systems used for processing data were written using two digits rather than
four to define the applicable year, and therefore may not recognize a date
using "00" as the year 2000. This could result in the inability of these
systems to properly process transactions with dates in the year 2000 and
thereafter. DTC has developed and is implementing a program to address this
problem so that its applications and systems relating to the payment of
distributions (including principal and interest payments) to
securityholders, book-entry deliveries and settlement of trades within DTC
continue to function properly. This program includes a technical assessment
and a remediation plan, each of which is complete. DTC plans to implement a
testing phase of this program which is expected to be completed within
appropriate time frames.
In addition, DTC is contacting (and will continue to contact)
third party vendors that provide services to DTC to determine the extent of
their year 2000 compliance, and DTC will develop contingency plans as it
deems appropriate to address failures in year 2000 compliance on the part
of third party vendors. However, there can be no assurance that the systems
of third party vendors will be timely converted and will not adversely
affect the proper functioning of DTC's services.
The information set forth in the preceding two paragraphs has been
provided by DTC for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
The Transferor makes no representations as to the accuracy or completeness
of such information.
Transfers between DTC Participants will occur in accordance with
DTC rules. Transfers between Cedelbank Customers 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 Cedelbank Customers 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. Cedelbank
Customers and Euroclear Participants may not deliver instructions directly
to the Depositaries.
Because of time-zone differences, credits of securities received
in Cedelbank 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 Cedelbank Customers or
Euroclear Participant on such business day. Cash received in Cedelbank or
Euroclear as a result of sales of securities by or through a Cedelbank
Customers 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
Cedelbank 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 DTC 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 DTC 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 DTC
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 DTC
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 DTC 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 DTC Participants shall be the responsibility of DTC, and
disbursement of such payments to the Security Owners shall be the
responsibility of DTC 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.
Cedelbank, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg
("Cedelbank"), was incorporated in 1970 as a limited company under
Luxembourg law (a societe anonyme). Cedelbank is owned by a parent
corporation, Cedelbank International, societe anonyme, the shareholders of
which are banks, securities dealers and financial institutions. Cedelbank
International currently has about 100 shareholders, including U.S.
financial institutions or their subsidiaries. No single entity may own more
then twenty percent of Cedelbank International's stock. Cedelbank is
registered as a bank in Luxembourg, and as such is subject to regulation by
the Luxembourg Commission for the Supervision of the Financial Sector,
which supervises Luxembourg banks.
Cedelbank holds securities for its customers and facilitates the
clearance and settlement of securities transactions by electronic
book-entry transfers between their accounts. Cedelbank provides various
services, including safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Cedelbank also deals with domestic securities market in over 30 countries
through established depository and custodial relationships. Cedelbank has
established an electronic bridge with Morgan Guaranty Trust as the Operator
of the Euroclear System ("MGT/EOC") in Brussels to facilitate settlement of
trades between Cedelbank and MGT/EOC. Cedelbank currently accepts over
110,000 securities issues on its books.
Cedelbank's customers ("Cedelbank Customers") are world-wide
financial institutions including underwriters, securities brokers and
dealers, banks, trust companies and clearing corporations, Cedelbank's U.S.
customers are limited to securities brokers and dealers, and banks.
Currently, Cedelbank has approximately 2,000 customers located in over 80
countries, including all major European countries, Canada, and the United
States. Indirect access to Cedelbank is available to other institutions
that clear through or maintain a custodial relationship with an account
holder of Cedelbank.
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 Cedelbank or
Euroclear will be credited to the cash accounts of Cedelbank Customers 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. Cedelbank 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
Cedelbank Customer 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, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among
participants of DTC, Cedelbank 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
Unless specified in the related Prospectus Supplement, the
Securities for each Series will not be issued in fully registered,
certificated form to the Security Owners or their nominees ("Definitive
Securities"), rather than to the Depository or its nominee, unless (i) the
Transferor advises the Trustee for each Series in writing that the
Depository is no longer willing or able to discharge properly its
responsibilities as Depository with respect to the 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 (or such other percentage specified in the related
Prospectus Supplement) of the 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 Securities and instructions for registration, the Trustee
will issue the 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 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
("Securityholders"). 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 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.
Interest
For each Series of Securities and Class thereof, interest will
accrue from the relevant Closing Date on the applicable principal balance
of the Securities (or other amount specified in the related Prospectus
Supplement), at the applicable rate, which may be a fixed, floating or
variable rate as specified in the related Prospectus Supplement (the
"Security Rate"). Interest will be distributed to Securityholders on the
dates (Which may be monthly, quarterly, semiannually or otherwise as
specified in the related Prospectus Supplement) (each, a "Distribution
Date"). Interest payments on any Distribution Date will generally be funded
from collections of Finance Charge Receivables allocated to the
Securityholders' Interest during the preceding fiscal month of the
Transferor (each, a "Monthly Period") and may be funded from certain
investment earnings on funds held in accounts of the Trust, from any
applicable Enhancement, if necessary, or certain other amounts as specified
in the related Prospectus Supplement. If the Distribution Dates for payment
of interest for a Series or Class occur less frequently than monthly, such
collections or other amounts (or the portion thereof allocable to the
Securityholders' Interest of such Class) may be deposited in one or more
trust accounts (each, an "Interest Funding Account") pending distribution
to the Securityholders of such Series or Class, as described in the related
Prospectus Supplement. If a Series has more than one Class of Securities,
each such Class may have a separate Interest Funding Account. The
Prospectus Supplement relating to each Series of Securities and each Class
thereof will describe the amounts and sources of interest payments to be
made, the Security Rate, and, for a Series or Class thereof bearing
interest at a floating or a variable Security Rate, the initial Security
Rate, the dates and the manner for determining subsequent Security Rates,
and the formula, index or other method by which such Security Rates are
determined.
Principal
Except to the extent specified in the related Prospectus
Supplement, during the Revolving Period (which begins on the Closing Date
relating to such Series and ends on the day before an Amortization Period
begins) for each Series of Securities offered hereby, no principal payments
will be made to the Securityholders of such Series. During the Controlled
Amortization Period, Principal Amortization Period or Accumulation Period,
as applicable, which will be scheduled to begin on the date specified or
determined as described in the related Prospectus Supplement, and during
the Early Amortization Period, which will begin upon the occurrence of a
Pay Out Event or, if so specified in the related Prospectus Supplement,
following the Accumulation Period, principal will be paid to the
Securityholders in the amounts and on Distribution Dates specified in the
related Prospectus Supplement or will be accumulated in a Principal Account
for later distribution to Securityholders on the Expected Final Payment
Date in the amounts specified in the related Prospectus Supplement. During
the Accumulation Period, the Trustee at the direction of the Servicer will
transfer from the Principal Account to one or more applicable segregated
trust accounts held for the benefit of the securityholders (each a
"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" Principal payments
for any Series or Class thereof will be funded from Collections of
Principal Receivables received during the related Monthly Period or periods
as specified in the related Prospectus Supplement and allocated to the
Securityholders' Interest of such Series or Class and from certain other
sources specified in the related Prospectus Supplement. In the case of a
Series with more than one Class of Securities, the Securityholders of one
or more Classes may receive payments of principal at different times. The
related Prospectus Supplement will describe the manner, timing and priority
of payments of principal to Securityholders of each Class.
Funds on deposit in any Principal Funding Account applicable to a
Series may be subject to a guaranteed rate or investment agreement or other
arrangement specified in the related Prospectus Supplement intended to
assure a specified rate of return on the investment of such funds. In order
to enhance the likelihood of the payment in full of the principal amount of
a Series of Securities or Class thereof at the end of an Accumulation
Period, such Series of Securities or Class thereof may be subject to a
principal guaranty or other similar arrangement specified in the related
Prospectus Supplement.
Revolving Period
Unless otherwise specified in the related Prospectus Supplement,
for the period beginning on the Closing Date and ending with the
commencement of an Amortization Period or an Accumulation Period (the
"Revolving Period"), collections of Principal Receivables otherwise
allocable to the Invested Amount will, subject to certain limitations, be
paid from the Trust to the holder of the Exchangeable Transferor Security
or, under certain circumstances and if so specified in the related
Prospectus Supplement, will be paid to the holders of other Series of
Securities issued by such Trust ("Shared Principal Collections"), as
described herein and in the related Prospectus Supplement. See "Description
of the Securities--Pay Out Events" in this Prospectus and the related
Prospectus Supplement for a discussion of the events which might lead to
early termination of the Revolving Period.
Controlled Amortization Period
If the Prospectus Supplement relating to a Series so specifies,
unless an Early Amortization Period with respect to such Series commences,
the Securities of such Series or any Class thereof will have an
amortization period (the "Controlled Amortization Period") during which
collections of Principal Receivables allocable to the Invested Amount of
such Series (and certain other amounts if so specified in the related
Prospectus Supplement) will be used on each Distribution Date to make
principal distributions in amounts determined in the manner specified in
the related Prospectus Supplement to the Securityholders of such Series or
any Class of such Series then scheduled to receive such distributions. The
amount to be distributed on any Distribution Date during the Controlled
Amortization Period will be limited to an amount (the "Controlled
Distribution Amount") equal to an amount specified in the related
Prospectus Supplement (the "Controlled Amortization Amount") plus any
existing deficit controlled amortization amount arising from prior
Distribution Dates. If a Series has more than one Class of Securities, each
Class may have a separate Controlled Amortization Amount. In addition, the
related Prospectus Supplement may describe certain priorities among such
Classes with respect to such distributions. The Controlled Amortization
Period will commence at the close of business on a date specified in the
related Prospectus Supplement and continue until the earliest of (a) the
commencement of the Early Amortization Period, (b) payment in full of the
Invested Amount of the Securities of such Series or Class and, if so
specified in the related Prospectus Supplement, of the Collateral Interest,
if any, with respect to such Series and (c) the Termination Date with
respect to such Series.
Principal Amortization Period
If the Prospectus Supplement relating to a Series so specifies,
unless an Early Amortization Period with respect to such Series commences,
the Securities of such Series or any Class thereof will have an
amortization period (the "Principal Amortization Period") during which
collections of Principal Receivables allocable to the Invested Amount of
such Series (and certain other amounts if so specified in the related
Prospectus Supplement) will be used on each Distribution Date to make
principal distributions in an amount specified in the Prospectus Supplement
to the Securityholders of such Series or any Class of such Series then
scheduled to receive such distributions. If a Series has more than one
Class of Securities, the related Prospectus Supplement may describe certain
priorities among such Classes with respect to such distributions. The
Principal Amortization Period will commence at the close of business on a
date specified in the related Prospectus Supplement and continue until the
earliest of (a) the commencement of the Early Amortization Period, (b)
payment in full of the Invested Amount of the Securities of such Series or
Class and, if so specified in the related Prospectus Supplement, of the
Collateral Interest, if any, with respect to such Series and (c) the
Termination Date with respect to such Series.
Accumulation Period
If the Prospectus Supplement relating to a Series so specifies,
unless an Early Amortization Period with respect to such Series commences,
the Securities of such Series or any Class thereof will have an
accumulation period (the "Accumulation Period") during which collections of
Principal Receivables allocable to the Invested Amount of such Series (and
certain other amounts if so specified in the related Prospectus Supplement)
will be transfered on the business day immediately prior to each
Distribution Date or other business day specified in the related Prospectus
Supplement (each, a "Transfer Date") from a Principal Account to a
Principal Funding Account and used to make distributions of principal to
the Securityholders of such Series or Class on the Scheduled Payment Date.
The amount to be deposited in the Principal Funding Account on any Transfer
Date will be limited to an amount (the "Controlled Deposit Amount") equal
to an amount specified in the related Prospectus Supplement (the
"Controlled Accumulation Amount") plus any deficit controlled accumulation
amount arising from prior Distribution Dates. If a Series has more than one
Class of Securities, each Class may have a separate Principal Funding
Account and Controlled Accumulation Amount. In addition, the related
Prospectus Supplement may describe certain priorities among such Classes
with respect to deposits of principal into such Principal Funding Accounts.
The Accumulation Period will commence at the close of business on a date
specified in or determined in the manner specified in the related
Prospectus Supplement and continue until the earliest of (a) the
commencement of the Early Amortization Period, or, if so specified in the
related Prospectus Supplement, the Accumulation Period, (b) payment in full
of the Invested Amount of the Securities of such Series or Class and, if so
specified in the related Prospectus Supplement, of the Collateral Interest,
if any, with respect to such Series and (c) the Termination Date with
respect to such Series.
Funds on deposit in any Principal Funding Account may be invested
in cash equivalents or subject to a guaranteed rate or investment contract
or other arrangement intended to assure a minimum return on the investment
of such funds. Investment earnings on such funds may be applied to pay
interest on the related Series of Securities. In order to enhance the
likelihood of payment in full of principal at the end of an Accumulation
Period with respect to a Series of Securities, such Series or any Class
thereof may be subject to a principal payment guaranty or other similar
arrangement.
Early Amortization Period
During the period from the day on which a Pay Out Event has
occurred with respect to a Series or, if so specified in the Prospectus
Supplement relating to a Series with a controlled Accumulation Period, from
such time specified in the related Prospectus Supplement after a Pay Out
Event has occurred and the Accumulation Period has commenced, to the
earlier of (a) the date on which the Invested Amount of the Securities of
such Series and the Enhancement Invested Amount or the Collateral Interest,
if any, with respect to such Series have been paid in full and (b) the
related Termination Date (the "Early Amortization Period"), collections of
Principal Receivables allocable to the Invested Amount of such Series (and
certain other amounts if so specified in the related Prospectus Supplement)
will be distributed as principal payments to the Securityholders of such
Series and, in certain circumstances, to the Enhancement provider, monthly
on or before each Distribution Date with respect to such Series in the
manner and order of priority set forth in the related Prospectus
Supplement. During the Early Amortization Period with respect to a Series,
distributions of principal will not be limited by any Controlled Deposit
Amount or Controlled Distribution Amount. In addition, upon the
commencement of the Early Amortization Period with respect to a Series, any
funds on deposit in a Principal Funding Account with respect to such Series
or any Class thereof will be paid to the Securityholders of such Series or
Class on the first Distribution Date in the Early Amortization Period. See
"Description of the Securities--Pay Out Events" in this Prospectus and the
related Prospectus Supplement for a discussion of the events which might
lead to commencement of the Early Amortization Period.
Discount Option
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 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 (as defined in the Pooling and
Servicing Agreement or related Supplement) to a rate below the average base
rate for such period (as defined in the Pooling and Servicing Agreement or
related Supplement) 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.
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 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 (the "Purchase Agreement", and
together with the Bank Purchase Agreement, the "Purchase Agreements"), 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 and related Supplement
provides for the Trustee to issue two types of securities: (i) 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 ("Investor
Securities") 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 (the "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. The
Transferor may offer any Series to the public or other investors in
transactions either registered under the Securities Act of 1933, as amended
(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 such that each Series issued under the Trust has a 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. 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 equals or exceeds the minimum
Retained Interest, as defined in the relevant Supplement. "Retained
Interest" means, on any Determination Date, the sum of the Transferor
Interest and the interest in the Trust represented by any class of Investor
Securities retained by the Transferor. "Determination Date" shall mean the
second business day prior to any Distribution Date.
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 related
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 related 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
related Series 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
and related Supplement 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). "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. 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 related 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 related 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 and related
Supplement, (vi) the Transferor is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended (the "Investment
Company Act") (or is exempt from all provisions of the Investment Company
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 related
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 Receivable, it will deposit such
collections to the Collection Account within two business days, (iv) it
will notify the Trust promptly after becoming aware of any lien on any
Receivable other than Permitted Liens, (v) it will take all actions
necessary to enforce its rights and claims under the Purchase Agreement,
(vi) it will promptly provide the Trustee any notices, reports or
certificates given or delivered under the Purchase Agreement and (vii)
except as permitted by the Pooling and Servicing Agreement, it will not
commingle its assets with those of Direct Merchants Bank or Metris or any
affiliate thereof.
Eligible Accounts
As of the Initial Closing Date (or, with respect to Additional
Accounts, on the date the Credit Card Originator acquires rights therein,
or, with respect to Supplemental Accounts, as of the date the Receivables
arising in such Accounts are designated for inclusion in the Trust), each
revolving credit consumer credit card account owned by a Credit Card
Originator and having the following characteristics shall be an Eligible
Account (each, an "Eligible Account"): (a) which is payable in United
States dollars, (b) the Obligor on which has provided, as its initial
billing address, an address located in the United States or its territories
or possessions or a United States military address, (c) which has not been
identified by a Credit Card Originator in its computer files as stolen or
lost, (d) which is not at the time of transfer to the Trust sold or pledged
to any other party and which does not have Receivables which, at the time
of transfer to the Trust, are sold or pledged to any other party (provided
that Receivables which were sold or pledged prior to the Closing Date, but
were repurchased free of all liens or where all liens were released prior
to sale, shall not be disqualified under this clause (d)), and (e) the
Receivables in which the Credit Card Originator has not charged off in its
customary and usual manner for charging off Receivables in such Accounts as
of the Initial Closing Date (or, with respect to Additional Accounts, as of
the date the Receivables of such Accounts are first designated for
inclusion in the Trust) unless such Account is subsequently reinstated. An
"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.
"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.
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). "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.
"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).
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." "Minimum Transferor Interest" for any period means the
product of (a) the sum of (1) the aggregate Principal Receivables and (2)
the amounts on deposit in the Excess Funding Account and (b) the highest
Minimum Transferor Percentage for any Series. "Minimum Transferor
Percentage" for any Series will have the meaning specified in the related
Prospectus Supplement. "Minimum Aggregate Principal Receivables" means an
amount equal to the sum of the numerators used to calculate the Investor
Percentages with respect to the allocation of collections of Principal
Receivables for each Series then outstanding.
"Excluded Accounts" means, on any date of determination (a) 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 (b) 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. "Additional
Accounts" 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 July 30, 1998 (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. "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.
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 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 (each, an "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. Unless
otherwise specified in the Prospectus Supplement relating to the Trust,
"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. 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--Collection of Delinquent Accounts." 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 certified
public accountants to prepare and deliver the annual reports described in
"--Evidence as to Compliance."
Trust Accounts
Unless otherwise specified in the Prospectus Supplement relating
to the Trust, the Trustee will establish and maintain with a Qualified
Institution in the name of the Trust, for the benefit of the
Securityholders of each Series, at least three separate accounts, each in a
segregated trust account, consisting of an "Interest Funding Account," a
"Principal Account," and an "Excess Funding 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 Investors Service, Inc. ("Moody's") and of A-1+ by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("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
Federal Deposit Insurance Corporation ("FDIC"), or a depository
institution, which may include the Trustee, which is acceptable to the
Rating Agencies; provided, however, that no such rating shall be required
of an institution which shall have corporate trust powers and which
maintains the Collection Account, any principal account, any interest
funding account or any other account maintained for the benefit of
Securityholders as a fully segregated trust account with the trust
department of such institution which is rated at least Baa3 by Moody's.
Funds in the Trust Accounts will be invested in (a) negotiable instruments
or securities represented by instruments in bearer or registered form which
evidence (i) obligations of or fully guaranteed by the United States of
America; (ii) time deposits, promissory notes, or certificates of deposit
of any depository institution or trust company; provided, however, that at
the time of the Trust's investment or contractual commitment to invest
therein, the certificates of deposit or short-term deposits of such
depository institution or trust company shall have a credit rating from
Standard & Poor's of A-1+ and from Moody's of P-1; (iii) commercial paper
having, at the time of the Trust's investment or contractual commitment to
invest therein, a rating from Standard & Poor's of A-1+ and from Moody's of
P-1; (iv) banker's acceptances issued by any depository institution or
trust company described in clause (a)(ii) above; and (v) investments in
money market funds rated AAA-m or AAA-mg by Standard & Poor's 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 United States federal
bankruptcy code, as amended, 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 above in
"--Application of Collections" and in "Description of the
Securities--Application of Collections" in the related Prospectus
Supplement. 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.
Deposits in Collection Account
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.
Investor Percentage and Transferor Percentage
For each Trust, the Servicer will allocate between the Invested
Amount of each Series issued by such Trust (and between each Class of each
Series) and the Transferor Interest, and, in certain circumstances, the
interest of certain Enhancement providers, all amounts collected on Finance
Charge Receivables, all amounts collected on Principal Receivables and all
Receivables in Defaulted Accounts. The Servicer will make each allocation
by reference to the applicable Investor Percentage of each Series and the
Transferor Percentage, and, in certain circumstances, the percentage
interest of certain Enhancement providers (the "Enhancement Percentage")
with respect to such Series. The Prospectus Supplement relating to a Series
will specify the Investor Percentage and the Enhancement Percentage (or the
method of calculating such percentage) with respect to the allocations of
collections of Principal Receivables, Finance Charge Receivables and
Receivables in Defaulted Accounts during the Revolving Period, any
Amortization Period and the Accumulation Period, as applicable. In
addition, for each Series of Securities having more than one Class, the
related Prospectus Supplement will specify the method of allocation between
each Class.
"Investor Percentage" shall mean, (a) with respect to Finance
Charge Collections, Receivables in Defaulted Accounts and Principal
Collections, the percentage specified in the related Prospectus Supplement.
The Transferor Percentage will, in all cases, be equal to 100% minus the
aggregate Investor Percentages and, if applicable, the Enhancement
Percentages, for all Series then outstanding.
Application of Collections
Unless otherwise specified in the related Prospectus Supplement,
except as otherwise provide below, on each Business day, (i) the amount of
Finance Charge Collections available in the Collection Account allocable to
each Series, (ii) the amount of Principal Collections available in the
Collection Account allocable to each Series and (iii) the Receivables in
Defaulted Accounts allocable to each Series shall be determined in
accordance with the provisions of the related Supplement. The Servicer
shall, prior to the close of business on the day any Collections are
deposited in the Collection Account, cause the Trustee to withdraw the
required amounts from the Collection Account and cause the Trustee to
deposit such amounts into the applicable Principal Account, the applicable
Interest Funding Account, the Excess Funding Account, or any Series Account
or pay such amounts to the holder of the Exchangeable Transferor Security
in accordance with the provisions of the Pooling and Servicing Agreement
and the related Supplement.
Throughout the existence of the Trust, unless otherwise stated in
any Prospectus Supplement, on each business day the Servicer shall allocate
to the holder of the Exchangeable Transferor Security an amount equal to
the product of (A) the Transferor Percentage as of the end of the preceding
business day and (B) the aggregate amount of Principal Collections and
Finance Charge Collections available in the Collection Account. The
Servicer shall pay such amount to the holder of the Exchangeable Transferor
Security on each business day; provided, however, that amounts payable to
the holder of the Exchangeable Transferor Security pursuant to the Pooling
and Servicing Agreement and related Supplement shall instead be deposited
in the Excess Funding Account to the extent necessary to prevent the
Transferor Interest from being less than the Minimum Transferor Interest.
Shared Principal Collections
If specified in the related Prospectus Supplement, on each
business day, Shared Principal Collections shall be allocated to each
outstanding Series pro rata based on the Principal Shortfall, if any, for
each such Series, and then, at the option of the Transferor, any remainder
may be applied as principal with respect to the Variable Funding
Securities. "Principal Shortfall" shall mean, with respect to any business
day and any outstanding Series, the amount which the related Prospectus
Supplement specifies as the principal shortfall for such business day. The
Servicer shall pay any remaining Shared Principal Collections on such
business day to the Transferor; provided, that if the Transferor Interest
as determined on such business day does not exceed the Minimum Transferor
Interest, then such remaining Shared Principal Collections shall be
deposited in the Excess Funding Account to the extent necessary to increase
the Transferor Interest above the Minimum Transferor Interest; provided,
further, that if an Amortization Period has commenced and is continuing
with respect to more than one outstanding Series, such remaining Shared
Principal Collections shall be allocated to such Series pro rata based on
the Investor Percentage for Principal Receivables applicable for such
Series.
In addition, if so specified in the related Prospectus Supplement,
Collections of Principal Receivables and Finance Charge Receivables
otherwise payable to the Transferor may be designated to be paid to the
Securityholders of the applicable Series.
Shared 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. If so specified in the related Prospectus Supplement,
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. Unless
otherwise provided in the related Prospectus Supplement, with respect to
any Series, "Excess Finance Charge Collections" for any Monthly Period
shall mean 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
The Trustee has established and will maintain in the name of the
Trust, for the benefit of the securityholders of all Series, a segregated
account with a Qualified Institution (the "Excess Funding Account"). The
Servicer has the power, revocable by the Trustee, to make withdrawals and
payments from the Excess Funding Account for the purpose of carrying out
the Servicer's or the Trustee's duties. At any time during which no Series
is in an amortization period (including any accumulation period or early
amortization period), or for a Series in amortization, the principal
account, if any, is fully funded for an applicable period, and the
Transferor Interest does not exceed the Minimum Transferor Interest, funds
(to the extent available therefor as described herein) otherwise payable to
the Transferor will be deposited in the Excess Funding Account on any
business day until the Transferor Interest is at least equal to the Minimum
Transferor Interest. Funds on deposit in the Excess Funding Account may, at
the option of the Transferor, be withdrawn and paid to the Transferor to
the extent that on any day the Transferor Interest exceeds the Minimum
Transferor Interest. Such deposits in and withdrawals from the Excess
Funding Account may be made on a daily basis.
Any funds on deposit in the Excess Funding Account at the
beginning of an Amortization Period for any Series will be deposited in the
Principal Account as part of 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.
Paired Series
If so provided in the Prospectus Supplement relating to a Series,
such Series may be subject to being paired with another Series (in such
case, a "Paired Series"). The Prospectus Supplement for such Series and the
Prospectus Supplement for the Paired Series will each specify the
relationship between the 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 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 above 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.
Funding Period
For any Series of Securities, the related Prospectus Supplement
may specify that for a period beginning on the Closing Date and ending on a
specified date before the commencement of an Amortization Period or
Accumulation Period with respect to such Series (the "Funding Period"), the
aggregate amount of Principal Receivables in the Trust allocable to such
Series may be less than the aggregate principal amount of the Securities of
such Series and that the amount of such deficiency (the "Pre-Funding
Amount") will be held in a trust account established with the Trustee for
the benefit of the Securityholders of such Series (the "Pre-Funding
Account") pending the transfer of additional Receivables to the Trust or
pending the reduction of the Invested Amounts of other Series. The related
Prospectus Supplement will specify the initial Invested Amount with respect
to such Series, the aggregate principal amount of such Series (the "Full
Invested Amount") and the date by which the Invested Amount is expected to
equal the Full Invested Amount. The Invested Amount will increase as
Receivables are delivered to the Trust or as the Invested Amounts of other
Series are reduced. The Invested Amount may also decrease due to Investor
Charge-Offs as provided in the related Prospectus Supplement.
During the Funding Period, funds on deposit in the Pre-Funding
Account for a Series of Securities will be withdrawn and paid to the
Transferor to the extent of any increases in the Invested Amount. In the
event that the Invested Amount does not for any reason equal the Full
Invested Amount by the end of the Funding Period, any amount remaining in
the Pre-Funding Account and any additional amounts specified in the related
Prospectus Supplement will be payable to the Securityholders of such Series
in the manner and at such time as set forth in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, monies in
the Pre-Funding Account will be invested by the Trustee in Cash Equivalents
or will be subject to a guaranteed rate or investment agreement or other
similar arrangement, and, in connection with each Distribution Date during
the Funding Period, investment earnings on funds in the Pre- Funding
Account during the related Monthly Period will be withdrawn from the
Pre-Funding Account and deposited, together with any applicable payment
under a guaranteed rate or investment agreement or other similar
arrangement, into the Collection Account for distribution in respect of
interest on the Securities of the related Series in the manner specified in
the related Prospectus Supplement.
Defaulted Receivables; Dilution
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 (a "Defaulted Account"). An Account shall become a Defaulted
Account on the day on which such Receivables are recorded as charged off as
uncollectible on the Servicer's computer master file of consumer credit
card revolving accounts. Notwithstanding any other provision hereof, any
Receivables in an Account that are ineligible Receivables shall be treated
as ineligible Receivables rather than Receivables in Defaulted Accounts.
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--Collection of Delinquent Accounts"
in this Prospectus and "Direct Merchants Bank's Credit Card
Portfolio--Delinquency and Loss Experience" in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus
Supplement, the "Default Recognition Date" for each Series shall be 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. 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 Investor Percentage applicable to
Defaulted Receivables 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. To the extent
that Finance Charge Collections and certain other amounts as more fully
described in the related Prospectus Supplement for any Series are not
sufficient to cover the Series Default Amount allocated to such Series,
there will be an Investor Charge-Off. "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.
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 Finance
Charge Collections designated for such purpose as more fully described in
the related Prospectus Supplement for any Series. To the extent that such
amounts are not sufficient to cover the portion of the unpaid Adjustment
Payments allocated to the related Series, there will be an Investor
Charge-Off for such Series.
Investor Charge-Offs
With respect to each Series of Securities, if the sum of the
Series Default Amount and the portion of the unpaid Adjustment Payments
allocated to such Series exceeds the Finance Charge Collections and other
amounts allocated to cover such amounts on any Distribution Date, then the
Invested Amount with respect to such Series will be reduced by the amount
of such excess (an "Investor Charge-Off"). Investor Charge-Offs will be
reimbursed on any subsequent Distribution Date to the extent of Finance
Charge Collections and other amounts allocated and amounts available
therefor. Such reimbursement of Investor Charge-Offs will result in an
increase in the Invested Amount with respect to such Series. In the case of
a Series of Securities having more than one Class, the related Prospectus
Supplement will describe the manner and priority of allocating Investor
Charge-Offs and reimbursements thereof among the Invested Amounts of the
Classes.
Defeasance
The Transferor may, at its option, be discharged from its
obligations with respect to any Series or all outstanding Series (each, a
"Defeased Series") on the date that the following conditions shall have
been satisfied: (i) the Transferor shall have deposited with the Trustee,
pursuant to an irrevocable trust agreement in form and substance
satisfactory to the Trustee, as trust funds in trust for making the
payments described below, Cash Equivalents which through the scheduled
payment of principal and interest in respect thereof will provide, no later
than the due date of payment thereon, a dollar amount sufficient to pay and
discharge all remaining scheduled interest and principal payments on all
outstanding Securities of the Defeased Series on the dates scheduled for
such payments and any amounts owing to any Enhancement providers with
respect to the Defeased Series; (ii) prior to any exercise of its right to
substitute Cash Equivalents for Receivables, the Transferor shall have
delivered to the Trustee a Tax Opinion with respect to such deposit and
termination of obligations and 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; (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 cause a Pay Out Event or any event that, with the
giving of notice or the lapse of time, would constitute a Pay Out Event to
occur with respect to any Series; and (iv) a Ratings Effect will not occur.
Subject to the foregoing, the Transferor may cause Collections allocated to
the Defeased Series and available to purchase additional Receivables to be
applied to purchase Cash Equivalents, rather than additional Receivables.
Final Payment of Principal; Termination
With respect to each Series, the Securities will be subject to
optional repurchase by the Transferor on any Distribution Date if on such
Distribution Date the Invested Amount of such Series would be reduced to an
amount less than or equal to 10 percent of the initial Invested Amount, if
any (or such other amount specified in the related Prospectus Supplement)
if certain conditions set forth in the Pooling and Servicing Agreement and
the related Supplement are satisfied, together with interest thereon, have
been paid. The repurchase price will be equal to the total Invested Amount
of such Series (less the amount, if any, on deposit in any Principal
Funding Account with respect to such Series), plus accrued and unpaid
interest on the 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. Each Prospectus Supplement
will specify the final date on which principal and interest with respect to
the related Series of Securities will be scheduled to be distributed (the
"Termination Date"); provided, however that the Securities may be subject
to prior termination as provided above. 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
interests in the Receivables or certain Receivables, as specified in the
Pooling and Servicing Agreement and the related Supplement, in an amount up
to 110 percent of the Invested Amount at the close of business on such date
(but not more than the total amount of Receivables allocable to the
Securities in accordance with the Pooling and Servicing Agreement). If the
sale contemplated by the preceding sentence has not occurred by the
Termination Date, the affected Securityholders shall remain entitled to
receive proceeds of such sale when it occurs.
Unless the Servicer and the holder of the Exchangeable Transferor
Security instruct the Trustee otherwise, the Trust will terminate on the
earlier of (a) the day after the Distribution Date following the date on
which funds shall have been deposited in the Distribution Account for the
payment to securityholders sufficient to pay in full the aggregate investor
interest of all Series outstanding plus interest thereon at the applicable
interest rates to the next Distribution Date and (b) a date which shall not
be later than May 26, 2095. Upon the termination of the Trust and the
surrender of the Exchangeable Transferor Security, the Trustee will convey
to the holder of the Exchangeable Transferor Security all right, title and
interest of the Trust in and to the Receivables and other funds of the
Trust (other than funds on deposit in the Distribution Account and other
similar bank accounts of the Trust with respect to any Series).
Pay Out Events
Unless otherwise specified in the related Prospectus Supplement,
as described above, the Revolving Period will continue through the dates
specified in the related Prospectus Supplement unless a Pay Out Event
occurs prior to such date. A "Pay Out Event" occurs with respect to all
Series issued by the Trust upon the occurrence of any of the following
events:
(i) certain events of bankruptcy or insolvency relating
to the Transferor, Direct Merchants Bank or Metris; or
(ii) the Trust shall become subject to regulation by the
SEC as an "investment company" within the meaning of the
Investment Company Act.
In addition, a Pay Out Event may occur with respect to any Series
upon the occurrence of any other event specified in the related Prospectus
Supplement. On the date on which a Pay Out Event is deemed to have
occurred, the Early Amortization Period will commence. In such event,
unless otherwise specified in the related Prospectus Supplement,
distributions of principal to the Securityholders of such Series 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, unless otherwise specified in the related Prospectus Supplement, 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" and in the related Prospectus Supplement. "Retained
Percentage" shall mean, on any Determination Date, 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 Determination
Date plus amounts on deposit in the Excess Funding Account (but not
including investment earnings on such amounts).
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
Unless otherwise specified in the related Prospectus Supplement,
for each Series of Securities, the Servicer's compensation for its
servicing activities and reimbursement for its expenses will take the form
of the payment to it of a fee (the "Monthly Servicing Fee") payable at the
times and in the amounts specified in the related Prospectus Supplement.
The Monthly Servicing Fee will be funded from collections of Finance Charge
Collections allocated to the Investor Interest and will be paid each month,
or on such other specified periodic basis, from amounts allocated for such
purpose. The remainder of the servicing fee will be allocable to the
Transferor Interest, the Investor Interests of any other Series issued by
such Trust and the interest represented by the Enhancement Invested Amount
or the Collateral Interest, if any, with respect to such Series, as
described in the related Prospectus Supplement. Neither the Trust nor the
Securityholders will have any obligation to pay the portion of the
servicing fee allocable to the Transferor Interest.
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 related Trust or the Securityholders other than federal, state and
local income and franchise taxes, if any, of the Trust.
The Servicer will pay from its servicing compensation certain
expenses incurred in connection with servicing the Receivables, including
without limitation payment of the fees and disbursements of the Trustee and
independent certified public accountants and other fees which are not
expressly stated in the Pooling and Servicing Agreement to be payable by
the Trust or the Securityholders other than federal, state, and local
income and franchise taxes, if any, of the Trust.
Certain Matters Regarding the Transferor and the Servicer
The Servicer may not resign from its obligations and duties under
the Pooling and Servicing Agreement, except upon determination that
performance of its duties is no longer permissible under applicable law. No
such resignation will become effective until the Trustee or a successor to
the Servicer has assumed the Servicer's responsibilities and obligations
under the Pooling and Servicing Agreement and related Supplement. 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 and related Supplement, (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
and any Supplement to any taxing authority.
In addition, the Pooling and Servicing Agreement provides that,
subject to certain exceptions, the Transferor will indemnify the Trust and
the Trustee from and against any reasonable loss, liability, expense,
damage or injury (other than to the extent that any of the foregoing relate
to any tax law or any failure to comply therewith) suffered or sustained by
reason of any acts or omissions or alleged acts or omissions arising out of
or based upon the arrangement created by the Pooling and Servicing
Agreement as though the Pooling and Servicing Agreement created a
partnership under the Delaware Uniform Partnership Act in which the
Transferor is a general partner.
The Pooling and Servicing Agreement provides that, except for the
foregoing indemnities, neither the Transferor nor the Servicer nor any of
their respective directors, officers, employees, or agents will be under
any liability to the Trust, the Securityholders, or any other person for
any action taken, or for refraining from taking any action pursuant to the
Pooling and Servicing Agreement. Neither the Transferor nor the Servicer
nor any of their respective directors, officers, employees or agents will
be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith, or gross negligence of the
Transferor, the Servicer, or any such person in the performance of its
duties thereunder 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.
The Pooling and Servicing Agreement provides that, in addition to
Exchanges, the Transferor may transfer its interest in all or a portion of
the Exchangeable Transferor Security, provided that prior to any such
transfer (a) the Trustee receives written notification from each Rating
Agency that such transfer will not result in a Ratings Event and (b) the
Trustee receives an opinion of counsel that such transfer would not (i)
adversely affect the conclusions reached in any of the federal income tax
opinions issued in connection with the original issuance of any Series of
Investor Securities or (ii) result in a taxable event to the holders of any
such Series.
Under the Pooling and Servicing Agreement, the Transferor will be
liable directly to an injured party for the entire amount of any losses,
claims, damages or liabilities (other than those incurred by a
Securityholder in the capacity of an investor in the Securities) arising
out of or based on the arrangement created by the Pooling and Servicing
Agreement or the actions of the Servicer taken pursuant to the Pooling and
Servicing Agreement as though the Pooling and Servicing Agreement created a
partnership under the Delaware Uniform Partnership Act in which the
Transferor is a general partner. The Transferor will also pay, indemnify
and hold harmless each Securityholder for any such losses, claims, damages
or liabilities (other than those incurred by a Securityholder in the
capacity of an investor in the Securities) except to the extent that they
arise from any action by any Securityholder. In the event of a Service
Transfer, the successor Servicer will indemnify the Transferor for any
losses, claims, damages and liabilities of the Transferor as described in
this paragraph arising from the actions or omissions of such successor.
Servicer Default
In the event of any Servicer Default (as defined below), either
the Trustee or securityholders representing undivided interests aggregating
more than 50 percent of the aggregate investor interests for all
outstanding Series, by written notice to the Servicer (and to the Trustee
if given by the securityholders), may terminate all of the rights and
obligations of the Servicer as servicer under the Pooling and Servicing
Agreement and in and to the Receivables and the proceeds thereof and the
Trustee may appoint a new Servicer (a "Service Transfer"). The rights and
interest of the Transferor under the Pooling and Servicing Agreement and in
the Transferor Interest will not be affected by such termination. Upon such
termination, the Trustee will as promptly as possible appoint a successor
Servicer. If no such Servicer has been appointed and has accepted such
appointment by the time the Servicer ceases to act as Servicer, all
authority, power and obligations of the Servicer under the Pooling and
Servicing Agreement will pass to and be vested in the Trustee. If the
Trustee is unable to obtain any bids from eligible servicers and the
Servicer delivers an officer's certificate to the effect that it cannot in
good faith cure the applicable Servicer Default, and if the Trustee is
legally unable to act as a successor Servicer, then the Trustee will give
the Transferor the right to accept reassignment of all of the Receivables
on terms equivalent to the best purchase offer as determined by the
Trustee.
A "Servicer Default" refers to any of the following events:
(i) failure by the Servicer to make any payment,
transfer, or deposit, or to give instructions to the Trustee to
make certain payments, transfers, or deposits within five business
days after the date the Servicer is required to do so under the
Pooling and Servicing Agreement or any Supplement; provided,
however, that any such failure caused by a nonwillful act of the
Servicer shall not constitute a Servicer Default if the Servicer
promptly remedies such failure within five business days after
receiving notice of such failure or otherwise becoming aware of
such failure;
(ii) failure on the part of the Servicer duly to observe
or perform in any respect any other covenants or agreements of the
Servicer which has a material adverse effect on the
securityholders of any Series then outstanding and which continues
unremedied for a period of 60 days after written notice of such
failure, requiring the same to be remedied, shall have been given
to the Servicer by the Trustee, or to the Servicer and the Trustee
by holders of Securities evidencing undivided interests
aggregating not less than 50 percent of the Invested Amount of any
Series materially adversely affected thereby and continues to have
a material adverse effect on the securityholders of any Series
then outstanding for such period; or the delegation by the
Servicer of its duties under the Pooling and Servicing Agreement,
except as specifically permitted thereunder;
(iii) any representation, warranty, or certification made
by the Servicer in the Pooling and Servicing Agreement, or in any
certificate delivered pursuant to the Pooling and Servicing
Agreement, proves to have been incorrect when made which has a
material adverse effect on the securityholders of any Series then
outstanding, and which continues to be incorrect in any material
respect for a period of 60 days after written notice of such
failure, requiring the same to be remedied, shall have been given
to the Servicer by the Trustee, or to the Servicer and Trustee by
the holders of Securities evidencing undivided interests
aggregating not less than 50 percent of the Invested Amount of any
Series materially adversely affected thereby and continues to have
a material adverse effect on such securityholders for such period;
or
(iv) the occurrence of certain events of bankruptcy,
insolvency or receivership of the Servicer.
Notwithstanding the foregoing, a delay in or failure of
performance referred to in clause (i) above for a period of [five] business
days, or referred to under clause (ii) or (iii) for a period of 60 business
days, will not constitute a Servicer Default if such delay or failure could
not be prevented by the exercise of reasonable diligence by the Servicer
and such delay or failure was caused by an act of God or other similar
occurrence. Upon the Servicer becoming aware of any such event, the
Servicer will not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of the Pooling
and Servicing Agreement, and the Servicer will provide the Trustee, any
provider of Enhancement, the Transferor and the holders of securities of
all Series outstanding prompt notice of such failure or delay by it,
together with a description of the cause of such failure or delay and its
efforts to perform its obligations.
In the event of a Servicer Default, if a bankruptcy trustee or
receiver were appointed for the Servicer and no Servicer Default other than
such bankruptcy or receivership or the insolvency of the Servicer exists,
the bankruptcy trustee or receiver may have the power to prevent either the
Trustee or the majority of the securityholders from effecting a Service
Transfer.
Reports to Securityholders
Unless otherwise specified in the related Prospectus Supplement,
for each Series of Securities, 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 Securities, (c) the amount of such distribution allocable to interest
on the Securities, (d) the amount of Principal Collections processed during
the related Monthly Period and allocated in respect of the Securities, (e)
the amount of Finance Charge Collections processed during the preceding
Monthly Period and allocated in respect of the Securities, (f) the
aggregate amount of Principal Receivables, the Invested Amount and the
Invested Amount as a 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 for each Series, (i) the aggregate amount of
Investor Charge-Offs for each Class of such Series, for the preceding
Monthly Period, (j) the amount of the Monthly Servicing Fee for the
preceding Monthly Period, and (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.
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.
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 certified 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 certified 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 related 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 Supplement or of modifying in any manner
the rights of such Securityholders, unless otherwise specified in the
related Prospectus Supplement; 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
Securities, 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 any 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 (i) in
"--Pay Out Events" above.
The Pooling and Servicing Agreement and any Supplement may be
amended by the Transferor, the Servicer, and the Trustee with the consent
of the holders of securities evidencing undivided interests aggregating not
less than 66 2/3 percent of the investor interests of each and every Series
adversely affected, for the purpose of adding any provisions to, changing
in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement, or any Supplement or of modifying in any manner the
rights of securityholders of any then outstanding Series. No such
amendment, however, may (a) reduce in any manner the amount of, or delay
the timing of, distributions required to be made on any such Series, (b)
change the definition of or the manner of calculating the interest of any
securityholder of such Series, or (c) reduce the aforesaid percentage of
investor interests the holders of which are required to consent to any such
amendment, in each case without the consent of all securityholders of all
Series adversely affected. Promptly following the execution of any
amendment to the Pooling and Servicing Agreement, the Trustee will furnish
written notice of the substance of such amendment to each Securityholder.
Any Supplement and any amendments regarding the addition or removal of
Receivables from the Trust will not be considered an amendment requiring
securityholder consent under the provisions of the Pooling and Servicing
Agreement and any Supplement.
Additionally, upon the receipt by the Transferor, the Servicer and
the Trustee of a Tax Opinion reasonably satisfactory to each of them, the
Pooling and Servicing Agreement and any 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 "Tax
Matters--FASIT Legislation"), or to enable all or a portion of the Trust to
qualify and an election to be made for similar treatment under such
comparable subsequent federal income tax provisions as may ultimately be
enacted into law, and (ii) in connection with any such election, to modify
or eliminate existing provisions of the Pooling and 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.
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. "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.
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
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.
Enhancement
General
For any Series, "Enhancement" may be provided with respect to one
or more Classes thereof. Enhancement may be in the form of the
subordination of one or more Classes of the Securities of such Series, a
letter of credit, the establishment of a cash collateral guaranty or
account, a collateral interest, a surety bond, an insurance policy, a
spread account, a reserve account, the use of cross support features or
another method of Enhancement described in the related Prospectus
Supplement, or any combination of the foregoing. If so specified in the
related Prospectus Supplement, any form of Enhancement may be structured so
as to be drawn upon by more than one Class to the extent described therein.
The type, characteristics and amount of the Enhancement for any
Series or Class will be determined based on several factors, including the
characteristics of the Receivables and Accounts included in the Trust
Portfolio as of the Closing Date with respect to such Series and the
desired rating for each Class, and will be established on the basis of
requirements of each Rating Agency rating the Securities of such Series or
Class.
Unless otherwise specified in the related Prospectus Supplement
for a Series, the Enhancement will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal balance of
the Securities and interest thereon. If losses occur which exceed the
amount covered by the Enhancement or which are not covered by the
Enhancement, Securityholders will bear their allocable share of
deficiencies.
If Enhancement is provided with respect to a Series, the related
Prospectus Supplement will include a description of (a) the amount payable
under such Enhancement, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the
amount payable under such Enhancement may be reduced and under which such
Enhancement may be terminated or replaced and (d) any material provision of
any agreement relating to such Enhancement. Additionally, the related
Prospectus Supplement may set forth information with respect to any
Enhancement provider, including (i) a brief description of its principal
business activities, (ii) its principal place of business, place of
incorporation and the jurisdiction under which it is chartered or licensed
to do business, (iii) if applicable, the identity of regulatory agencies
which exercise primary jurisdiction over the conduct of its business and
(iv) certain summary financial information as of the date specified in the
Prospectus Supplement. If so specified in the related Prospectus
Supplement, Enhancement with respect to a Series may be available to pay
principal of the Securities of such Series following the occurrence of
certain Pay Out Events with respect to such Series. In such event, the
Enhancement provider may have an interest in certain cash flows in respect
of the Receivables to the extent described in such Prospectus Supplement
(the "Enhancement Invested Amount").
Subordination
If so specified in the related Prospectus Supplement, one or more
Classes of any Series will be subordinated as described in the related
Prospectus Supplement to the extent necessary to fund payments with respect
to the Senior Securities. The rights of the holders of any such
Subordinated Securities to receive distributions of principal and/or
interest on any Distribution Date for such Series will be subordinated in
right and priority to the rights of the holders of Senior Securities, but
only to the extent set forth in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, subordination may apply
only in the event of certain types of losses not covered by another
Enhancement. The related Prospectus Supplement will also set forth
information concerning the amount of subordination of a Class or Classes of
Subordinated Securities in a Series, the circumstances in which such
subordination will be applicable, the manner, if any, in which the amount
of subordination will be applicable, the manner, if any, in which the
amount of subordination will decrease over time, and the conditions under
which amounts available from payments that would otherwise be made to
holders of such Subordinated Securities will be distributed to holders of
Senior Securities. If collections of Receivables otherwise distributable to
holders of a subordinated Class of a Series will be used as support for a
Class of another Series, the related Prospectus Supplement will specify the
manner and conditions for applying such a cross-support feature.
Letter of Credit
If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes thereof will be provided by one or more
letters of credit. A letter of credit may provide limited protection
against certain losses in addition to or in lieu of other Enhancement. The
issuer of the letter of credit (the "L/C Bank") will be obligated to honor
demands with respect to such letter of credit, to the extent of the amount
available thereunder, to provide funds under the circumstances and subject
to such conditions as are specified in the related Prospectus Supplement.
Cash Collateral Guaranty or Account
If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes thereof will be provided by a guaranty (the
"Cash Collateral Guaranty") secured by the deposit of cash or Cash
Equivalents in an account (the "Cash Collateral Account") reserved for the
beneficiaries of the Cash Collateral Guaranty or by a Cash Collateral
Account alone. The amount available pursuant to the Cash Collateral
Guaranty or the Cash Collateral Account will be the lesser of amounts on
deposit in the Cash Collateral Account and an amount specified in the
related Prospectus Supplement. The related Prospectus Supplement will set
forth the circumstances under which payments are made to beneficiaries of
the Cash Collateral Guaranty from the Cash Collateral Account or from the
Cash Collateral Account directly.
Collateral Interest
If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes thereof will be provided initially by an
undivided interest in the Trust (the "Collateral Interest") in an amount
initially equal to a percentage of the Securities of such Series as
specified in the Prospectus Supplement. Such Series may also have the
benefit of a Cash Collateral Guaranty or Cash Collateral Account with an
initial amount on deposit therein, if any, as specified in the related
Prospectus Supplement which will be increased (i) to the extent the
Transferor elects, subject to certain conditions specified in such
Prospectus Supplement, to apply collections of Principal Receivables
allocable to the Collateral Interest to decrease the Collateral Interest,
(ii) to the extent collections of Principal Receivables allocable to the
Collateral Interest are required to be deposited into the Cash Collateral
Account as specified in such Prospectus Supplement and (iii) to the extent
excess collections of Finance Charge Receivables are required to be
deposited into the Cash Collateral Account as specified in such Prospectus
Supplement. The total amount of the Enhancement available pursuant to the
Collateral Interest and, if applicable, the Cash Collateral Guaranty or
Cash Collateral Account will be the lesser of the sum of the Collateral
Interest and the amount on deposit in the Cash Collateral Account and an
amount specified in the related Prospectus Supplement. The related
Prospectus Supplement will set forth the circumstances under which payments
which otherwise would be made to holders of the Collateral Interest will be
distributed to holders of Securities and, if applicable, the circumstances
under which payment will be made under the Cash Collateral Guaranty or
under the Cash Collateral Account.
Surety Bond or Insurance Policy
If so specified in the related Prospectus Supplement, insurance
with respect to a Series or one or more Classes thereof will be provided by
one or more insurance companies. Such insurance will guarantee, with
respect to one or more Classes of the related Series, distributions of
interest or principal in the manner and amount specified in the related
Prospectus
Supplement.
If so specified in the related Prospectus Supplement, a surety
bond will be purchased for the benefit of the holders of any Series or
Class of such Series to assure distributions of interest or principal with
respect to such Series or Class of Securities
in the manner and amount specified in the related Prospectus Supplement.
Spread Account
If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes thereof will be provided by the periodic
deposit of certain available excess cash flow from the Trust assets into an
account (the "Spread Account") intended to assist with subsequent
distribution of interest and principal on the Securities of such Class or
Series in the manner specified in the related Prospectus Supplement.
Reserve Account
If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes thereof will be provided by the
establishment of a reserve account (the "Reserve Account"). The Reserve
Account may be funded, to the extent provided in the related Prospectus
Supplement, by an initial cash deposit, the retention of certain periodic
distributions of principal or interest or both otherwise payable to one or
more Classes of Securities, including the Subordinated Securities, or the
provision of a letter of credit, guaranty, insurance policy or other form
of credit or any combination thereof. The Reserve Account will be
established to assist with the subsequent distribution of principal or
interest on the Securities of such Series or Class in the manner provided
in the related Prospectus Supplement.
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.
Unless otherwise specified in the Prospectus Supplement relating
to a Series of Securities, 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 and related Supplement.
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."
Security Ratings
Any rating of the Securities by a Rating Agency will indicate:
o its view on the likelihood that Securityholders will receive
required interest and principal payments; and
o its evaluation of the Receivables and the availability of any
Enhancement for the Securities.
Among the things a rating will not indicate are:
o the likelihood that principal payments will be paid on a scheduled
date;
o the likelihood that a Pay Out Event will occur;
o the likelihood that a United States withholding tax will be
imposed on non-U.S. Securityholders;
o the marketability of the Securities;
o the market price of the Securities; or
o whether the Securities are an appropriate investment for any
purchaser.
A rating will not be a recommendation to buy, sell or hold the Securities.
A rating may be lowered or withdrawn at any time
by a Rating Agency.
The Transferor will request a rating of the Securities offered by
this Prospectus and the Prospectus Supplement from at least one Rating
Agency. It will be a condition to the issuance of the Securities of each
Series or Class offered pursuant to this Prospectus and the related
Prospectus Supplement (including each Series that includes a Pre-Funding
Account) that they be rated in one of the four highest rating categories by
at least one nationally recognized rating organization (each such rating
agency selected by the Transferor to rate any Series, a "Rating Agency").
The rating or ratings applicable to the Securities of each Series or Class
offered hereby will be set forth in the related Prospectus Supplement.
Rating agencies other than those requested could assign a rating to the
Securities and such a rating could be lower than any rating assigned by a
Rating Agency chosen by the Transferor.
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 is
either a valid transfer and assignment to the Trust of all right, title,
and interest of the Transferor in and to the Receivables, except for the
interest of the Transferor as holder of the Exchangeable Transferor
Security and any other Investor Security of any Series then held by the
Transferor, 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 Uniform Commercial Code as in effect in the State of
Delaware (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, except for
certain tax and other governmental liens, subject to the limitations
described below. For a discussion of the Trust's rights arising from a
breach of these warranties, see "Description of the
Securities--Representations and Warranties."
The Transferor has represented that the Receivables are "accounts"
or "general intangibles" or "chattel paper" for purposes of the UCC. Both
the transfer and assignment of accounts and chattel paper and the transfer
of accounts and chattel paper as security for an obligation are treated
under Article 9 of the UCC as creating a security interest therein and are
subject to its provisions, and the filing of an appropriate financing
statement is required to perfect the security interest of the Trust.
If a transfer of general intangibles is deemed to create a security
interest, the UCC applies and filing of an appropriate financing statement
or statements is also required in order to perfect the Trust's security
interest. Financing statements covering the Receivables have been and will
be filed with the appropriate governmental authority to protect the
interests of the Trust in the Receivables. If a transfer of general
intangibles is deemed to be a sale, then the UCC is not applicable and no
further action under the UCC is required to protect the Trust's interest
from third parties.
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 the Receivables with
priority over the Trust's interest. Under the Pooling and Servicing
Agreement, however, the Transferor has represented and warranted that it
transferred the Receivables to the Trust free and clear of the lien of any
third party. In addition, the Transferor has covenanted that it will not
sell, pledge, assign, transfer, or grant any lien on any Receivable (or any
interest therein) other than to the Trust. A tax or government lien or
other nonconsensual 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. If the FDIC were appointed as
receiver of the Transferor, certain administrative expenses of the receiver
may also have priority over the interest of the Trust in such Receivable.
While the Bank is the Servicer, collections will be commingled with the
Bank's general funds and used for the Bank's benefit prior to each
Distribution Date. Accordingly, in the event of the insolvency of Direct
Merchants Bank, the Trust may not have a perfected security interest in
such collections. If the short-term deposit rating of the Bank is reduced
below A-1 or P-1 by the applicable Rating Agency, the Bank will be
obligated to cease commingling collections and commence depositing
collections into the Collection Account within two business days after the
date of processing.
Certain Matters Relating to Receivership
The Bank is chartered as a national banking association and is
subject to regulation and supervision by the Comptroller. If the Bank
becomes insolvent or is in an unsound condition or if certain other
circumstances occur, the Comptroller is authorized to appoint the FDIC as
receiver.
The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") sets forth certain powers that the FDIC may exercise as
receiver for the 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) the
interest was not taken or granted in contemplation of Direct Merchants
Bank's insolvency or with the intent to hinder, delay or defraud Direct
Merchants Bank or its creditors, (iv) 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 Trustee would 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 Trustee to establish its right to
those payments by submitting to and completing the administrative claims
procedure established under FIRREA, or the FDIC as 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
December 18, 1998, the FDIC proposed a statement of policy regarding the
treatment of asset-backed securitization transactions in the event of
conservatorship or receivership in which the FDIC stated that a claim for
"actual direct compensatory damages" is limited to such damages determined
as of the date of appointment of the FDIC as conservator or receiver. Since
the FDIC may delay repudiation or disaffirmation for up to 180 days
following such appointment, investors may not have a claim for interest
accrued during this 180 day period. In addition, in one case involving the
repudiation by the Resolution Trust Corporation, formerly a sister agency
of the FDIC, 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
market 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 the FDIC repudiated the Transferor's
obligations under the Pooling and Servicing 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.
Upon the appointment of a conservator or receiver or upon a
voluntary liquidation with respect to the Transferor, Direct Merchants Bank
or Metris, the Transferor will promptly give notice thereof to the Trustee,
and a Pay Out Event will occur with respect to all Series then outstanding.
Pursuant to the Pooling and Servicing Agreement and related Supplement,
newly created Principal Receivables will not be transferred to the Trust on
and after such appointment or voluntary liquidation, and the Trustee will
proceed to sell, dispose of or otherwise liquidate the Receivables in a
commercially reasonable manner and on commercially reasonable terms, unless
otherwise instructed within a specified period by the securityholders
representing undivided interests aggregating more than 50 percent of the
aggregate invested amount of each Series (or if any Series has more than
one Class, of each Class, and any other person specified in a related
Supplement), or unless required by the FDIC as receiver or conservator of
the Bank. Under the Pooling and Servicing Agreement and related Supplement,
the proceeds from the sale of the Receivables would be treated as
collections of the Receivables and the Investor Percentage of such proceeds
would be distributed to the Securityholders. If the only Pay Out Event to
occur is either the insolvency of the Transferor or the appointment of a
conservator or receiver for the Transferor, such receiver or conservator
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 conservator or receiver may have
the power to cause the early sale of the Receivables and the early
retirement of the Securities or to prohibit the continued transfer of
Principal Receivables to the Trust. However, if no Servicer Default other
than the conservatorship or receivership of the Servicer exists, the
conservator or receiver for the Servicer may have the power to prevent
either the Trustee and the Securityholders from appointing a successor
Servicer. See "Description of the 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.
Consumer Protection Laws
The relationship of the cardholder and credit card issuer is
extensively regulated by federal and state consumer protection 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. 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. In addition, these statutes limit customer
liability for unauthorized use, prohibit certain discriminatory practices
in extending credit, and impose certain limitations on the type of
account-related charges that may be assessed. Cardholders are entitled
under these laws to have payments and credits applied to the credit card
accounts promptly, to receive prescribed notices and to require billing
errors to be resolved promptly. A Trust may be liable for certain
violations of consumer protection laws that apply to the Receivables,
either as assignee from the Transferor with respect to obligations arising
before transfer of the Receivables to the Trust 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 his obligation to pay the amount of Receivables owing. The
Transferor has warranted and will warrant in the Pooling and Servicing
Agreement that all related Receivables have been and will be created in
compliance with the requirements of such laws. The Servicer has also agreed
in the Pooling and Servicing Agreement to indemnify the Trust, among other
things, for any liability arising from such violations caused by the
Servicer. For a discussion of the Trust's rights arising from the breach of
these warranties, see "Description of the Securities--Representations and
Warranties."
Various proposed laws and amendments to existing laws have from
time to time been introduced in Congress and certain state and local
legislatures that, if enacted, would further regulate the credit card
industry, certain of which would, among other things, impose a ceiling on
the rate at which a financial institution may assess finance charges and
fees on credit card accounts that would be substantially below the rates of
the finance charges and fees the Bank currently assesses on its accounts.
In particular, on June 19, 1997, a proposal to amend the Federal
Truth-in-Lending Act was introduced in the House of Representatives and
referred to the Committee on Banking and Financial Services, which would,
among other things, prohibit the imposition of certain minimum finance
charges and other fees, prohibit certain methods of calculating finance
charges, require prior notice of any increase in the interest rate assessed
with respect to a credit card account and limit the amount of certain fees.
Although such proposed legislation has not been enacted, there can be no
assurance that such a bill will not become law in the future. The potential
effect of any legislation which limits the amount of finance charges and
fees that may be charged on credit cards could be to reduce the portfolio
yield on the Accounts. If such portfolio yield is reduced, a Pay Out Event
may occur, and the Early Amortization Period would commence.
Application of federal and state bankruptcy and debtor relief laws
would affect the interests of the Securityholders if such laws result in
any Receivables of the Trust being written off as uncollectible when the
amount available under any Enhancement is equal to zero. See "Description
of the Securities--Defaulted Receivables; Dilution."
Claims and Defenses of Obligors 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 Obligors on
the Accounts in connection with the transfer of the Receivables to the
Trust.
Tax Matters
General
Set forth below is a general discussion of the material United
States federal income tax consequences of the purchase, ownership and
disposition of the 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 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
Securities. This discussion is intended as an explanatory discussion of the
possible effects of the classification of the 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 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 Securities in the initial distribution thereof, who are citizens
or residents of the United States, including domestic corporations and
partnerships, and who hold the 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.
Treatment of the Securities as Debt
The Transferor, the Servicer and each Security Owner will express
in the Pooling and Servicing Agreement and related Supplement the intent
that, for federal, state and local income and franchise tax purposes, the
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 related Supplement, and each
Security Owner, by acquiring an interest in a Security, will agree to treat
the 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 and related Supplement, 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 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 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 Securities as
debt for federal income tax purposes or otherwise makes the rationale of
those cases inapplicable to this situation.
Taxation of Interest Income of U.S. Securityholders
The following discussion is based in part upon Treasury
Regulations interpreting the original issue discount ("OID") provisions of
Sections 1271 through 1275 of the Code which were adopted as final on
January 27, 1994 (the "OID Regulations"). The OID Regulations are, however,
subject to varying interpretations and do not address all issues that could
affect Security Owners.
Stated Interest. It is not expected that the Securities will be
issued with OID. Based upon the foregoing opinions, and assuming that all
of the Securities are treated as debt, the stated interest on 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 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 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 Security were not
materially different from its coupon, this treatment would have no
significant effect on Security Owners using the accrual method of
accounting. However, cash method Security Owners may be required to report
income with respect to the Securities in advance of the receipt of cash
attributable to such income.
While it is not anticipated that the Securities will be issued at
a discount from their stated principal amount that is greater than a de
minimis amount, under Treasury Regulations the 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 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
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 Securities if they are issued at a
price that is less than a de minimis discount from their stated principal
amount.
If the 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 a 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 Securities are sold to the public) will
constitute OID. A Security Owner must include OID in income as interest
over the term of the 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 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
Securities are issued with OID. Any Security issued with de minimis OID
must include such OID in income proportionately as principal payments are
made on such Security.
Discount and Premium. A subsequent holder who purchases a 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
Security, and for the deferral of interest deductions with respect to debt
incurred to acquire or carry the market discount 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 a 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 other taxable disposition.
A subsequent holder who purchases a Security at a premium may
elect to amortize and deduct this premium over the remaining term of the
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 a 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 Securityholders, and other interest income must be
reported by Securityholders that report income on the accrual method, as it
accrues, whether or not such 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 OID in excess of de minimis
OID, the amount of income reported by a Securityholder in any period could
exceed the amount of cash distributed to such holder in that period. A
Securityholder generally will realize a loss where either principal or
previously accrued interest are determined to be uncollectible with respect
to the 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.
Sale, Exchange or Retirement of Securities
Generally, capital gain or loss will be recognized on a sale or
other taxable disposition of 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
Securities. A Security Owner's tax basis in a 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
Security and decreased by any bond premium previously amortized and any
principal payments previously received by such Security Owner with respect
to the Security. Subject to the market discount rules of the Code discussed
above under "--Taxation of Interest Income of U.S.
Securityholders--Discount and Premium", any such gain or loss will be
capital gain or loss if the 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 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.)
Possible Alternative Characterizations
Although, as described above, it is the opinion of Special Tax
Counsel that the 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 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 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 Securities.
Non-U.S. Securityholders
As noted above, Special Tax Counsel will render its opinion,
subject to the analysis and assumptions contained therein, that the
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 Securities that are Foreign Persons. 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
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 a 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 a Security held by a
Foreign Person is effectively connected with the conduct of
a trade or business in the United States by the Foreign
Person, the holder (although exempt from the withholding tax
previously discussed if an appropriate statement is
furnished) generally will be subject to United States
federal income tax on the interest, gain or income at
regular federal income tax rates. In addition, if the
Foreign Person is a foreign corporation, it may be subject
to a branch profits tax equal to 30 percent of its
"effectively connected earnings and profits" within the
meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an
applicable tax treaty.
If the IRS were to contend successfully that the 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
Securities were recharacterized as interests in a "publicly traded
partnership" taxable as a corporation, to the extent distributions on the
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.
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 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 are
not explained in the FASIT legislation.
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.
State and Local Taxation
Because of the differences in state tax laws and their
applicability to different investors, it is not possible to summarize the
potential state and local tax consequences of holding the Securities.
ACCORDINGLY, PURCHASERS OF SECURITIES SHOULD CONSULT THEIR RESPECTIVE TAX
ADVISORS REGARDING THE STATE AND LOCAL TAX CONSEQUENCES OF PURCHASING ANY
CLASS OF SECURITIES.
Employee Benefit Plan Considerations
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on those employee
benefit plans to which they apply ("Plans") and on those persons who are
fiduciaries with respect to such Plans. In accordance with ERISA's general
fiduciary standards, before investing in Securities, a Plan fiduciary
should determine whether such an investment (a) is permitted under the
governing Plan instruments; (b) is appropriate for the Plan in view of its
overall investment policy and the composition and diversification of its
portfolio; and (c) is prudent considering the factors discussed in this
Prospectus.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of a Plan and persons who have certain
specified relationships to the Plan ("parties in interest" within the
meaning of ERISA or "disqualified persons" within the meaning of the Code).
Prohibited transactions may generate excise taxes and other liabilities.
Thus, a Plan fiduciary considering an investment in the Securities should
also consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code.
For example, regardless of whether the Trust was deemed to hold
"plan assets" of Plans that are Security Owners (as discussed below), the
purchase of Securities by a Plan with respect to which the Transferor, the
Trustee, or underwriters or any of their affiliates is a "party in
interest" under ERISA or a "disqualified person" under the Code could
constitute a prohibited transaction under the Code or ERISA unless an
exemption is applicable. Accordingly, fiduciaries of a Plan with respect to
which the Transferor, the Trustee, or underwriters or any of their
affiliates is a "party in interest" or "disqualified person" should consult
their own counsel concerning the propriety of the investment prior to
making the purchase.
Certain transactions involved in the operation of the Trust might
also be deemed to constitute prohibited transactions under ERISA and the
Code, if assets of the Trust were deemed to be assets of an investing Plan.
The U.S. Department of Labor (the "DOL") has issued a regulation (the
"Regulation") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity (such as the
Trust) for purposes of the reporting and disclosure and fiduciary
responsibility provisions of ERISA. If assets of the Trust were deemed to
be assets of an investing Plan, any person who is a "fiduciary," as
described in the preceding paragraph, with respect to Trust assets will be
a fiduciary of the investing Plan, thus increasing the scope of activities
which could be considered prohibited transactions under ERISA and the Code.
If investments by Plans are made in the Trust, the Trust could be deemed to
hold plan assets unless one of the exceptions contained in the Regulation
is applicable to the Trust.
The Regulation contains an exception which provides that if a Plan
acquires a "publicly-offered security," the issuer of the security is not
deemed to hold plan assets solely by reason of such acquisition. A
publicly-offered security is a security that is (i) freely transferable,
(ii) part of a class of securities that is 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 the 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 SEC) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred.
Although it is anticipated that the conditions of this exception may be met
with respect to certain Classes of Securities, no assurance can be given,
and no monitoring or other measures will be taken to ensure that the
exception will be met with respect to any such Class.
The Regulation also states that an entity's assets will not be
deemed to be plan assets if equity participation in the entity by "benefit
plan investors" (e.g., employee welfare benefit plans and employee pension
benefit plans defined pursuant to Section 3(3) of ERISA, trusts described
in Section 401(a) of the Code or a plan described in Section 403(a) of the
Code, which trust or plan is exempt from tax under Section 501(a) of the
Code, an individual retirement account or annuity under Section 408 of the
Code and any entity whose underlying assets include plan assets by reason
of a plan's investment in the entity) is not "significant." Equity
participation in an entity by benefit plan investors is not significant on
any date if, immediately after the most recent acquisition of any equity
interests in the entity, less than 25% of the value of each class of equity
interests in the entity (excluding the value of any equity interests held
by the Transferor, the Trustee, or underwriters or any of their affiliates)
is held by benefit plan investors. No assurance can be given as to whether
the value of any class of equity interests in the Trust held by benefit
plan investors will be less than 25%, or whether the value will remain
below 25%.
If interests in the Certificates of a Series fail to meet the
criteria of publicly-offered securities or investment by benefit plan
investors becomes significant and the Trust's assets are deemed to include
assets of Benefit Plans that are Certificateholders, transactions involving
the Trust and "parties in interest" or "disqualified persons" with respect
to such plans might be prohibited under Section 406 of ERISA and Section
4975 of the Code. In addition, the Transferor or any underwriter of such
Series may be considered to be a party in interest, disqualified person or
fiduciary with respect to an investing Benefit Plan. Accordingly, an
investment by a Benefit Plan in Certificates may be a prohibited
transaction under ERISA and the Code. Thus, for example, if a participant
in any Benefit Plan is a cardholder of one of the Accounts, under DOL
interpretations the purchase of interests in Certificates by such plan
could constitute a prohibited transaction. Such transactions may, however,
be subject to statutory or administrative exemptions from the penalties
normally associated with prohibited transactions. Five class exemptions
issued by DOL that could apply in such event are DOL Prohibited Transaction
Exemption ("PTE") 84-14 (Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional Asset Managers), 91-38
(Class Exemption for Certain Transactions Involving Bank Collective
Investment Funds), 90-1 (Class Exemption for Certain Transactions Involving
Insurance Company Pooled Separate Accounts), 95-60 (Class Exemption for
Certain Transactions Involving Insurance Company General Accounts) and
96-23 (Class Exemption for Plan Asset Transactions Determined by In-House
Asset Managers). There is no assurance that these exemptions, even if all
of the conditions specified therein are satisfied, or any other exemption
will apply to all transactions involving the Trust's assets.
IN LIGHT OF THE FOREGOING, FIDUCIARIES OF A BENEFIT PLAN
CONSIDERING THE PURCHASE OF INTERESTS IN CERTIFICATES OF ANY SERIES SHOULD
CONSULT THEIR OWN COUNSEL AS TO WHETHER THE ASSETS OF THE TRUST WHICH ARE
REPRESENTED BY SUCH INTERESTS WOULD BE CONSIDERED PLAN ASSETS, AND WHETHER,
UNDER THE GENERAL FIDUCIARY STANDARDS OF INVESTMENT PRUDENCE AND
DIVERSIFICATION, AN INVESTMENT IN CERTIFICATES OF ANY SERIES IS APPROPRIATE
FOR THE BENEFIT PLAN TAKING INTO ACCOUNT THE OVERALL INVESTMENT POLICY OF
THE BENEFIT PLAN AND THE COMPOSITION OF THE BENEFIT PLAN'S INVESTMENT
PORTFOLIO. In addition, fiduciaries should consider the consequences that
would apply if the Trust's assets were considered plan assets, the
applicability of exemptive relief from the prohibited transaction rules and
whether all conditions for such exemptive relief would be satisfied.
In particular, insurance companies considering the purchase of
Securities of any Series should consult their own employee benefits counsel
or other appropriate counsel with respect to the United States Supreme
Court's decision in John Hancock Mutual Life Insurance Co. v. Harris Trust
& Savings Bank, 114 S. Ct. 517 (1993) ("John Hancock"). In John Hancock,
the Supreme Court held that assets held in an insurance company's general
account may be deemed to be "plan assets" of plans that were issued
policies supported by such general account under certain circumstances;
however, the Small Business Job Protection Act of 1996 added a 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. Section 401(c)
provides that assets underlying general account policies issued before
December 31, 1998 will not be considered "plan assets" to the extent
criteria set forth in DOL regulations are satisfied. Section 401(c) also
requires the DOL to issue regulations establishing such criteria. On
December 22, 1997, the DOL published proposed regulations (the "General
Account Regulations") for this purpose. The General Account Regulations
provide that when a plan acquires a transition policy issued by an
insurance company on or before December 31, 1998, which is supported by
assets of the insurance company's general account, the plan's assets will
include the policy but not the underlying assets of the general account to
the extent the requirements set forth in the General Account Regulations
are satisfied. The General Account Regulations also require an independent
fiduciary who has the authority to manage the plan's assets to expressly
authorize the acquisition of such a transition policy. If adopted as
proposed, the General Account Regulations would not apply to any general
account policies issued after December 31, 1998. Accordingly, investors
should analyze whether John Hancock, Section 401(c) and the General Account
Regulations may have an impact with respect to their purchase of the
Securities of any Series.
Plan of Distribution
The Transferor may sell Securities (a) through underwriters or
dealers, (b) directly to one or more purchasers, or (c) through agents. The
related Prospectus Supplement will set forth the terms of the offering of
any Securities offered hereby, including, without limitation, the names of
any underwriters, the purchase price of such Securities and the proceeds to
the Transferor from such sale, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price
and any discounts or concessions allowed or reallowed or paid to dealers.
If underwriters are used in a sale of any Securities of a Series
offered hereby, such Securities will be acquired by the underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices to be determined at the time of sale or at the
time of commitment therefor. Such Securities may be offered to the public
either through underwriting syndicates represented by managing underwriters
or by underwriters without a syndicate. Unless otherwise set forth in the
related Prospectus Supplement, the obligations of the underwriters to
purchase such Securities will be subject to certain conditions precedent,
and the underwriters will be obligated to purchase all of such Securities
if any of such Securities are purchased. Any initial public offering price
and any discounts or concessions allowed or reallowed or paid to dealers
may be changed from time to time.
Securities may also be sold directly by the Transferor or through
agents designated by the Transferor from time to time. Any agent involved
in the offer or sale of Securities will be named, and any commissions
payable by the Transferor to such agent will be set forth, in the related
Prospectus Supplement. Unless otherwise indicated in the related Prospectus
Supplement, any such agent will act on a best efforts basis for the period
of its appointment.
Any underwriters, agents or dealers participating in the
distribution of Securities may be deemed to be underwriters, and any
discounts or commissions received by them on the sale or resale of
Securities may be deemed to be underwriting discounts and commissions,
under the Securities Act. Agents and underwriters may be entitled under
agreements entered into with the Transferor to indemnification by the
Transferor against certain civil liabilities, including liabilities under
the Securities Act, or to contribution with respect to payments that the
agents or underwriters may be required to make in respect thereof. Agents
and underwriters may be affiliates or customers of, engage in transactions
with, or perform services for, the Transferor or its affiliates in the
ordinary course of business.
Each underwriting agreement will provide that the Transferor will
indemnify the related underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
Legal Matters
Certain legal matters relating to the 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 issuance of the Securities will be passed upon for the
underwriters by Brown & Wood LLP, New York, New York.
Reports to Securityholders
Unless and until Definitive Securities are issued, monthly and
annual reports, containing information concerning the Trust and prepared by
the Servicer, will be sent on behalf of the Trust to Cede & Co. as nominee
of DTC and registered holder of the related Securities, pursuant to the
Pooling and Servicing Agreement. See "Description of the
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. The Servicer does not intend to send any financial reports of
Metris Receivables, Inc. or Direct Merchants Bank to Securityholders or to
the Security Owners. The Servicer will file with the SEC such periodic
reports with respect to each Trust as are required under the Exchange Act
and the rules and regulations of the SEC thereunder.
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
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" in the attached Prospectus
Supplement.
Where Can You Find More Information
We filed a registration statement relating to the Securities with
the SEC. This Prospectus is part of the registration statement, but the
registration statement includes additional information.
The Servicer will file with the SEC all required annual, monthly
and special SEC reports and other information about
each Trust.
You may read and copy any reports, statements or other information
we file at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the SEC. Please call the SEC at
(800) SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings are also available to the public on the
SEC Internet site (http://www.sec.gov).
The SEC allows us to "incorporate by reference" information we
file with it, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by
reference is considered to be part of this Prospectus. Information that we
file later with the SEC will automatically update the information in this
Prospectus. In all cases, you should rely on the later information over
different information included in this Prospectus or the Prospectus
Supplement. We incorporate by reference any future annual, monthly and
special SEC reports and proxy materials filed by or on behalf of the Trust
until we terminate our offering of the Securities.
As a recipient of this Prospectus, you may request a copy of any
document we incorporate by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference), at no
cost, by writing or calling us at: Metris Receivables, Inc., 600 South
Highway 169, Suite 300, St. Louis Park, Minnesota 55426, (612) 417-5645.
Index of Terms for the Prospectus
Term Page
Accounts...............................................................2
Additional Accounts...................................................26
Approved Account......................................................25
Accumulation Period...................................................19
Adaptive Control System................................................4
Addition Date.........................................................27
Adjustment Payment....................................................33
Amendment Closing Date................................................26
Amortization Period....................................................9
Assignment............................................................27
Automatic Additional Accounts.........................................26
Bank...............................................................2, 10
Bank Purchase Agreement................................................8
Cash Collateral Account...............................................41
Cash Collateral Guaranty..............................................41
Cash Equivalents......................................................29
Cedelbank.............................................................16
Cedelbank Customers...................................................16
Change of Control.....................................................10
Class.................................................................13
Code..................................................................50
Collateral Interest...................................................41
Collection Account....................................................28
Collections............................................................8
Comptroller............................................................6
Contract..............................................................26
Controlled Accumulation Amount........................................20
Controlled Amortization Amount........................................19
Controlled Amortization Period........................................19
Controlled Deposit Amount.............................................19
Controlled Distribution Amount........................................19
Cooperative...........................................................16
Credit and Collection Policy..........................................28
Credit Card Originator................................................25
Default Recognition Date..............................................32
Default Recognition Percentage........................................33
Defaulted Account.....................................................32
Defaulted Receivable..................................................32
Defeased Series.......................................................33
Definitive Securities.................................................17
Depositaries..........................................................14
Depository............................................................14
Determination Date....................................................23
Dilution..............................................................33
Direct Merchants Bank.................................................10
Direct Merchants Bank Portfolio........................................2
Discount Option Receivables...........................................20
Discount Percentage...................................................20
Distribution Account..................................................28
Distribution Date.....................................................18
DOL...................................................................55
DTC................................................................A-1-1
DTC Participants......................................................14
Early Amortization Period.............................................20
Eligible Account......................................................25
Eligible Receivable...................................................25
Enhancement...........................................................40
Enhancement Invested Amount...........................................41
Enhancement Percentage................................................30
ERISA.................................................................55
Euroclear.............................................................16
Euroclear Operator....................................................16
Euroclear Participants................................................16
Euroclear System ....................................................16
Excess Finance Charge Collections.....................................31
Excess Funding Account............................................28, 31
Exchange..............................................................21
Exchange Act..........................................................14
Exchangeable Transferor Security...................................2, 13
Excluded Accounts.....................................................26
Expected Final Payment Date............................................8
External Prospects....................................................10
FASIT.................................................................54
FASIT Provisions......................................................54
FCI...................................................................10
FDIC..................................................................28
FDR....................................................................2
FICO scores............................................................3
Finance Charge Collections.............................................2
Finance Charge Receivables.............................................8
Fingerhut..............................................................3
Fingerhut Customers...................................................10
Fingerhut Database....................................................11
Fingerhut Scores......................................................11
FIRREA................................................................47
Foreign Person........................................................53
Full Invested Amount..................................................32
Funding Period........................................................32
General Account Regulations...........................................56
Global Securities..................................................A-1-1
Indirect Participants.................................................14
Initial Closing Date..................................................21
Insolvency Event......................................................35
Interest Funding Account..........................................18, 28
Invested Amount.......................................................13
Investment Company Act................................................24
Investor Charge-Off...................................................33
Investor Interest.....................................................13
Investor Percentage...................................................30
Investor Securities...................................................21
IRS...................................................................50
John Hancock..........................................................56
L/C Bank..............................................................41
Lee Company...........................................................10
MasterCard International...............................................3
Metris................................................................10
Metris Direct.........................................................10
MGT/EOC...............................................................16
Minimum Aggregate Principal Receivables...............................26
Minimum Transferor Interest...........................................26
Minimum Transferor Percentage.........................................26
Monthly Period........................................................18
Monthly Servicing Fee.................................................35
Moody's...............................................................28
New Regulations.......................................................54
Notice Date...........................................................27
Obligors...............................................................8
OID...................................................................51
OID Regulations.......................................................51
Paired Series.........................................................31
Participants..........................................................14
Pay Out Event.........................................................34
Paying Agent..........................................................29
Payment Date...........................................................5
Periodic Finance Charges...............................................5
Permitted Lien........................................................23
Plans.................................................................55
Pooling and Servicing Agreement........................................2
Pre-Funding Account...................................................32
Pre-Funding Amount....................................................32
Prepayable Instrument.................................................51
Principal Account.....................................................28
Principal Amortization Period.........................................19
Principal Collections..................................................2
Principal Funding Account.............................................18
Principal Receivables..................................................8
Principal Shortfall...................................................30
Principal Terms.......................................................22
Proprietary Modeling System............................................3
Proprietary Score......................................................3
Prospectus Supplement..................................................2
PTE...................................................................56
Purchase Agreement....................................................21
Purchase Agreements................................................8, 21
Purchase Termination Date.............................................45
Qualified Institution.................................................28
Rating Agency.........................................................46
Ratings Event.........................................................26
Receivables............................................................2
Record Date...........................................................14
Recoveries.............................................................6
Regulation............................................................55
Related Person........................................................40
Relevant UCC State....................................................25
Reserve Account.......................................................42
Restart Date..........................................................26
Retained Interest.....................................................23
Retained Percentage...................................................35
Revolving Period......................................................19
SEC...................................................................14
Securities.............................................................2
Securities Act........................................................22
Security Owner........................................................14
Security Rate.........................................................18
Securityholders.......................................................17
Series.................................................................2
Series C Preferred....................................................10
Series Default Amount.................................................33
Service Transfer......................................................37
Servicer...............................................................2
Servicer Default......................................................37
Shared Principal Collections..........................................19
SIPC..................................................................29
Special Tax Counsel...................................................50
Spin Off..............................................................10
Spread Account........................................................42
Standard & Poor's ....................................................28
Supplement............................................................13
Supplemental Accounts.................................................26
Supplemental Security.................................................23
Suppress File.........................................................11
Tax Certificate....................................................A-1-3
Tax Opinion...........................................................23
Termination Date......................................................34
Terms and Conditions..................................................17
Transfer Agent and Registrar..........................................18
Transfer Date.....................................................19, 29
Transferor.........................................................2, 11
Transferor Amount ....................................................13
Transferor Interest...................................................13
Treasury Regulations..................................................50
Trigger Event.........................................................35
Trust..................................................................2
Trust Accounts........................................................28
Trustee................................................................2
U.S. Person........................................................A-1-3
UCC...................................................................46
Utah Bank.............................................................11
Variable Funding Securities...........................................13
Variable Funding Supplement...........................................13
VISA...................................................................3
Waiver Agreement......................................................10
ANNEX I
Global Clearance, Settlement and
Tax Documentation Procedures
Except in certain limited circumstances, the globally offered
Metris Master Trust Asset Backed Trust Securities (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"), Cedelbank 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 Cedelbank 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 Cedelbank or Euroclear and
DTC Participants holding Securities will be effected on a
delivery-against-payment basis through the respective Depositaries of
Cedelbank 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,
Cedelbank 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
Cedelbank 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 Cedelbank Customers and/or Euroclear Participants.
Secondary market trading between Cedelbank Customers or Euroclear
Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank customer or Euroclear
participant. When Global Securities are to be transferred from the account
of a DTC Participant to the accounts of a Cedelbank Customer or a Euroclear
Participant, the purchaser will send instructions to Cedelbank or Euroclear
through a Cedelbank Customers or Euroclear Participant at least one
business day prior to settlement. Cedelbank 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 Cedelbank Customer'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 Cedelbank or Euroclear cash debit will be valued instead as of
the actual settlement date.
Cedelbank Customers 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
Cedelbank or Euroclear. Under this approach, they may take on credit
exposure to Cedelbank or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line
of credit to them, Cedelbank Customers 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, Cedelbank Customers 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 Cedelbank Customer'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 Cedelbank
Customers 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 Cedelbank or Euroclear seller and DTC purchaser.
Due to time zone differences in their favor, Cedelbank Customer 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 Cedelbank or Euroclear
through a Cedelbank Customer or Euroclear Participant at least one business
day prior to settlement. In these cases, Cedelbank 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 Cedelbank Customer or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedelbank Customer'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 Cedelbank Customer 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 Cedelbank
Customer's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Cedelbank
Customers 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 Cedelbank or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Cedelbank 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 Cedelbank 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 Cedelbank Customers or
Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedelbank 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
58th Floor
New York, NY 10048
INDEPENDENT ACCOUNTANTS TO THE TRANSFEROR
KPMG Peat Marwick LLP
4200 Norwest Center
90 South 7th Street
Minneapolis, Minnesota 55402-3900
PART II
Item 14. Other Expenses of Issuance and Distribution
Registration Fee.....................................................$278
Printing and Engraving..................................................*
Trustee's Fees..........................................................*
Legal Fees and Expenses.................................................*
Blue Sky Fees and Expenses..............................................*
Accountants' Fees and Expenses..........................................*
Rating Agency Fees......................................................*
Miscellaneous Fees................................................______*
Total...............................................$
- ----------
* To be supplied by amendment.
Item 15. Indemnification of Directors and Officers
The Registrant's certificate of incorporation and by-laws provide
for the indemnification of the directors, officers, employees, and agents
of the Registrant to the full extent that may be permitted by Delaware law
from time to time. Certain provisions of the Registrant's certificate of
incorporation protect the Registrant's directors against personal liability
for monetary damages resulting from breaches of their fiduciary duty of
care; however, the Registrant's directors remain liable for breaches of
their duty of loyalty to the Registrant, as well as for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, transactions from which a director derives improper
personal benefit and liability under section 174 of the Delaware General
Corporation Law, which makes directors personally liable for unlawful
dividends or unlawful stock repurchases or redemptions in certain
circumstances and expressly sets forth a negligence standard with respect
to such liability.
Under Section 145 of the Delaware General Corporation Law,
directors, officers, employees, and other individuals may be indemnified
against expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative, or investigative
(other than a "derivative action" by or in the right of the corporation) if
they acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful. A similar standard of care is applicable in the
case of a derivative action, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with defense or
settlement of such an action and Delaware law requires court approval
before there can be any indemnification of expenses where the person
seeking indemnification has been found liable to the corporation.
The Registrant's parent corporation currently maintains a policy
insuring, subject to certain exceptions, its directors and officers and the
directors and officers of its subsidiaries against liabilities which may be
incurred by such persons acting
in such capacities.
Item 16. Exhibits and Financial Statements
Exhibits
1 --Form of Underwriting Agreement.*
3(a) --Amended and Restated Certificate of Incorporation of Metris
Receivables, Inc. (incorporated herein by reference to
Registration Statement No. 333-23045).
3(b) --By-laws of Metris Receivables, Inc. (incorporated herein by
reference to Registration Statement No. 33-99514).
4(a) --Amended and Restated Pooling and Servicing Agreement, dated
as of July 30, 1998 among the Transferor, the Servicer and
the Trustee (incorporated herein by reference to Registration
Statement No. 333-61343).
4(b) --Form of Series 1999-1 Supplement.*
4(c) --Amended and Restated Bank Receivables Purchase Agreement
dated as of July 30, 1998 between Direct Merchants Bank and
Metris (incorporated herein by reference to Registration
Statement No. 333-61343).
4(d) --Amended and Restated Receivables Purchase Agreement dated
as of July 30, 1988 between Metris and the Transferor
(incorporated herein by reference to Registration Statement
No. 333-61343).
5 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to legality.*
8 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to tax matters.*
24 --Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(Contained in Exhibits 5 and 8).*
25 --Power of Attorney (contained on the signature page).
- ----------
* To be filed by amendment.
Item 17. Undertakings
The undersigned registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement securities in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 14 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrants will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(d) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(e) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Trust's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the state of Minnesota, city of
St. Louis Park, on April 9, 1999.
METRIS RECEIVABLES, INC.
By: /s/ PAUL T. RUNICE
----------------------------------
Paul T. Runice
Senior Vice President and
Treasurer
METRIS MASTER TRUST
(Co-Registrant)
By: METRIS RECEIVABLES, INC.
(Originator of the Trust)
By: /s/ PAUL T. RUNICE
----------------------------------
Paul T. Runice
Senior Vice President and
Treasurer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does
hereby constitute and appoint both David D. Wesselink and Paul T. Runice
his or her true and lawful attorney-in-fact and agent, each with full power
of substitu tion, for him or her and on his or her behalf to sign, execute
and file this Registration Statement and any or all amendments (including,
without limitation, post-effective amendments and any amendment or
amendments increasing the amount of securities for which registration is
being sought) to this Registration Statement, with all exhibits and any and
all documents re quired to be filed with respect thereto, with the
Securities and Exchange Commission or any regulatory authority, granting
unto such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all
intents and purposes as he or she might or could do if personally present,
hereby ratifying and confirming all that such attorney-in-fact and agents
may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following
persons in the capacities indicated on April 9, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C> <C>
/s/ DAVID D.WESSELINK
- --------------------------- President (Principal Executive Officer)
David D. Wesselink
/s/ PAUL T. RUNICE
- --------------------------- Senior Vice President and (Principal Financial Officer)
Paul T. Runice Treasurer
/s/ JEAN C. BENSON
- --------------------------- Vice President and Controller (Principal Accounting Officer)
Jean C. Benson
/s/ DAVID D. WESSELINK
- --------------------------- Director
David D. Wesselink
/s/ JEAN C. BENSON
- --------------------------- Director
Jean C. Benson
/s/ JEFFREY GROSKLAGS
- --------------------------- Director
Jeffrey Grosklags
/s/ JAMES B, O'NEILL
- --------------------------- Director
James B. O'Neill
/s/ RUTH K. LAVELLE
- --------------------------- Director
Ruth K. Lavelle
*By: /s/ DAVID D. WESSELINK
----------------------
David D. Wesselink
Attorney-in-fact
*By: /s/ PAUL T. RUNICE
----------------------
Paul T. Runice
Attorney-in-fact
</TABLE>
EXHIBIT INDEX
EXHIBIT NO.
1 --Form of Underwriting Agreement.*
3(a) --Amended and Restated Certificate of Incorporation of Metris
Receivables, Inc. (incorporated herein by reference to
Registration Statement No. 333-23045).
3(b) --By-laws of Metris Receivables, Inc. (incorporated herein by
reference to Registration Statement No. 33-99514).
4(a) --Amended and Restated Pooling and Servicing Agreement
(incorporated herein by reference to Registration Statement
No. 333-61343).
4(b) --Form of Series 1999-1 Supplement.*
4(c) --Amended and Restated Bank Receivables Purchase Agreement
dated as of July 30, 1998 between Direct Merchants Bank and
Metris (incorporated herein by reference to Registration
Statement No. 333-61343).
4(d) --Amended and Restated Receivables Purchase Agreement dated
as of July 30, 1998 between Metris and the Transferor
(incorporated herein by reference to Registration Statement
No. 333-61343).
5 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to legality.*
8 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to tax matters.*
24 --Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(Contained in Exhibits 5 and 8).*
25 --Power of Attorney (contained on the signature page).
* To be filed by Amendment.
