PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED DECEMBER 1, 1999
METRIS MASTER TRUST
$300,000,000 CLASS A FLOATING RATE ASSET BACKED SECURITIES, SERIES 1999-3
METRIS RECEIVABLES, INC.
Transferor
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Servicer
Principal Amount $300,000,000
Proceeds to the Transferor $299,145,000 (99.715%)
Interest Rate one-month LIBOR + 0.42% p.a.
Interest Payment Dates monthly on the 20th
First Interest Payment Date January 20, 2000
Expected Final Payment Date November 21, 2005
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 WILL HAVE THE BENEFITS OF AN INTEREST RATE CAP.
THESE SECURITIES WILL ALSO RECEIVE THE BENEFITS OF AN INSURANCE POLICY
ISSUED BY MBIA INSURANCE CORPORATION.
[MBIA LOGO]
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-10 OF THIS PROSPECTUS SUPPLEMENT.
BEAR, STEARNS & CO. INC. WILL OFFER TO THE PUBLIC THE CLASS A
SECURITIES AT VARYING PRICES TO BE DETERMINED AT THE TIME OF SALE. THE
PROCEEDS TO METRIS RECEIVABLES, INC. FROM THE SALE OF THE CLASS A
SECURITIES WILL BE APPROXIMATELY 99.715% OF THE PRINCIPAL BALANCE OF THE
CLASS A SECURITIES, BEFORE DEDUCTING EXPENSES.
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 IS A
CRIMINAL OFFENSE.
These securities are offered subject to availability.
We expect that these securities will be delivered in book-entry form
on December 9, 1999 through The Depository Trust Company, Cedelbank,
societe anonyme and the Euroclear System.
Bear, Stearns & Co. Inc.
The date of this Prospectus Supplement is December 1, 1999
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-10
Potential Early Repayment or Delayed
Payment due to Reduced Portfolio
Yield...............................................................S-10
Voting Rights May Be Exercised by MBIA....................................S-13
Limited History of Direct Merchants Bank,
the Trust and the Trust Portfolio...................................S-14
Allocations of Charged-Off Receivables Could
Reduce Payments to Securityholders..................................S-14
Limited Ability to Resell Securities......................................S-15
Certain Liens Could Be Given Priority
Over Your Securities................................................S-15
Insolvency or Bankruptcy of Metris Receivables,
Inc., Direct Merchants Bank or Metris
Companies Inc. Could Result in Accelerated,
Delayed or Reduced Payments to
Securityholders.....................................................S-15
Negative Carry............................................................S-17
Issuance of Additional Series by the Trust
May Affect the Timing of Payments...................................S-17
Individual Securityholders Will Have Limited
Control of Trust Actions............................................S-18
Rating of Your Securities May be Reduced..................................S-18
TRUST CREDIT CARD PORTFOLIO...............................................S-19
General...................................................................S-19
Growing Credit Card Portfolio by Portfolio
Acquisitions........................................................S-19
Assessment of Fees and Finance and other
Charges.............................................................S-20
Delinquency and Loss Experience...........................................S-21
Recoveries................................................................S-22
THE RECEIVABLES...........................................................S-22
General...................................................................S-22
MATURITY CONSIDERATIONS...................................................S-26
Accumulation Period.......................................................S-26
Early Amortization Period.................................................S-27
Pay Out Events............................................................S-27
Payment Rates.............................................................S-28
RECEIVABLE YIELD CONSIDERATIONS...........................................S-29
USE OF PROCEEDS...........................................................S-29
DESCRIPTION OF MBIA.......................................................S-30
MBIA ....................................................................S-30
MBIA Financial Information................................................S-30
Where You Can Obtain Additional Information
About MBIA..........................................................S-31
Year 2000 Readiness Disclosure............................................S-31
Financial Strength Ratings of MBIA........................................S-31
Experts...................................................................S-32
DESCRIPTION OF THE SECURITIES.............................................S-32
General...................................................................S-32
Status of the Securities..................................................S-34
Previously Issued Series..................................................S-34
Interest Payments.........................................................S-34
Principal Payments........................................................S-35
Postponement of Accumulation Period.......................................S-36
Subordination.............................................................S-37
The Interest Rate Caps....................................................S-37
Allocation Percentages....................................................S-39
Redirected Cash Flows.....................................................S-41
Redirected Principal Collections..........................................S-42
Application of Collections................................................S-43
Coverage of Interest Shortfalls...........................................S-47
Shared Principal Collections..............................................S-48
Defaulted Receivables; Dilution...........................................S-48
Investor Charge-Offs......................................................S-49
Principal Funding Account.................................................S-49
Accumulation Period Reserve Account ......................................S-50
The Policy................................................................S-51
Paired Series.............................................................S-52
Defeasance................................................................S-53
Final Payment of Principal; Termination...................................S-53
Pay Out Events............................................................S-54
Servicing Compensation and Payment
of Expenses.........................................................S-56
Reports to Securityholders................................................S-57
GENERAL INFORMATION.......................................................S-57
ERISA CONSIDERATIONS......................................................S-58
Class A Securities........................................................S-58
Consultation with Counsel.................................................S-58
UNDERWRITING..............................................................S-58
INDEX OF TERMS FOR PROSPECTUS SUPPLEMENT..................................S-60
ANNEX I- PREVIOUSLY ISSUED SERIES........................................A-I-1
ANNEX II - CONSENT OF INDEPENDENT ACCOUNTANTS ..........................A-II-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
1999-3 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 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)
Insurer: MBIA Insurance Company--"MBIA"
Interest Rate Cap Provider: Bank of Montreal, Chicago Branch
Pricing Date: December 1, 1999
Closing Date: December 9, 1999
Clearance and Settlement: DTC/Cedelbank/Euroclear
Trust Assets: receivables originated in MasterCard, VISA
and co-branded accounts, including recoveries
on charged-off receivables and the benefits
of the MBIA insurance policy
Series Structure: Amount % of Total Series
Class A $300,000,000 91%
Class B $ 29,670,330 9%
Annual Servicing Fee: 2.0%
CLASS A
Anticipated Ratings:
(Moody's/Standard & Poor's) Aaa/AAA
Credit Enhancement: subordination of Class B and MBIA
insurance policy
Interest Rate: one-month LIBOR + 0.42% p.a.
Interest Accrual Method: actual/360
Interest Payment Dates: monthly on the 20th
Interest Rate Index Reset Date: 2 business days before each interest
payment date
First Interest Payment Date: January 20, 2000
Expected Final Payment Date: November 21, 2005
Commencement of
Accumulation Period
(subject to adjustment): Last day of October 2004
Series 1999-3
Legal Final Maturity: April 20, 2009
CUSIP Number: 59159UAP3
ISIN: US59159UAP30
STRUCTURAL SUMMARY
This summary briefly describes certain major structural components of
Series 1999-3. To fully understand the terms of Series 1999-3 you will need
to read both this supplement and the attached prospectus in their entirety.
THE SERIES 1999-3 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 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 Credit Card Bank, N.A. as servicer and to
cover losses allocated to your series. Any collections allocated to your
series in excess of the amount owed to you or Direct Merchants Credit Card
Bank, N.A. 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.
CREDIT ENHANCEMENT
Your Class A securities feature credit enhancement by means of the
subordination of Class B and payments under an insurance policy and
interest rate caps, which are intended to protect you from losses and
shortfalls in cash flow.
The effect of subordination of Class B is that Class B will absorb any
losses allocated to Series 1999-3, and make up any shortfalls in cash flow,
before Class A is affected. The insurance policy will be available to cover
shortfalls in amounts available to pay interest and to cover potential
reductions of the Class A amount due to losses allocated to Series 1999-3.
The interest rate caps provide an additional source for interest payments
if LIBOR is greater than 9.25%. If the cash flow, any subordinated interest
and proceeds from the insurance policy and the interest rate caps do not
cover all losses allocated to Series 1999-3, 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
1999-3, see "Description of the Securities--Subordination" in this
supplement. For a more detailed description of the other credit enhancement
provided to your securities, see "Description of the Securities--The
Interest Rate Caps" and "--The Policy." 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 1999-3.
METRIS MASTER TRUST
Your series is one of ten series issued by Metris Master Trust that will be
outstanding on the date of issuance of your series. Metris Master Trust is
maintained by the trustee for the benefit of:
o securityholders of Series 1999-3;
o securityholders of other series issued
by Metris Master Trust;
o providers of credit enhancements for
Series 1999-3 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 Metris Master Trust's assets, see "Trust Credit
Card Portfolio" and "The Receivables" in this supplement and "Direct
Merchants Credit Card Bank, N.A. Activities" and "The Receivables" in the
attached prospectus.
SCHEDULED PRINCIPAL PAYMENTS AND POTENTIAL
EARLIER OR LATER PAYMENTS
Prior to the commencement of an accumulation or early amortization period
for Series 1999-3, principal collections will be paid to Metris
Receivables, Inc. or shared with other series that are amortizing or in an
accumulation period.
Metris Master Trust is expected to pay the entire principal amount of Class
A in one payment on November 21, 2005 if the early amortization period has
not begun. In order to accumulate the funds to pay Class A on its expected
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 expected 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 expected payment date, Class A will
begin to amortize by means of monthly payments of all principal collections
allocated to Series 1999-3 until it is fully repaid.
For more information on expected principal payments and the accumulation
period, see "Maturity Considerations" and "Description of the
Securities--Principal Payments," "--Postponement of Accumulation Period"
and "--Application of Collections--Payment of Principal" in this supplement
and "Description of the Securities--Principal" and "--Accumulation Period"
in the attached prospectus.
MINIMUM YIELD ON THE RECEIVABLES; POSSIBLE
EARLY PRINCIPAL REPAYMENT OF SERIES 1999-3
Your securities may be repaid earlier than their expected 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 1999-3 in any
month, referred to as the "base rate," is the sum of the interest payable
to Class A for the related interest period, plus the servicing fee for the
related month. If the average yield after reduction for receivable defaults
for Series 1999-3 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 1999-3 and the Trust will commence an "early
amortization period" for Series 1999-3, and you will receive principal
payments earlier than the expected final payment date.
Series 1999-3 is also subject to several other pay out events, which could
cause Series 1999-3 to amortize, and which are summarized under the heading
"Description of the Securities--Pay Out Events" in this supplement. If
Series 1999-3 begins to amortize, Class A will receive monthly payments of
principal until it is fully repaid. In that event, your securities may be
repaid prior to the expected final payment date.
The final payment of principal and interest will be made no later than
April 20, 2009, which is the Series 1999-3 final payment date.
For more information on pay out events, the portfolio yield and base rate,
early principal payment and early amortization, see "Maturity
Considerations," "Description of the Securities--Principal Payments,"
"--Final Payment of Principal; Termination" 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.
INCOME TAX STATUS OF CLASS A AND METRIS
MASTER TRUST
Skadden, Arps, Slate, Meagher & Flom LLP, special federal income tax
counsel to Metris Receivables, Inc., is of the opinion that:
o under existing law the Class A
securities will be characterized as debt
for U.S. federal income tax purposes;
and
o Metris Master Trust will not be an
association or publicly traded
partnership taxable as a corporation
for U.S. federal income tax purposes.
For more information regarding the application of
U.S. federal income tax laws, see "Income Tax
Matters" in the attached prospectus.
ERISA CONSIDERATIONS
It is not anticipated that the Class A securities will meet the criteria
for treatment as "publicly-offered securities." As such, pension plans and
other investors subject to ERISA cannot acquire Class A 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
assets" under ERISA by reason of any such plan's investment in the
entity, including insurance company general accounts.
By purchasing any Class A securities you certify that you are not within
any of those categories.
For more information regarding the application of ERISA, see "ERISA
Considerations" in this supplement and "Employee Benefit Plan
Considerations" in 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) 417-5645.
SELECTED TRUST PORTFOLIO SUMMARY DATA
[GRAPHIC OMITTED]
The chart above shows the geographic distribution of the accounts in the
Trust portfolio among the 50 states and the District of Columbia. Other
than the states specifically shown in the chart, no state accounts for more
than 5% of the accounts in the Trust portfolio.
[GRAPHIC OMITTED]
The chart above shows the percentage of the receivables in the Trust
portfolio arising under accounts within the age brackets shown.
PAYMENT DATA
[GRAPHIC OMITTED]
The chart above shows the total yield, charge-off rate and payment
rate for the Trust portfolio for each month from January 1998 to October
1999.
"TOTAL YIELD" for any month means the total amount of collected
finance charge receivables allocated to the Trust for the month, expressed
as a percentage of average outstanding principal receivables for the month.
The amount of "CHARGE-OFFS" for any month is the amount of
charged-off principal receivables recorded in the month expressed as a
percentage of average outstanding principal receivables for the 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 at the end of the previous month.
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the Class A securities described in this supplement.
POTENTIAL EARLY REPAYMENT
OR DELAYED PAYMENT DUE TO
REDUCED PORTFOLIO YIELD If the average Trust portfolio yield after
reduction for receivable defaults for Series
1999-3 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 1999-3 and
the early amortization of Series 1999-3 will
commence, and you will receive principal
payments earlier than the expected final
payment date. Moreover, if principal
collections on receivables allocated to other
series are available for application to an
early amortization of any outstanding
securities, the period during which that
early 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 1999-3. Conversely, any
reduction in collections may cause the period
during which collections are retained for
payment of your securities 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
minimum monthly 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 1999-3.
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 your securities and
other amounts required to be funded out of
collections of finance charge receivables.
Finance charges on certain of the accounts of
the Trust may 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 may 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 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.
See "Description of the
Securities--Representations and Warranties"
and "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 the 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.
VOTING RIGHTS MAY BE
EXERCISED BY MBIA So long as MBIA has not defaulted on its
obligations under the insurance policy, MBIA
will be entitled to exercise all of your
voting rights and you may exercise such
rights only with MBIA's consent. Under
certain circumstances the consent or approval
of all of the series issued by the Trust may
be required to direct certain actions,
including requiring the appointment of a
successor servicer following a default by
Direct Merchants Bank, amending the pooling
and servicing agreement in certain
circumstances, directing Direct Merchants
Bank not to sell receivables upon the
occurrence of an event of insolvency and
directing a repurchase of all outstanding
series issued by the Trust upon the breach of
certain representations and warranties by
Metris Receivables, Inc.
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
"Trust Credit Card Portfolio" in this
supplement and "Direct Merchants Credit Card
Bank, N.A. Activities" in the attached
prospectus.
The Trust 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 October
31, 1999 approximately 19.6% of the accounts
in the Trust portfolio had been originated
within the last 12 months and approximately
42.7% 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" pie chart in
"Selected Trust Portfolio Summary Data" 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 1999-3
will be allocated a portion of those
charged-off receivables. See "Description of
the Securities--Allocation Percentages" and
"Trust 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," "--Defaulted
Receivables; Dilution" and "--Investor
Charge-Offs" in this supplement.
LIMITED ABILITY TO RESELL
SECURITIES The underwriter may assist in resales of your
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.,
DIRECT MERCHANTS BANK OR
METRIS COMPANIES 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 the 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 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.
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 Bankruptcy or 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 Bankruptcy or Receivership" in
the attached prospectus.
NEGATIVE CARRY Any amounts deposited in the excess funding
account and the principal funding account may
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 and "Description of
the Securities--Paired Series" in this
supplement.
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.
RATING OF YOUR SECURITIES
MAY BE REDUCED Your securities will only be issued if they are
rated "AAA" or the equivalent by at least one
nationally recognized rating agency. The
ratings will be based primarily on an
assessment of the receivables in the Trust,
the amounts held in any trust account for
your benefit, the subordination of the Class
B securities for the benefit of your
securities and the claims-paying ability of
MBIA. Any reduction in MBIA's ratings or
claims-paying ability ratings may cause a
reduction in the rating of your securities.
TRUST 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
1999-3 SUPPLEMENT") (the term "POOLING AND SERVICING AGREEMENT," unless the
context requires otherwise, refers to the Pooling and Servicing Agreement
as supplemented by the Series 1999-3 Supplement) have been or will be
generated from transactions made by holders of certain designated
MasterCard(R) and VISA(R) 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 1999-3 (collectively, the "CLASS A SECURITIES") and each Class B
Asset Backed Security, Series 1999-3 (collectively, the "CLASS B
Securities" and, together with the Class A Securities, the "SECURITIES" or
the "SERIES 1999-3 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. As
of October 31, 1999, the Metris Master Trust had approximately 3 million
credit card accounts and approximately $5.0 billion in Receivables;
Fingerhut Customers represented approximately 38% of the accounts and
approximately 43% of the Receivables.
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 were active accounts. In June 1998, Direct Merchants Bank
acquired a credit card portfolio from Huntington BancShares which had
approximately 42,000 accounts with balances of approximately $100 million.
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 were active accounts. 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. In June 1999, Metris acquired a portfolio of
approximately 485,000 active accounts and approximately $1.2 billion of
credit card receivables (the "GE Portfolio") from General Electric Capital
Corporation ("GE"), a unit of the General Electric Company. While none of
these accounts has been designated as an Account, the Transferor may
determine to add such accounts as Accounts designated to have
their Receivables transferred to the Trust 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
for 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
any amount past due, plus any amount over the cardholder's credit line. The
Bank assesses an annual fee on some credit card accounts. The Bank may
waive the annual membership fees, or a portion of those fees, in connection
with the solicitation of new accounts depending on the credit terms
offered, which are determined by the prospect's risk profile prior to
solicitation or when the Bank determines a waiver to be appropriate
considering the account's overall profitability. In addition to the annual
fee, the Bank charges accounts certain other fees including: (i) a late fee
with respect to any unpaid monthly payment if the Bank does not receive the
required minimum monthly payment by the payment due date shown on the
monthly billing statement, (ii) a cash advance fee for each cash advance,
(iii) a fee with respect to each check submitted by a cardholder in payment
of an account which is not honored by the cardholder's bank, and (iv) an
overlimit charge if, at any time during the billing cycle, the total amount
owed exceeds the cardholder's credit line by at least $30. 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 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
under that account 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 Credit Card Bank, N.A. Activities--Delinquency, Collections and
Charge-Offs" 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 Trust 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. 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 Trust, is the
denominator used to calculate the percentages set forth below. Newly
originated or acquired accounts currently do not automatically become part
of the Trust Portfolio but may be added from time to time at the option of
Metris Receivables, Inc. See "Description of the Securities--Addition of
Trust Assets" in the attached prospectus.
<TABLE>
DELINQUENCY EXPERIENCE FOR THE TRUST PORTFOLIO
(DOLLARS IN THOUSANDS)
1999 1998 1997 1996
----------------------- ----------------------- ----------------------- -----------------------
RECEIVABLES PERCENTAGE RECEIVABLES PERCENTAGE RECEIVABLES PERCENTAGE RECEIVABLES PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL OF TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
---------- ----------- ---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables $5,046,840 100.00% $4,125,979 100.00% $2,854,929 100.00% $1,605,338 100.00%
Outstanding(1)
Receivables
Delinquent:
30-59 Days $ 121,755 2.41% $ 99,840 2.42% $ 64,504 2.26% $ 33,065 2.06%
60-89 Days 91,065 1.81 67,959 1.65 44,078 1.54 20,216 1.26
90 or More Days 182,656 3.62 149,361 3.62 89,504 3.14 45,822 2.85
---------- -------- -------------------- ------------------- -------------------
Total $ 395,476 7.84% $ 317,160 7.69% $ 198,086 6.94% $ 99,103 6.17%
========== ======== ==================== =================== ===================
- ------------
(1)Receivables Outstanding consist of all amounts due from cardholders as
posted to the Trust Accounts as of the date shown.
</TABLE>
<TABLE>
LOSS EXPERIENCE FOR THE TRUST PORTFOLIO(1)
(DOLLARS IN THOUSANDS)
TEN MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------
OCTOBER 31,
1999 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average Receivables Outstanding(2)..... $4,413,103 $3,231,883 $2,067,424 $1,011,589
Total Net Charge-Offs(3)............... $ 377,049 $ 355,279 $ 182,984 $ 34,104
Total Net Charge-Offs as a Percentage
of Average Receivables
Outstanding.......................... 8.54% 10.99% 8.85% 3.37%
(Annualized)........................... 10.26% 10.99% 8.85% 3.37%
- -------------
</TABLE>
(1)The Trust reports charge-offs on a gross basis, not net of
recoveries. Recoveries are treated as Finance Charge Collections and
included in the calculation of Portfolio Yield.
(2)Average Receivables Outstanding is calculated by determining the daily
average of outstanding balances for Trust Accounts 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 Net Charge-Offs are total charge-offs of Principal Receivables
less Recoveries and do not include the amount of any reductions in total
Principal 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 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 Finance Charge
Collections. See "--Delinquency and Loss Experience" and "Direct Merchants
Credit Card Bank, N.A. Activities--Delinquency, Collections and
Charge-Offs" 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 "INITIAL CLOSING DATE") and, with
respect to Supplemental Accounts, as of the related dates of their
designations. 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
in that agreement, 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 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" means, for Series 1999-3
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 Principal Collections 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 end of the day on
October 31, 1999, included approximately $4,799,022,034 of Principal
Receivables and approximately $247,818,068 of Finance Charge Receivables.
The Accounts had an average Principal Receivable balance of $1,493 and an
average credit limit of $4,132. The percentage of the aggregate total
Receivable balance to the aggregate total credit limit was approximately
38%. The average age of the Accounts was approximately 38 months. As of the
end of the day on October 31, 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 October 31, 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 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, including approximately $20,000,000 of
Receivables in Supplemental Accounts to be added to the Trust Portfolio on
December 3, 1999.
<TABLE>
COMPOSITION BY CREDIT LIMIT
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
NUMBER OF TOTAL OF TOTAL
OF NUMBER OF RECEIVABLES RECEIVABLES
CREDIT LIMIT RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
$ 0.00 - $500.00............. 89,063 2.8% $ 25,943,416.24 0.5%
$ 500.01 - $1,000.00......... 160,961 5.0 98,329,296.77 1.9
$ 1,000.01 -$1,500.00........ 240,569 7.5 201,390,219.87 4.0
$ 1,500.01 -$3,000.00........ 755,682 23.5 956,618,082.93 19.0
$ 3,000.01 - $5,000.00....... 934,088 29.1 1,653,213,350.61 32.8
$ 5,000.01 - $10,0000.00..... 958,762 29.8 2,006,024,512.30 39.7
$ 10,000.01 & Greater........ 74,752 2.3 105,321,224.46 2.1
---------- ---------- ---------------- ----------
Total...................... 3,213,877 100.0% $5,046,840,103.1 100.0%
========== ========== ================ ==========
</TABLE>
<TABLE>
COMPOSITION BY ACCOUNT BALANCE
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
NUMBER OF TOTAL OF TOTAL
OF NUMBER OF RECEIVABLES RECEIVABLES
ACCOUNT BALANCE RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ----------------------------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Credit Balance................ 34,506 1.1% $ (3,246,780.19) (0.1)%
No Balance................... 1,016,906 31.6 0.00 0.0
$0.01 - $500.00.............. 351,303 10.9 73,694,920.49 1.5
$500.01 - $1,000.00.......... 249,335 7.8 188,327,667.87 3.7
$1,000.01 - $1,500.00........ 245,293 7.6 307,802,443.46 6.1
$1,500.01 - $3,000.00........ 648,440 20.2 1,426,845,869.73 28.3
$3,000.01 - $5,000.00........ 458,869 14.3 1,770,333,742.06 35.1
$5,000.01 & Greater.......... 209,225 6.5 1,283,082,239.76 25.4
---------- ---------- ----------------- ----------
Total..................... 3,213,877 100.0% $5,046,840,103.18 100.0%
========== ========== ================= =========
</TABLE>
<TABLE>
COMPOSITION BY GEOGRAPHIC DISTRIBUTION IN TRUST PORTFOLIO
PERCENTAGE
PERCENTAGE OF
OF TOTAL
NUMBER OF TOTAL NUMBER RECEIVABLES RECEIVABLES
LOCATION ACCOUNTS OF ACCOUNTS OUTSTANDING OUTSTANDING
- ------------------------ ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Alabama................. 57,476 1.8% $ 89,714,925.62 1.8%
Alaska.................. 5,471 0.2 9,184,414.79 0.2
Arizona................. 45,608 1.4 74,017,783.13 1.5
Arkansas................ 32,158 1.0 51,133,307.59 1.0
California.............. 384,609 12.0 633,758,690.36 12.6
Colorado................ 47,479 1.5 78,843,017.41 1.6
Connecticut............. 35,548 1.1 56,534,796.87 1.1
Delaware................ 7,612 0.3 12,674,427.09 0.3
District of Columbia.... 7,586 0.3 12,509,376.45 0.2
Florida................. 240,118 7.5 399,684,628.27 7.9
Georgia................. 86,173 2.7 136,702,861.10 2.7
Hawaii.................. 9,859 0.3 17,304,823.33 0.4
Idaho................... 12,323 0.4 18,855,675.12 0.4
Illinois................ 116,205 3.6 184,311,163.52 3.7
Indiana................. 68,977 2.1 114,668,624.08 2.3
Iowa.................... 29,125 0.9 42,713,084.58 0.8
Kansas.................. 29,022 0.9 48,887,044.12 1.0
Kentucky................ 47,158 1.5 74,320,675.48 1.5
Louisiana............... 49,741 1.5 74,831,399.08 1.5
Maine................... 13,615 0.4 21,261,023.29 0.4
Maryland................ 62,902 2.0 100,956,872.22 2.0
Massachusetts........... 64,276 2.0 94,430,532.34 1.9
Michigan................ 88,675 2.8 140,930,142.27 2.8
Minnesota............... 47,133 1.5 67,731,567.04 1.3
Mississippi............. 118,721 3.7 94,706,158.52 1.9
Missouri................ 63,319 2.0 102,604,076.08 2.0
Montana................. 9,731 0.3 15,301,517.74 0.3
Nebraska................ 14,361 0.4 22,136,406.04 0.4
Nevada.................. 33,200 1.0 62,134,994.59 1.2
New Hampshire........... 13,615 0.4 21,521,848.02 0.4
New Jersey.............. 87,559 2.7 131,719,253.21 2.6
New Mexico.............. 17,365 0.6 27,488,512.90 0.5
New York................ 247,298 7.7 399,068,112.61 7.9
North Carolina.......... 84,484 2.6 128,396,518.52 2.5
North Dakota............ 6,301 0.2 9,065,434.10 0.2
Ohio.................... 129,540 4.0 211,992,222.18 4.2
Oklahoma................ 42,696 1.3 72,992,195.01 1.4
Oregon.................. 33,449 1.0 54,134,585.97 1.1
Pennsylvania............ 120,126 3.7 185,789,652.81 3.7
Rhode Island............ 12,915 0.4 20,041,162.47 0.4
South Carolina.......... 33,787 1.1 52,736,782.26 1.0
South Dakota............ 6,525 0.2 9,995,649.35 0.2
Tennessee............... 74,795 2.3 109,164,391.95 2.2
Texas................... 222,826 6.9 370,272,118.21 7.3
Utah.................... 13,599 0.4 20,428,992.99 0.4
Vermont................. 6,362 0.2 10,250,913.79 0.2
Virginia................ 85,521 2.7 135,372,088.22 2.7
Washington.............. 56,435 1.8 92,927,632.77 1.8
West Virginia........... 23,192 0.7 35,396,491.18 0.7
Wisconsin............... 51,755 1.6 74,960,261.94 1.5
Wyoming................. 10,914 0.3 13,533,909.21 0.3
Other................... 4,637 0.1 6,747,365.39 0.1
---------- ------------ ----------------- -----------
Total................ 3,213,877 100.0% $5,046,840,103.18 100.0%
========== ============ ================= ===========
</TABLE>
MATURITY CONSIDERATIONS
The Pooling and Servicing Agreement provides that Class A
Securityholders will not receive payments of principal until the November
2005 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. If a Pay Out Event occurs, Class A Securityholders
will receive payments of principal on each Distribution Date following the
Monthly Period in which a Pay Out Event occurs until the Class A Invested
Amount is paid in full or the Series 1999-3 Termination Date has occurred.
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 on the last
day of the October 2004 Monthly Period. Subject to the conditions set forth
in this supplement under "Description of the Securities--Postponement of
Accumulation Period," the day on which the Revolving Period ends and the
Accumulation Period begins may be delayed to no later than the close of
business on the last day of the September 2005 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 Series 1999-3 Principal
Collections 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.
Amounts in the Principal Funding Account are expected to be available to
pay the Class A Invested Amount in full 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. 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 Series 1999-3 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 the 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 in this supplement. 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, then 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 such 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 Series 1999-3 Principal Collections on
each Distribution Date with respect to such Early Amortization Period until
the earlier of the date on which the Class A Securities have been paid in
full and the Series 1999-3 Termination Date. After the Class A Securities
have been paid in full and if the Series 1999-3 Termination Date has not
occurred, Available Series 1999-3 Principal Collections will be paid to the
Class B Securities on each Distribution Date until the Class B Securities
have been paid in full.
"EARLY AMORTIZATION PERIOD" means the period beginning on the earlier
of (a) the date on which a Pay Out Event occurs or is deemed to have
occurred with respect to the Series 1999-3 Securities and (b) the Expected
Final Payment Date if the Class A Invested Amount has not been paid in full
on such date, and ending on the earlier of (i) the date on which the Class
A Invested Amount and the Class B Invested Amount have been paid in full
and (ii) the Series 1999-3 Termination Date.
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) the Series 1999-3 Percentage of the sum of
the total amount of Principal Receivables plus amounts on deposit in the
Excess Funding Account being less than 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, the Principal Account and the Principal Funding
Account being less than the Minimum Aggregate Principal Receivables, or (z)
the Retained Percentage being equal to or less than 2 percent, in each case
as of any Determination Date, (f) the Trust becoming subject to regulation
as an "investment company" within the meaning of the Investment Company
Act, (g) a reduction in the average of the Portfolio Yields for any three
consecutive Monthly Periods to a rate which is less than the average of the
Base Rates for such three consecutive Monthly Periods, or (h) the
occurrence of any claim on the Policy. See "Description of the
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
Class A Interest Rate 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 1999-3 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 1999-3 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 1999-3
Percentage of any Adjustment Payments which the Transferor is required but
fails to make pursuant to the Pooling and Servicing Agreement for such
Monthly Period, and the denominator of which is the average daily Invested
Amount during the preceding Monthly Period; provided, however, that Excess
Finance Charge Collections applied for the benefit of the Securityholders
may be added to the numerator if the Rating Agency Condition is satisfied.
See "Description of the Securities--Pay Out Events" in this supplement.
PAYMENT RATES
The following table sets forth the highest and lowest cardholder
monthly payment rates for the Trust 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.
CARDHOLDER MONTHLY PAYMENT RATES FOR THE TRUST PORTFOLIO(1)
TEN MONTHS ENDED YEAR ENDED DECEMBER 31,
------------------------------
OCTOBER 31, 1999 1998 1997 1996
---------------- --------- --------- ---------
Highest Month................. 8.0% 7.4% 7.6% 9.1%
Lowest Month.................. 6.7% 6.1% 5.3% 5.7%
Monthly Average(2)............ 7.2% 6.6% 6.5% 7.1%
- ------------
(1)The monthly 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 at the end of the previous month.
(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
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 to the Expected Final Payment Date
will equal the expected number of months. As described under "Description
of the Securities--Postponement of Accumulation Period" in this supplement,
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 on the Expected Final Payment Date,
especially if a pay out event were to occur with respect to one or more
other Series thereby limiting the amount of Shared Principal Collections
allocable to the Class A Securities. See "Risk Factors" in this supplement
and "Maturity Considerations" in the attached prospectus.
RECEIVABLE YIELD CONSIDERATIONS
The gross revenues from finance charges and fees billed to accounts
in the Trust Portfolio for each of the three calendar years contained in
the period ended December 31, 1998 and for the ten-month period ended
October 31, 1999, are set forth in the following table. The historical
yield figures in the following table 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 Trust 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" above. Revenues vary for each account based
on the type and volume of activity for each account. Interchange fees are
not included in the Trust assets and are not included in the yield numbers
for the Trust Portfolio in the following table.
REVENUE YIELD EXPERIENCE FOR THE TRUST PORTFOLIO (1)
(DOLLARS IN THOUSANDS)
TEN MONTHS YEAR ENDED DECEMBER 31,
ENDED
-----------------------------
OCTOBER 31, 1998 1997 1996
1999
---------- ---------- ---------- ----------
Average Receivables Outstanding. $4,503,305 $3,611,436 $2,204,287 $1,017,236
Total Finance Charges and Fees $ 930,310 $ 858,196 $ 533,005 $ 269,298
Billed(2).......................
Average Revenue Yield 24.80% 23.76% 24.18% 26.47%
(Annualized)....................
- ------------
(1) The amounts presented in the above table include a small amount of
receivables and fees billed in accounts that were newly originated and
had not yet been included in the Trust for the periods shown. Those
receivable balances were generally added to the Trust in subsequent
periods in account additions approved by the Rating Agencies.
(2) Total Finance Charges and Fees Billed include finance charges, cash
advance fees, annual membership fees, late fees, and other charges. It
does not include interchange fees. 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 $299,145,000, (a) to
repay a portion of the principal of the Series 1998-1 Variable Funding
Securities and (b) to pay the purchase price of Receivables.
DESCRIPTION OF MBIA
MBIA
MBIA Insurance Corporation ("MBIA") is the principal operating
subsidiary of MBIA Inc., a New York Stock Exchange listed company (the
"PARENT COMPANY"). The Parent Company is not obligated to pay the debts of
or claims against MBIA. MBIA is domiciled in the State of New York and
licensed to do business in and is subject to regulation under the laws of
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico,
the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the
United States and the Territory of Guam. MBIA has two European branches,
one in the Republic of France and the other in the Kingdom of Spain. New
York has laws prescribing minimum capital requirements, limiting classes
and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate
and individual risks that may be insured, the payment of dividends by MBIA,
changes in control and transactions among affiliates. Additionally, MBIA is
required to maintain contingency reserves on its liabilities in certain
amounts and for certain periods of time.
MBIA does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Insurer set forth under the
heading "Description of MBIA." Additionally, MBIA makes no representation
regarding the Class A Securities or the advisability of investing in the
Class A Securities.
The Policy is not covered by the Property Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law.
MBIA FINANCIAL INFORMATION
The consolidated financial statements of MBIA, a wholly owned
subsidiary of the Parent Company, and its subsidiaries as of December 31,
1998 and December 31, 1997 and for each of the three years in the period
ended December 31, 1998, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of the
Parent Company for the year ended December 31, 1998 and the consolidated
financial statements of MBIA and its subsidiaries as of September 30, 1999
and for the nine month periods ended September 30, 1999 and September 30,
1998 included in the Quarterly Report on Form 10-Q of the Parent Company
for the period ended September 30, 1999, are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference
herein shall be modified or superseded for purposes of this Prospectus
Supplement to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of MBIA and its subsidiaries included in
documents filed by the Parent Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Class A Securities shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The tables below present selected financial information of MBIA
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally
accepted accounting principles ("GAAP"):
SAP
-----------------------------------------
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- -------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
Admitted Assets....................... $ 6,521 $ 6,930
Liabilities........................... 4,231 4,571
Capital and Surplus................... 2,290 2,359
GAAP
-----------------------------------------
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- -------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
Assets................................ $ 7,488 $ 7,422
Liabilities........................... 3,211 3,234
Shareholder's Equity.................. 4,277 4,188
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT MBIA
Copies of the financial statements of MBIA incorporated by reference
herein and copies of MBIA's 1998 year-end audited financial statements
prepared in accordance with statutory accounting practices are available,
without charge, from MBIA. The address of MBIA is 113 King Street, Armonk,
New York 10504. The telephone number of MBIA is (914) 273-4545.
YEAR 2000 READINESS DISCLOSURE
The Parent Company is actively managing a high-priority Year 2000
("Y2K") program addressing the issue of whether its computer systems can
correctly distinguish between the years 1900 and 2000. The Parent Company
has established an independent Y2K testing lab in its Armonk headquarters,
with a committee of business unit managers overseeing the project. The
Parent Company has a budget of $1.13 million for its 1998-2000 Y2K efforts.
As of September 30, 1999, the Parent Company has spent $949,000 on the
project. A recent review of efforts at certain subsidiaries has indicated
the need to spend an additional $1.03 million this year on remediation. As
of September 30, 1999, the Parent Company has spent $568,000 of this
additional amount. However, this increase will not have a material effect
on the Parent Company's financial results.
The Parent Company has initiated a comprehensive Y2K plan which
includes the following phases: assessment -- completed in the second
quarter of 1998; remediation -- completed in the fourth quarter of 1998;
testing -- completed in the second quarter of 1999; and contingency
planning -- completed in the third quarter of 1999, subject to final
approval by senior management and any need for revision that might arise in
the future. This plan covers "mission-critical" internally developed
systems, vendor software, hardware and certain third-party entities through
which the Parent Company conducts its business. Testing to date indicates
that functions critical to the financial guarantee business, both domestic
and international, were Y2K-ready as of December 31, 1998. Additional
testing is being carried out throughout 1999.
FINANCIAL STRENGTH RATINGS OF MBIA
Moody's Investors Service, Inc. rates the financial strength of MBIA
"Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of MBIA "AAA."
Fitch IBCA, Inc. rates the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Securities, and such ratings may be subject to revision or
withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the
market price of the Class A Securities. MBIA does not guaranty the market
price of the securities nor does it guaranty that the ratings on the Class
A Securities will not be revised or withdrawn.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity, and
cash flows for each of the three years in the period ended December 31,
1998, incorporated by reference in this Prospectus Supplement, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
DESCRIPTION OF THE SECURITIES
The Class A Securities will be issued pursuant to the Pooling and
Servicing Agreement. 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 Class A
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. See "Description of the Securities" in the
attached prospectus for additional information concerning the Securities
and the Pooling and Servicing Agreement.
GENERAL
The Class A 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 funded from Available Series 1999-3 Finance Charge
Collections and certain other sources designated herein and, if such
amounts are insufficient, from claims for payment on the Policy and the
right to receive payments of principal on the Expected Final Payment Date
or, to the extent of the Class A Invested Amount, on each Distribution Date
during the Early Amortization Period, funded from Principal Collections
allocated to Series 1999-3. In addition, if on any Distribution Date there
is a Potential Class A Charge-Off, the Trustee will make a claim for
payment on the Policy and such amount will be used during the Early
Amortization Period to make payments of principal to Class A
Securityholders.
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
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 Collections
are deposited into the Principal Account or the Principal Funding Account
for distribution to the Securityholders. During the Early Amortization
Period, the Invested Amount will decline as Principal Collections 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 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). 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 business day preceding such Distribution Date, or with
respect to any Definitive Securities, the fifth day of the Monthly Period
during which such Distribution Date occurs (each, a "RECORD DATE"). Series
1999-3 will also be allocated a portion of the amount of Defaulted
Receivables each month.
Beneficial interests in the Class A Securities will be offered for
purchase in minimum denominations of $1,000 and integral multiples thereof.
The Class A 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 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 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 1999-3 will rank pari passu with all other
outstanding Series.
PREVIOUSLY ISSUED SERIES
The Trust has previously issued nine other Series that will remain
outstanding on the date of issuance of the Class A Securities. The other
Series bear the various rates of interest and have the outstanding
principal amounts and other characteristics 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 December 9, 1999 ("THE CLOSING DATE"). Interest will
accrue on the Securities and be distributed to Class A Securityholders on
January 20, 2000 and on the 20th day of each following month (or, if such
20th 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 outstanding principal balance for
the related Interest Accrual Period of the Class A Securities at the close
of business on the first day of the related Interest Accrual Period (or in
the case of the first Distribution Date, an amount equal to the product of
(a) the Class A Initial Invested Amount, (b) 42 divided by 360 and (c) the
Class A Interest Rate, determined on December 7, 1999). Interest payments
on the Class A Securities on any Distribution Date will be funded from
Available Series 1999-3 Finance Charge Collections with respect to the
preceding Monthly Period and from certain other funds allocated as set
forth in the Pooling and Servicing Agreement to the Class A Securities and
deposited on each business day during such Monthly Period in the Interest
Funding Account. In addition, if on any Distribution Date, there is an
Interest and Servicing Fee Deficiency with respect to such Monthly Period,
then the Trustee will demand payment on the Policy in an amount equal to
such deficiency in accordance with the terms thereof. 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 January 19, 2000.
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 1999-3 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 made by the Transferor 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 made by the
Transferor, (b) investment earnings on amounts on deposit in the Payment
Reserve Account, the Principal Funding Account and the Accumulation Period
Reserve Account, (c) amounts on deposit in the Cap Proceeds Account, if
any, and (d) amounts on deposit in the Payment Reserve Account, if any, if
and to the extent the Transferor designates that such amounts are to be so
applied. Net investment earnings on amounts in the Excess Funding Account
are treated as Finance Charge Collections.
The Class A Securities will bear interest at the rate equal to 0.42%
per annum above LIBOR determined as set forth below for the period from the
Closing Date through January 19, 2000 and each Interest Accrual Period
thereafter (the "CLASS A INTEREST RATE").
The Trustee will determine LIBOR on December 7, 1999 for the period
from the Closing Date through January 19, 2000 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, except for the
LIBOR Determination Date occuring on December 7, 1999, the offered 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).
For the LIBOR Determination Date occurring on December 7, 1999, LIBOR
means the result of the following calculation: the sum of (i) the product
of (a) 12 divided by 30 and (b) two month LIBOR, as determined using the
same methodology described in the preceding paragraph, less LIBOR as
defined in the preceding paragraph, plus (ii) LIBOR as defined in the
preceding paragraph. If the value in (b) is negative, LIBOR as defined in
this paragraph will be less than one month LIBOR.
"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 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 Class A Interest Rate as well as the amount of Class A Monthly Interest
applicable to an Interest Accrual Period will be included in a statement to
the Class A 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"), Principal
Collections 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, 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 Series 1999-3 Principal Collections with respect to such
Monthly Period, (b) the applicable Controlled Deposit Amount and (c) the
Class A Adjusted Invested Amount prior to any such deposit. Amounts in the
Principal Funding Account up to the Class A Invested Amount will be paid to
the Class A Securityholders on the Expected Final Payment Date. During the
Accumulation Period, concurrently with deposits to the Principal Funding
Account for the benefit of the Class A Securities, the Class B Invested
Amount will be reduced to an amount equal to the Stated Class B Amount.
During the Accumulation Period, the portion of Available Series 1999-3
Principal Collections not required to be deposited in the Principal Funding
Account will generally be treated as Shared Principal Collections.
"AVAILABLE SERIES 1999-3 PRINCIPAL COLLECTIONS" means, with respect
to any Monthly Period, or portion thereof, commencing on or after the
Amortization Period Commencement Date, an amount equal to the sum of (i) an
amount equal to the Fixed/Floating Percentage of all Principal Collections
(less the amount of Redirected Principal Collections) received during such
Monthly Period, (ii) any amount on deposit in the Excess Funding Account
allocated to the Securities with respect to such Monthly Period, (iii) the
aggregate Series Default Amount and the Series 1999-3 Percentage of overdue
Adjustment Payments paid from Available Series 1999-3 Finance Charge
Collections, Transferor Finance Charge Collections, Excess Finance Charge
Collections, Redirected Principal Collections and Policy Claim Amounts for
Potential Class A Charge-Offs with respect to such Monthly Period and any
reimbursements from Available Series 1999-3 Finance Charge Collections,
Transferor Finance Charge Collections, Excess Finance Charge Collections or
Redirected Principal Collections of unreimbursed Class A Charge-Offs and
reductions of the Class B Invested Amount, (iv) Shared Principal
Collections allocated to the Securities, and (v) the proceeds of the sale
of all or a portion of the Interest Rate Cap with respect to such Monthly
Period.
On each Distribution Date during the Early Amortization Period, the
Class A Securityholders will be entitled to receive Available Series 1999-3
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 Series 1999-3 Termination Date. In
addition, if a Pay Out Event occurs during the Accumulation Period, the
Early Amortization Period will commence and any amount on deposit in the
Principal Funding Account will be paid to the Class A Securityholders on
the Distribution Date following the Monthly Period in which the Early
Amortization Period commences. After payment in full of the Class A
Invested Amount, the Class B Securityholders will be entitled to receive
Available Series 1999-3 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 Series 1999-3 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
distributions of principal will be made to the Securityholders upon
surrender of their Securities. See "--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. The proceeds of any such sale or
repurchase of Receivables will be allocated first to pay amounts due with
respect to the Class A Securities, then to reimburse the Insurer for any
unreimbursed draws under the Policy and then to pay amounts due with
respect to the Class B Securities as described in this supplement.
POSTPONEMENT OF ACCUMULATION PERIOD
The Accumulation Period is scheduled to begin at the close of
business on the last day of the October 2004 Monthly 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
Principal Collections 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 Class A
Securityholders would receive some of their principal later than if the
Accumulation Period had not been so postponed.
SUBORDINATION
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 Securityholders in subsequent Monthly
Periods 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 1999-3 Finance Charge Collections applied to the payment thereof as
described below in clauses (iii) and (iv) of "--Application of
Collections--Payment of Fees, Interest and Other Items," (b) the amount of
Transferor Finance Charge Collections and Excess Finance Charge Collections
allocated thereto as described 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
Class B Invested Amount (following the reduction thereof in an amount equal
to the amount of any Redirected Principal Collections to be applied on the
related Distribution Date) will be reduced by the amount by which the sum
of the aggregate Series Default Amount and the unpaid Adjustment Payments
exceeds the amount applied with respect thereto during the preceding
Monthly Period.
In the event that any such reduction of the Class B Invested Amount
would cause the Class B Invested Amount to be a negative number, the Class
B Invested Amount will be reduced to zero and the Trustee will make a claim
for payment on the Policy in an amount equal to the amount by which the
Class B Invested Amount would have been reduced below zero, but not more
than the sum of the remaining aggregate Series Default Amount and the
remaining unpaid Adjustment Payments for such Monthly Period. In the event
that the Insurer fails to make the payment of such Potential Class A
Charge-Off amount as required under the Policy, the Class A Invested Amount
will be reduced by the amount the Insurer has failed to pay. Such
reductions of the Class A Invested Amount will thereafter be reimbursed and
the Class A Invested Amount increased on each business day by the amount,
if any, of Available Series 1999-3 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.
THE INTEREST RATE CAPS
The Transferor will obtain and at all times prior to the Series
1999-3 Termination Date maintain one or more interest rate caps ("INTEREST
RATE CAPS") whose notional amounts singly or taken as a group equal or
exceed the outstanding principal balance of the Class A Securities. The
Transferor will pledge to the Trustee for the benefit of the Class A
Securityholders all of the Transferor's right, title and interest in and to
the interest rate cap agreements and the Interest Rate Caps arising
thereunder, together with the Cap Proceeds Account and all other proceeds
thereof, as collateral security for the benefit of the Class A
Securityholders. Pursuant to the Interest Rate Caps, on each Transfer Date
on which LIBOR for the related Interest Accrual Period exceeds 9.25%, the
provider of the Interest Rate Caps will make a payment to the Trustee, on
behalf of the Trust, in an amount equal to the product of (i) such excess,
(ii) the notional amount as of such Transfer Date and (iii) the actual
number of days in the related Monthly Period divided by 360. The Interest
Rate Cap will terminate on the Series 1999-3 Termination Date; provided,
however, that the Interest Rate Cap may be terminated at an earlier date if
the Trustee has obtained a substitute interest rate cap or entered into an
alternative arrangement satisfactory to the Rating Agencies and the
Insurer, which in each case will not result in the reduction or withdrawal
of the rating of the Class A Securities without giving effect to the Policy
(such substitute interest rate cap, a "REPLACEMENT INTEREST RATE CAP"; such
alternative arrangement, a "QUALIFIED SUBSTITUTE ARRANGEMENT").
In the event that the rating of the Interest Rate Cap Provider is
reduced or withdrawn, as specified in the Interest Rate Cap, the Servicer
will use its best efforts either to obtain for each such Interest Rate Cap
a Replacement Interest Rate Cap, at the expense of the Interest Rate Cap
Provider, or to enter into a Qualified Substitute Arrangement.
The Trustee, on behalf of the Trust, may sell all or a portion of an
Interest Rate Cap in an amount equal to the excess on such date of the
notional amount over the outstanding principal balance of the Class A
Securities, subject to (among other things) Rating Agency confirmation of
the rating of the Class A Securities without giving effect to the Policy.
Funds from any such sale will be applied as Principal Collections allocable
in accordance with the allocations described below in "--Application of
Collections--Payment of Principal." Each Interest Rate Cap will provide for
payments to the Trustee and the Trust's interest in respect of such
payments will be deposited into the Cap Proceeds Account.
The Trustee will establish and maintain with a Qualified Institution
in the name of the Trust, for the benefit of the Class A Securityholders, a
segregated trust account into which all amounts paid pursuant to the
Interest Rate Caps or any Qualified Substitute Arrangement are deposited
(the "CAP PROCEEDS ACCOUNT," and collectively with the Interest Funding
Account, the Principal Account and the Excess Funding Account, the "TRUST
ACCOUNTS"), which shall be considered a Trust Account for all purposes
under this supplement and the attached prospectus.
INTEREST RATE CAP PROVIDER
Each "INTEREST RATE CAP PROVIDER" will be a third party cap provider
having a rating acceptable to the Rating Agencies. The initial Interest
Rate Cap Provider is Bank of Montreal, Chicago Branch. Following is a
description of Bank of Montreal, Chicago Branch which has been provided by
Bank of Montreal, Chicago Branch. Neither the Transferor nor the Servicer
makes any representation as to the accuracy or completeness of such
information.
Bank of Montreal, Chicago Branch
Bank of Montreal, Chicago Branch (the "BRANCH") is a branch of Bank
of Montreal. The Branch's office is currently located at 115 S. LaSalle
Street, 19th Floor West, Chicago, Illinois 60603. The Branch is examined by
the Federal Reserve Bank of Chicago and the State of Illinois and is
subject to the banking laws and regulations applicable to a foreign bank.
Bank of Montreal commenced business in Montreal in 1817 and was
incorporated in 1821 by an Act of Lower Canada as the first Canadian
chartered bank. Bank of Montreal's head office is located at 129 rue Saint
Jacques, Montreal, Quebec, H2Y 1L6, and its executive offices are located
at 100 King Street West, 1 First Canadian Place, Toronto, Ontario, M5X 1A1.
Bank of Montreal, in terms of assets, is the fourth largest chartered
bank in Canada. As of October 31, 1999, it had consolidated average assets
of $227 billion Canadian dollars based on the unaudited balance sheet of
that date. As of October 31, 1999, the exchange rate was approximately US$1
= C$1.4713. Bank of Montreal offers a broad range of credit and non-credit
products and services directly and through special-purpose Canadian and
non-Canadian subsidiaries, offices and branches. As of October 31, 1999,
Bank of Montreal maintained 1,042 bank branches in Canada and operated
internationally in major markets and trading areas in 16 other countries,
including the United States and Mexico. The Harris Bank group (Harris
Bankcorp, Inc. and Harris Bankmont, Inc.), wholly-owned by Bank of
Montreal, operates its own banking business in the United States based in
Chicago, engaging in commercial banking, investment and trust businesses.
Bank of Montreal has a 16% equity interest (20% voting interest) in Grupo
Financiero Bancomer, a bank holding company resident in Mexico. Bank of
Montreal also provides a full range of investment dealer services through
the Nesbitt Burns group of companies which includes The Nesbitt Burns
Corporation Limited, a major fully integrated Canadian investment dealer in
which Bank of Montreal owns 100 percent of the voting shares, and Nesbitt
Burns Securities, Inc., Bank of Montreal's wholly-owned registered
securities dealer in the United States. Through these and other operations,
Bank of Montreal is building a North American financial services
organization with a broad range of capabilities in Canada, the United
States and Mexico.
Moody's currently rates Bank of Montreal's long-term certificates of
deposit as "Aa3" and short-term certificates of deposit as "P-1". Further
information with respect to such ratings may be obtained from Moody's.
Standard & Poor's rates Bank of Montreal's long-term certificates of
deposit as "AA-" and its short-term certificates of deposit as "A-1+".
Fitch rates Bank of Montreal's long-term certificates of deposit as "AA-"
and its short-term certificates of deposit as "F1+". Further information
with respect to such ratings may be obtained from Moody's, Standard &
Poor's and Fitch, respectively. No assurances can be given that the current
ratings of Bank of Montreal's instruments will be maintained.
Bank of Montreal will provide copies of the most recent annual report
of Bank of Montreal and the most recent publicly available portions of the
quarterly call report of Bank of Montreal, without charge, to each person
to whom this document is delivered, on the written request of such person.
Written request should be directed to: Bank of Montreal, Investor
Relations, 100 King Street, 1 First Canadian Place, 18th floor, Toronto,
Ontario M5X 1A1. Attention: David Brennan.
ALLOCATION PERCENTAGES
Pursuant to the Pooling and Servicing Agreement, during each Monthly
Period the Servicer will allocate among the Class A Securityholders'
Interest, the Class B Securityholders' Interest, the interest of 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 and the Class B Securityholders' Interest, based on the percentage
equivalent of a fraction the numerator of which is the Class A Adjusted
Invested Amount and the Class B Invested Amount, 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" and the "CLASS B FLOATING
PERCENTAGE," respectively; the sum of both 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 or the Class B
Invested Amount, respectively, at the end of the last day of the Revolving
Period and the denominator of which is the greater of (a) the sum of the
aggregate amount of Principal Receivables and the amounts on deposit in the
Excess Funding Account at the end of the preceding business day and (b) the
sum of the numerators used for all classes of all Series to calculate the
applicable allocation percentages (the "CLASS A FIXED/FLOATING PERCENTAGE"
and the "CLASS B FIXED/FLOATING PERCENTAGE," respectively; the sum of both
percentages, the "FIXED/FLOATING PERCENTAGE"). Finance Charge Collections
will be allocated on and after the date on which a Pay Out Event is deemed
to occur to the Securityholders' Interest based on the Fixed/Floating
Percentage; provided, however, that the numerator used in calculating the
Fixed/Floating Percentage will be the Adjusted Invested Amount as of the
end of the day preceding the date on which a Pay Out Event is deemed to
occur. 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."
Finance Charge Collections, Principal Collections and the amount of
all Defaulted Receivables will be allocated to the Transferor based on the
Transferor Percentage. The term "TRANSFEROR PERCENTAGE" means (a) when used
with respect to (i) Principal Collections during the Revolving Period, (ii)
Finance Charge Collections prior to the date on which a Pay Out Event
occurs and (iii) the amount of Defaulted Receivables at all times, 100
percent minus the sum of the Floating Percentage and the applicable
Investor Percentages used for all other Series and (b) when used with
respect to (i) Principal Collections during an Amortization Period and (ii)
Finance Charge Collections on and after the date on which a Pay Out Event
occurs, 100 percent minus the sum of the applicable Fixed/Floating
Percentage and the Investor Percentages used with respect to Principal
Collections or Finance Charge Collections, as applicable, for all other
Series.
As used in this supplement, the term "AMORTIZATION PERIOD
COMMENCEMENT DATE" means the earliest of (a) the first day of the
Accumulation Period and (b) the date on which a Pay Out Event occurs or is
deemed to have occurred.
As used in this supplement, 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, 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 1999-3 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 in this supplement, 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 in this supplement, the term "CLASS A INITIAL INVESTED
AMOUNT" means $300,000,000.
As used in this supplement, 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 or reductions made by the Transferor to the extent of the
excess of the Class B Invested Amount prior to such reduction over the
Stated Class B Amount 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 Principal Collections for all
prior Distribution Dates, and plus (e) the aggregate amount of Available
Series 1999-3 Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections and certain other amounts
applied on all prior Distribution Dates for the purpose of reimbursing
amounts deducted pursuant to the foregoing clauses (c) and (d); provided,
however, that the Class B Invested Amount may not be reduced below zero.
As used in this supplement, the term "CLASS B INITIAL INVESTED
AMOUNT" means $29,670,330.
As used in this supplement, the term "STATED CLASS B AMOUNT" means
the greater of (a) zero and (b) a number rounded to the nearest dollar
equal to 9.89 percent of the Class A Adjusted Invested Amount; provided,
however, that in no event shall the Stated Class B Amount be less than
$9,890,110 except that if the Class A Adjusted Invested Amount is equal to
zero the "Stated Class B Amount" will be zero; and provided further that
during the Early Amortization Period the Stated Class B Amount shall be
equal to the Stated Class B Amount immediately preceding the commencement
of the Early Amortization Period.
As used in this supplement, the term "INVESTED AMOUNT" means the sum
of the Class A Invested Amount and the Class B Invested Amount.
As used in this supplement, the "INITIAL INVESTED AMOUNT" means the
sum of the Class A Initial Invested Amount and the Class B Initial Invested
Amount.
As used in this supplement, "CLASS A SECURITYHOLDERS' INTEREST" means
the interest in the assets of the Trust allocated to the Class A
Securityholders.
As used in this supplement, "CLASS B SECURITYHOLDERS' INTEREST" means
the interest in the assets of the Trust allocated to the Class B
Securityholders.
As a result of the Floating Percentage, Finance Charge Collections
(prior to the commencement of the Early Amortization Period) and the
portion of Defaulted Receivables allocated to the Securityholders will
change each business day based on the relationship of the Class A Adjusted
Invested Amount and the Class B Invested Amount to the total amount of
Principal Receivables and amounts on deposit in the Excess Funding Account
on the preceding business day. The numerator of the allocation percentages
of Principal Collections allocable to the Class A Securityholders and the
Class B Securityholders, however, will remain fixed during an Amortization
Period. Principal Collections allocable to the Class B Securities are
subject to possible redirection for the benefit of the Class A
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, (b) the amount on deposit in the Excess Funding Account
and (c) the number of days elapsed since the previous business day divided
by the actual number of days in such year over (y) the aggregate amount of
all earnings since the previous business day available from the Cash
Equivalents in which funds on deposit in the Excess Funding Account are
invested. The Servicer will apply an amount equal to the lesser of (i) the
Series 1999-3 Percentage of Finance Charge Collections allocable to the
Exchangeable Transferor Security ("TRANSFEROR FINANCE CHARGE COLLECTIONS")
on such business day and (ii) the sum of the Negative Carry Amount for such
business day and, following a claim for payment on the Policy, the
unreimbursed claims on the Policy that have not been deposited in the
Interest Funding Account prior to such business day, in the manner
specified for application of Available Series 1999-3 Finance Charge
Collections.
As used in this supplement, "SERIES 1999-3 PERCENTAGE" means the
percentage equivalent of a fraction the numerator of which is the Invested
Amount and the denominator of which is the sum of the Invested Amounts of
all Series then outstanding.
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) through (xi) in "--Application of Collections
- --Payment of Fees, Interest and Other Items" exceeds the portion of
Available Series 1999-3 Finance Charge Collections and Transferor Finance
Charge Collections, if any, applied to the payment of the amounts described
in such clauses. 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 1999-3
Securities in an amount equal to the remaining Required Amount. Excess
Finance Charge Collections from other Series allocable to the Series 1999-3
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
second 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
Charge 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 Class B Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the Class B Floating
Percentage or (ii) during an Amortization Period, the Class B
Fixed/Floating Percentage and (b) the amount of Principal Collections with
respect to such business day to the following amounts in the following
priority (such collections applied in accordance with clause (a) below are
called "REDIRECTED PRINCIPAL COLLECTIONS"):
(a) an amount equal to the Class A Required Amount with respect
to such business day, will be applied to the components of the Class
A Required Amount, as described in "--Application of
Collections--Payment of Fees, Interest and Other Items" below; and
(b) during the Revolving Period, any such collections not
applied in the foregoing manner (and therefore not constituting
Redirected Principal Collections) will be applied as Shared Principal
Collections and during an Amortization Period such collections will
be included in Available Series 1999-3 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.
"CLASS A REQUIRED AMOUNT" means for any business day during a Monthly
Period the amount, if any, by which (a) 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 amount of Principal Receivables in Defaulted
Accounts for such Monthly Period (to date), (iii) the Class A Percentage of
the Monthly Servicing Fee for the related Monthly Period and (iv) the Class
A Percentage of the Series 1999-3 Percentage of the Adjustment Payment
required to be made by the Transferor but not made on such business day and
on each previous business day during such Monthly Period exceeds (b) the
Available Series 1999-3 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. The "CLASS A
PERCENTAGE" means for any business day during a Monthly Period a fraction
the numerator of which is the Class A Initial Invested Amount and the
denominator of which is the Initial Invested Amount.
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;
(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 1999-3
Securities, any amounts to be paid in respect of the Series Default Amount,
unpaid Adjustment Payments, Class A Charge-Offs, Class B Charge- Offs and
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
(a) retained therein, (b) applied as Available Series 1999-3 Finance Charge
Collections or (c) released to the Transferor.
Payment of Fees, Interest and Other Items. On each business day
during a Monthly Period, the Servicer will determine the amount of
Available Series 1999-3 Finance Charge Collections and will apply
such amount in the following priority:
(i) an amount equal to the lesser of (A) the Available Series
1999-3 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
1999-3 Finance Charge Collections remaining and (B) the portion of
the Monthly Servicing Fee for the current month that has not been
previously paid to the Servicer plus any prior Monthly Servicing Fee
that was due but not previously paid to the Servicer will be
distributed to the Servicer;
(iii) an amount equal to the lesser of (A) the sum of any
Available Series 1999-3 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 Series 1999-3
Principal Collections for the benefit of the Securities;
(iv) an amount equal to the lesser of (A) the sum of any
Available Series 1999-3 Finance Charge Collections remaining and (B)
the Series 1999-3 Percentage of any Adjustment Payment which the
Transferor is required but fails to make pursuant to the Pooling and
Servicing Agreement will be (a) during the Revolving Period, treated
as Shared Principal Collections and (b) during an Amortization
Period, treated as Available Series 1999-3 Principal Collections for
the benefit of the Securities;
(v) an amount equal to the lesser of (A) any Available Series
1999-3 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 Series 1999-3 Principal Collections for the
benefit of the Securities;
(vi) an amount equal to the lesser of (A) any Available Series
1999-3 Finance Charge Collections remaining and (B) the portion of
the monthly premium with respect to the Policy due on the
Distribution Date in the next succeeding Monthly Period that has not
been previously deposited in the Interest Funding Account plus any
prior monthly premium with respect to the Policy that was due but not
previously deposited in the Interest Funding Account will be
deposited in the Interest Funding Account for distribution on the
next succeeding Distribution Date to the Insurer;
(vii) an amount equal to the lesser of (A) any Available Series
1999-3 Finance Charge Collections remaining and (B) the portion of
the unreimbursed claims on the Policy that have not been previously
deposited in the Interest Funding Account will be deposited in the
Interest Funding Account for distribution on the next succeeding
Distribution Date to the Insurer;
(viii) an amount equal to the lesser of (A) any Available
Series 1999-3 Finance Charge Collections remaining and (B) the
excess, if any, of the amount required to be retained in the Spread
Account established for the benefit of the Insurer over the amount on
deposit in the Spread Account will be deposited in the Spread
Account;
(ix) an amount equal to the lesser of (A) any Available Series
1999-3 Finance Charge Collections remaining and (B) any other amounts
required to be paid to the Insurer pursuant to the Insurance
Agreement that have not previously been deposited in the Interest
Funding Account, will be deposited in the Interest Funding Account
for distribution on the next succeeding Distribution Date to the
Insurer;
(x) an amount equal to the lesser of (A) any Available Series
1999-3 Finance Charge Collections remaining and (B) the unreimbursed
amount by which the Class B Invested Amount has been reduced pursuant
to clauses (c) and (d) of the definition thereof on prior business
days, if any, will be applied to reimburse such amount and (w) during
the Revolving Period, be treated as Shared Principal Collections and
(x) during the Amortization Period, be treated as Available Series
1999-3 Principal Collections for the benefit of the Securities;
(xi) on and after the Reserve Account Funding Date, but prior
to the date on which the Accumulation Period Reserve Account
terminates, an amount equal to the lesser of (A) any Available Series
1999-3 Finance Charge Collections remaining and (B) the excess, if
any, of the Required Reserve Account Amount over the Available
Reserve Account Amount will be deposited in the Accumulation Period
Reserve Account;
(xii) an amount equal to the lesser of (A) any remaining
Available Series 1999-3 Finance Charge Collections and (B) the amount
designated by the Transferor in writing in its instructions to the
Trustee to be deposited in the Payment Reserve Account; and
(xiii) any Available Series 1999-3 Finance Charge Collections
remaining after making the above described distributions will be
treated as Excess Finance Charge Collections which will be available
to cover shortfalls, if any, in amounts payable from Finance Charge
Collections to securityholders of other Series, then to pay any
unpaid commercially reasonable costs and expenses of a successor
Servicer, if any, and then on each business day other than the
Default Recognition Date to be paid to the Transferor to be treated
as "TRANSFEROR RETAINED FINANCE CHARGE COLLECTIONS." On the Default
Recognition Date, any remaining Excess Finance Charge Collections
which are not so used will be paid to the Transferor.
Notwithstanding the foregoing, if on any Default Recognition Date the
sum of the amount of Available Series 1999-3 Finance Charge Collections
(including all amounts on deposit in the Payment Reserve Account) and
Transferor Retained Finance Change Collections is less than the amount of
the aggregate Series Default Amount for such business day, the Servicer
will apply amounts deposited in the Accumulation Period Reserve Account and
the Spread Account during the then current Monthly Period in accordance
with clause (iii) above to the extent of such shortfall. The "PAYMENT
RESERVE ACCOUNT" means an account established with a Qualified Institution
for the benefit of Securityholders into which the Transferor may, at its
option, retain Available Series 1999-3 Finance Charge Collections on any
business day for application, at its option, as Available Series 1999-3
Finance Charge Collections on any subsequent business day. The "SPREAD
ACCOUNT" means an account established pursuant to the Insurance Agreement
to reimburse MBIA for any draws on the Policy.
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 1999-3 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 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) 42
divided by 360 and (z) the Class A 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); and
(ii) on each Transfer Date with respect to the Accumulation
Period, the balance of Available Series 1999-3 Principal Collections
not applied pursuant to (i) above, if any, may be applied to the
payment of principal to the Class B Securityholders to the extent
that the Class B Invested Amount exceeds the Stated Class B Amount
and any remaining excess on each Transfer Date with respect to the
Accumulation Period and the Early Amortization Period will be treated
as Shared Principal Collections and applied as described in clause
(vi) of "--Allocations."
"CLASS A PRINCIPAL" with respect to any Distribution 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 Series 1999-3 Principal Collections on deposit in the
Principal Account with respect to the related Transfer Date, (ii) for each
Distribution 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 Distribution Date and (iii) the Class A Adjusted Invested Amount on
the related 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, $25,000,000; 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 Class A Securities for the previous Monthly Period.
COVERAGE OF INTEREST SHORTFALLS
To the extent of any shortfall in the amount of Available Series
1999-3 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 the Negative Carry Amount and the amount of any
unreimbursed claims on the Policy that have not previously been deposited
in the Interest Funding Account.
Finance Charge Collections allocable to any Series in excess of the
amounts necessary to make required payments with respect to such Series
("EXCESS FINANCE CHARGE COLLECTIONS") will be applied to cover any
shortfalls with respect to amounts payable from Finance Charge Collections
allocable to any other Series, pro rata based upon the amounts of the
shortfalls, if any, with respect to such other Series. To the extent of any
unreimbursed claim on the Policy, following the repayment in full of the
Invested Amount, Excess Finance Charge Collections will be applied to cover
any unreimbursed claims on the Policy pro rata, based upon the amount of
such unreimbursed claims and the amount of shortfalls, if any, with respect
to other Series. Any Excess Finance Charge Collections remaining after
covering shortfalls with respect to all outstanding Series during a Monthly
Period will be paid to the successor Servicer, if any, to cover certain
costs and expenses and then to the holder of the Exchangeable Transferor
Security.
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 "--Application of Collections" above and
"Description of the 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 Credit Card Bank,
N.A. Activities--Delinquency, Collections and Charge-Offs" in the attached
prospectus and "Trust Credit Card Portfolio--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 1999-3 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 1999-3, there
will be an Investor Charge- Off as described below.
INVESTOR CHARGE-OFFS
If on the second business day preceding each Distribution Date (the
"DETERMINATION DATE"), the aggregate Series Default Amount and the Series
1999-3 Percentage of unpaid Adjustment Payments, if any, for all business
days in the preceding Monthly Period exceeds the aggregate amount of
Available Series 1999-3 Finance Charge Collections, Transferor Finance
Charge Collections, Excess Finance Charge Collections, Redirected Principal
Collections, Principal Funding Investment Proceeds and any amounts
withdrawn from the Accumulation Period Reserve Account, and applied with
respect to the Series Default Amount and the Series 1999-3 Percentage of
unpaid Adjustment Payments with respect to such Monthly Period, then the
Class B Invested Amount will be reduced by the aggregate amount of such
excess, but not more than the sum of the remaining aggregate Series Default
Amount and the remaining Series 1999-3 Percentage of unpaid Adjustment
Payments for such Monthly Period (a "CLASS B CHARGE-OFF"). The Class B
Invested Amount thereafter will be increased (but not in excess of the
unpaid principal balance of the Class B Securities) on any business day by
the amounts allocated and available for that purpose as described above
under clause (x) of "--Application of Collections--Payment of Fees,
Interest and Other Items."
In the event that any such reduction of the Class B Invested Amount
would cause the Class B Invested Amount to be a negative number, the Class
B Invested Amount will be reduced to zero, and the Trustee will make a
claim for payment on the Policy in an amount equal to the amount by which
the Class B Invested Amount would have been reduced below zero, but not
more than the sum of the remaining aggregate Series Default Amount and the
remaining Series 1999-3 Percentage of unpaid Adjustment Payments for such
Monthly Period (a "POTENTIAL CLASS A CHARGE-OFF"). In the event that the
Insurer fails to make the payment of the Potential Class A Charge-Off
amount as required under the Policy, the Class A Invested Amount will be
reduced by the amount the Insurer has failed to pay (a "CLASS A
CHARGE-OFF"). This reduction will have the effect of slowing or reducing
the return of principal to the Class A Securityholders. The Class A
Invested Amount will thereafter be increased (but not in excess of the
unpaid principal balance of the Class A Securities) on any business day by
the amounts allocated and available for that purpose as described above
under clause (v) of "--Application of Collections--Payment of Fees,
Interest and Other Items."
PRINCIPAL FUNDING ACCOUNT
Pursuant to the Series 1999-3 Supplement, the Servicer will establish
and maintain with a Qualified Institution a principal funding account as a
segregated trust account held for the benefit of the Class A
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
Class A 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 1999-3 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 1999-3 Finance Charge Collections on the last business day of the
preceding Monthly Period.
ACCUMULATION PERIOD RESERVE ACCOUNT
Pursuant to the Series 1999-3 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
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 1999-3 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 in
accordance with the Pooling and Servicing Agreement. 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 Class A Invested Amount or (b) any
other amount designated by the Transferor; provided that if such
designation is of a lesser amount, the Transferor shall have provided the
Servicer and the Trustee with evidence that the Rating Agency Condition has
been satisfied and the Transferor shall have delivered to the Trustee a
certificate of an authorized officer to the effect that, based on the facts
known to such officer at such time, in the reasonable belief of the
Transferor, such designation will not cause a Pay Out Event or an event
that, after giving of notice or the lapse of time, would cause a Pay Out
Event to occur with respect to Series 1999-3.
"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, and with respect to Series 1999-3, without regard to the Policy.
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
1999-3 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 1999-3 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 Class A
Interest Rate (in effect for the related Interest Accrual Period) and (z)
the Principal Funding Account Balance as of the last day of the Monthly
Period preceding the Monthly Period in which such Interest Accrual Periods
ends (the "COVERED AMOUNT") over (ii) the Principal Funding 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 1999-3
Finance Charge Collections.
THE POLICY
On or before the Closing Date, MBIA (the "INSURER") will issue the
Financial Guaranty Insurance Policy (the "POLICY") pursuant to the
provisions of the Insurance and Reimbursement Agreement (the "INSURANCE
AGREEMENT") to be dated as of the Closing Date, among the Insurer, the
Transferor, the Trustee and the Servicer.
The Policy will irrevocably and unconditionally guarantee to the
Trustee for the benefit of the Class A Securityholders the payment of
interest, the payment of the Monthly Servicing Fee and the payment of
Potential Class A Charge-Offs, if any, on each Distribution Date (such
distributions, the "GUARANTEED DISTRIBUTIONS").
If on any Distribution Date the Available Series 1999-3 Finance
Charge Collections, Transferor Finance Charge Collections, Excess Finance
Charge Collections, Redirected Principal Collections, Principal Funding
Investment Proceeds and the amounts withdrawn from the Accumulation Period
Reserve Account, if any, each with respect to the Monthly Period relating
to such Distribution Date are insufficient to pay the Class A Monthly
Interest and the Monthly Servicing Fee with respect to such Monthly Period,
then the Trustee will demand payment on the Policy in an amount equal to
such deficiency (the "INTEREST AND SERVICING FEE DEFICIENCY").
Furthermore, on any Distribution Date with respect to which a
Potential Class A Charge-Off has occurred, the Trustee will make a claim
for payment on the Policy in an amount equal to the amount of such
Potential Class A Charge-Off. In addition, if on the Series 1999-3
Termination Date the outstanding principal amount of the Class A
Securities, after application of all amounts allocable to Class A Principal
on such date, is greater than zero, the Trustee will make a claim for
payment on the Policy in an amount equal to such excess. The amounts
described in the two preceding sentences, together with the Interest and
Servicing Fee Deficiency, are referred to herein as the "POLICY CLAIM
AMOUNT."
Payment of claims on the Policy will be made by the Insurer on the
later of 12:00 noon New York City time on the first business day preceding
the Distribution Date and 12:00 noon New York City time on the business day
following receipt by the Insurer or the fiscal agent of the
appropriate notice for payment.
Pursuant to the Insurance Agreement and the Series 1999-3 Supplement,
funds deposited in the Spread Account shall be used to reimburse the
Insurer for any claims made on the Policy. Any such reimbursement will
reduce any reimbursement required to be made from Available Series 1999-3
Finance Charge Collections.
If payment of any amount guaranteed by the Insurer pursuant to the
Policy is avoided as a preference payment (the "PREFERENCE AMOUNT") under
applicable bankruptcy, insolvency, receivership or similar law in the event
of an insolvency of the Transferor, the Servicer, Metris Companies Inc. or
the Trust, the Insurer will pay such amount out of its funds on the later
of (a) the date when due to be paid pursuant to the Order referred to below
or (b) the first to occur of (i) the fourth business day following Receipt
by the Insurer or the fiscal agent from the Trustee of (A) a certified copy
of the order (the "ORDER") of the court or other governmental body which
exercised jurisdiction to the effect that the Trustee is required to return
the amount of any Policy Claim Amounts distributed with respect to the
Class A Securities during the term of the Policy because such distributions
were avoidable preference payments under applicable bankruptcy law, (B) a
notice for payment in the form specified by the Policy and (C) an
assignment duly executed and delivered by the Class A Securityholders, in
such form as is reasonably required by the Insurer and provided to the
Class A Securityholders by the Insurer, irrevocably assigning to the
Insurer all rights and claims of the Class A Securityholders relating to or
arising under the Class A Securities against the debtor which made such
preference payment or otherwise with respect to such preference payment or
(ii) the date of Receipt by the Insurer or the fiscal agent from the
Trustee of the items referred to in clauses (A), (B) and (C) above if, at
least four business days prior to such date of Receipt, the Insurer or the
fiscal agent shall have Received written notice from the Trustee that such
items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to
the Trustee or Class A Securityholders directly.
The terms "Receipt" and "Received," with respect to the Policy, mean
actual delivery to the Insurer and to its fiscal agent appointed by the
Insurer at its option, if any, prior to 1:00 p.m., New York City time, on a
business day; delivery either on a day that is not a business day or after
1:00 p.m., New York City time, shall be deemed to be Received on the next
succeeding business day. If any notice or certificate given under the
Policy by the Trustee is not in proper form or is not properly completed,
executed or delivered, it shall be deemed not to have been Received, and
the Insurer or the fiscal agent shall promptly so advise the Trustee and
the Trustee may submit an amended notice.
The Insurer shall be subrogated to the rights of each Class A
Securityholder to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Securities to the
extent of any payment by the Insurer under the Policy and shall be
reimbursed in accordance with the payment priorities described herein.
The terms of the Policy cannot be modified, altered or affected by
any other agreement or instrument. The Policy by its terms may not be
cancelled or revoked. The Policy is governed by the laws of the State of
New York.
THE POLICY IS NOT COVERED BY THE PROPERTY CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Subject to certain exceptions, the investor securityholders of each
Series may take certain actions, or direct certain actions to be taken,
under the Pooling and Servicing Agreement or the related Supplement. So
long as the Insurer has not defaulted on its obligations under the Policy,
the Insurer will be entitled to exercise all voting rights of the
Securityholders without consent of the Class A Securityholders and the
Class A Securityholders may exercise such rights only with the prior
written consent of the Insurer. In addition, the Insurer will have certain
additional rights as third party beneficiary to the Insurance Agreement.
In the absence of payments under the Policy, and if the Class B
Invested Amount has been reduced to zero, Class A Securityholders will bear
directly the credit and other risks associated with their undivided
interest in the Trust.
PAIRED SERIES
Subject to the satisfaction of the Rating Agency Condition, prior to
the commencement of the Early Amortization Period the Securities may be
paired with one or more other Series or a portion of one or more other
Series issued by the Trust (each, a "PAIRED SERIES"). Each Paired Series
either will be pre-funded with an initial deposit to a pre-funding account
in an amount up to the initial principal balance of such Paired Series and
primarily from the proceeds of the sale of such Paired Series or will have
a variable principal amount. Any such pre-funding account will be held for
the benefit of such Paired Series and not for the benefit of the
Securityholders. As amounts are deposited in the Principal Funding Account
for the benefit of the Class A Securityholders either (i) in the case of a
pre-funded Paired Series, an equal amount of funds on deposit in any
pre-funding account for such pre-funded Paired Series will be released
(which funds will be distributed to the Transferor) or (ii) in the case of
a Paired Series having a variable principal amount, an interest in such
variable Paired Series in an equal or lesser amount may be sold by the
Trust (and the proceeds thereof will be distributed to the Transferor) and,
in either case, the invested amount in the Trust of such Paired Series will
increase by up to a corresponding amount. Upon payment in full of the
Securities, assuming that there have been no unreimbursed charge-offs with
respect to any related Paired Series, the aggregate invested amount of such
related Paired Series will have been increased by an amount up to an
aggregate amount equal to the Invested Amount paid to the Securityholders
since the issuance of such Paired Series. The issuance of a Paired Series
will be subject to the conditions described under "Description of the
Securities--Exchanges" in the attached prospectus. 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 Principal Collections and Finance
Charge Collections allocated to Series 1999-3 if such event required
reliance by Series 1999-3 on clause (b) of the denominator of the
applicable Fixed/Floating Percentages and, in the case of Principal
Collections, allowed payment of principal at such time to the Paired
Series. See "--Allocation Percentages" 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 outstanding principal balance of the Class A
Securities, which amount shall be invested in Cash Equivalents and (y) in
the Accumulation Period Reserve Account an amount equal to or greater than
the Covered Amount, as estimated by the Transferor, for the period from the
date of the deposit to the Principal Funding Account through the Expected
Final Payment Date; (ii) the Transferor shall have delivered to the Trustee
an opinion of counsel to the effect that such deposit and termination of
obligations will not result in the Trust being required to register as an
"investment company" within the meaning of the Investment Company Act and
an opinion of counsel to the effect that following such deposit none of the
Trust, the Accumulation Period Reserve Account or the Principal Funding
Account will be deemed to be an association (or publicly traded
partnership) taxable as a corporation; (iii) the Transferor shall have
delivered to the Trustee a certificate of an officer of the Transferor
stating that the Transferor reasonably believes that such deposit and
termination of its obligations will not constitute a Pay Out Event or any
event that, with the giving of notice or the lapse of time, would cause a
Pay Out Event to occur; and (iv) a Ratings Event will not occur as a result
of such events; then, the Securities will no longer be entitled to the
security interest of the Trust in the Receivables and, except those set
forth in clause (i) above, other Trust assets ("DEFEASANCE"), and the
percentages applicable to the allocation to the Securityholders of
Principal Collections, Finance Charge Collections and amounts of Defaulted
Receivables will be reduced to zero.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Class A Securities will be subject to optional repurchase by the
Transferor on any Distribution Date if on such Distribution Date the Class
A Invested Amount would be reduced to an amount less than or equal to 10
percent of the Class A Initial Invested Amount, if certain conditions set
forth in the Pooling and Servicing Agreement are satisfied, including that
all unreimbursed draws on the Policy and other amounts due and owing to the
Insurer under the Insurance Agreement, together with interest thereon, have
been paid. The repurchase price will be equal to the unpaid Class A
Invested Amount plus accrued and unpaid interest on the Class A Securities
after giving effect to any payments on such date. In each case, interest
will accrue through the day preceding the Distribution Date on which the
repurchase occurs.
The Securities will be retired on the day following the Distribution
Date on which the final payment of principal is scheduled to be made to the
Securityholders, whether as a result of optional reassignment to the
Transferor or otherwise. Subject to prior termination as provided above,
the Pooling and Servicing Agreement provides that the final distribution of
principal and interest on the Class A Securities will be made on the April
2009 Distribution Date (the "SERIES 1999-3 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 Series
1999-3 Termination Date, the Trustee will sell or cause to be sold (and
apply the proceeds first to the Class A Securities until paid in full and
then to the Insurer for unreimbursed draws under the Policy and other
amounts payable to the Insurer under the Insurance Agreement, and then to
the Class B Securities to the extent necessary to pay such remaining
amounts to all Securityholders pro rata within each Class as final payment
of the Securities) interests in the Receivables or certain Receivables, as
specified in the Pooling and Servicing Agreement and the Series 1999-3
Supplement, in an amount up to 110 percent of the Invested Amount at the
close of business on such date (but not more than the total amount of
Receivables allocable to the Securities in accordance with the Pooling and
Servicing Agreement). If the sale contemplated by the preceding sentence
has not occurred by the Series 1999-3 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 Series 1999-3
Termination Date first to Class A Securityholders until the Class A
Invested Amount is paid in full, then to the Insurer for unreimbursed draws
under the Policy and other amounts payable to the Insurer under the
Insurance Agreement and then to the Class B Securityholders until the Class
B Invested Amount is paid in full.
Unless the Servicer and the holder of the Exchangeable Transferor
Security instruct the Trustee otherwise, the Trust will terminate on the
earlier of (a) the day after the Distribution Date following the date on
which funds shall have been deposited in the Distribution Account for the
payment to securityholders sufficient to pay in full the aggregate investor
interest of all Series outstanding plus interest thereon at the applicable
interest rates to the next Distribution Date and (b) a date which shall not
be later than May 26, 2095. Upon the termination of the Trust and the
surrender of the Exchangeable Transferor Security, the Trustee will convey
to the holder of the Exchangeable Transferor Security all right, title and
interest of the Trust in and to the Receivables and other funds of the
Trust (other than funds on deposit in the Distribution Account and other
similar bank accounts of the Trust with respect to any Series).
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 or the Purchase Agreement, 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 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) the Series 1999-3 Percentage of the sum of
the total amount of Principal Receivables plus amounts on deposit in
the Excess Funding Account shall be less than the sum of the
aggregate outstanding principal amounts of the Class A Securities and
the Class B Securities, (c) the total amount of Principal Receivables
and the amounts on deposit in the Excess Funding Account, the
Principal Account and the Principal Funding Account shall be less
than the Minimum Aggregate Principal Receivables or (d) the Retained
Percentage shall be equal to or less than 2 percent, in each case as
of any Determination Date;
(vii) any Servicer Default shall occur which would have a
material adverse effect on the Securityholders; or
(viii) any claim on the Policy shall occur.
In the case of any event described in clause (i), (ii), or (vii)
above, a Pay Out Event will be deemed to have occurred with respect to the
Securities only if, after any applicable grace period, the Securityholders
evidencing undivided interests aggregating more than 50 percent of the
Invested Amount, by written notice to the Trustee, the Transferor, the
Interest Rate Cap Provider pursuant to the Series 1999-3 Supplement and the
Servicer declare that a Pay Out Event has occurred with respect to the
Securities as of the date of such notice. In the case of any event
described in clause (iii) or (v) above, a Pay Out Event with respect to all
Series then outstanding, and in the case of any event described in clause
(iv), (vi) or (viii), a Pay Out Event with respect only to the Securities,
will be deemed to have occurred without any notice or other action on the
part of the Trustee or the Securityholders or all securityholders, as
appropriate, immediately upon the occurrence of such event. On the date on
which a Pay Out Event is deemed to have occurred, the Early Amortization
Period will commence. In such event, distributions of principal to the
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
Pursuant to the Series 1999-3 Supplement, the Insurer (so long as the
Insurer has not defaulted on its obligations under the Policy) and not the
holders of the Class A Securities, will have the right to vote the Class A
Securities with respect to the termination of the Servicer upon the
occurrence of a Servicer Default.
The 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 1999-3 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.
If on any Distribution Date through the end of the Accumulation
Period, there is an Interest and Servicing Fee Deficiency with respect to
such Monthly Period, then the Trustee will demand payment on the Policy in
an amount equal to such deficiency.
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, (b) the Transferor Interest, if any, for
such Transfer Date, (c) the aggregate Interest Rate Caps notional amount
and the amount deposited in the Cap Proceeds Account during the related
Monthly Period and (d) the amount of any claim on the Policy on such
Distribution Date. 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.
GENERAL INFORMATION
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 US59159UAP30 and
the CUSIP number for the Class A Securities is 59159UAP3.
The transactions contemplated in this prospectus supplement were
authorized by resolutions adopted by Metris Receivables, Inc.'s Board of
Directors on March 19, 1999.
The Transferor confirms that there has been no material adverse
change in the performance of the Trust since October 31, 1999, the date of
the information with respect to the Trust set forth in this supplement
under "The Receivables."
The Pooling and Servicing Agreement provides that the Trustee shall
pay to the Transferor upon request any monies held by the Trustee for the
payment of principal and interest which remains unclaimed for two years.
After payment to the Transferor, Securityholders entitled to the money must
look to the Transferor for payment as general creditors unless an abandoned
property law designates otherwise.
The Securities, the Pooling and Servicing Agreement and the Series
1999-3 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 Internal Revenue Code of 1986, as amended (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
The Underwriter does not expect that the Class A Securities will be
held by at least 100 investors who are independent of the issuer and of one
another and, therefore, does not expect that such Class A Securities will
qualify as "publicly-offered securities." Accordingly, the Class A
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 A Security, each Class A
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 Class A Securities on behalf or with "plan assets" of any
Plan should consult their own counsel regarding whether the Trust assets
represented by the Class A 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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement dated December 1, 1999 (the "UNDERWRITING AGREEMENT") among
Metris Receivables, Inc., Metris Companies Inc. and Bear, Stearns & Co.
Inc. (the "UNDERWRITER"), Metris Receivables, Inc. has agreed to sell to
the Underwriter, and the Underwriter has agreed to purchase, the principal
amount of the Class A Securities.
The distribution of the Class A Securities by the Underwriter may be
conducted in one or more negotiated transactions, or otherwise, at varying
prices to be determined at the time of sale. Proceeds to the Transferor
from the sale of the Class A Securities, before deducting expenses payable
by the Transferor, will be approximately 99.715% of the aggregate principal
balance of the Class A Securities. The Underwriter may effect such
transactions by selling the related Class A Certificates to or through
dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter for
whom they act as agent. Total proceeds to the Transferor will be
$299,145,000 before deducting expenses payable by the Transferor, which are
estimated to be $875,000. In connection with the sale of the Class A
Securities the Underwriter may be deemed to have received compensation from
the Transferor in the form of underwriting compensation. The Underwriter
and any dealers that participate with the Underwriter in the distribution
of the Class A Securities may be deemed to be underwriters and any profit
on the resale of the Class A Securities positioned by them may be deemed to
be underwriting discounts and commissions under the Securities Act of 1933,
as amended.
The 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 Class A 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 Class A Securities in, from or
otherwise involving the United Kingdom and (c) if the 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. and Metris Companies Inc. will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriter may be required
to make in respect thereof.
The Underwriter may engage in over-allotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids
with respect to the Class A 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 Class A Securities so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of the Class A Securities in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriter to reclaim a
selling concession from a syndicate member when the Class A 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
the price of the Class A Securities to be higher than it would otherwise be
in the absence of such transactions. Neither the Transferor, the Trust nor
the Underwriter represent that the Underwriter will engage in any such
transactions nor that such transactions, once commenced, will not be
discontinued without notice.
In the ordinary course of business, the Underwriter or its affiliates
has engaged, and may engage in the future, in certain investment banking or
commercial banking transactions with Metris and its affiliates.
INDEX OF TERMS FOR PROSPECTUS SUPPLEMENT
Accounts.................................................................S-19
Accumulation Period......................................................S-26
Accumulation Period Length...............................................S-36
Accumulation Period Reserve Account......................................S-50
Accumulation Shortfall.............................................S-26, S-47
Adjusted Invested Amount.................................................S-27
Adjustment Payment.......................................................S-48
Agreement................................................................S-19
Amortization Period Commencement Date....................................S-40
Available Reserve Account Amount.........................................S-50
Available Series 1999-3 Finance Charge
Collections...........................................................S-34
Available Series 1999-3 Principal Collections............................S-36
Base Rate................................................................S-27
Branch...................................................................S-38
Cap Proceeds Account.....................................................S-38
Cedelbank................................................................S-33
Class A Adjusted Invested Amount.........................................S-40
Class A Charge-Off.......................................................S-49
Class A Fixed/Floating Percentage........................................S-40
Class A Floating Percentage..............................................S-39
Class A Initial Invested Amount..........................................S-40
Class A Interest Rate....................................................S-34
Class A Invested Amount..................................................S-40
Class A Monthly Interest.................................................S-46
Class A Percentage.......................................................S-43
Class A Principal........................................................S-47
Class A Required Amount..................................................S-43
Class A Securities.......................................................S-19
Class A Securityholders..................................................S-19
Class A Securityholders' Interest........................................S-41
Class B Charge-Off.......................................................S-49
Class B Fixed/Floating Percentage........................................S-40
Class B Floating Percentage..............................................S-39
Class B Initial Invested Amount..........................................S-41
Class B Invested Amount..................................................S-41
Class B Securities.......................................................S-19
Class B Securityholders..................................................S-19
Class B Securityholders' Interest........................................S-41
Code.....................................................................S-58
Controlled Accumulation Amount...........................................S-47
Controlled Deposit Amount................................................S-26
Covered Amount...........................................................S-50
Defeasance...............................................................S-53
Determination Date.......................................................S-49
Dilution.................................................................S-48
Distribution Date........................................................S-34
DTC......................................................................S-33
Early Amortization Period................................................S-27
ERISA....................................................................S-58
Euroclear................................................................S-33
Excess Finance Charge Collections..................................S-42, S-48
Expected Final Payment Date..............................................S-26
Fixed/Floating Percentage................................................S-40
Floating Percentage......................................................S-40
GAAP.....................................................................S-30
GE ......................................................................S-19
GE Portfolio.............................................................S-19
Guaranteed Distributions.................................................S-51
Initial Closing Date.....................................................S-22
Initial Invested Amount..................................................S-41
Insolvency Event.........................................................S-56
Insurance Agreement......................................................S-51
Insurer..................................................................S-51
Interest and Servicing Fee Deficiency....................................S-51
Interest Rate Cap Provider...............................................S-38
Interest Rate Caps.......................................................S-37
Invested Amount..........................................................S-41
LIBOR....................................................................S-35
LIBOR Determination Date.................................................S-34
MBIA.....................................................................S-30
Minimum Aggregate Principal Receivables..................................S-23
Minimum Transferor Interest..............................................S-23
Minimum Transferor Percentage............................................S-23
Monthly Servicing Fee....................................................S-56
Negative Carry Amount....................................................S-41
Order....................................................................S-52
Paired Series............................................................S-53
Parent Company...........................................................S-30
Parties in Interest......................................................S-58
Pay Out Event............................................................S-54
Payment Date.............................................................S-20
Payment Reserve Account..................................................S-46
Plans....................................................................S-58
PNC......................................................................S-19
Policy...................................................................S-51
Policy Claim Amount......................................................S-51
Pooling and Servicing Agreement..........................................S-19
Portfolio Yield..........................................................S-27
Potential Class A Charge-Off.............................................S-49
Preference Amount........................................................S-51
Principal Funding Account................................................S-49
Principal Funding Account Balance........................................S-26
Principal Funding Investment Proceeds....................................S-49
Qualified Substitute Arrangement.........................................S-38
Rating Agency Condition..................................................S-50
Receivables..............................................................S-19
Record Date..............................................................S-33
Recoveries...............................................................S-22
Redirected Principal Collections.........................................S-42
Reference Banks..........................................................S-35
Removed Accounts.........................................................S-23
Replacement Interest Rate Cap............................................S-38
Required Amount..........................................................S-42
Required Reserve Account Amount..........................................S-50
Reserve Account Funding Date.............................................S-50
Revolving Period.........................................................S-35
SAP......................................................................S-30
Securities...............................................................S-19
Securityholders..........................................................S-19
Series 1999-3 Percentage.................................................S-42
Series 1999-3 Securities.................................................S-19
Series 1999-3 Supplement.................................................S-19
Series 1999-3 Termination Date...........................................S-54
Series Default Amount....................................................S-48
Servicing Fee Percentage.................................................S-57
Shared Principal Collections.............................................S-48
Spread Account...........................................................S-46
Stated Class B Amount....................................................S-41
Telerate Page 3750.......................................................S-35
Transfer Date............................................................S-43
Transferor...............................................................S-19
Transferor Finance Charge Collections....................................S-42
Transferor Interest......................................................S-39
Transferor Percentage....................................................S-40
Transferor Retained Finance Charge Collections...........................S-46
Trigger Event............................................................S-56
Trust Accounts...........................................................S-38
Trustee..................................................................S-19
Underwriter..............................................................S-58
Underwriting Agreement...................................................S-58
US ......................................................................S-33
Y2K......................................................................S-31
ANNEX I
PREVIOUSLY ISSUED SERIES
The Trust has previously issued nine 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 1998-2, Series 1998-3, Series
1999-A, Series 1999-1 and Series 1999-2. 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 Class A Securities, a copy of the disclosure
documents for any previous publicly issued Series.
<TABLE>
SERIES 1996-1
<S> <C>
Class A Certificates
Initial Invested Amount............. $518,000,000
Interest Rate....................... 6.45%
Commencement of Amortization Period. First day of August 1998 Monthly Period
Annual Servicing Fee Percentage..... 2.00%
Enhancement......................... Subordination of Class B Certificates,
Class C Certificates
and Class D Certificates
Scheduled Series Termination Date... February 2002 Distribution Date
Series Issuance Date................ April 23, 1996
Class B Certificates
Initial Invested Amount............. $87,500,000
Interest Rate....................... 6.80%
Annual Servicing Fee Percentage..... Same as above for Class A Certificates
Enhancement......................... Subordination of Class C Certificates and
Class D Certificates
Scheduled Series Termination Date... Same as above for Class A Certificates
Class C Certificates
Initial Invested Amount............. $50,000,000
Interest Rate....................... LIBOR + 0.650%
Annual Servicing Fee Percentage..... Same as above for Class A Certificates
Enhancement......................... Subordination of Class D Certificates and
Class C Reserve Account
Scheduled Series Termination Date... Same as above for Class A Certificates
Class D Certificates
Invested Amount..................... $44,500,000
Interest Rate....................... None
Annual Servicing Fee Percentage..... Same as above for Class A Certificates
Scheduled Series Termination Date... Same as above for Class A Certificates
SERIES 1997-1
Class A Certificates
Initial Invested Amount............. $616,250,000
Interest Rate....................... 6.87%
Commencement of Accumulation Period. Same as above for Class A Certificates
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. Same as above for Class A Certificates
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. Same as above for Class A Certificates
Annual Servicing Fee Percentage..... Same as above for Class A Certificates
Enhancement......................... Subordination of Class D Certificates and
Class C Reserve Account
Scheduled Series Termination Date... Same as above for Class A Certificates
Class D Certificates
Invested Amount..................... $55,250,000
Interest Rate....................... None
Annual Servicing Fee Percentage..... Same as above for Class A Certificates
Scheduled Series Termination Date... Same as above for Class A Certificates
SERIES 1997-2
Class A Certificates
Initial Invested Amount............. $455,000,000
Interest Rate....................... LIBOR + 0.20%
Commencement of Accumulation Period.Last day of
October 2001 Monthly Period or later
date as determined in the Agreement
Annual Servicing Fee Percentage..... 2.00%
Enhancement......................... Subordination of Class B Certificates,
Class C Certificates
and Class D Certificates
Scheduled Series Termination Date... May 2006 Distribution Date
Series Issuance Date................ November 20, 1997
Class B Certificates
Initial Invested Amount............. $101,500,000
Interest Rate....................... LIBOR + 0.43%
Commencement of Accumulation Period. Same as above for Class A Certificates
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. Same as above for Class A Certificates
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 December 1, $299,005,350
1999................................
Expected Invested Amount as of
Closing Date
(after application of proceeds). $30,000,000
Maximum Permitted Invested Amount... $600,000,000
Interest Rate....................... A1/P1 Commercial Paper/LIBOR + 0.75%
Blended
Commencement of Amortization Period. August 20, 2001 (extendible)
Annual Servicing Fee Percentage..... 2.00%
Enhancement......................... Subordination of Class B Securities,
Collateralized Trust
Obligations and Class D Securities
Scheduled Series Termination Date... August 20, 2005 (extendible)
Series Issuance Date................ July 30, 1998
Class B Securities
Initial Invested Amount............. $56,376,000
Interest Rate....................... LIBOR + 0.45%
Annual Servicing Fee Percentage..... Same as above for Class A Securities
Enhancement......................... Subordination of Collateralized Trust
Obligations and
Class D Securities
Scheduled Series Termination Date... Same as above for Class A Securities
Collateralized Trust Obligations
Initial Invested Amount............. $96,645,000
Interest Rate....................... LIBOR + 0.85%
Annual Servicing Fee Percentage..... Same as above for Class A Securities
Enhancement......................... Subordination of Class D Securities
Scheduled Series Termination Date... Same as above for Class A Securities
Class D Securities
Invested Amount as of December 1, $31,435,000
1999................................
Expected Invested Amount as of $12,724,000
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 1998-2
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..... 2.00%
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..... 2.00%
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
SERIES 1999-A
Class A Securities
Invested Amount as of December 1, $395,149,998
1999................................
Expected Invested Amount as of $395,149,998
Closing Date........................
Maximum Permitted Invested Amount... $469,262,500
Interest Rate....................... A1/P1 Commercial Paper/LIBOR + 0.65%
Blended
Commencement of Amortization Period. February 2004 (extendible)
Annual Servicing Fee Percentage..... 2.00%
Enhancement......................... Subordination of Class B Securities and
Class C Securities
Scheduled Series Termination Date... August 2004
Series Issuance Date................ April 23, 1999
Class B Securities
Invested Amount as of December 1, $71,382,500
1999................................
Expected Invested Amount as of $71,382,500
Closing Date........................
Maximum Outstanding Principal Amount $84,770,000
Interest Rate....................... A1/P1 Commercial Paper/LIBOR + 2.00%
Blended
Commencement of Amortization Period. Same as above for Class A Securities
Annual Servicing Fee Percentage..... Same as above for Class A Securities
Enhancement......................... Subordination of Class C Securities
Scheduled Series Termination Date... Same as above for Class A Securities
Class C Securities
Initial Invested Amount............. $51,467,500
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 1999-1
Class A Securities
Initial Invested Amount............. $500,000,000
Interest Rate....................... LIBOR + 0.35%
Commencement of Accumulation Period. Last day of May 2003 Monthly Period or
later date as determined in the
Agreement
Annual Servicing Fee Percentage..... 2.00%
Enhancement......................... Subordination of Class B Securities and
Financial Guaranty Insurance Policy
Scheduled Series Termination Date... October 2007
Series Issuance Date................ July 7, 1999
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 1999-2
Class A Securities
Initial Invested Amount............. $500,000,000
Interest Rate....................... LIBOR + 0.52%
Commencement of Accumulation Period. Last day of June 2005 Monthly Period or
later date as determined in the
Agreement
Annual Servicing Fee Percentage..... 2.00%
Enhancement......................... Subordination of Class B Securities and
Financial Guaranty Insurance Policy
Scheduled Series Termination Date... July 2006 (extendible)
Series Issuance Date................ September 22, 1999
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>
ANNEX II
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Prospectus Supplement
of Metris Receivables, Inc. relating to Metris Master Trust Class A
Floating Rate Asset Backed Securities, Series 1999-3, of our report dated
February 2, 1999 on our audits of the consolidated financial statements of
MBIA Insurance Corporation and Subsidiaries as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998.
We also consent to the reference to our firm under the caption "Experts."
/s/ PriceWaterhouseCoopers LLP
PricewaterhouseCoopers LLP
December 1, 1999
PROSPECTUS
METRIS MASTER TRUST
Issuer
METRIS RECEIVABLES, INC.
Transferor
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Servicer
ASSET BACKED SECURITIES
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 Corpora tion or any other govern mental agency.
The securities will represent interests in the trust only and will not
represent inter ests in or recourse obliga tions 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 pro spectus supplement for that series.
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 December 1, 1999
TABLE OF CONTENTS
Page
OVERVIEW OF THE INFORMATION IN THIS PROSPECTUS
AND THE PROSPECTUS SUPPLEMENT...........................................3
THE TRUST..................................................................4
DIRECT MERCHANTS CREDIT CARD BANK, N.A. ACTIVITIES.........................5
General.................................................................5
New Account Underwriting................................................5
Solicitation............................................................6
Pricing.................................................................7
Credit Lines............................................................7
The Adaptive Control System.............................................7
Delinquency, Collections and Charge-Offs................................7
Servicing, Billing and Payment..........................................8
Acquisition of Credit Card Accounts.....................................9
Recoveries..............................................................9
Year 2000 Compliance....................................................9
THE RECEIVABLES...........................................................10
MATURITY CONSIDERATIONS...................................................11
USE OF PROCEEDS...........................................................12
METRIS COMPANIES INC......................................................12
Certain Litigation.....................................................13
THE TRANSFEROR............................................................13
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION...................14
FINGERHUT CORPORATION.....................................................14
DESCRIPTION OF THE SECURITIES.............................................15
General................................................................15
Book-Entry Registration................................................17
Definitive Securities..................................................21
Interest...............................................................22
Principal..............................................................23
Revolving Period.......................................................23
Controlled Amortization Period.........................................24
Principal Amortization Period..........................................24
Accumulation Period....................................................24
Early Amortization Period..............................................25
Discount Option........................................................25
Transfer and Assignment of Receivables.................................26
Exchanges..............................................................27
Representations and Warranties.........................................29
Certain Covenants......................................................32
Eligible Accounts......................................................32
Eligible Receivables...................................................32
Addition of Trust Assets...............................................33
Collection and Other Servicing Procedures..............................36
Trust Accounts.........................................................36
Deposits in Collection Account.........................................38
Investor Percentage and Transferor Percentage..........................39
Application of Collections.............................................39
Shared Principal Collections...........................................40
Shared Excess Finance Charge Collections...............................40
Excess Funding Account.................................................40
Paired Series..........................................................41
Funding Period.........................................................42
Defaulted Receivables; Dilution........................................42
Investor Charge-Offs...................................................43
Defeasance.............................................................43
Final Payment of Principal; Termination................................44
Pay Out Events.........................................................45
Servicing Compensation and Payment of Expenses.........................46
Certain Matters Regarding the Transferor
and the Servicer....................................................46
Servicer Default.......................................................48
Reports to Securityholders.............................................49
Evidence as to Compliance..............................................50
Amendments.............................................................50
List of Securityholders................................................52
The Trustee............................................................52
ENHANCEMENT...............................................................53
General................................................................53
Subordination..........................................................54
Letter of Credit.......................................................54
Cash Collateral Guaranty or Account....................................54
Collateral Interest....................................................54
Surety Bond or Insurance Policy........................................55
Spread Account.........................................................55
Reserve Account........................................................55
DESCRIPTION OF THE PURCHASE AGREEMENTS....................................56
Purchases of Receivables...............................................56
Representations and Warranties.........................................56
Certain Covenants......................................................58
Purchase Termination Date..............................................59
SECURITY RATINGS..........................................................59
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES..................................60
Transfer of Receivables................................................60
Certain Matters Relating to Bankruptcy or Receivership.................61
Consumer Protection Laws...............................................64
Industry Litigation....................................................65
Claims and Defenses of Obligors Against the Trust......................65
INCOME TAX MATTERS........................................................66
General................................................................66
Treatment of the Securities as Debt....................................67
Taxation of Interest Income of U.S. Securityholders....................67
Sale, Exchange or Retirement of Securities.............................69
Defeasance.............................................................70
Possible Alternative Characterizations.................................70
Non-U.S. Securityholders...............................................70
Information Reporting and Backup Withholding...........................72
FASIT Legislation......................................................72
New Withholding Regulations............................................72
State and Local Taxation...............................................73
EMPLOYEE BENEFIT PLAN CONSIDERATIONS......................................73
PLAN OF DISTRIBUTION......................................................75
LEGAL MATTERS.............................................................76
REPORTS TO SECURITYHOLDERS................................................76
OTHER INFORMATION.........................................................77
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS....................77
WHERE YOU CAN FIND MORE INFORMATION ......................................77
INDEX OF TERMS FOR THE PROSPECTUS.........................................79
ANNEX I................................................................A-I-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 79 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" or "DIRECT MERCHANTS 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
undivided 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 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, 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.
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.
- --------
* MasterCard(R) and VISA(R) are federally registered servicemarks of
MasterCard International Inc. and VISA USA Incorporated, respectively.
DIRECT MERCHANTS CREDIT CARD BANK, N.A. ACTIVITIES
GENERAL
The portfolio of credit card accounts serviced by Direct Merchants
Bank (the "DIRECT MERCHANTS BANK PORTFOLIO") currently consists of
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 these accounts and, subject to certain
conditions, may also 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, Scottsdale, Arizona and
Jacksonville, Florida. 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 "--Servicing, Billing and Payment." In addition, the collection and
management of delinquent accounts are performed by Metris Direct, Inc., a
subsidiary of Metris Companies Inc.
NEW ACCOUNT UNDERWRITING
Direct Merchants Bank targets moderate income consumers whom it
believes are underserved by traditional providers of consumer credit.
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.
Direct Merchants Bank is a member of MasterCard International Inc.
("MASTERCARD INTERNATIONAL") and of VISA USA, Incorporated ("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.
The MasterCard(R) and VISA(R) credit cards from which the Accounts
were established may be used to purchase goods and services, to obtain cash
advances and to consolidate and transfer account balances from other credit
cards. Cardholders make purchases when using a credit card to buy
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, Isaac & Company, a third party
provider of risk scores ("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 Fingerhut Score has been effective in
enhancing the Bank's ability to select which Fingerhut Customers to solicit
and in rank ordering Fingerhut customers according to their likelihood of
delinquency. See "Fingerhut Corporation--The Fingerhut Database."
The Bank uses internally and externally developed proprietary models
in enhancing its evaluation of External Prospects. These models help
segment External Prospects into narrower ranges within each FICO Score
subsegment, allowing the Bank to better evaluate individual credit risk and
to tailor its risk-based pricing accordingly. The Bank also uses this
segmentation along with the Fingerhut Suppress File to exclude certain
individuals from its marketing solicitations.
The Bank generates External Prospects from lists obtained from the
major credit bureaus based on criteria established by the Bank. The Bank
uses proprietary models and additional analysis in conjunction with files
obtained from the credit bureaus to further segment External Prospects
based upon their likelihood of delinquency. The Bank also eliminates any
names which are included in the Fingerhut Suppress File. The Bank currently
does not solicit External Prospects who do not have FICO Scores.
The Bank believes that the proprietary models in conjunction with
additional analysis is effective in further segmenting and evaluating risk
within FICO Score bands. However, for certain campaigns the models and
additional analysis were less effective in doing so than in other
campaigns. The Bank has and continues to use the results of its analysis of
External Prospects to adjust the proprietary models to determine the
pricing for various segments and to exclude certain segments from
subsequent direct marketing efforts. While the Bank believes that the
proprietary models and additional analysis are valuable tools in analyzing
relative risks, it is not possible to accurately predict which consumers
will default or the overall level of defaults.
The Bank believes that due to the amount and type of credit
information available in the Fingerhut Database, the Fingerhut Score is
currently more effective than the proprietary models in allowing the Bank
to evaluate the credit risk of prospects having lower FICO Scores.
Therefore, the Bank has been willing to solicit consumers who have lower
FICO Scores if they also have an appropriate Fingerhut Score. As a result,
the Bank's Fingerhut-sourced credit card customers generally have lower
initial FICO Scores than do External Prospects. After every marketing
campaign, the Bank monitors the performance of the proprietary models and
continually re-evaluates the effectiveness of these models in segmenting
credit risk, resulting in further refinements to its selection criteria for
External Prospects. Over time, the Bank believes that it will capture
additional credit information on the behavorial characteristics of External
Prospects which allow it to further increase the effectiveness of the
proprietary models.
SOLICITATION
Prospects for solicitation include both Fingerhut Customers and
External Prospects. Prospects are contacted on a nationwide basis primarily
through pre-screened direct mail and telephone solicitations. The 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 sent to third
party data entry providers which key the application information and
process the applications based on the criteria provided by the Bank. The
Bank then makes the credit decisions and approves, denies or begins
exception processing. The Bank processes exceptions for, among other
things, derogatory credit bureau information and fraud warnings. Exception
applications are processed manually by credit analysts based on policies
approved by the Bank's credit committee.
PRICING
Through risk-based pricing, the Bank prices credit card offers based
upon a prospect's risk profile prior to solicitation. The Bank evaluates a
prospect to determine credit needs, credit risk, and existing credit
availability and then develops a customized offer that includes the most
appropriate product, brand, pricing and credit line. The Bank currently
offers over 100 different pricing structures on its credit card products,
with annual fees ranging from $0 to $75 and annual interest rates up to
26.9%. After credit accounts are opened, the Bank periodically monitors
customers' internal and external credit performance and periodically
recalculates behavior, revenue, attrition and bankruptcy predictors. As
customers evolve through the credit life cycle and are regularly re-scored,
the lending relationship can evolve to include more competitive (or more
restrictive) pricing and product configurations.
CREDIT LINES
Once an account is approved, an initial credit line is established
based on the individual's risk profile using automated screening and credit
scoring techniques. This process results in a portfolio (excluding
portfolio acquisitions) with average credit lines that are below the
industry average due to the higher average risk inherent in the Bank's
target market. The Bank may elect, at any time and without prior notice to
the cardholder, to preclude or restrict further credit card use by the
cardholders, usually as a result of poor payment performance or the Bank's
concern over the creditworthiness of the cardholders. Credit lines are
managed based on the results of the behavioral scoring analysis in
accordance with criteria established by the Bank.
THE ADAPTIVE CONTROL SYSTEM
The 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 the Bank
to be used for non-delinquent accounts that have balances above their
assigned credit line (referred to as "overlimit" accounts).
DELINQUENCY, COLLECTIONS AND CHARGE-OFFS
The Bank considers an account delinquent if a payment due is not
received by the Bank within 25 days from the closing date of the statement.
Collection activities are determined by the Adaptive Control System, which
continually monitors all delinquent accounts. The collections function is
handled internally. Accounts that become 60 days contractually delinquent
are closed, but not necessarily charged off. Accounts are charged off and
taken as a loss either within 60 days 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. Charged-off accounts are referred to the Bank's recovery
unit for coordination of collection efforts to recover the amounts owed.
When appropriate, accounts are placed with external collection agencies or
attorneys.
SERVICING, BILLING AND PAYMENT
The Bank has established a relationship with FDR for cardholder
processing services. FDR is a subsidiary of First Data Corporation, a
provider of information processing and related services including
cardholder processing (services for financial institutions which issue
credit cards to cardholders), and merchant processing (services for
financial institutions which make arrangements with merchants for the
acceptance of credit cards as methods of payment). FDR provides data
processing, credit card reissuance, monthly statements, some in-bound
customer service telephone calls and interbank settlement for the Bank.
Effective February 1998, the Bank extended its processing services
agreement with FDR for an additional six years, expiring 2006. Applications
processing and back office support for mail inquiries and fraud management
are handled internally by the Bank. In addition the Bank handles in- bound
customer service telephone calls for a part of its customer base.
The Bank generally assesses periodic finance charges ("PERIODIC
FINANCE CHARGES") on an account if the cardholder has not paid the balance
in full from the previous billing cycle. These finance charges are based
upon the average daily balance outstanding on the account during the
monthly billing cycle. Payments by cardholders to the Bank on the accounts
are processed by a third party servicer 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 the Bank. If a payment
in full is not received prior to 25 days after the statement cycle date
(the "PAY BY DATE"), finance charges are imposed on all purchases from the
date of the transaction to the statement cycle date. Finance charges are
also imposed on each cash advance from the day such advance is made until
the advance is paid in full. The finance charge is applied to the average
daily balance. For most cardholders, if the entire balance on the account
is paid by the due date a finance charge on purchases is not imposed.
The Bank assesses an annual fee on some credit card accounts. The
Bank may waive the annual membership fees, or a portion thereof, in
connection with the solicitation of new accounts depending on the credit
terms offered, which are determined by the prospect's risk profile prior to
solicitation or when the Bank determines a waiver to be appropriate
considering the account's overall profitability. In addition to the annual
fee, the Bank charges accounts certain other fees including: (i) a late fee
with respect to any unpaid monthly payment if the Bank does not receive the
required minimum monthly payment by the Pay by Date, (ii) a cash advance
fee for each cash advance, (iii) a fee with respect to each check submitted
by a cardholder in payment of an account which is not honored by the
cardholder's bank, and (iv) an overlimit charge if, at any time during the
billing cycle, the total amount owed exceeds the cardholder's credit line
by at least $30.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, the Bank reserves
the right to change or terminate certain terms, conditions, services and
features of the account (including Periodic Finance Charges, late fees,
returned check charges and any other charges or the minimum payment),
subject to the conditions set forth in the account agreement.
Monthly billing statements are sent to cardholders by FDR on behalf
of the Bank. When an account is established, it is assigned a billing
cycle. Currently, there are 20 billing cycles and each such cycle has a
separate monthly billing date based on the respective business day the
cycle represents in each calendar month. Each month, a statement is sent to
all accounts with an outstanding balance greater than $1. All cardholders
with open accounts must make a minimum monthly payment generally of the
greater of $15, 2.5% of the outstanding balance, the finance charge or the
balance of the account if the balance is less than $15. If the minimum
payment is not collected by the Pay by Date, the account is considered
delinquent.
Most merchant transactions by cardholders are authorized online. The
remaining transactions generally are low dollar amounts, typically below
$50. All authorizations are handled through the Adaptive Control System.
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 acquired credit card
accounts 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."
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. The
Bank has developed plans to address potential problems posed by this
development to assure that the Bank is prepared for year 2000. Most of the
Bank's existing information systems are less than three years old and were
originally designed for year 2000 compliance, but as a cautionary measure
the Bank has begun testing such internal systems for year 2000 compliance.
In addition, the Bank 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. The Bank 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 the Bank's
operations.
In addition, the Bank is dependent on databases maintained by
Fingerhut and card and statement generation, among other services, provided
by FDR. The project team has been working with its material vendors,
including Fingerhut and FDR, to determine the status of each vendor's plans
for becoming year 2000 compliant. The project team has developed high level
contingency plans to address non-compliance by its material vendors, which
may include replacing such vendors. Although the Bank cannot ensure
compliance by all of its vendors on a timely basis, the Bank believes that
it is taking appropriate steps to identify exposure to year 2000 problems
and to address them on a timely basis.
The most reasonably likely worst case scenario that may impact the
Bank's results of operations, financial condition and prospects is the
failure of FDR, VISA(R) and MasterCard(R) to provide services. The Bank's
cardholders would be unable to use their credit cards or otherwise access
their accounts. Due to several unknown contributing factors, and the scope
of the year 2000 issue, the impact this worst case scenario would have on
the Bank's results of operations, financial condition and prospects, is an
uncertainty. The scenarios are analyzed and addressed in the Bank's
contingency plans.
The Bank views contingency planning from a remediation and business
resumption perspective. Remediation contingency planning refers to
mitigating the risks associated with the failure to successfully complete
renovation, validation, and implementation of mission-critical systems and
vendor services. Year 2000 business resumption contingency planning is the
process of identifying core business processes and critical information
systems that support those processes, and developing plans to enable those
processes to be resumed, or alternatives instituted, in the event of a
disruption.
The Bank has completed high level year 2000 remediation contingency
plans for mission-critical applications and vendors. The contingency plans
include identification of the product/service provided, the current vendor,
other vendors that could provide the product/service, estimated timeline
and cost to convert services to another vendor, and any business reasons
why the backup vendors could not provide the services. These plans are
reviewed periodically for accuracy.
The Bank has completed year 2000 business resumption contingency
plans for mission-critical core business processes.
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 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, Principal Collections 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, Principal Collections will be paid to Securityholders in
the manner described herein and in the related Prospectus Supplement. The
related Prospectus Supplement will specify the date or the method for
determining the date on which the Controlled Amortization Period, the
Principal Amortization Period or a controlled 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 controlled 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, a rapid 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 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 Principal
Collections 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
Principal Collections 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 Controlled Amortization Period, the Principal
Amortization 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 indirect subsidiary, Direct Merchants
Credit Card Bank, National Association. 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
clubs, extended service plans 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 Asset
Funding Co.
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. On May 28, 1999,
the Lee Company received notice that there was no regulatory objection to
the transaction. The conversion occurred on June 1, 1999, and as a result
the Lee Company owns approximately 30% of the common stock of Metris on a
diluted basis, assuming conversion of the Series C Preferred into common
stock.
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.
THE TRANSFEROR
Metris Receivables, Inc., formerly known as Fingerhut Financial
Services Receivables, Inc. (the "TRANSFEROR"), was incorporated under the
laws of the State of Delaware on May 23, 1995. All of its outstanding
capital stock is owned by Metris Direct. The Transferor was organized for
the limited purpose of purchasing, holding, owning and selling receivables
and any activities incidental to and necessary or convenient for the
accomplishment of such purposes, and has no material assets other than such
receivables. Neither Metris Direct, as stockholder of the Transferor, nor
the Transferor's board of directors, intends to change its business
purpose. The Transferor's executive offices are located at 600 South
Highway 169, Suite 300, St. Louis Park, Minnesota 55426. The Transferor's
telephone number is (612) 417-5645.
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Direct Merchants Bank, a wholly owned indirect 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 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. 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 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 individuals about whom it
has information relating to 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 March 18, 1999, Fingerhut was acquired by Federated Department
Stores, Inc. Although Metris' agreements with Fingerhut were not terminated
by this transaction, Metris cannot predict how this change in status may
impact the relationship of Metris with 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 Fingerhut 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 "SECURITYHOLDERS' 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 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, and may
include the underwriters of any Series of Securities. 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 Customer 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 Customer 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 purchases, 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, clearing corporations,and certain other
organizations, and may include the underwriters of any Series of
Securities. 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 and Euroclear and customers of Cedelbank, 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.
If any Securities are listed on the Luxembourg Stock Exchange, upon
surrender by the Depository of the definitive certificates representing the
Securities and instructions for registration, the Trustee will also issue
and make available the Securities as Definitive Securities to all holders
thereof through the office of the listing agent in Luxembourg and the
Trustee will recognize such holders of Definitive Securities as
Securityholders pursuant to the Pooling and Servicing Agreement. The final
payment of any Security may also be made upon presentation and surrender of
such Security at the office of the listing agent in Luxembourg as specified
in the notice of final distribution to Securityholders. A notice of such
final distribution will be published in a daily newspaper in Luxembourg,
which is expected to be the Luxemburger Wort, not later than the fifth day
of the month of such final distribution. Definitive Securities will also be
transferable and exchangeable at the offices of the listing agent in
Luxembourg. With respect to any transfer of Definitive Securities in part,
the new Definitive Securities registered in the names specified by the
transferee and the original transferor will be available at the offices of
the listing agent in Luxembourg.
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, semiannual 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 controlled
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 a rapid 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 Principal Collections 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"), Principal Collections 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
Principal Collections 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
Principal Collections 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 Principal
Collections allocable to the Invested Amount of such Series (and certain
other amounts if so specified in the related Prospectus Supplement) will be
transferred 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 Expected Final Payment Date. If the Prospectus
Supplement relating to a Series so specifies, 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 the Accumulation Period is a controlled Accumulation Period
and if so specified in the related Prospectus Supplement, the commencement
of a rapid 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 agreement 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"), Principal Collections
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) Principal Collections,
prior to any reduction for Finance Charge Receivables which are Discount
Option Receivables, received on such date of processing, and (iii) a
fraction the numerator of which is the aggregate amount of Principal
Receivables arising on each date of processing falling on or after the date
on which the Transferor exercises its discount option and the denominator
of which is the aggregate Principal Receivables on such date of processing,
will be deemed Collections of Finance Charge Receivables and will be
applied accordingly. Any such designation would result in an increase in
the amount of Finance Charge Receivables and a corresponding increase in
the portfolio yield, a reduction in the amount of Principal Receivables in
the Trust and a reduction in the Transferor Interest and therefore the
effect on Securityholders will be to decrease the likelihood of a Pay Out
Event based upon a reduction of the average portfolio yield for any
designated period to a rate below the average base rate for such period
while increasing the likelihood that the Transferor will be required to add
Principal Receivables to the Trust and, because of the reduction in the
aggregate amount of Principal Receivables which, if additional Principal
Receivables were not available at such time, could cause the occurrence of
a Pay Out Event. Unless otherwise specified, all references herein to
Principal Receivables or Finance Charge Receivables, or Collections with
respect thereto, are references to such Receivables, or Collections with
respect thereto, as defined above after application of the Discount
Percentage.
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 ("TRUST PORTFOLIO"). 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 amended from time
to time in accordance with its 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 provide
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. "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 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. 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.
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 respects 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.
"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 Receivable 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 Principal Collections 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.
An "APPROVED ACCOUNT" means (i) each 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. "RATINGS EVENT" means, 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 Credit Card Bank,
N.A. Activities--Delinquency, Collections and Charge-Offs." Managerial
functions to be performed by the Servicer on behalf of the Trust include
maintaining books and records with respect to the foregoing and other
matters pertinent to the Receivables, assisting the Trustee with any
inspections of such books and records by the Trustee pursuant to the
Pooling and Servicing Agreement, preparing and delivering the monthly and
annual statements described in "--Reports to Securityholders," and causing
a firm of independent 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 from Moody's of P-1; (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 (the "BANKRUPTCY CODE"),
provided, however, that (A) the term of the repurchase agreement is
consistent with the requirements with regard to the maturity of Cash
Equivalents specified herein or in the applicable Supplement for the
applicable account or is due on demand, (B) the Trustee or a third party
acting solely as agent for the Trustee has possession of the collateral,
(C) the Trustee on behalf of the Trust has a perfected first priority
security interest in the collateral, (D) the market value of the collateral
is maintained at the requisite collateral percentage of the obligation in
accordance with the standards of the Rating Agencies, (E) the failure to
maintain the requisite collateral level will obligate the Trustee to
liquidate the collateral as promptly as practicable upon instructions from
the Servicer, (F) the securities subject to the repurchase agreement are
either obligations of, or fully guaranteed as to principal and interest by,
the United States of America or any instrumentality or agency thereof,
certificates of deposit or banker's acceptances and (G) the securities
subject to the repurchase agreement are free and clear of any third party
lien or claim, or (ii) a financial institution insured by the FDIC, or any
broker-dealer with "retail-customers" that is under the jurisdiction of the
Securities Investors Protection Corporation ("SIPC"), provided, however,
that (A) the market value of the collateral is maintained at the requisite
collateral percentage of the obligation in accordance with the standards of
the Rating Agencies, (B) the Trustee or a third party (with a rating from
Moody's and Standard & Poor's of P-1 and A-1+, respectively) acting solely
as agent for the Trustee has possession of the collateral, (C) the
collateral is free and clear of third party liens and, in the case of an
SIPC broker, was not acquired pursuant to a repurchase or reverse
repurchase agreement and (D) the failure to maintain the requisite
collateral percentage will obligate the Trustee to liquidate the collateral
upon instructions from the Servicer; provided, however, that at the time of
the Trust's investment or contractual commitment to invest in any
repurchase agreement the short-term deposits or commercial paper 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
below 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
Principal Collections, Finance Charge Receivables and Receivables in
Defaulted Accounts during the Revolving Period and any Amortization Period.
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 provided 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 other Trust
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,
Principal Collections 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.
In addition, if so specified in the related Prospectus Supplement,
Finance Charge Collections otherwise payable to the Transferor may be
designated to be paid to the Securityholders of the applicable
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 or a portion
of that Series (in each 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 prefunded 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
prefunded Paired Series, an equal amount of funds on deposit in any
pre-funding account for such prefunded 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 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 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 Credit Card Bank,
N.A. Activities--Delinquency, Collections and Charge-Offs" in this
Prospectus and "Trust Credit Card Portfolio--Delinquency and Loss
Experience" in the related Prospectus Supplement. 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. 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" will 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 will be deemed to apply to the related Monthly Period. "DEFAULT
RECOGNITION PERCENTAGE" means, with respect to each Default Recognition
Date, the percentage equivalent of a fraction, the numerator of which is
the weighted average Invested Amount for the related Monthly Period and the
denominator of which is the weighted average Principal Receivables in the
Trust for the related Monthly Period.
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 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 Finance Charge
Collections and other amounts 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 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 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 (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 including that all amounts owing to any
Enhancement provider, 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 or Metris
voluntarily enters liquidation or a trustee-in-bankruptcy is appointed for
the Transferor (an "INSOLVENCY EVENT"), the Transferor or Metris 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 Finance Charge Collections
allocated to the Securityholders 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 Securityholders 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.
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 the 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
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 662/3 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 "Income
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, including Classes that are described as
"COLLATERALIZED TRUST OBLIGATIONS" 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 Principal Collections allocable to the
Collateral Interest to decrease the Collateral Interest, (ii) to the extent
Principal Collections 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
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 (the "UCC") as in effect in the
Relevant UCC State, 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. Although the priority of
future generated general intangibles is not as clear as the priority of
interests governed by the UCC, Direct Merchants Bank, Metris and the
Transferor believe that it would be inconsistent for a court to afford the
Trust less favorable treatment if the transfer of the Receivables is deemed
to be a sale than if it were deemed to be a security interest and that a
court should conclude that a sale of Receivables consisting of general
intangibles would be deemed to have occurred as of the Initial Closing Date
or, as applicable, the relevant date of designation for inclusion in the
Trust.
There are certain limited circumstances under the UCC in which a
prior or subsequent transferee of Receivables coming into existence after
the Initial Closing Date could have an interest in 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 and certain other permitted
liens. 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.
There is a significant possibility that the Trust may not have a perfected
security interest in any of the Receivables created after the filing of a
petition for relief by or against Metris or the Transferor under the
Bankruptcy Code or after the appointment of a receiver or conservator with
respect to Direct Merchants Bank. Nevertheless, it is anticipated that the
Trust will either own or have a perfected security interest in Receivables
existing on the date of filing a petition by or against Metris or the
Transferor under the Bankruptcy Code or after the date of appointment of a
receiver or conservator with respect to Direct Merchants Bank and will be
able to make payments in respect of principal and interest on the
Securities, although there can be no assurance that any of such payments
would be timely. Because the Trust's interest in the Receivables is
dependent upon the Transferor's interest in the Receivables, which is
dependent upon Metris' or Direct Merchants Bank's interest in the
Receivables, any adverse change in the priority or perfection of the
Transferor's or Metris' security interest would correspondingly affect the
Trust's interest in the affected Receivables. In addition, if a receiver or
conservator were appointed for Direct Merchants Bank, certain
administrative expenses of the receiver or conservator also may have
priority over the interest of the Trust in such Receivables. While Direct
Merchants Bank is the Servicer, certain cash collections on the Receivables
may be held by Direct Merchants Bank and commingled with its funds for
brief periods, and if an Insolvency Event occurs, the Trust may not have a
perfected interest in such commingled collections.
CERTAIN MATTERS RELATING TO BANKRUPTCY OR RECEIVERSHIP
The Transferor will not engage in any activities except purchasing
accounts receivable from Metris or any affiliate of Metris, forming trusts,
transferring such accounts receivable to such trusts and engaging in
activities incident to, or necessary or convenient to accomplish, the
foregoing. The Transferor has no intention of filing a voluntary petition
under the Bankruptcy Code or any similar applicable state law so long as
the Transferor is solvent and does not reasonably foresee becoming
insolvent.
The voluntary or involuntary application for relief under the
Bankruptcy Code or any similar applicable state law with respect to Metris
should not necessarily result in a similar voluntary application with
respect to the Transferor so long as the Transferor is solvent and does not
reasonably foresee becoming insolvent either by reason of Metris'
insolvency or otherwise. Counsel has advised Metris and the Transferor that
(i) the assets and liabilities of the Transferor would not be substantively
consolidated with the assets and liabilities of Metris in the event of a
petition for relief under the Bankruptcy Code with respect to Metris and
(ii) the sale of Receivables by Metris would constitute a valid sale and,
therefore, such Receivables would not be property of Metris in the event of
the filing of an application for relief by or against Metris under the
Bankruptcy Code. The foregoing conclusions are reasoned conclusions, based
upon various assumptions regarding factual matters and future events, as to
which there necessarily can be no assurance. If a bankruptcy trustee for
Metris, Metris as debtor-in-possession, or a creditor of Metris were to
take the view that Metris and the Transferor should be substantively
consolidated or that the transfer of the Receivables from Metris to the
Transferor should be recharacterized as a pledge of such Receivables, then
delays in payments on the Securities or (should the bankruptcy court rule
in favor of any such trustee, debtor-in-possession or creditor) reductions
in such payments on such Securities could result. In addition, if the
Transferor otherwise were to become a debtor in a bankruptcy case, and if a
bankruptcy trustee for the Transferor or a creditor of the Transferor or
the Transferor itself were to take the position that the transfer of
Receivables from the Transferor to the Trust should be recharacterized as a
pledge of such Receivables, then delays in payments on the Securities or
(should the bankruptcy court rule in favor of any such trustee, creditor or
debtor-in- possession) reductions in such payments on such Securities could
result.
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
Federal Deposit Insurance Act does not define the terms "actual direct
compensatory damages." The FDIC has 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.
The Pooling and Servicing Agreement provides that, upon the
bankruptcy or appointment of a receiver for the Transferor, Direct
Merchants Bank or Metris, the Transferor will promptly give notice thereof
to the Trustee, and a Pay Out Event with respect to all Series will occur,
and under the Pooling and Servicing Agreement, no new Principal Receivables
will be transferred to the Trust. Upon the 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 from
Collections on 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.
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993), cert. denied, 114 S. Ct. 554 (1993), the United States Court of
Appeals for the 10th Circuit suggested that even where a transfer of
accounts from a seller to a buyer constitute a "true sale," the accounts
would nevertheless constitute property of the seller's bankruptcy estate in
a bankruptcy of the seller. If Metris or the Transferor were to become
subject to a bankruptcy proceeding or if Direct Merchants Bank were to
become subject to a receivership and a court were to follow the 10th
Circuit's reasoning, Securityholders might experience delays in payment or
possibly losses in their investment in the Securities. Counsel to the
Transferor has advised the Transferor that the facts of the Octagon case
are distinguishable from those in the sale transactions between Direct
Merchants Bank and Metris, Metris and the Transferor and the Transferor and
the Trust and that the reasoning of the 10th Circuit appears to be
inconsistent with established precedent and the UCC.
The occurrence of certain events of insolvency, conservatorship or
receivership with respect to the Servicer will result in a Servicer
Default, which Servicer Default, in turn, could result in a Pay Out Event.
If no other Servicer Default other than the commencement of such bankruptcy
or similar event exists, a conservator or receiver of the Servicer may have
the power to prevent the Trustee and the Securityholders from appointing a
successor Servicer.
CONSUMER PROTECTION LAWS
The Accounts and Receivables are subject to numerous federal and
state consumer protection laws that impose requirements related to offering
and extending credit. Any failure by a Credit Card Originator or the
Servicer to comply with such legal requirements also could adversely affect
the Servicer's ability to collect the full amount of the Receivables. The
United States Congress and the states may enact laws and amendments to
existing laws to further regulate consumer credit or to reduce finance
charges or other fees or charges applicable to credit card and other
consumer revolving loan accounts. Such laws, as well as any new laws or
rulings which may be adopted, may adversely affect the Servicer's ability
to collect on the Receivables or maintain previous levels of collections.
The relationship of the 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.
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."
INDUSTRY LITIGATION
In October 1998, the United States Department of Justice (the "DOJ")
filed an antitrust lawsuit in Federal court in Manhattan against VISA and
MasterCard International alleging that the two credit card associations
restrain competition and limit consumer choice. The DOJ in such lawsuit
challenges, among other things, the control of both VISA and MasterCard
International by the same set of banks, as well as the rules adopted by the
two associations prohibiting members from offering credit cards of
competitors. In public statements, both VISA and MasterCard International
have contested the DOJ's allegations. The Bank is unable to predict what
the effect of such lawsuit may ultimately be on the Bank's credit card
business. A final adverse decision against VISA and MasterCard
International, or a similar settlement with the DOJ by the two
associations, could result in changes in the current associations and may
result in adverse consequences for members of the two associations, such as
the Bank.
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.
INCOME 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 offered hereunder 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 income 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).
Except as otherwise set forth herein, 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
Except as provided in the related Supplement, 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. Except as provided in the related
Supplement, 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, except as provided in the
related Supplement, 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 Securities will be
characterized for federal income tax purposes as indebtedness. 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 does 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 cash is actually received in respect thereof. 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 treated as issued with OID, 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 treated as 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
market discount 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, 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.)
DEFEASANCE
A Series is subject to becoming a Defeased Series in certain
circumstances. It is not clear under the existing authorities whether
becoming a Defeased Series would, for federal income tax purposes, result
in a deemed taxable sale or exchange of the Securities of such a Series in
exchange for the amounts deposited in the Principal Funding Account and the
Accumulation Period Reserve Account; however, if such a sale or exchange
were deemed to occur, because of the anticipated short time period, the
amount required to be deposited and the nature of the assets in which such
amount may be invested, such a result would not be expected to have a
material adverse effect on a Securityholder for federal income tax
purposes, notwithstanding that, if such a sale or exchange were deemed to
occur, each Securityholder would thereafter be deemed to own its pro rata
share of the assets in which such amount is invested, and would be required
to report its taxable income on such basis.
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 partnership or as a publicly traded
partnership taxable as a corporation and, if the latter, would be subject
to federal income taxes at corporate tax rates on its taxable income
generated by ownership of the Receivables. Moreover, if such arrangement
were treated as a publicly traded partnership taxable as a corporation
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 (but possibly without the availability of
any dividends received deduction). Such an entity-level tax could result in
reduced distributions to Securityholders and the Securityholders could be
liable for a share of such tax if not paid by the entity.
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 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, as
determined for U.S. federal income tax purposes, (i) a citizen or resident
of the United States, (ii) a corporation or partnership organized in or
under the laws of the United States, or any political subdivision thereof
or 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.
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 if a
U.S. court is able to exercise primary supervision over the administration
of such trust and one or more U.S. persons 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.
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, 2000, 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
("PARTIES IN INTEREST")). 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 Section
4975 of 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 could constitute a prohibited transaction under Section 4975 of
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 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 Section
4975 of 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 benefit plans (as defined in Section 3(3) of
ERISA), whether or not subject to 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 Securities 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
Plans that are Securityholders, transactions involving the Trust and
Parties in Interest 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, or fiduciary with respect to an investing Plan.
Accordingly, an investment by a Plan in Securities may be a prohibited
transaction under ERISA and Section 4975 of the Code. Thus, for example, if
a participant in any Plan is a cardholder of one of the Accounts, under DOL
interpretations the purchase of interests in Securities 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 PLAN CONSIDERING THE
PURCHASE OF INTERESTS IN SECURITIES 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 ERISA'S
GENERAL FIDUCIARY STANDARDS OF INVESTMENT PRUDENCE AND DIVERSIFICATION, AN
INVESTMENT IN SECURITIES OF ANY SERIES IS APPROPRIATE FOR THE PLAN TAKING
INTO ACCOUNT THE OVERALL INVESTMENT POLICY OF THE PLAN AND THE COMPOSITION
OF THE 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, 510 U.S. 86 (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 Orrick, Herrington & Sutcliffe LLP, Washington, D.C.
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 Credit Card Bank, N.A. 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 YOU CAN 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 .................................................................4
Accumulation Period......................................................24
Adaptive Control System...................................................7
Addition Date............................................................34
Additional Accounts......................................................34
Adjustment Payment.......................................................43
Amendment Closing Date...................................................34
Amortization Period......................................................12
Approved Account.........................................................34
Assignment...............................................................34
Automatic Additional Accounts............................................33
Bank .................................................................4
Bank Purchase Agreement..................................................11
Bankruptcy Code..........................................................37
Cash Collateral Account..................................................54
Cash Collateral Guaranty.................................................54
Cash Equivalents.........................................................38
Cedelbank................................................................19
Cedelbank Customers......................................................20
Change of Control........................................................13
Class ................................................................16
Code ................................................................66
Collateral Interest......................................................54
Collateralized Trust Obligations.........................................54
Collection Account.......................................................36
Collections..............................................................11
Comptroller...............................................................9
Contract ................................................................33
Controlled Accumulation Amount...........................................25
Controlled Amortization Amount...........................................24
Controlled Amortization Period...........................................24
Controlled Deposit Amount................................................25
Controlled Distribution Amount...........................................24
Cooperative..............................................................20
Credit and Collection Policy.............................................36
Credit Card Originator...................................................32
Default Recognition Date.................................................43
Default Recognition Percentage...........................................43
Defaulted Account........................................................42
Defaulted Receivable.....................................................42
Defeased Series..........................................................43
Definitive Securities....................................................21
Depositaries.............................................................17
Depository...............................................................16
Determination Date.......................................................29
Dilution ................................................................43
Direct Merchants Bank.....................................................4
Direct Merchants Bank Portfolio...........................................5
Discount Option Receivables..............................................26
Discount Percentage......................................................25
Distribution Account.....................................................36
Distribution Date........................................................22
DOJ ................................................................65
DOL ................................................................73
DTC .............................................................A-I-1
DTC Participants.........................................................17
Early Amortization Period................................................25
Eligible Account.........................................................32
Eligible Receivable......................................................32
Enhancement..............................................................53
Enhancement Invested Amount..............................................53
Enhancement Percentage...................................................39
ERISA ................................................................73
Euroclear................................................................20
Euroclear Operator.......................................................20
Euroclear Participants...................................................20
Euroclear System.........................................................20
Excess Finance Charge Collections........................................40
Excess Funding Account...............................................36, 40
Exchange ................................................................27
Exchange Act.............................................................17
Exchangeable Transferor Security......................................4, 15
Excluded Accounts........................................................34
Expected Final Payment Date..............................................11
External Prospects.......................................................12
FASIT ................................................................72
FASIT Provisions.........................................................72
FCI ................................................................13
FDIC ................................................................36
FDR .................................................................5
FICO Scores...............................................................5
Finance Charge Collections................................................4
Finance Charge Receivables...............................................10
Fingerhut.................................................................5
Fingerhut Customers......................................................12
Fingerhut Database.......................................................14
Fingerhut Scores.........................................................14
FIRREA ................................................................62
Foreign Person...........................................................70
Full Invested Amount.....................................................42
Funding Period...........................................................42
General Account Regulations..............................................75
Global Securities.....................................................A-I-1
Indirect Participants....................................................17
Initial Closing Date.....................................................26
Insolvency Event.........................................................45
Interest Accrual Period..................................................30
Interest Funding Account.............................................22, 36
Invested Amount..........................................................15
Investment Company Act...................................................31
Investor Charge-Off......................................................43
Investor Percentage......................................................39
Investor Securities......................................................27
IRS ................................................................66
John Hancock.............................................................75
L/C Bank ................................................................54
Lee Company..............................................................13
MasterCard International..................................................5
Metris ................................................................12
Metris Direct............................................................13
MGT/EOC ................................................................20
Minimum Aggregate Principal Receivables..................................34
Minimum Transferor Interest..............................................34
Minimum Transferor Percentage............................................34
Monthly Period...........................................................22
Monthly Servicing Fee....................................................46
Moody's ................................................................36
New Regulations..........................................................72
Notice Date..............................................................34
Obligors ................................................................10
OID ................................................................67
OID Regulations..........................................................67
Paired Series............................................................41
Participants.............................................................16
Parties in Interest......................................................73
Pay by Date...............................................................8
Pay Out Event............................................................45
Paying Agent.............................................................38
Periodic Finance Charges..................................................8
Permitted Lien...........................................................30
Plans ................................................................73
Pooling and Servicing Agreement...........................................4
Pre-Funding Account......................................................42
Pre-Funding Amount.......................................................42
Prepayable Instrument....................................................68
Principal Account........................................................36
Principal Amortization Period............................................24
Principal Collections.....................................................4
Principal Funding Account................................................23
Principal Receivables....................................................11
Principal Shortfall......................................................40
Principal Terms..........................................................28
Prospectus Supplement.....................................................4
PTE ................................................................74
Purchase Agreement.......................................................26
Purchase Agreements..................................................11, 26
Purchase Termination Date................................................59
Qualified Institution....................................................36
Rating Agency............................................................60
Ratings Event............................................................34
Receivables...............................................................4
Record Date..............................................................16
Recoveries................................................................9
Regulation...............................................................73
Related Person...........................................................52
Relevant UCC State.......................................................33
Reserve Account..........................................................55
Restart Date.............................................................33
Retained Interest........................................................29
Retained Percentage......................................................46
Revolving Period.........................................................23
SEC ................................................................17
Securities................................................................4
Securities Act...........................................................28
Security Owner...........................................................16
Security Rate............................................................22
Securityholders..........................................................21
Securityholders' Interest................................................15
Series .................................................................4
Series C Preferred.......................................................13
Series Default Amount....................................................42
Service Transfer.........................................................48
Servicer .................................................................4
Servicer Default.........................................................48
Shared Principal Collections.............................................23
SIPC ................................................................37
Special Tax Counsel......................................................66
Spin Off ................................................................13
Spread Account...........................................................55
Standard & Poor's........................................................36
Supplement...............................................................15
Supplemental Accounts....................................................33
Supplemental Security....................................................29
Suppress File............................................................14
Tax Certificate.......................................................A-I-4
Tax Opinion..............................................................29
Termination Date.........................................................44
Terms and Conditions.....................................................20
Transfer Agent and Registrar.............................................22
Transfer Date........................................................24, 38
Transferor...............................................................13
Transferor Amount........................................................15
Transferor Interest......................................................15
Treasury Regulations.....................................................66
Trigger Event............................................................45
Trust .................................................................4
Trust Accounts...........................................................36
Trust Portfolio..........................................................26
Trustee .................................................................4
U.S. Person..............................................................71
UCC ................................................................60
Utah Bank................................................................14
Variable Funding Securities..............................................16
Variable Funding Supplement..............................................16
VISA .................................................................5
Waiver Agreement.........................................................13
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 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 Customer 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 Participant 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 Customers 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 Customer 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 OID) 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. The
procedures described above would be changed under new Treasury regulations
which are effective for payments made after December 31, 2000. The new
Treasury regulations would combine several existing forms, including Form
W-8, Form 4224 and Form 1001, into a single, expanded Form W-8. The new
Forms W-8 are Form W-8BEN, Certificate of Foreign Status of Beneficial
Owner for U.S. Tax Withholding, that replaces the existing Form W-8; Form
W-8ECI, Certificate of Foreign Person's Claim for Exemption From
Withholding on Income Effectively Connected With the Conduct Of a Trade or
Business in the United States, that replaces the existing Form 4224;
Revised Form W-8 used as a substitute for existing Form 1001 to secure
treaty benefits; Form W-8EXP, Certificate of Foreign Government Or Other
Foreign Organization for United States Tax Withholding; and Form W-8IMY,
Certificate of Foreign Intermediary, Foreign Partnership, or Certain U.S.
Branches for U.S. Tax Withholding.
Certifications currently made on Forms W-8, 4224 or 1001 remain valid
until they expire under the existing regulations, but not after December
31, 2000, and a beneficial owner of a Global Certificate would have to
timely sign the appropriate W-8 Form to avoid withholding at a rate of 30%
in respect of payments of interest (including original issue discount) made
after December 31, 2000, or after the expiration of the current
certificate.
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.
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.
Further, the U.S. Treasury Department has recently finalized new
regulations that will revise some aspects of the current system for
withholding on amounts paid to foreign persons after December 31, 2000.
Under these regulations, interest or OID paid to a nonresident alien would
continue to be exempt from U.S. withholding taxes (including backup
withholding) provided that the holder complies with the new certification
procedures.
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Prospectus Supplement
METRIS MASTER TRUST
SERIES 1999-3
$300,000,000
Class A Floating Rate
Asset Backed Securities
Metris Receivables, Inc.
Transferor
Direct Merchants
Credit Card Bank, National Association
Servicer
Bear, Stearns & Co. Inc.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the prospectus. We have not
authorized anyone to provide you with different information.
We are not offering these securities in any state where the offer is
not permitted.
We do not claim the accuracy of the information in this prospectus
supplement and the prospectus as of any date other than the dates stated on
their respective covers.
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of these securities and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling these
securities will deliver a prospectus supplement and prospectus until
February 28, 2000.
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