<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement and the accompanying prospectus +
+is not complete and may be amended. We may not sell these securities until we +
+deliver a final prospectus supplement and accompanying prospectus. This +
+prospectus supplement and the accompanying prospectus are not an offer to +
+sell nor are they seeking an offer to buy these securities in any state where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 22, 1999
Prospectus Supplement to Prospectus dated June 22, 1999
METRIS MASTER TRUST
$500,000,000 Class A Floating Rate Asset Backed Securities, Series 1999-1
Metris Receivables, Inc.
Transferor
Direct Merchants Credit Card Bank, National Association
Servicer
<TABLE>
<S> <C>
Principal Amount $500,000,000
Price $ ( %)
Underwriters' Commissions $ ( %)
Proceeds to the Issuer $ ( %)
Interest Rate one-month LIBOR + % p.a.
Interest Payment Dates monthly on the 20th
First Interest Payment Date August 20, 1999
Expected Final Payment Date June 21, 2004
</TABLE>
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 interest rate caps. These
securities will also receive the benefits of an insurance policy issued by MBIA
Insurance Corporation.
(MBIA LOGO APPEARS HERE)
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.
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.
We will apply to have these securities listed on the Luxembourg Stock
Exchange but we are not sure that they will be listed on the Luxembourg Stock
Exchange or any other stock exchange.
These securities are offered subject to availability.
We expect that these securities will be delivered in book-entry form on ,
1999 through The Depository Trust Company, Cedelbank, societe anonyme and the
Euroclear System.
Banc of America Securities LLC Salomon Smith Barney
Bear, Stearns & Co. Inc.
Credit Suisse First Boston
The date of this Prospectus Supplement is June , 1999
<PAGE>
Table Of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
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-13
Allocations of Charged-Off Receivables Could Reduce Payments to
Securityholders......................................................... S-14
Limited Ability to Resell Securities..................................... S-14
Certain Liens Could Be Given Priority Over Your Securities............... S-14
Insolvency or Bankruptcy of Metris Receivables, Inc. Could Result in
Accelerated, Delayed or Reduced Payments to Securityholders............. S-14
Negative Carry........................................................... S-16
Issuance of Additional Series by the Trust May Affect the Timing of
Payments................................................................ S-16
Individual Securityholders Will Have Limited Control of Trust Actions.... S-16
Rating of Your Securities May be Reduced................................. S-17
Direct Merchants Bank's Credit Card Portfolio............................. S-18
General.................................................................. S-18
Growing Credit Card Portfolio by Portfolio Acquisitions.................. S-18
Assessment of Fees and Finance and other Charges......................... S-19
Delinquency and Loss Experience.......................................... S-19
Recoveries............................................................... S-21
The Receivables........................................................... S-21
General.................................................................. S-21
Maturity Considerations................................................... S-25
Accumulation Period...................................................... S-25
Early Amortization Period................................................ S-25
Pay Out Events........................................................... S-26
Payment Rates............................................................ S-26
Receivable Yield Considerations........................................... S-28
</TABLE>
<TABLE>
<CAPTION>
Page
------
<S> <C>
Use of Proceeds.......................................................... S-28
Description of MBIA...................................................... S-29
MBIA.................................................................... S-29
MBIA Financial Information.............................................. S-29
Where You Can Obtain Additional Information about MBIA.................. S-30
Year 2000 Readiness Disclosure.......................................... S-30
Financial Strength Ratings of MBIA...................................... S-30
Experts................................................................. S-31
Description of the Securities............................................ S-31
General................................................................. S-31
Status of the Securities................................................ S-32
Previously Issued Series................................................ S-32
Interest Payments....................................................... S-33
Principal Payments...................................................... S-34
Postponement of Accumulation Period..................................... S-35
Subordination........................................................... S-35
The Interest Rate Caps.................................................. S-36
Interest Rate Cap Providers............................................. S-37
Allocation Percentages.................................................. S-37
Redirected Cash Flows................................................... S-39
Redirected Principal Collections........................................ S-39
Application of Collections.............................................. S-40
Coverage of Interest Shortfalls......................................... S-44
Shared Principal Collections............................................ S-45
Defaulted Receivables; Dilution......................................... S-45
Investor Charge-Offs.................................................... S-45
Principal Funding Account............................................... S-46
Accumulation Period Reserve Account..................................... S-46
The Policy.............................................................. S-47
Paired Series........................................................... S-49
Defeasance.............................................................. S-49
Final Payment of Principal; Termination................................. S-50
Pay Out Events.......................................................... S-51
Servicing Compensation and Payment of Expenses.......................... S-52
Reports to Securityholders.............................................. S-53
Listing And General Information.......................................... S-53
ERISA Considerations..................................................... S-54
Class A Securities...................................................... S-54
Consultation with Counsel............................................... S-55
Underwriting............................................................. S-56
Exchange Listing......................................................... S-57
Index of Terms for Prospectus Supplement................................. S-58
Annex I Previously Issued Series......................................... A-I-1
Annex II Consent of Independent Accountants.............................. A-II-1
</TABLE>
S-2
<PAGE>
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 1999-1 are
described in this supplement.
This supplement begins with several introductory sections describing your
series and Metris Master Trust in abbreviated form:
. Summary of Terms provides important amounts, dates and other terms of
your series;
. Structural Summary gives a brief introduction of the key structural
features of your series and directions for locating further information;
. Selected Trust Portfolio Summary Data gives certain financial information
about the assets of the Trust; and
. Risk Factors describes risks that apply to your series.
As you read through these sections, cross-references will direct you to more
detailed descriptions in the attached prospectus and elsewhere in this
supplement. You can also directly reference key topics by looking at the table
of contents pages in this supplement and the attached prospectus.
To understand the structure of these securities, you must read carefully
the attached prospectus and this supplement in their entirety.
S-3
<PAGE>
Summary of Terms
<TABLE>
<C> <S>
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 Providers:
Pricing Date:
Closing Date:
Clearance and Settlement: DTC/Cedelbank/Euroclear
Trust Assets: receivables originated in MasterCard, VISA and co-branded
accounts, including recoveries on charged-off receivables
</TABLE>
<TABLE>
<CAPTION>
Series Structure: Amount % of Total Series
<S> <C> <C>
Class A $500,000,000 91%
Class B $49,450,550 9%
Annual Servicing Fee: 2.0%
Class A
Anticipated Ratings:*
(Moody's/Standard &
Poor's/Fitch IBCA) Aaa/AAA/AAA
Credit Enhancement: subordination of Class B,
insurance policy and
interest rate caps
Interest Rate: one-month LIBOR + % p.a.
Interest Accrual Method: actual/360
Interest Payment Dates: monthly (20th)
Interest Rate Index Reset 2 business days before each
Date: interest payment date
First Interest Payment Date: August 20, 1999
Expected Final Payment Date: June 21, 2004
Commencement of Accumulation Last day of May 2003
Period
(subject to adjustment):
Series 1999-1 Legal Final October 22, 2007
Maturity:
CUSIP Number:
ISIN:
Common Code:
</TABLE>
- --------
* It is a condition to issuance that one of these ratings be obtained.
S-4
<PAGE>
Structural Summary
This summary briefly describes certain major structural components of Series
1999-1. To fully understand the terms of Series 1999-1 you will need to read
both this supplement and the attached prospectus in their entirety.
The Series 1999-1 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 1999-1, 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 1999-1. 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 1999-1, 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-
1, 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 1999-1.
Metris Master Trust
Your series is one of eight 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:
. securityholders of Series 1999-1;
. securityholders of other series issued by Metris Master Trust;
. providers of credit enhancements for Series 1999-1 and other series
issued by Metris Master Trust; and
. 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
S-5
<PAGE>
fluctuates with the total amount of receivables in the Trust.
For more information on the Metris Master Trust's assets, see "Direct Merchants
Bank's Credit Card Portfolio" and "The Receivables" in this supplement and
"Direct Merchants Credit Card Bank, N.A. Activities" and "The Receivables" in
the attached prospectus.
Scheduled Principal Payments and Potential Later Payments
Metris Master Trust expects to pay the entire principal amount of Class A in
one payment on June 21, 2004. In order to accumulate the funds to pay Class A
on its scheduled payment date, the Trust will accumulate principal collections
in a principal funding account. The Trust will deposit funds into the principal
funding account during an "accumulation period." The length of the accumulation
period will be as many months as is expected to be necessary for the
accumulation of the Class A payment amount, but will not be less than one
month. The accumulation period will end on the scheduled payment date for Class
A, when the funds on deposit in the principal funding account will be paid to
Class A.
If Class A is not fully repaid on its scheduled payment date, Class A will
begin to amortize by means of monthly payments of all principal collections
allocated to Series 1999-1 until it is fully repaid.
For more information on scheduled 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.
Prior to the commencement of an accumulation or amortization period for Series
1999-1, principal collections will be paid to Metris Receivables, Inc. or
shared with other series that are amortizing or in an accumulation period.
Minimum Yield on the Receivables; Possible Early Principal Repayment of Series
1999-1
Your securities may be repaid earlier than their scheduled principal repayment
date if collections on the underlying receivables, together with other amounts
available for payment to securityholders, are too low. The minimum amount that
must be available for payment to Series 1999-1 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 1999-1 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 1999-1
and the Trust will commence a rapid amortization of Series 1999-1, and you will
receive principal payments earlier than the expected final payment date.
Series 1999-1 is also subject to several other pay out events, which could
cause Series 1999-1 to amortize, and which are summarized under the heading
"Description of the Securities--Pay Out Events" in this supplement. If Series
1999-1 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 October
22, 2007, which is the Series 1999-1 final payment date.
For more information on pay out events, the portfolio yield and base rate,
early principal payment and rapid amortization, see "Maturity Considerations,"
"Description of the Securities--Principal Payments" and "--Pay Out Events" in
this supplement and "Description of the Securities--Principal," "--Early
Amortization Period" and "--Final Payment of Principal; Termination" in the
attached prospectus and "--Final Payment of Principal; Termination" in this
supplement.
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:
. under existing law the Class A Securities will be characterized as debt
for U.S. federal income tax purposes; and
S-6
<PAGE>
. that Metris Master Trust will not be an association or publicly traded
partnership taxable as a corporation for U.S. federal income tax
purposes.
For further information regarding the application of U.S. federal income tax
laws, see "Income Tax Matters" in the attached prospectus.
ERISA Considerations
The underwriters anticipate that the Class A Securities will meet the criteria
for treatment as "publicly-offered securities." If so, subject to important
considerations described under "ERISA Considerations" in this supplement and
"Employee Benefit Plan Considerations" in the attached prospectus, the Class A
Securities will be eligible for purchase by persons investing assets of
employee benefit plans or individual retirement accounts.
For further 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.
S-7
<PAGE>
Selected Trust Portfolio Summary Data
[Pie Chart of Geographic Distribution of Accounts in Trust Portfolio]
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.
[Bar Chart of Aged Receivables in Trust Portfolio]
The chart above shows the percentage of the receivables in the Trust portfolio
arising under accounts within the age brackets shown.
S-8
<PAGE>
[Chart of Payment Data]
The chart above shows the total yield, payment rate and charge-off rate for the
Direct Merchants Bank portfolio for each month from January 1998 to March 1999.
"Total yield" for any month means the total amount of collected finance charges
allocated to the Metris Master Trust for the month, expressed as a percentage
of 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 of
the previous month.
The amount of "charge-offs" for any month is the amount of charged-off
receivables recorded in the month expressed as a percentage of average
outstanding principal receivables for the month.
S-9
<PAGE>
Risk Factors
You should consider the following risk factors in deciding whether to
purchase the asset backed 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
1999-1 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 1999-1 and the rapid
amortization of Series 1999-1 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 a
rapid amortization of any outstanding securities,
the period during which that rapid amortization
occurs may be substantially shortened. Because of
the potential for early repayment if collections
on the receivables fall below the minimum amount,
any circumstances that tend to reduce collections
may increase the risk of early repayment of
Series 1999-1.
Conversely, any reduction in collections may
cause the period during which collections are
accumulated in the principal funding account 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
S-10
<PAGE>
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 1999-1.
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
S-11
<PAGE>
the designated index, resulting in a higher or
lower spread, or difference, between the amount
of collections of finance charge receivables on
the accounts and the amounts of interest payable
on Series 1999-1 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
described under "Description of the Securities--
Representations and Warranties" in the attached
prospectus, Metris Receivables, Inc. must accept
reassignment of each receivable that does not
comply in all material respects with all
requirements of applicable law. However, we do
not anticipate that the trustee under the pooling
and servicing agreement will make any examination
of the receivables or the related records for the
purpose of determining the presence or absence of
defects, compliance with representations and
warranties, or for any other purpose. The only
remedy if any representation or warranty is
violated, and the violation continues beyond the
period of time Metris Receivables, Inc. has to
correct the violation, is that Metris
Receivables, Inc. must accept reassignment of the
receivables affected by the violation, subject to
certain conditions described under "Description
of the Securities--Representations and
Warranties" in the attached prospectus. See also
"Certain Legal Aspects of the Receivables--
Consumer Protection Laws" in the attached
prospectus.
If a cardholder sought protection under federal
or state bankruptcy or debtor relief laws, a
court could reduce or discharge completely the
cardholder's obligations to repay amounts due on
its account and, as a
S-12
<PAGE>
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
Trustand the Trust
Portfolio
Direct Merchants Bank's predecessor began
originating and servicing credit card accounts in
March 1995. Direct Merchants Bank and its
predecessor have had limited underwriting and
servicing experience, and limited delinquency,
default and loss experience with respect to the
accounts. See "Direct Merchants Bank's Credit
Card Portfolio" in this supplement and "Direct
Merchants Bank's Credit Card Activities" in the
attached prospectus.
The Trust 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 March 31, 1999 approximately 23.1% of
the accounts in the Trust portfolio had been
originated within the last 12 months and
approximately 44.4% of the accounts in the Trust
portfolio had been originated within the last 24
months. As a result, the current portfolio
history may not be indicative of the portfolio
performance as the receivables and accounts
mature. See the "Composition by Account Age--
Trust Portfolio" table in "The Receivables" in
this supplement.
S-13
<PAGE>
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 1999-1 will be
allocated a portion of those charged-off
receivables. See "Description of the Securities--
Allocation Percentages" and "Direct Merchants
Bank's Credit Card Portfolio--Delinquency and
Loss Experience" in this supplement. If the
amount of charged-off receivables allocated to
any class of securities exceeds the amount of
other funds available for reimbursement of those
charge-offs (which could occur if the limited
amount of credit enhancement for those securities
is reduced to zero) the holders of those
securities may not receive the full amount of
principal and interest due to them. See
"Description of the Securities--Redirected Cash
Flows," "--Application of Collections" and "--
Defaulted Receivables; Dilution" and "--Investor
Charge-Offs" in this supplement.
Limited Ability to Resell The underwriters may assist in resales of your
Securities 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.
S-14
<PAGE>
Insolvency or Bankruptcy
of Metris Receivables,
Inc. Could Result in
Accelerated, Delayed or
Reduced Payments to
Securityholders
Under the Federal Deposit Insurance Act, as
amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Trust's
security interest in the receivables arising
under the accounts in the Trust portfolio should
be respected by the FDIC where--
. 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;
. Direct Merchants Bank becomes insolvent and
the FDIC is appointed conservator or
receiver of Direct Merchants Bank;
. 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
. 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--
. 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;
. request a stay of proceedings with respect
to Direct Merchants Bank; or
. 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
S-15
<PAGE>
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
S-16
<PAGE>
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 and 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.
S-17
<PAGE>
Direct Merchants Bank's Credit Card Portfolio
Capitalized items are defined in the attached prospectus or in this
supplement. Definitions are indicated by boldface type. Both the attached
prospectus and this supplement contain an index of terms listing the page
numbers where definitions can be found.
General
The receivables (the "Receivables") conveyed or to be conveyed to the Trust
pursuant to a pooling and servicing agreement (as the same may be amended from
time to time, the "Agreement"), among Metris Receivables, Inc. (the
"Transferor"), Direct Merchants Bank, as Servicer of the Receivables, and The
Bank of New York (Delaware), as trustee (the "Trustee"), as supplemented by the
supplement relating to the Securities (the "Series 1999-1 Supplement") (the
term "Pooling and Servicing Agreement," unless the context requires otherwise,
refers to the Pooling and Servicing Agreement as supplemented by the Series
1999-1 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
1999-1 (collectively, the "Class A Securities") and each Class B Asset Backed
Security, Series 1999-1 (collectively, the "Class B Securities" and, together
with the Class A Securities, the "Securities" or the "Series 1999-1
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, the term "Class B Securityholders" refers to holders
of the Class B Securities, and "Transferor" means Metris Receivables, Inc. As
of March 31, 1999, Direct Merchants Bank had approximately 2.9 million credit
card accounts and approximately $5.1 billion in managed loans; Fingerhut
Customers represented approximately 36% of the accounts and approximately 36%
of the managed loans.
Growing Credit Card Portfolio by Portfolio Acquisitions
In the first quarter of 1997, Direct Merchants Bank acquired a credit card
portfolio from a California based credit union which, as of August 31, 1997,
had approximately 18,500 accounts with balances of approximately $36 million.
In September 1997, Direct Merchants Bank acquired an approximately $317 million
credit card portfolio consisting of approximately 260,000 accounts from Key
Bank USA, National Association, of which approximately 197,000 accounts are
active accounts. Such accounts have been designated as Supplemental Accounts
the Receivables of which have been transferred to the Trust.
In October 1997, Direct Merchants Bank acquired an approximately $405
million credit card portfolio consisting of approximately 460,000 accounts from
Mercantile Bank National Association, of which approximately 240,000 accounts
are active accounts. In June 1998, Direct Merchants Bank acquired an
approximately $100 million credit card portfolio consisting of approximately
42,000 accounts from Huntington BancShares. 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. 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.
S-18
<PAGE>
On May 10, 1999, Metris announced that it had entered into a definitive
agreement with General Electric Capital Corporation ("GE"), a unit of General
Electric Company, to acquire a portfolio of approximately 563,000 active
accounts and approximately $1.3 billion of credit card receivables (the "GE
Portfolio"). It is intended that Direct Merchants Bank will purchase the GE
Portfolio from GE Capital Consumer Card Co. Direct Merchants Bank intends to
finance the GE Portfolio acquisition with proceeds from the sale of the
portfolio's credit card receivables to one or more commercial paper conduits.
The GE Portfolio acquisition is expected to close in the second quarter of
1999. The contemplated arrangements described above are subject to the
negotiation and execution of definitive agreements and the fulfillment of any
business conditions contained in those agreements. Accordingly, no assurance
can be given as to whether or to what extent such arrangements will be
consummated.
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 ("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.
S-19
<PAGE>
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--Collection of Delinquent Accounts" in the attached
prospectus.
The Bank's policy is to charge off an account at the end of the month during
which the account becomes contractually one hundred eighty (180) days past due.
If the Bank receives notice that a cardholder is the subject of a bankruptcy
proceeding, the Bank charges off such account upon the earlier of (a) receipt
of such notice and (b) the time period set forth in the previous sentence.
The following tables set forth the delinquency and loss experience as of the
dates and for each of the periods shown for the Direct Merchants Bank
Portfolio. There can be no assurance that the delinquency and loss experience
for the Trust Portfolio will be similar to the historical experience set forth
in the following table because, among other things, economic and financial
conditions affecting the ability of cardholders to make payments may be
different from those that have prevailed during the periods reflected below and
many of the Accounts have been originated in the last twelve months. In
particular, reported loss and delinquency percentages for the portfolio may be
reduced as a result of the addition of newly originated receivables.
Receivables in newly originated accounts generally have lower delinquency and
loss levels than receivables in more seasoned accounts and the addition of
these receivables to a portfolio increases the outstanding receivables balance
for such portfolio which, for the Direct Merchants Bank Portfolio, is the
denominator used to calculate the percentages set forth below. Whereas all
newly originated and newly acquired accounts become part of the Direct
Merchants Bank Portfolio when originated or acquired, newly originated or
acquired accounts do not automatically become part of the Trust Portfolio but
may be added from time to time at the option of Metris Receivables, Inc.
Delinquency Experience for the Direct Merchants Bank Portfolio(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------
As of March 31, 1999 1998 1997 1996
----------------------- ----------------------- ----------------------- -----------------------
Percentage Percentage Percentage Percentage
of Total of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables Receivables Receivables
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding(2)........ $4,161,181 100.00% $4,169,064 100.00% $3,165,229 100.00% $1,615,940 100.00%
Receivables Delinquent:
30-59 Days............ $ 104,050 2.50% $ 99,910 2.40% $ 67,178 2.12% $ 32,114 1.99%
60-89 Days............ 84,956 2.04 68,006 1.63 46,252 1.46 20,398 1.26
90 or More Days....... 165,571 3.98 149,446 3.58 98,403 3.11 36,857 2.28
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total................. $ 354,577 8.52% $ 317,362 7.61% $ 211,833 6.69% $ 89,369 5.53%
========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
- --------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association, PNC or
Huntington BancShares acquired accounts or Direct Merchants Bank's minor
secured card portfolio. The above amounts and percentages include the Key
Bank USA, National Association acquired accounts.
(2) Receivables Outstanding on the accounts consist of all amounts due from
cardholders as posted to the accounts as of the date shown.
S-20
<PAGE>
Loss Experience for the Direct Merchants Bank Portfolio(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
Three Months Ended ----------------------------------
March 31, 1999 1998 1997 1996
------------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Receivables
Outstanding(2)......... $4,186,623 $3,565,292 $2,204,289 $1,017,236
Total Gross Charge-
Offs(3)................ $ 109,701 $ 391,571 $ 202,639 $ 64,453
Total Gross Charge-Offs
as a Percentage of
Average Receivables
Outstanding............ 2.62% 10.98% 9.19% 6.34%
(Annualized)............ 10.63% 10.98% 9.19% 6.34%
</TABLE>
- --------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association, PNC or
Huntington BancShares acquired accounts or Direct Merchants Bank's minor
secured card portfolio. The above amounts and percentages include the Key
Bank USA, National Association acquired accounts.
(2) Average Receivables Outstanding is calculated by determining the daily
average of outstanding account balances for each month and then dividing
the sum of such daily averages for such months by the number of months in
such period.
(3) Gross Charge-Offs are total principal charge-offs before recoveries and do
not include the amount of any reductions in Average Receivables Outstanding
due to fraud, returned goods, customer disputes or other miscellaneous
credit adjustments.
Recoveries
Pursuant to the terms of the Pooling and Servicing Agreement, the Bank will
be required to transfer to the Trust all of the recoveries on charged-off
accounts in the Direct Merchants Bank Portfolio ("Recoveries"). In the event of
any sale or other disposition of Receivables in Defaulted Accounts as provided
in the Pooling and Servicing Agreement, Recoveries will not include amounts
received by the purchaser or transferee of such Receivables but will be limited
to amounts received by the Servicer from the purchaser or transferee.
Collections of Recoveries will be treated as Collections of Finance Charge
Receivables. See "--Delinquency and Loss Experience" and "Direct Merchants
Credit Card Bank N.A. Activities--Collection of Delinquent Accounts" in the
attached prospectus.
The Receivables
General
The Receivables conveyed to the Trust arise in Accounts selected by Metris
Receivables, Inc. from the Direct Merchants Bank Portfolio on the basis of
criteria set forth in the Pooling and Servicing Agreement as applied on or
about May 30, 1995 (the "Initial Closing Date") and, with respect to
Supplemental Accounts, as of the related dates of their designations (the
"Trust Portfolio"). On the Initial Closing Date, the Transferor transferred and
assigned to the Trust all of its right, title, and interest in and to the
Receivables outstanding as of the Initial Closing Date, all of the Receivables
thereafter created and the proceeds of all of the foregoing. Prior to such
transfer and assignment and pursuant to the Purchase Agreement, FCI (as
predecessor to Metris under the Purchase Agreement) contributed and sold to the
Transferor all its right, title and interest in and to the Receivables existing
as of the Initial Closing Date, all the Receivables thereafter created and all
FCI's interest in the Bank Purchase Agreement with respect to the Receivables.
Prior to such sale and contribution and pursuant to the Bank Purchase
Agreement, Direct Merchants Bank sold to FCI (as predecessor to Metris under
the Bank Purchase Agreement) all its right, title and interest in and to the
Receivables existing as of the date of such agreement and all the Receivables
arising from time to time thereafter. In connection with the realignment of
FCI's subsidiaries in September 1996, FCI assigned to Metris all of FCI's
rights and Metris assumed all of FCI's obligations under the Bank Purchase
Agreement and the Purchase Agreement.
S-21
<PAGE>
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 Receivable in such Accounts
shall be included as Eligible Receivables if they satisfy the requirements of
the definition of "Eligible Receivables." "Minimum Transferor Interest" for any
period means the product of (a) the sum of (1) the aggregate Principal
Receivables and (2) the amounts on deposit in the Excess Funding Account and
(b) the highest Minimum Transferor Percentage for any Series. "Minimum
Transferor Percentage" means, for Series 1999-1 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 March
31, 1999, included approximately $3,936,081,748 of Principal Receivables and
approximately $202,208,711 of Finance Charge Receivables. The Accounts had an
average Principal Receivable balance of $1,429 and an average credit limit of
$3,794. The percentage of the aggregate total Receivable balance to the
aggregate total credit limit was approximately 39.6%. The average age of the
Accounts was approximately 38 months. As of the end of the day on March 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 March 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 following tables summarize the Receivables which have been conveyed to
the Trust Portfolio by various criteria as of the close of business on March
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
S-22
<PAGE>
Portfolio at any subsequent time. The Transferor will add to the Trust, in
compliance with the provisions of the Pooling and Servicing Agreement,
Receivables in Additional Accounts and Supplemental Accounts in addition to
those reflected in the tables below.
Composition By Credit Limit
Trust Portfolio
<TABLE>
<CAPTION>
Percentage Percentage
of Total of Total
Credit Limit Number of Number of Receivables Receivables
Range Accounts Accounts Outstanding Outstanding
- ------------ --------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
$0.00-$500.00............................. 76,712 2.8% $ 22,923,258.40 0.6%
$500.01-$1,000.00......................... 170,155 6.2 109,704,426.72 2.7
$1,000.01-$1,500.00....................... 262,688 9.5 258,656,201.33 6.3
$1,500.01-$3,000.00....................... 784,279 28.4 1,116,854,849.53 26.9
$3,000.01-$5,000.00....................... 795,118 28.9 1,375,229,253.35 33.2
$5,000.01-$10,000.00...................... 596,516 21.7 1,167,297,692.80 28.2
$10,000.01 & Greater...................... 69,462 2.5 87,624,776.96 2.1
--------- ----- ----------------- -----
Total................................... 2,754,930 100.0% $4,138,290,459.09 100.0%
========= ===== ================= =====
Composition By Period Of Delinquency
Trust Portfolio
<CAPTION>
Percentage Percentage
Period of Delinquency of Total of Total
(Days Contractually Number of Number of Receivables Receivables
Delinquent) Accounts Accounts Outstanding Outstanding
- --------------------- --------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Current................................... 2,525,730 91.6% $3,533,122,906.08 85.4%
1-29 Days................................. 104,740 3.8 250,797,037.49 6.1
30-59 Days................................ 38,386 1.4 103,969,095.98 2.5
60-89 Days................................ 29,851 1.1 84,930,222.33 2.1
90-119 Days............................... 22,517 0.8 64,116,327.75 1.5
120-149 Days.............................. 18,281 0.7 53,919,347.29 1.3
150 Days or More.......................... 15,425 0.6 47,435,522.17 1.1
--------- ----- ----------------- -----
Total................................... 2,754,930 100.0% $4,138,290,459.09 100.0%
========= ===== ================= =====
Composition By Account Balance
Trust Portfolio
<CAPTION>
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Account Balance Range Accounts Accounts Outstanding Outstanding
- --------------------- --------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Credit Balance............................ 32,520 1.2% $ (3,293,803.93) (0.1)%
No Balance................................ 816,963 29.6 0.00 0.0
$0.01-$500.00............................. 265,887 9.7 57,265,701.09 1.4
$500.01-$1,000.00......................... 233,001 8.5 177,869,127.65 4.3
$1,000.01-$1,500.00....................... 254,439 9.2 322,360,751.26 7.8
$1,500.01-$3,000.00....................... 664,723 24.1 1,449,183,969.61 35.0
$3,000.01-$5,000.00....................... 369,580 13.4 1,425,052,671.22 34.4
$5,000.01 & Greater....................... 117,817 4.3 709,852,042.19 17.2
--------- ----- ----------------- -----
Total................................... 2,754,930 100.0% $4,138,290,459.09 100.0 %
========= ===== ================= =====
</TABLE>
S-23
<PAGE>
Composition By Geographic Distribution Trust Portfolio
<TABLE>
<CAPTION>
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Location Accounts Accounts Outstanding Outstanding
- -------- --------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Alabama...................... 50,891 1.8% $ 75,126,876.06 1.8%
Alaska....................... 4,720 0.2 7,826,314.46 0.2
Arizona...................... 27,899 1.0 42,037,064.24 1.0
Arkansas..................... 37,839 1.4 59,336,339.09 1.4
California................... 334,973 12.3 546,192,873.38 13.4
Colorado..................... 40,554 1.5 64,948,374.17 1.6
Connecticut.................. 29,339 1.1 44,915,679.26 1.1
District of Columbia......... 6,442 0.2 10,217,871.37 0.2
Delaware..................... 6,533 0.2 10,213,737.28 0.2
Florida...................... 215,178 7.8 342,765,314.48 8.3
Georgia...................... 74,422 2.7 111,327,656.18 2.7
Hawaii....................... 9,116 0.3 15,429,090.06 0.4
Idaho........................ 10,904 0.4 15,676,890.59 0.4
Illinois..................... 97,210 3.5 147,304,554.96 3.6
Indiana...................... 60,321 2.2 93,165,788.59 2.3
Iowa......................... 24,325 0.9 34,092,984.94 0.8
Kansas....................... 24,717 0.9 38,927,612.32 0.9
Kentucky..................... 42,660 1.5 61,517,072.18 1.5
Louisiana.................... 43,897 1.6 63,116,923.67 1.5
Maine........................ 11,624 0.4 16,989,422.11 0.4
Maryland..................... 52,007 1.9 81,127,574.55 2.0
Massachusetts................ 46,735 1.7 67,862,267.05 1.6
Michigan..................... 74,386 2.7 111,889,150.45 2.7
Minnesota.................... 38,619 1.4 53,664,020.50 1.3
Mississippi.................. 119,397 4.3 91,375,958.38 2.2
Missouri..................... 52,886 1.9 81,213,027.92 2.0
Montana...................... 8,448 0.3 12,487,329.27 0.3
Nebraska..................... 12,301 0.4 17,966,248.91 0.4
Nevada....................... 28,784 1.0 50,579,901.71 1.2
New Hampshire................ 10,637 0.4 16,029,960.09 0.4
New Jersey................... 67,748 2.5 99,516,435.74 2.4
New Mexico................... 14,806 0.5 22,651,378.71 0.5
New York..................... 197,703 7.2 311,229,650.02 7.5
North Carolina............... 72,324 2.6 104,702,952.86 2.5
North Dakota................. 5,360 0.2 7,350,730.82 0.2
Ohio......................... 113,311 4.1 172,919,464.74 4.2
Oklahoma..................... 36,859 1.3 59,263,126.82 1.4
Oregon....................... 28,346 1.0 44,621,619.51 1.1
Pennsylvania................. 100,922 3.7 149,043,056.80 3.6
Rhode Island................. 10,383 0.4 15,681,499.45 0.4
South Carolina............... 29,399 1.1 43,309,350.88 1.0
South Dakota................. 5,468 0.2 7,933,274.69 0.2
Tennessee.................... 65,723 2.4 90,985,593.94 2.2
Texas........................ 192,501 7.0 305,338,555.59 7.4
Utah......................... 12,364 0.4 17,835,431.92 0.4
Vermont...................... 5,279 0.2 8,138,348.82 0.2
Virginia..................... 71,733 2.6 109,182,185.77 2.6
Washington................... 48,726 1.8 77,342,493.28 1.9
West Virginia................ 20,243 0.7 28,820,363.66 0.7
Wisconsin.................... 42,825 1.6 59,077,504.26 1.4
Wyoming...................... 10,584 0.4 12,203,350.43 0.3
Other........................ 4,559 0.2 5,820,212.16 0.1
--------- ----- ----------------- -----
Total...................... 2,754,930 100.0% $4,138,290,459.09 100.0%
========= ===== ================= =====
</TABLE>
S-24
<PAGE>
Maturity Considerations
The Pooling and Servicing Agreement provides that Class A Securityholders
will not receive payments of principal until the June 2004 Distribution Date
(the "Expected Final Payment Date"), or earlier in the event of a Pay Out Event
which results in the commencement of the Early Amortization Period. The Class B
Securityholders will not begin to receive payments of principal until the final
principal payment on the Class A Securities has been made.
Accumulation Period
The accumulation period (the "Accumulation Period") with respect to the
Securities is scheduled to begin at the close of business of the last day of
the May 2003 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 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 1999-1 Principal Collection for
such Monthly Period, (b) the "Controlled Deposit Amount" for such Monthly
Period, which is equal to the sum of the Controlled Accumulation Amount for
such Monthly Period and the Accumulation Shortfall, if any, for such Monthly
Period and (c) the Class A Adjusted Invested Amount will be deposited in the
Principal Funding Account until the principal amount on deposit in the
Principal Funding Account (the "Principal Funding Account Balance") equals the
Class A Invested Amount. 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 1999-1 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, the Early Amortization Period will commence and
any amounts on deposit in the Principal Funding Account will be paid to the
Class A Securityholders on the Distribution Date in the month following the
commencement of the Early Amortization Period. In addition, to the extent that
the Class
S-25
<PAGE>
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
1999-1 Principal Collections until the earlier of the date on which the Class A
Securities have been paid in full and the Series 1999-1 Termination Date. After
the Class A Securities have been paid in full and if the Series 1999-1
Termination Date has not occurred, Available Series 1999-1 Principal
Collections will be paid to the Class B Securities on each Distribution Date
until the Class B Securities have been paid in full.
Pay Out Events
A Pay Out Event occurs, either automatically or after specified notice, upon
(a) the failure of the Transferor to make certain payments or transfers of
funds for the benefit of the Securityholders or to observe or perform in any
material respect certain other covenants within the time periods stated in the
Pooling and Servicing Agreement, (b) material breaches of certain
representations, warranties, or covenants of the Transferor which remain
uncured after the grace periods specified in the Pooling and Servicing
Agreement, (c) certain bankruptcy or insolvency events relating to Metris, the
Transferor or Direct Merchants Bank, (d) the occurrence of a Servicer Default
that would have a material adverse effect on the Securityholders, (e) (w) the
Transferor Interest being less than the Minimum Transferor Interest, (x) (i)
the Series 1999-1 Percentage of the sum of the total amount of Principal
Receivables plus amounts on deposit in the Excess Funding Account being less
than (ii) the sum of the aggregate outstanding principal amounts of the Class A
Securities and the Class B Securities, (y) the total amount of Principal
Receivables and the amounts on deposit in the Excess Funding Account, 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
1999-1 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 1999-1 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 1999-1 Percentage of any
Adjustment Payments which the Transferor is required but fails to make pursuant
to the Pooling and Servicing Agreement for such Monthly Period, and the
denominator of which is the average daily Invested Amount during the preceding
Monthly Period; provided, however, that Excess Finance Charge Collections
applied for the benefit of the Securityholders may be added to the numerator if
the Rating Agency Condition is satisfied. See "Description of the Securities--
Pay Out Events."
Payment Rates
The following table sets forth the highest and lowest cardholder monthly
payment rates for the Direct Merchants Bank Portfolio during any month in the
period shown and the average cardholder monthly payment
S-26
<PAGE>
rates for all months during the periods shown, in each case calculated as a
percentage of total opening monthly account balances during the periods shown.
Payment rates shown in the table are based on amounts which would be deemed
payments of Principal Receivables and Finance Charge Receivables with respect
to the Accounts (total payments).
Cardholder Monthly Payment Rates for the Direct Merchants Bank Portfolio(1)
<TABLE>
<CAPTION>
Year Ended December 31,
Three Months Ended ---------------------------
March 31, 1999 1998 1997 1996
------------------ ------- ------- -------
<S> <C> <C> <C> <C>
Highest Month.................... 7.9% 7.7% 7.6% 8.8%
Lowest Month..................... 6.8% 6.5% 6.2% 6.4%
Monthly Average (2).............. 7.2% 6.8% 6.9% 7.8%
</TABLE>
- --------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association, PNC or
Huntington BancShares acquired accounts or Direct Merchants Bank's minor
secured card portfolio. The above amounts and percentages include the Key
Bank USA, National Association acquired accounts.
(2) Monthly Averages shown are expressed as an arithmetic average of the
payment rate for each month for the period indicated.
The Bank generally determines the minimum monthly payment with respect to
the accounts by multiplying the combined new balance of purchases and cash
advances, less any disputed amounts, by a minimum percentage of the outstanding
balance. If the amount so calculated is less than a minimum dollar amount, it
is increased to such minimum dollar amount. The sum of such amount and any past
due amounts equals the minimum payment amount. The minimum payment amount,
however, is never more than the new balance.
There can be no assurance that the cardholder monthly payment rates in the
future will be similar to the historical experience set forth above. The amount
of collections of Receivables may vary from month to month due to seasonal
variations, general economic conditions, payment habits of individual
cardholders, the Credit Card Originator's monthly minimum payment requirements
and acts of God. There can be no assurance that Principal Collections with
respect to the Trust Portfolio will be similar to the historical experience set
forth above or that deposits into the Principal Funding Account or the
Distribution Account, as applicable, will be made in accordance with the
applicable Controlled Accumulation Amount. If a Pay Out Event occurs, the
average life of the Securities could be significantly reduced or increased.
Because there may be a slowdown in the payment rate below the payment rates
used to determine the Controlled Accumulation Amounts, or a Pay Out Event may
occur which would initiate the Early Amortization Period, there can be no
assurance that the actual number of months elapsed from the date of issuance of
the Class A Securities 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
"Maturity Considerations" and "Risk Factors" in this supplement and "Maturity
Considerations" in the attached prospectus.
S-27
<PAGE>
Receivable Yield Considerations
The gross revenues from finance charges and fees billed to accounts in the
Direct Merchants Bank Portfolio for each of the three calendar years contained
in the period ended December 31, 1998 and for the 3-month period ended March
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
Direct Merchants Bank Portfolio. The Portfolio Yield calculated on both a
billed and a cash basis will also be affected by numerous factors, including
changes in the monthly interest rate, variations in the rate of payments and
new borrowings on the Accounts, the amount of the annual membership fee and
other fees, changes in the delinquency and loss rates on the Receivables, and
the percentage of cardholders who pay their balances in full each month and,
except in the case of cash advances, do not incur periodic finance charges,
which may in turn be caused by a variety of factors including seasonal
variations, the availability of other sources of credit and general economic
conditions. See "Maturity Considerations." Revenues vary for each account based
on the type and volume of activity for each account. Because the Trust
Portfolio represents only a portion of the Direct Merchants Bank Portfolio,
actual yield with respect to the Receivables may be different from that set
forth below. See "Direct Merchants Bank's Credit Card Portfolio" and "The
Receivables" herein and "Direct Merchants Credit Card Bank, N.A. Activities" in
the attached prospectus. Interchange fees are not included in the Trust assets
and are not included in the yield numbers for the Direct Merchants Bank
Portfolio in the following table.
Revenue Yield Experience for the Direct Merchants Bank Portfolio(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
Three Months Ended ----------------------------------
March 31, 1999 1998 1997 1996
------------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Receivables
Outstanding (2)........ $4,186,623 $3,565,292 $2,204,289 $1,017,236
Total Finance Charges
and Fees
Billed (3)(4).......... 272,073 852,099 533,005 269,298
Average Revenue Yield
(Annualized)........... 26.36% 23.90% 24.18% 26.47%
</TABLE>
- --------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association, PNC or
Huntington BancShares acquired accounts or Direct Merchants Bank's minor
secured card portfolio. The above amounts and percentages include the Key
Bank USA, National Association acquired accounts.
(2) Average Receivables Outstanding is calculated by determining the daily
average of outstanding account balances for each month and then dividing
the sum of such daily averages for such months by the number of months in
such period.
(3) Total Finance Charges and Fees Billed include finance charges, cash advance
fees, annual membership fees, late fees, and other charges. It does not
include interchange fees.
(4) Total Finance Charges and Fees Billed are presented net of adjustments made
pursuant to the Bank's normal servicing procedures, including removal of
incorrect or disputed finance charges and reversal of finance charges
accrued on charged-off accounts.
Use Of Proceeds
Metris Receivables, Inc. will apply the net proceeds from the sale of the
Securities, which is expected to be approximately $ , (a) to repay a portion
of the principal of the Series 1998-1 Variable Funding Securities, (b) to pay
the purchase price of Receivables and (c) to make a deposit to the Interest
Funding Account for the payment of the Class A Monthly Interest on the first
Distribution Date.
S-28
<PAGE>
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
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 March 31, 1999 and for the three month periods ended March
31, 1999 and March 31, 1998 included in the Quarterly Report on Form 10-Q of
the Parent Company for the period ended March 31, 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.
S-29
<PAGE>
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"):
<TABLE>
<CAPTION>
SAP
--------------------------------
December 31, 1998 March 31, 1999
----------------- --------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets................................ $6,521 $6,742
Liabilities.................................... 4,231 4,412
Capital and Surplus............................ 2,290 2,330
<CAPTION>
GAAP
--------------------------------
December 31, 1998 March 31, 1999
----------------- --------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets......................................... $7,488 $7,625
Liabilities.................................... 3,211 3,370
Shareholder's Equity........................... 4,277 4,255
</TABLE>
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. 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. Expenditures are proceeding as anticipated, and the Parent Company
does not expect the project budget to materially exceed this amount. The Parent
Company has initiated a comprehensive Y2K plan that includes assessment,
remediation, testing and contingency planning. 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 will continue 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. (formerly known as Fitch Investor Service, L.P.) 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
S-30
<PAGE>
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 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 1999-1 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 1999-1. 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
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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
Certificates, the fifth day of the Monthly Period during which such
Distribution Date occurs (each, a "Record Date").
Beneficial interests in the Class A Securities will be offered for purchase
in minimum denominations of $1,000 and integral multiples thereof.
Application will be made to list the Class A Securities on the Luxembourg
Stock Exchange. There can be no assurance that the Class A Securities will be
listed on the Luxembourg Stock Exchange or any other stock exchange. Purchasers
of the Class A Securities should not rely upon the Class A Securities being
listed on the Luxembourg Stock Exchange or any other stock exchange. The
Trustee will maintain a paying agent in Luxembourg for so long as the Class A
Securities are outstanding and listed on the Luxembourg Stock Exchange. The
name and address of the paying agent in Luxembourg are set forth at the end of
this prospectus supplement.
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 1999-1 will rank pari passu with all other outstanding
Series.
Previously Issued Series
The Trust has previously issued seven 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."
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Interest Payments
Interest will accrue on the Class A Securities at the Class A Interest Rate
from June , 1999 (the "Closing Date"). Interest will be distributed to Class A
Securityholders on August 20, 1999 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
initial Class A Invested Amount, (b) divided by 360 and (c) the Class A
Interest Rate, determined on , 1999. Interest payments on the Class A
Securities on any Distribution Date will be funded from Available Series 1999-1
Finance Charge Collections with respect to the preceding Monthly Period (and
with respect to the first Distribution Date, the amount of the initial deposit
to the Interest Funding Account to be made on the Closing Date) and from
certain other funds allocated as set forth in the Pooling and Servicing
Agreement to the 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 August
19, 1999. Interest on the Securities will be calculated on the basis of the
actual number of days in the Interest Accrual Period and a 360-day year.
"Available Series 1999-1 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 Collection Account, (c) amounts on deposit in the Cap Proceeds Account,
if any, (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,
and (e) with respect to the Closing Date, the amount of the initial deposit by
the Transferor to the Interest Funding Account.
The Class A Securities will bear interest at the rate equal to % per annum
above LIBOR (the "Class A Interest Rate") determined as set forth below for the
period from the Closing Date through August 19, 1999 and each Interest Accrual
Period thereafter.
The Trustee will determine LIBOR for the period from the Closing Date
through August 19, 1999 on , 1999 and for each Interest Accrual Period
thereafter on the second business day prior to the Distribution Date on which
such Interest Accrual Period commences (each, a "LIBOR Determination Date").
For purposes of calculating LIBOR, a business day is any day on which banks in
London and New York are open for the transaction of international business.
"LIBOR" means, as of any LIBOR Determination Date, the rate for deposits in
United States dollars for one month (commencing on the first day of the
relevant Interest Accrual Period) which appears on Telerate Page 3750 as of
11:00 a.m., London time, on the LIBOR Determination Date for such Interest
Accrual Period. If such rate does not appear on Telerate Page 3750, the rate
for such LIBOR Determination Date will be determined on the basis of the rates
at which deposits in United States dollars are offered by the Reference Banks
at approximately 11:00 a.m., London time, on such LIBOR Determination Date to
prime banks in the London interbank market for a period equal to one month
(commencing on the first day of the relevant Interest Accrual Period). The
Trustee will request the principal London office of each such bank to provide a
quotation of its rate. If at least two such quotations are provided, the rate
for such LIBOR Determination Date will be the
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arithmetic mean of the quotations. If fewer than two quotations are provided
as requested, the rate for such LIBOR Determination Date will be the
arithmetic mean of the rates quoted by four major banks in New York City,
selected by the Trustee, at approximately 11:00 a.m., New York City time, on
that LIBOR Determination Date for loans in United States dollars to leading
European banks for a period equal to one month (commencing on the first day of
the relevant Interest Accrual Period).
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the Servicer.
The Class A Interest Rate applicable to the then current and immediately
preceding Interest Accrual Period may be obtained by telephoning the Trustee
at its Corporate Trust Office at (302) 451-2500. The Trustee will cause the
Class A Interest Rate as well as the amount of Class A Monthly Interest
applicable to an Interest Accrual Period to be provided to the Luxembourg
Stock Exchange as soon as possible after its determination but in no event
later than the first day of such Interest Accrual Period. Such information
will also be included in a statement to the 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 1999-1 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 1999-1 Principal Collections not
required to be deposited in the Principal Funding Account will generally be
treated as Shared Principal Collections.
"Available Series 1999-1 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 1999-1 Percentage of overdue Adjustment Payments
paid from Available Series 1999-1 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 1999-1 Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections or Redirected Principal
Collections of unreimbursed Class A Charge-Offs and reductions of the Class B
Invested Amount, (iv) Shared Principal Collections allocated to the
Securities, and (v) the proceeds of the sale of all or a portion of an
Interest Rate Cap with respect to such Monthly Period.
On each Distribution Date during the Early Amortization Period, the Class A
Securityholders will be entitled to receive Available Series 1999-1 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
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and the Series 1999-1 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 1999-1 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 1999-1 Termination Date. See "--
Pay Out Events" below for a discussion of events which might lead to the
commencement of the Early Amortization Period.
In the event of a sale of the Receivables and an early termination of the
Trust due to a Trigger Event, the breach of certain representations and
warranties, an optional repurchase of the Receivables by the Transferor, a
repurchase of the Receivables in connection with a Servicer Default or a sale
of the Receivables in connection with the Termination Date (each as described
under "--Pay Out Events" and "--Final Payment of Principal; Termination" below
and "Description of the Securities--Pay Out Events," "--Servicer Default," and
"-- Final Payment of Principal; Termination" in the attached prospectus),
distributions of principal will be made to the Securityholders upon surrender
of their Securities. The proceeds of any such sale or repurchase of Receivables
will be allocated first to pay amounts due with respect to the Class A
Securities, then to 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 May 2003 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 1999-1
Finance Charge Collections applied to the payment thereof as described below in
clauses
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(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 1999-1 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 1999-1
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 ("Interest Rate Cap
Provider") will make a payment to the Trustee, on behalf of the Trust, in an
amount equal to the product of (i) such excess, (ii) the notional amount as of
such Transfer Date and (iii) the actual number of days in the related Monthly
Period divided by 360. The Interest Rate Caps will terminate on the Series
1999-1 Termination Date; provided, however, that the Interest Rate Caps may be
terminated at an earlier date if the Trustee has obtained a substitute interest
rate cap or entered into an alternative arrangement satisfactory to the Rating
Agencies and the Insurer, which in each case will not result in the reduction
or withdrawal of the rating of the 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 Caps, 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.
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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 Providers
Each "Interest Rate Cap Provider" will be a third party cap provider having
a short-term rating of at least "A-1+" from Standard & Poor's and at least "P-
1" from Moody's or any other rating acceptable to the Rating Agencies. The
identity and description of the Interest Rate Cap Providers will be included in
the final prospectus supplement.
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."
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 floating percentages 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
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Event occurs, 100 percent minus the sum of the applicable Fixed/Floating
Percentage and the allocation 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 earlier of the first day of the Accumulation Period and the date on
which a Pay Out Event occurs or is deemed to have occurred.
As used 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
1999-1 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
$500,000,000.
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 1999-1 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
$49,450,550.
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 $16,483,517 except
that if the Class A Adjusted Invested Amount is equal to zero the "Stated Class
B Amount" will be zero; and provided further that during the Early Amortization
Period the Stated Class B Amount shall be equal to the Stated Class B Amount
immediately preceding the commencement of the Early Amortization Period.
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.
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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 used in this supplement, "Securityholders' Interest" means the interest
in the assets of the Trust allocated to the Securityholders.
As a result of the Floating Percentage, Finance Charge Collections (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 1999-1 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 1999-1 Finance Charge
Collections.
As used in this supplement, "Series 1999-1 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 1999-1
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 1999-1 Securities in an amount equal to the remaining
Required Amount. Excess Finance Charge Collections from other Series allocable
to the Series 1999-1 Securities for any business day will be equal to the
product of (a) Excess Finance Charge Collections available from all other
Series for such business day and (b) a fraction, the numerator of which is the
Required Amount for such business day (as reduced by amounts applied pursuant
to the preceding paragraph) and the denominator of which is the aggregate
amount of shortfalls in required amounts or other amounts to be paid from
available Finance Charge Collections for all Series for such business day.
"Excess Finance Charge Collections" means any Collections of Finance Charge
Receivables allocable to any Series in excess of the amounts necessary to make
required payments with respect to such Series.
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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
1999-1 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
Default Amount 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 1999-1 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 1999-1 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
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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 1999-1 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 retained
therein, applied as Available Series 1999-1 Finance Charge Collections or
released to the Transferor.
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Payment of Fees, Interest and Other Items. On each business day during a
Monthly Period, the Servicer will determine the amount of Available Series
1999-1 Finance Charge Collections and will apply such amount in the following
priority:
(i) an amount equal to the lesser of (A) the Available Series 1999-1
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 1999-1
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 1999-1 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 1999-1
Principal Collections for the benefit of the Securities;
(iv) an amount equal to the lesser of (A) the sum of any Available
Series 1999-1 Finance Charge Collections remaining and (B) the Series 1999-
1 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 1999-1
Principal Collections for the benefit of the Securities;
(v) an amount equal to the lesser of (A) any Available Series 1999-1
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 1999-1
Principal Collections for the benefit of the Securities;
(vi) an amount equal to the lesser of (A) any Available Series 1999-1
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 1999-1
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 1999-1
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 1999-1
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;
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(x) an amount equal to the lesser of (A) any Available Series 1999-1
Finance Charge Collections remaining and (B) the unreimbursed amount by
which the Class B Invested Amount has been reduced pursuant to clauses (c)
and (d) of the definition thereof on prior business days, if any, will be
applied to reimburse such amount and (w) during the Revolving Period, be
treated as Shared Principal Collections and (x) during the Amortization
Period, be treated as Available Investor Principal Collections for the
benefit of the Securities;
(xi) on and after the Reserve Account Funding Date, but prior to the
date on which the Accumulation Period Reserve Account terminates, an amount
equal to the lesser of (A) any Available Series 1999-1 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 1999-1 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 1999-1 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 1999-1 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 1999-1 Finance Charge
Collections on any business day for application, at its option, as Available
Series 1999-1 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 1999-1 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) 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
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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 1999-1 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 1999-1 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, $41,666,667; 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 1999-1
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.
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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--Collection of Delinquent Accounts" in the attached prospectus and
"Direct Merchants Bank's 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
1999-1 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
1999-1, 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-
1 Percentage of unpaid Adjustment Payments, if any, for all business days in
the preceding Monthly Period exceeds the aggregate amount of Available Series
1999-1 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 1999-1 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 1999-1 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."
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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 1999-1
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 1999-1 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 1999-1 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 1999-1 Finance Charge Collections on the last business
day of the preceding Monthly Period.
Accumulation Period Reserve Account
Pursuant to the Series 1999-1 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 1999-1 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,
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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 1999-1.
"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 1999-1, 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 1999-1 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 1999-1 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 1999-1 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").
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If on any Distribution Date the Available Series 1999-1 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 (such amount, together with the Interest and Servicing Fee Deficiency, the
"Policy Claim Amount").
Payment of claims on the Policy will be made by the Insurer on the later of
12:00 noon New York City time on the first business day preceding the
Distribution Date and 12:00 noon New York City time on the business day
following receipt by the Insurer or the fiscal agent of the appropriate notice
for payment.
Pursuant to the Insurance Agreement and the Series 1999-1 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 1999-1 Finance Charge Collections.
If payment of any amount guaranteed by the Insurer pursuant to the Policy is
avoided as a preference payment (the "Preference Amount") under applicable
bankruptcy, insolvency, receivership or similar law in the event of an
insolvency of the Transferor, the Servicer, Metris Companies Inc. or the Trust,
the Insurer will pay such amount out of its funds on the later of (a) the date
when due to be paid pursuant to the Order referred to below or (b) the first to
occur of (i) the fourth business day following Receipt by the Insurer or the
fiscal agent from the Trustee of (A) a certified copy of the order (the
"Order") of the court or other governmental body which exercised jurisdiction
to the effect that the Trustee is required to return the amount of any Policy
Claim Amounts distributed with respect to the Class A Securities during the
term of the Policy because such distributions were avoidable preference
payments under applicable bankruptcy law, (B) a notice for payment in the form
specified by the Policy and (C) an assignment duly executed and delivered by
the Class A Securityholder, in such form as is reasonably required by the
Insurer and provided to the Class A Securityholder by the Insurer, irrevocably
assigning to the Insurer all rights and claims of the Class A Securityholder
relating to or arising under the Class A Securities against the debtor which
made such preference payment or otherwise with respect to such preference
payment or (ii) the date of Receipt by the Insurer or the fiscal agent from the
Trustee of the items referred to in clauses (A), (B) and (C) above if, at least
four business days prior to such date of Receipt, the Insurer or the fiscal
agent shall have Received written notice from the Trustee that such items were
to be delivered on such date and such date was specified in such notice. Such
payment shall be disbursed to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order and not to the Trustee or Class A
Securityholder directly.
The terms "Receipt" and "Received", with respect to the Policy, mean actual
delivery to the Insurer and to its fiscal agent appointed by the Insurer at its
option, if any, prior to 1:00 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.
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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 Receivables allocated to Series 1999-1 if such
event required reliance by Series 1999-1 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
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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 October 2007
Distribution Date (the "Series 1999-1 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 1999-1 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 1999-1 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 1999-1 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 1999-1 Termination Date first to Class A
Securityholders until the Class A Invested Amount is paid in full, then to the
Insurer for unreimbursed draws under the Policy and other amounts payable to
the Insurer under the Insurance Agreement and then to the Class B
Securityholders until the Class B Invested Amount is paid in full.
Unless the Servicer and the holder of the Exchangeable Transferor Security
instruct the Trustee otherwise, the Trust will terminate on the earlier of (a)
the day after the Distribution Date following the date on which funds shall
have been deposited in the Distribution Account for the payment to
securityholders sufficient to pay in full the aggregate investor interest of
all Series outstanding plus interest thereon at the applicable interest rates
to the next Distribution Date and (b) a date which shall not be later than May
26, 2095. Upon the termination of the Trust and the surrender of the
Exchangeable Transferor Security, the Trustee will convey to the holder of the
Exchangeable Transferor Security all right, title and interest of the Trust in
and to the Receivables and other funds of the Trust (other than funds on
deposit in the Distribution Account and other similar bank accounts of the
Trust with respect to any Series).
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Pay Out Events
As described above, the Revolving Period will continue until the
commencement of the Accumulation Period, unless a Pay Out Event occurs prior to
such date. A "Pay Out Event" refers to any of the following events:
(i) failure on the part of the Transferor (a) to make any payment or
deposit on the date required under the Pooling and Servicing Agreement (or
within the applicable grace period which will not exceed five business
days); (b) to perform in all material respects the Transferor's covenant
not to sell, pledge, assign, or transfer to any person, or grant any
unpermitted lien on, any Receivable; or (c) to observe or perform in any
material respect any other covenants or agreements of the Transferor set
forth in the Pooling and Servicing Agreement 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) (I) the Series 1999-1 Percentage of the sum of the
total amount of Principal Receivables plus amounts on deposit in the Excess
Funding Account shall be less than (II) the sum of the aggregate
outstanding principal amounts of the Class A Securities and the Class B
Securities, (c) the total amount of Principal Receivables and the amounts
on deposit in the Excess Funding Account, 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 1999-1 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
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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 1999-1 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 1999-1 Supplement.
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The Servicer will pay from its servicing compensation certain expenses
incurred in connection with servicing the Receivables including, without
limitation, payment of the fees and disbursements of the Trustee and
independent certified public accountants and other fees which are not expressly
stated in the Pooling and Servicing Agreement to be payable by the Trust or the
Securityholders other than federal, state and local income and franchise taxes,
if any, of the Trust.
If on any Distribution Date through the end of the Accumulation Period,
there is an Interest and Servicing Fee Deficiency with respect to such Monthly
Period, then the Trustee will demand payment on the Policy in an amount equal
to such deficiency.
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 and (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. If the Class A
Securities are listed on the Luxembourg Stock Exchange, notices to Class A
Securityholders will be given by publication in a daily newspaper in Luxembourg
(expected to be the Luxemburger Wort). In the event that Definitive Securities
are issued, notices to Securityholders will also be given by mail to their
addresses as they appear on the register maintained by the Trustee.
Listing and General Information
Application will be made to list the Class A Securities on the Luxembourg
Stock Exchange. There can be no assurance that the Class A Securities will be
listed on the Luxembourg Stock Exchange or any other stock exchange. Purchasers
of the Class A Securities should not rely upon the Class A Securities being
listed on the Luxembourg Stock Exchange or any other stock exchange. In
connection with the listing application, the Certificate of Incorporation and
By-laws of the Transferor, as well as legal notice relating to the issuance of
the Class A Securities will be deposited prior to listing with the Chief
Registrar of the District Court of Luxembourg, where copies thereof may be
obtained upon request. Once the Class A Securities have been so listed, trading
of the Class A Securities may be effected on the Luxembourg Stock Exchange. The
Class A Securities have been accepted for clearance through the facilities of
DTC, Cedelbank and Euroclear. The International Securities Identification
Number (ISIN) for the Class A Securities is , the Common Code number for
the Class A Securities is , and the CUSIP number for the Class A Securities
is .
The transactions contemplated in this prospectus supplement were authorized
by resolutions adopted by Metris Receivables, Inc.'s Board of Directors on
March 19, 1999.
If the Class A Securities are listed on the Luxembourg Stock Exchange copies
of the Pooling and Servicing Agreement, the Series 1999-1 Supplement, the
annual report of independent certified public accountants described in
"Description of the Securities--Evidence as to Compliance" in the attached
prospectus, the documents listed under "Where You Can Find More Information"
and the reports to Securityholders referred to under "Reports to
Securityholders" and "Description of the Securities--Reports to
Securityholders" in the attached prospectus will be available free of charge at
the office of Banque Generale du Luxembourg S.A. (the "Listing Agent"), 50
Avenue J.F. Kennedy, L-2951 Luxembourg. Financial information regarding the
Transferor is included in the consolidated financial statements of Metris
Companies Inc. in its Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, also available at the office of the Listing Agent in
Luxembourg. For so long as the Class A Securities are outstanding and are
listed on the Luxembourg Stock Exchange, copies of each Annual Report on Form
10-K for subsequent fiscal years
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will also be available at the office of the listing agent in Luxembourg. In
addition, if the Class A Securities are listed on the Luxembourg Stock
Exchange, all publicly available information of MBIA, including all quarterly
and annual reports, will be provided to the Listing Agent on a periodic basis,
in such quantities as requested by the Listing Agent so that they may be made
available to the Securityholders free of charge.
The Transferor confirms that there has been no material adverse change in
the performance of the Trust since March 31, 1999, the date of the information
with respect to the Trust set forth in this supplement under "The Receivables."
In the event that the Class A Securities are listed on the Luxembourg Stock
Exchange and Definitive Securities are issued and the rules of the Luxembourg
Stock Exchange require a Luxembourg Transfer Agent, the Luxembourg Paying Agent
will be appointed as a Transfer Agent.
The Pooling and Servicing Agreement provides that the Trustee and the Paying
Agent shall pay to the Transferor upon request any monies held by them 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 1999-1
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
A violation of the prohibited transaction rules could occur if the Class A
Securities were to be purchased with assets of any Plan if the Transferor, the
Trustee, any underwriters of Series 1999-1 or any of their affiliates were a
Party in Interest with respect to such Plan, unless a statutory, regulatory or
administrative exemption is available or an exemption applies under a
regulation (the "Plan Asset Regulation") issued by the Department of Labor
("DOL"). The Transferor, the Trustee, any underwriters of a Series and their
affiliates are likely to be Parties in Interest with respect to many Plans.
Before purchasing the Class A Securities, a Plan fiduciary or other Plan
investor should consider whether a prohibited transaction might arise by reason
of the relationship between the Plan and the Transferor, the Trustee, any
underwriters of Series 1999-1 or any of their affiliates and consult their
counsel regarding the purchase in light of the considerations described below
and in the accompanying prospectus.
Under certain circumstances, the Plan Asset Regulation treats the assets of
an entity in which a Plan holds an equity interest as "plan assets" of such
Plan. Because the Class A Securities will represent beneficial interests in the
Trust, and despite the agreement of the Transferor and the Security Owners to
treat the Class A Securities as debt instruments, the Class A Securities are
likely to be considered equity interests in the Trust for purposes of the Plan
Asset Regulation, with the result that the assets of the Trust are likely to be
treated as "plan assets" of the investing Plans for purposes of ERISA and
Section 4975 of the Code, unless the exception
S-54
<PAGE>
for "publicly-offered securities" is applicable as described in the
accompanying prospectus. The Underwriters anticipate that the Class A
Securities will meet the criteria for treatment as "publicly-offered
securities" as described in the accompanying prospectus. No restrictions will
be imposed on the transfer of the Class A Securities. It is expected that the
Class A Securities will be held by at least 100 or more investors who were
independent of the issuer and of one another ("Independent Investors") at the
conclusion of the initial public offering although no assurance can be given,
and no monitoring or other measures will be taken to ensure, that such
condition is met. The Class A Securities will be sold as part of an offering
pursuant to an effective registration statement under the Securities Act and
then will be timely registered under the Exchange Act.
If the foregoing exception under the Plan Asset Regulation were not
satisfied, transactions involving the Trust and Parties in Interest with
respect to a Plan that purchases or holds Class A Securities might be
prohibited under Section 406 of ERISA and/or Section 4975 of the Code and
result in excise tax and other liabilities under ERISA and Section 4975 of the
Code unless an exemption were available. The five DOL class exemptions
described in the accompanying prospectus may not provide relief for all
transactions involving the assets of the Trust even if they would otherwise
apply to the purchase of a Class A Security by a Plan.
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.
Finally, Plan fiduciaries and other Plan investors should consider the
fiduciary standards under ERISA or other applicable law in the context of the
Plan's particular circumstances before authorizing an investment of a portion
of the Plan's assets in the Class A Securities. Accordingly, among other
factors, Plan fiduciaries and other Plan investors should consider whether the
investment (i) satisfies the diversification requirement of ERISA or other
applicable law, (ii) is in accordance with the Plan's governing instruments,
and (iii) is prudent in light of the "Risk Factors" and other factors discussed
in this prospectus supplement.
S-55
<PAGE>
Underwriting
Subject to the terms and conditions set forth in the Underwriting Agreement
dated , 1999 (the "Underwriting Agreement") between Metris Receivables, Inc.
and the underwriters named below (the "Underwriters"), Metris Receivables, Inc.
has agreed to sell to the Underwriters, and each of the Underwriters has
severally agreed to purchase, the principal amount of the Class A Securities,
set forth opposite its name:
<TABLE>
<CAPTION>
Principal
Amount of
Class A
Underwriters Securities
------------ ------------
<S> <C>
Banc of America Securities LLC................................. $
Salomon Smith Barney Inc. .....................................
Bear, Stearns & Co., Inc.......................................
Credit Suisse First Boston Corporation.........................
------------
Total........................................................ $500,000,000
============
</TABLE>
The price to public, Underwriters' discounts and commissions, the
concessions that the Underwriters may allow to certain dealers, and the
discounts that such dealers may reallow to certain other dealers, each
expressed as a percentage of the principal amount of the Class A Securities,
shall be as follows:
<TABLE>
<CAPTION>
Selling
Underwriting concessions,
Price to discount and not to Reallowance
public commissions exceed not to exceed
-------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Class A Securities............. ( %) ( %) ( %) ( %)
</TABLE>
After the offering is completed, Metris Receivables, Inc. will receive the
proceeds, after deduction of the underwriting and other expenses, listed below:
<TABLE>
<CAPTION>
Proceeds to
Transferor
(as % of
the principal Underwriting
amount of the discounts
Proceeds to Class A and
Transferor Securities) concessions
----------- ------------- ------------
<S> <C> <C> <C>
Class A Securities....................... ($ ) ( %) ($ )
</TABLE>
After the public offering, the public offering price and other selling terms
may be changed by the Underwriters. Additional offering expenses are estimated
to be $858,000.
Each Underwriter has represented and agreed that (a) it only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the 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 that Underwriter is an authorized person under the Financial
Services Act 1986, it has only promoted and will only promote (as that term is
defined in Regulation 1.02 of the Financial Services (Promotion of Unregulated
Schemes) Regulations 1991) to any person in the United Kingdom the scheme
described herein if that person is of a kind described either in Section 76(2)
of the Financial Services Act 1986 or in Regulation 1.04 of the Financial
Services (Promotion of Unregulated Schemes) Regulations 1991.
S-56
<PAGE>
Metris Receivables, Inc. will indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
The Underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the 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
Underwriters 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 any of the
Underwriters represent that the Underwriters will engage in any such
transactions nor that such transactions, once commenced, will not be
discontinued without notice.
In the ordinary course of business, one or more of the Underwriters or their
affiliates have engaged, and may engage in the future, in certain investment
banking or commercial banking transactions with Metris and its affiliates.
Exchange Listing
We will apply to list the Class A Securities on the Luxembourg Stock
Exchange. We can give no assurance that the application for the listing will be
accepted. Purchasers of the Class A Securities should not rely upon the Class A
Securities being listed on the Luxembourg Stock Exchange or any other stock
exchange. You should consult with Banque Generale du Luxembourg S.A., the
Luxembourg listing agent for the Class A Securities, 50 Avenue J.F. Kennedy, L-
2951 Luxembourg, phone number (352) 42421, to determine whether or not the
Class A Securities are listed on the Luxembourg Stock Exchange.
S-57
<PAGE>
Index of Terms for Prospectus Supplement
<TABLE>
<CAPTION>
Term Page
- ---- ----
<S> <C>
Accounts............................................................. S-18
Accumulation Period.................................................. S-25
Accumulation Period Length........................................... S-35
Accumulation Period Reserve Account.................................. S-46
Accumulation Shortfall............................................... S-25, S-44
Adjusted Invested Amount............................................. S-26
Adjustment Payment................................................... S-45
Agreement............................................................ S-18
Amortization Period Commencement Date................................ S-38
Available Reserve Account Amount..................................... S-47
Available Series 1999-1 Finance Charge Collections................... S-33
Available Series 1999-1 Principal Collections........................ S-34
Base Rate............................................................ S-26
Cap Proceeds Account................................................. S-37
Cedelbank............................................................ S-32
Class A Adjusted Invested Amount..................................... S-38
Class A Charge-Off................................................... S-46
Class A Fixed/Floating Percentage.................................... S-37
Class A Floating Percentage.......................................... S-37
Class A Initial Invested Amount...................................... S-38
Class A Interest Rate................................................ S-33
Class A Invested Amount.............................................. S-38
Class A Monthly Interest............................................. S-43
Class A Principal.................................................... S-44
Class A Required Amount.............................................. S-40
Class A Securities................................................... S-18
Class A Securityholders.............................................. S-18
Class A Securityholders' Interest.................................... S-39
Class B Charge-Off................................................... S-45
Class B Fixed/Floating Percentage.................................... S-37
Class B Floating Percentage.......................................... S-37
Class B Initial Invested Amount...................................... S-38
Class B Invested Amount.............................................. S-38
Class B Securities................................................... S-18
Class B Securityholders.............................................. S-18
Class B Securityholders' Interest.................................... S-39
Closing Date......................................................... S-33
Code................................................................. S-54
Controlled Accumulation Amount....................................... S-44
Controlled Deposit Amount............................................ S-25
Covered Amount....................................................... S-47
Defeasance........................................................... S-50
Determination Date................................................... S-45
Dilution............................................................. S-45
</TABLE>
<TABLE>
<CAPTION>
Term Page
- ---- ----
<S> <C>
Distribution Date.................................................... S-33
DOL.................................................................. S-54
DTC.................................................................. S-32
ERISA................................................................ S-54
Euroclear............................................................ S-32
Excess Finance Charge Collections.................................... S-39, S-44
Expected Final Payment Date.......................................... S-25
Fixed/Floating Percentage............................................ S-37
Floating Percentage.................................................. S-37
GAAP................................................................. S-30
GE................................................................... S-19
GE Portfolio......................................................... S-19
Guaranteed Distributions............................................. S-47
Independent Investors................................................ S-55
Initial Closing Date................................................. S-21
Initial Invested Amount.............................................. S-38
Insolvency Event..................................................... S-52
Insurance Agreement.................................................. S-47
Insurer.............................................................. S-47
Interest Accrual Period.............................................. S-33
Interest and Servicing Fee Deficiency................................ S-48
Interest Rate Cap Provider........................................... S-36
Interest Rate Caps................................................... S-36
Invested Amount...................................................... S-38
LIBOR................................................................ S-33
LIBOR Determination Date............................................. S-33
Listing Agent........................................................ S-53
MBIA................................................................. S-29
Minimum Aggregate Principal Receivables.............................. S-22
Minimum Transferor Interest.......................................... S-22
Minimum Transferor Percentage........................................ S-22
Monthly Servicing Fee................................................ S-52
Negative Carry Amount................................................ S-39
Order................................................................ S-48
Paired Series........................................................ S-49
Parent Company....................................................... S-30
Parties in Interest.................................................. S-54
Pay Out Event........................................................ S-51
Payment Date......................................................... S-19
Payment Reserve Account.............................................. S-43
Periodic Finance Charges............................................. S-19
Plan Asset Regulation................................................ S-54
Plans................................................................ S-54
PNC.................................................................. S-18
Policy............................................................... S-47
</TABLE>
S-58
<PAGE>
<TABLE>
<CAPTION>
Term Page
- ---- ----
<S> <C>
Policy Claim Amount........................................................ S-48
Pooling and Servicing Agreement............................................ S-18
Portfolio Yield............................................................ S-26
Potential Class A Charge-Off............................................... S-46
Preference Amount.......................................................... S-48
Principal Funding Account.................................................. S-46
Principal Funding Account Balance.......................................... S-25
Principal Funding Investment Proceeds...................................... S-46
Qualified Substitute Arrangement........................................... S-36
Rating Agency Condition.................................................... S-47
Receivables................................................................ S-18
Record Date................................................................ S-32
Recoveries................................................................. S-21
Redirected Principal Collections........................................... S-40
Reference Banks............................................................ S-34
Removed Accounts........................................................... S-22
Replacement Interest Rate Cap.............................................. S-36
Required Amount............................................................ S-39
Required Reserve Account Amount............................................ S-46
Reserve Account Funding Date............................................... S-46
Revolving Period........................................................... S-34
SAP........................................................................ S-30
Securities................................................................. S-18
Securityholders............................................................ S-18
Securityholders' Interest.................................................. S-39
</TABLE>
<TABLE>
<CAPTION>
Term Page
- ---- ----
<S> <C>
Series 1999-1 Percentage................................................... S-39
Series 1999-1 Securities................................................... S-18
Series 1999-1 Supplement................................................... S-18
Series 1999-1 Termination Date............................................. S-50
Series Default Amount...................................................... S-45
Servicing Fee Percentage................................................... S-52
Shared Principal Collections............................................... S-45
Spread Account............................................................. S-43
Stated Class B Amount...................................................... S-38
Telerate Page 3750......................................................... S-34
Transfer Date.............................................................. S-40
Transferor................................................................. S-18
Transferor Finance Charge Collections...................................... S-39
Transferor Interest........................................................ S-37
Transferor Percentage...................................................... S-37
Transferor Retained Finance Charge Collections............................. S-43
Trigger Event.............................................................. S-52
Trust Accounts............................................................. S-37
Trust Portfolio............................................................ S-21
Trustee.................................................................... S-18
Underwriters............................................................... S-56
Underwriting Agreement..................................................... S-56
US......................................................................... S-32
Y2K........................................................................ S-30
</TABLE>
S-59
<PAGE>
Annex I
Previously Issued Series
The Trust has previously issued seven other Series that the Transferor
anticipates will be outstanding on the Closing Date. The table below sets forth
the principal characteristics of such Series: Series 1996-1, Series 1997-1,
Series 1997-2, Series 1998-1, Series 1998-2, Series 1998-3 and Series 1999-A.
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.
Series 1996-1
Class A Certificates
Initial Invested Amount....... $518,000,000
Interest Rate................. 6.45%
Commencement of Amortization
Period....................... First day of August 1998 Monthly Period
Annual Servicing Fee
Percentage................... 2.00%
Enhancement................... Subordination of Class B Certificates, Class C
Certificates and Class D Certificates
Scheduled Series Termination
Date......................... February 2002 Distribution Date
Series Issuance Date.......... April 23, 1996
Class B Certificates
Initial Invested Amount....... $87,500,000
Interest Rate................. 6.80%
Annual Servicing Fee
Percentage................... Same as above for Class A Certificates
Enhancement................... Subordination of Class 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 C Certificates and Class
C Reserve Account
Scheduled Series Termination
Date......................... Same as above for Class A Certificates
Class D Certificates
Invested Amount............... $44,500,000
Interest Rate................. None
Annual Servicing Fee
Percentage................... Same as above for Class A Certificates
Scheduled Series Termination
Date......................... Same as above for Class A Certificates
A-I-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Series 1997-1
Class A Certificates
Initial Invested Amount....... $616,250,000
Interest Rate................. 6.87%
Commencement of Accumulation
Period....................... Last day of March 2001 Monthly Period or later
Annual Servicing Fee date as determined in the Agreement
Percentage................... 2.00%
Enhancement................... Subordination of Class B Certificates, Class C
Certificates and Class D Certificates
Scheduled Series Termination
Date......................... October 2005 Distribution Date
Series Issuance Date.......... May 8, 1997
Class B Certificates
Initial Invested Amount....... $106,250,000
Interest Rate................. 7.11%
Commencement of Accumulation
Period....................... Last day of March 2001 Monthly Period or later
date as determined in the Agreement
Annual Servicing Fee
Percentage................... Same as above for Class A Certificates
Enhancement................... Subordination of Class C Certificates and Class
D Certificates
Scheduled Series Termination
Date......................... Same as above for Class A Certificates
Class C Certificates
Initial Invested Amount....... $72,250,000
Interest Rate................. LIBOR + 0.850%
Commencement of Accumulation
Period....................... Last day of March 2001 Monthly Period or later
date as determined in the Agreement
Annual Servicing Fee
Percentage................... Same as above for Class A Certificates
Enhancement................... Subordination of Class D Certificates and Class
C Reserve Account
Scheduled Series Termination
Date......................... Same as above for Class A Certificates
Class D Certificates
Invested Amount............... $55,250,000
Interest Rate................. None
Annual Servicing Fee
Percentage................... Same as above for Class A Certificates
Scheduled Series Termination
Date......................... Same as above for Class A Certificates
Series 1998-1
Class A Securities
Invested Amount as of June 16,
1999......................... $593,011,000
Expected Invested Amount as of
Closing Date (after
application of proceeds)..... $100,000,000
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
</TABLE>
A-I-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 June 16,
1999......................... $52,211,000
Expected Invested Amount as of
Closing Date (after reduction
of Class A Invested Amount).. $17,243,000
Maximum Permitted Invested
Amount....................... $52,350,000
Interest Rate................. None
Annual Servicing Fee
Percentage................... Same as above for Class A Securities
Scheduled Series Termination
Date......................... Same as above for Class A Securities
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
</TABLE>
A-I-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 June 16,
1999......................... $219,651,600
Expected Invested Amount as of
Closing Date................. $248,901,333
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 June 16,
1999......................... $39,480,900
Expected Invested Amount as of
Closing Date................. $44,964,500
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
Series Issuance Date.......... April 23, 1999
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
</TABLE>
A-I-4
<PAGE>
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 Series 1999-1, 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
June 21, 1999
A-II-1
<PAGE>
A security is not
a deposit and
neither the
securities nor the
underlying
accounts or
receivables are
insured or
guaranteed by the
Federal Deposit
Insurance
Corporation or any
other governmental
agency.
The securities
will represent
interests in the
trust only and
will not represent
interests in or
recourse
obligations of
Metris
Receivables, Inc.,
Metris Companies
Inc., Direct
Merchants Credit
Card Bank,
National
Association or any
affiliate thereof.
This prospectus
may be used to
offer and sell any
series of
securities only if
accompanied by the
prospectus
supplement for
that series.
Prospectus
METRIS MASTER TRUST
Issuer
Metris Receivables, Inc.
Transferor
Direct Merchants Credit Card Bank, National Association
Servicer
Asset Backed Securities
The trust--
. may periodically issue asset backed securities in one or more series with
one or more classes; and
. will own--
. receivables in a portfolio of consumer revolving credit card accounts;
. payments due on those receivables; and
. other property described in this prospectus and in the prospectus
supplement.
The securities--
. will represent interests in the trust and will be paid only from the assets
of the trust;
. offered by this prospectus will be rated in one of the four highest rating
categories by at least one nationally recognized rating organization;
. may have one or more forms of enhancement; and
. will be issued as part of a designated series which may include one or more
classes of securities and enhancement.
The securityholders--
. 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 June 22, 1999
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Overview Of The Information In This Prospectus And The Prospectus
Supplement.............................................................. 3
The Trust................................................................ 4
Direct Merchants Credit Card Bank, N.A. Activities....................... 4
General................................................................. 4
New Account Underwriting................................................ 5
Acquisition of Credit Card Accounts..................................... 6
Billing and Payments.................................................... 6
Collection of Delinquent Accounts....................................... 7
Description of FDR...................................................... 8
Recoveries.............................................................. 8
Year 2000 Compliance.................................................... 8
The Receivables.......................................................... 9
Maturity Considerations.................................................. 10
Use of Proceeds.......................................................... 10
Metris Companies Inc..................................................... 10
Certain Litigation...................................................... 11
The Transferor........................................................... 11
Direct Merchants Credit Card Bank, National Association.................. 11
Fingerhut Corporation.................................................... 12
Description of the Securities............................................ 13
General................................................................. 13
Book-Entry Registration................................................. 14
Definitive Securities................................................... 18
Interest................................................................ 18
Principal............................................................... 19
Revolving Period........................................................ 19
Controlled Amortization Period.......................................... 20
Principal Amortization Period........................................... 20
Accumulation Period..................................................... 20
Early Amortization Period............................................... 21
Discount Option......................................................... 21
Transfer and Assignment of Receivables.................................. 22
Exchanges............................................................... 23
Representations and Warranties.......................................... 24
Certain Covenants....................................................... 26
Eligible Accounts....................................................... 27
Eligible Receivables.................................................... 27
Addition of Trust Assets................................................ 28
Collection and Other Servicing Procedures............................... 30
Trust Accounts.......................................................... 30
Deposits in Collection Account.......................................... 32
Investor Percentage and Transferor Percentage........................... 32
Application of Collections.............................................. 33
Shared Principal Collections............................................ 33
Shared Excess Finance Charge Collections................................ 33
Excess Funding Account.................................................. 34
Paired Series........................................................... 34
Funding Period.......................................................... 35
Defaulted Receivables; Dilution......................................... 35
Investor Charge-Offs.................................................... 36
Defeasance.............................................................. 36
Final Payment of Principal; Termination................................. 37
Pay Out Events.......................................................... 37
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Servicing Compensation and Payment of Expenses........................... 38
Certain Matters Regarding the Transferor and the Servicer................ 39
Servicer Default......................................................... 40
Reports to Securityholders............................................... 41
Evidence as to Compliance................................................ 41
Amendments............................................................... 42
List of Securityholders.................................................. 43
The Trustee.............................................................. 43
Enhancement............................................................... 44
General.................................................................. 44
Subordination............................................................ 44
Letter of Credit......................................................... 45
Cash Collateral Guaranty or Account...................................... 45
Collateral Interest...................................................... 45
Surety Bond or Insurance Policy.......................................... 46
Spread Account........................................................... 46
Reserve Account.......................................................... 46
Description of the Purchase Agreements.................................... 46
Purchases of Receivables................................................. 46
Representations and Warranties........................................... 47
Certain Covenants........................................................ 48
Purchase Termination Date................................................ 49
Security Ratings.......................................................... 50
Certain Legal Aspects of the Receivables.................................. 50
Transfer of Receivables.................................................. 50
Certain Matters Relating to Bankruptcy or Receivership................... 51
Consumer Protection Laws................................................. 54
Industry Litigation...................................................... 55
Claims and Defenses of Obligors Against the Trust........................ 55
Income Tax Matters........................................................ 56
General.................................................................. 56
Treatment of the Securities as Debt...................................... 56
Taxation of Interest Income of U.S. Securityholders...................... 57
Sale, Exchange or Retirement of Securities............................... 59
Defeasance............................................................... 59
Possible Alternative Characterizations................................... 59
Non-U.S. Securityholders................................................. 59
Information Reporting and Backup Withholding............................. 60
FASIT Legislation........................................................ 61
New Withholding Regulations.............................................. 61
State and Local Taxation................................................. 61
Employee Benefit Plan Considerations...................................... 61
Plan of Distribution...................................................... 63
Legal Matters............................................................. 64
Reports to Securityholders................................................ 64
Other Information......................................................... 65
Cautionary Notice Regarding Forward-looking Statements.................... 65
Where You Can Find More Information....................................... 65
Index of Terms for the Prospectus......................................... 66
Annex I................................................................... A-1-1
</TABLE>
2
<PAGE>
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:
. the timing and amount of interest and principal payments;
. information about the receivables;
. information about credit enhancement for each offered class;
. credit ratings; and
. 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 66 in
this prospectus.
3
<PAGE>
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.
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
- --------
* MasterCard(R) and VISA(R) are federally registered servicemarks of
MasterCard International Inc. and VISA USA Incorporated, respectively.
4
<PAGE>
the servicing of the Receivables are performed on behalf of Direct Merchants
Bank through First Data Resources, Inc. ("FDR"). See "--Description of FDR." In
addition, the collection and management of delinquent accounts are performed by
Metris Direct, 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. They are contacted on a nationwide basis
generally through pre-screened direct mail and telephone solicitations. Direct
Merchants Bank receives responses to its pre-screened solicitations, performs
fraud screening, verifies name and address changes, and obtains any information
which may be missing from the application. Applications are then sent to third
party data entry providers, which key the application information and process
the applications based on the criteria provided by Direct Merchants Bank.
Applications are approved, denied or referred to the Bank for exception
processing. Direct Merchants Bank processes exceptions for, among other things,
derogatory credit bureau information and fraud warnings. Exception applications
are processed manually by a credit analyst based on policies approved by the
Bank's credit committee.
Direct Merchants Bank is a member of MasterCard International Inc.
("MasterCard International") and of VISA USA, Inc. ("VISA"). MasterCard
International and VISA license their respective marks permitting financial
institutions to issue credit cards to their customers. In addition, MasterCard
International and VISA provide clearing services facilitating exchange of
payments among member institutions and networks linking members' credit
authorization systems.
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, Isaacs & Company, a third party provider of risk scorecards
("FICO scores"). For those existing customers of Fingerhut who have FICO
scores, Direct Merchants Bank uses the Fingerhut Score to further segment such
customers into narrower ranges within each FICO score subsegment, allowing it
to better evaluate individual credit risk and to tailor its risk-based pricing
accordingly. Additionally, the Fingerhut Score is used to target individuals
who have no, or limited, credit bureau information and consequently no FICO
scores, allowing the Bank to target Fingerhut Customers who would not typically
be solicited by other credit card issuers. See "Fingerhut Corporation--The
Fingerhut Database."
The Bank has developed a proprietary modeling system for individuals for
whom credit bureau information is available (the "Proprietary Modeling
System"). The Proprietary Modeling System consists of sophisticated models
which produce a credit risk score (a "Proprietary Score") for each prospect.
The Proprietary Score, like the Fingerhut Score, segments such individuals into
narrower ranges within each FICO score subsegment, allowing the Bank to better
evaluate individual credit risk and to tailor its risk-based pricing
accordingly. The Bank also uses this segmentation to exclude certain
individuals from its marketing solicitations.
Direct Merchants Bank solicits individuals who are not Fingerhut Customers
from lists directly obtained from the major credit bureaus based on criteria
established by Direct Merchants Bank. Direct Merchants Bank establishes the
range of FICO scores that it plans to target for a specific campaign, and
receives files from the credit bureaus which contain individual credit records
of the individuals who fall within this range. The files are incorporated into
the Proprietary Modeling System, which further segments such individuals based
upon
5
<PAGE>
their Proprietary Scores. The mailing lists generated from the Proprietary
Modeling System are then checked against the Suppress File and any matching
names are excluded. Direct Merchants Bank currently does not solicit any
individuals who are not Fingerhut Customers and who do not have FICO scores.
The Bank's pricing strategy is to price for the risk associated with its
credit card customer. The specific pricing for a credit card offer is primarily
based on the prospective customer's risk profile prior to solicitation. Each
prospective customer is evaluated to determine credit needs, credit risk, and
existing credit availability. A customized offer is developed to include the
most appropriate product, brand, pricing, and credit line. Direct Merchants
Bank currently offers over 100 different pricing structures on its credit card
products, with a range of annual fees and variable annual percentage rates
based on floating rates of interest, primarily the prime rate. After credit
card accounts are opened, the customer's credit performance is actively
monitored and their risk scores are periodically recalculated. Over time, the
lending relationship can evolve to include more competitive (or more
restrictive) pricing and product configurations.
Direct Merchants Bank uses FDR's adaptive control system (the "Adaptive
Control System") which uses statistical models and basic account financial
information to automatically and regularly assign credit line increases and
decreases to individual customers, as well as to determine the systematic
collection steps to be taken at the various stages of delinquency. The Adaptive
Control System manages the authorization of each transaction; in addition, it
implements the collections strategies determined by Metris to be used for non-
delinquent accounts that have balances above their assigned credit line
(referred to as "overlimit" accounts).
Once an account is approved, an initial credit line is established based on
the individual's risk profile using automated screening and credit scoring
techniques. This process results in a portfolio (excluding portfolio
acquisitions) with average credit lines that are below the industry average due
to the higher average risk elements inherent in Direct Merchants Bank's target
market. Direct Merchants Bank may elect, at any time and without prior notice
to the cardholder, to preclude or restrict further credit card use by the
cardholder, usually as a result of poor payment performance or the Bank's
concern over the creditworthiness of the cardholder. Credit lines are managed
based on the results of the behavioral scoring analysis in accordance with
criteria established by Direct Merchants Bank.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, Direct Merchants Bank
reserves the right to change or terminate certain terms, conditions, services,
or features of the account (including periodic finance charges, late fees,
returned check charges and any other charges or the minimum payment), subject
to the conditions set forth in the account agreement.
Direct Merchants Bank may change its credit standards or screening criteria
and methods at any time.
Acquisition of Credit Card Accounts
Direct Merchants Bank has made portfolio acquisitions in the past and such
acquisitions are possible in the future. Prior to acquiring a portfolio, Direct
Merchants Bank reviews the historical performance and seasoning of the
portfolio and the policies and practices of the selling institution, but
individual accounts are not requalified by Direct Merchants Bank. There can be
no assurance that 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."
Billing and Payments
The Accounts have various billing and payment structures, including varying
minimum payment levels and fees. The following information reflects the current
billing and payment characteristics of the Accounts.
6
<PAGE>
Monthly billing statements are sent to cardholders by FDR on behalf of
Direct Merchants Bank. Direct Merchants Bank uses third party processors to
process certain cardholder payments. When an account is established, it is
randomly assigned a billing cycle. Currently, there are 20 billing cycles and
each such cycle has a separate monthly billing date based on the respective
business day the cycle represents in each calendar month. On a set billing date
each month, a statement is sent to all accounts with an outstanding balance
greater than $1.00. Cardholders must make a minimum monthly payment of the
greater of a minimum dollar amount, or a minimum percentage of the outstanding
balance, the finance charge or the balance of the account if the balance is
less than such minimum dollar amount. If the minimum payment is not collected
within 25 days after the Payment Date, the account is considered delinquent.
The Bank generally determines the minimum monthly payment with respect to the
accounts by multiplying the combined new balance of purchases and cash
advances, less any disputed amounts, by such minimum percentage of the
outstanding balance. If the amount so calculated is less than the minimum
dollar amount, it is increased to such minimum dollar amount. The sum of such
amount and any past due amounts equals the minimum payment amount.
Direct Merchants Bank generally assesses periodic finance charges on an
account if the cardholder has not paid the balance in full from the previous
billing cycle ("Periodic Finance Charges"). For most cardholders, if the entire
balance on the account is paid by the due date, no finance charge is imposed.
These finance charges are based upon the average daily balance outstanding on
the account during the monthly billing cycle. The average daily balance is the
sum of the daily unpaid balances of purchases and cash advances on each day of
the monthly billing cycle divided by the number of days in such monthly billing
cycle. Such unpaid balances are determined by deducting payments and credits,
adding any unpaid finance charges and late charges and adding new purchases,
cash advances and other charges, in each case as of the date of the
transaction. If a payment in full is not received prior to 25 days after the
statement cycle date (the "Payment Date"), finance charges are imposed on all
purchases from the date of the transaction to the statement cycle date. Finance
charges are also imposed on each cash advance from the day such advance is made
until the advance is paid in full. These cash advance finance charges are
applied to the average daily balance.
Direct Merchants Bank assesses an annual fee on some of its accounts. Direct
Merchants Bank may waive or lessen the annual membership fees, in connection
with the solicitation of new accounts. In addition to the annual fee, Direct
Merchants Bank may charge accounts certain other fees including: (i) a late fee
with respect to any unpaid monthly payment if the required minimum monthly
payment is not received by the Payment Date, (ii) a fee for cash advances equal
to the greater of a percentage of each cash advance or a minimum dollar amount,
(iii) a fee with respect to each check submitted by a cardholder in payment of
an account which is not honored by the cardholder's bank, and (iv) an overlimit
charge if, at any time during the billing cycle, the total amount owed for
principal and finance charges, in respect of purchases and cash advances,
exceeds the cardholder's credit line by a minimum dollar amount.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, Direct Merchants Bank
reserves the right to change or terminate certain terms, conditions, services
and features of the account (including Periodic Finance Charges, late fees,
returned check charges and any other charges or the minimum payment), subject
to the conditions set forth in the account agreement.
Most merchant transactions by cardholders are authorized online by FDR. The
remaining transactions generally are low dollar amounts, typically below
$50.00. All authorizations are handled through the Adaptive Control System.
Collection of Delinquent Accounts
Direct Merchants Bank considers an account delinquent if the minimum payment
due thereunder is not received within 25 days from the closing date of the
statements. Collection procedures are determined with the assistance of the
Adaptive Control System, which continually monitors all delinquent accounts.
The collections function is handled internally primarily through collection
facilities in Tulsa, Oklahoma, and Baltimore, Maryland. The Tulsa facility
employs approximately 675 collection personnel, and the Baltimore facility
employs approximately 830 collection personnel. Through these facilities,
customers with delinquent accounts are called as early as the first day of
delinquency and generally within the first week of delinquency, based
7
<PAGE>
upon the customer's behavior score and prior credit history. Metris Direct,
Inc.'s collections department generates letters through a proprietary letter
system when appropriate. Delinquent customers receive automatic collection
letters at various stages in their delinquency, from 5-90 days past due. Metris
Direct, Inc.'s collections personnel attempt a minimum of two contacts in each
30-day delinquency cycle, unless special arrangements have been made with the
customer. Accounts that become 60 days contractually delinquent are closed but
not necessarily charged off. Accounts are charged off and taken as a loss
either after formal notification of bankruptcy or at the end of the month
during which they become contractually 180 days past due. Accounts identified
as fraud losses are immediately reserved for and charged off no later than 90
days after the last activity. Accounts identified as deceased without a
surviving, contractually liable individual or an estate large enough to pay the
debt in full are charged off immediately upon notification. Charged-off
accounts are referred to Direct Merchants Bank's recovery unit in Baltimore,
Maryland, for coordination of collection efforts to recover the amounts owed.
When appropriate, accounts are placed with external collection agencies or
attorneys.
Direct Merchants Bank uses FDR's fraud protection system to improve the rate
of early detection of fraudulent activity on a cardholder account. The system
also provides work flow management that is used to investigate potentially
fraudulent transactions and to take prompt immediate action to reduce further
losses. A fraud score is established based on the details of the authorization
request and the previous behavior pattern of the cardholder. This score is used
in the determination of actions to be taken for potentially fraudulent
transactions.
Direct Merchants Bank reserves the right to cancel charge privileges at any
time, usually as a result of violating the contractual terms (delinquency,
overlimit, etc.) of the credit account. Activity on lost, stolen, or fraudulent
accounts is blocked immediately upon notification by the cardholder or upon
determination by FDR that a card is lost or stolen or being used fraudulently.
Description of FDR
FDR provides data processing, credit card reissuance, statementing, some
inbound customer service telephone calls and interbank settlement for Direct
Merchants Bank. Direct Merchants Bank believes that its relationship with FDR
allows it to achieve operational efficiencies while remaining flexible enough
to handle additional growth. Furthermore, Direct Merchants Bank's agreement
with FDR allows Direct Merchants Bank to internalize specific operational
functions if Direct Merchants Bank desires. If FDR were to fail to perform its
services for Direct Merchants Bank or become insolvent, delays in processing
and recovery of information with respect to charges incurred by the respective
cardholders could occur, and the replacement of the services FDR currently
provides to Direct Merchants Bank could be time-consuming. As a result, delays
in payment to Securityholders could occur.
FDR provides computer data processing services primarily to the bankcard
industry. FDR is a subsidiary of First Data Corp.
Recoveries
Pursuant to the terms of the Pooling and Servicing Agreement, the Servicer
will be required to transfer all amounts received by the Servicer with respect
to Receivables in Accounts that previously became Defaulted Accounts to the
Trust ("Recoveries"). In the event of any sale or other disposition of
Receivables in Defaulted Accounts as provided in the Pooling and Servicing
Agreement, Recoveries will not include amounts received by the purchaser or
transferee of such Receivables but will be limited to amounts received by the
Servicer from the purchaser or transferee. Collections of Recoveries will be
treated as Collections of Finance Charge Receivables.
Year 2000 Compliance
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value "2000." Many existing application software products
were designed to only accommodate a two digit date position which represents
the year (e.g.,
8
<PAGE>
the number "95" is stored on the system and represents the year 1995). As a
result, the year 1999 (i.e., "99") is the maximum date value many systems will
be able to accurately process. Metris has developed plans to address potential
problems posed by this development to assure that Metris is prepared for year
2000. Most of Metris' existing information systems are less than three years
old and were originally designed for year 2000 compliance, but as a cautionary
measure Metris has begun testing such internal systems for year 2000
compliance. In addition, Metris has created a project team to identify,
address, and monitor internal systems and vendor issues related to year 2000,
consistent with recommendations and guidelines set forth by the Office of the
Comptroller of the Currency (the "Comptroller") and the Federal Financial
Institutions Examination Council. Metris has identified financial and
operational systems that may be impacted by the year 2000 issues and is
actively working to address those issues. However, if plans to deal with year
2000 issues are not completed on a timely basis or are not fully effective,
such issues may have a material adverse effect on Metris' operations.
In addition, Metris is dependent on databases maintained by Fingerhut
Companies Inc. ("FCI") and card and statement generation, among other services,
provided by FDR. The project team has been working with its material vendors,
including FCI and FDR, to determine the status of each vendor's plans for
becoming year 2000 compliant. The project team is striving to obtain test
results showing year 2000 compliance by material vendors in the second quarter
of 1999 and has developed high level contingency plans to address non-
compliance by its material vendors, which may include replacing such vendors.
Although Metris cannot ensure compliance by all of its vendors on a timely
basis, Metris believes that it is taking appropriate steps to identify exposure
to year 2000 problems and to address them on a timely basis.
The Receivables
The Receivables consist of amounts owing on MasterCard(R) credit cards and
VISA(R) credit cards and may include amounts owing on other revolving credit
cards (see "Description of the Securities--Eligible Receivables"). The
Receivables in the Trust are divided into two components: Principal Receivables
and Finance Charge Receivables. At any time, "Finance Charge Receivables" means
all amounts billed from time to time to the obligors on any Account (the
"Obligors") in respect of Periodic Finance Charges, overlimit fees, late
charges, returned check fees, annual membership fees and annual service
charges, if any, transaction charges, cash advance fees and similar fees and
charges (excluding fees and charges for insurance and insurance type products
and interchange fees), plus Recoveries, investment earnings on amounts credited
to the Excess Funding Account and Discount Option Receivables, if any.
"Principal Receivables" equals all other Eligible Receivables.
All new Receivables arising in the Accounts are purchased by Metris from
Direct Merchants Bank pursuant to the certain Amended and Restated Bank
Receivables Purchase Agreement dated as of July 30, 1998 between Direct
Merchants Bank and Metris, as such document may be amended from time to time in
accordance with its terms, and, if the context requires, the prior versions
thereof, including the Amended and Restated Bank Receivables Purchase Agreement
dated as of May 26, 1995 (the "Bank Purchase Agreement," and together with the
Purchase Agreement, the "Purchase Agreements"), and subsequently are purchased
by the Transferor from Metris pursuant to the Purchase Agreement and thereafter
will be automatically transferred to the Trust. Accordingly, the amount of
Receivables fluctuates from day to day as new Receivables are generated and as
existing Receivables are collected, charged off as uncollectible, or otherwise
adjusted.
The Servicer deposits all collections of Receivables in the Collection
Account ("Collections"). The Collections on the Receivables received on any
business day are allocated by the Servicer between Principal Collections and
Finance Charge Collections in accordance with the definitions thereof. All such
amounts are then applied in accordance with the respective interests of the
Securityholders, any provider of Enhancement, the securityholders of any other
Series, and the holder of the Exchangeable Transferor Security in the Principal
Receivables and in the Finance Charge Receivables in the Trust. See
"Description of the Securities--Investor Percentage and Transferor Percentage"
in this Prospectus and "Description of the Securities--Allocation Percentages"
in the related Prospectus Supplement.
9
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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 on which the Controlled Amortization Period, the Principal
Amortization Period or the Accumulation Period, as applicable, will commence,
the principal payments expected or available to be received or accumulated
during such Controlled Amortization Period, Principal Amortization Period or
Accumulation Period, or on the Expected Final Payment Date, as applicable, the
manner and priority of principal accumulations and payments among the Classes
of a Series of Securities and the Pay Out Events which, if any were to occur,
would lead to the commencement of an Early Amortization Period or, if so
specified in the related Prospectus Supplement, an Accumulation Period.
The related Prospectus Supplement will provide certain historical data
relating to payments by cardholders, total charge-offs and other related
information relating to the Direct Merchants Bank Portfolio. There can be no
assurance that future events will be consistent with such historical data.
The amount of Collections 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 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
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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 programs and third party insurance, to its credit
card customers, and customers of third parties.
Metris is a Delaware corporation incorporated on August 20, 1996. Metris
became a publicly held company in October 1996 after completing an initial
public offering. Until September 25, 1998, Metris was an indirect subsidiary of
Fingerhut Companies, Inc. ("FCI"). Prior to the initial public offering,
Metris' business was operated as a division of FCI. On September 25, 1998, FCI
distributed its shares in Metris to FCI's shareholders in a tax free spin off
(the "Spin Off"). Metris' principal subsidiaries are Direct Merchants Bank,
Metris Direct, Inc. ("Metris Direct"), Metris Funding Co., Metris Receivables,
Inc. and Metris 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 is 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
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Association, located in Salt Lake City, Utah (the "Utah Bank") was chartered as
a national banking association on February 14, 1995. On July 13, 1998, the Utah
Bank was merged into Interim National Bank, a national banking association
located in Phoenix, Arizona, and an indirect subsidiary of Metris. The name of
the surviving entity was changed to Direct Merchants Credit Card Bank, National
Association. Its principal executive offices are located in Phoenix, Arizona,
with a mailing address at 6909 East Greenway Parkway, Scottsdale, Arizona
85254, telephone number (602) 718-4600. Any references to Direct Merchants
Credit Card Bank, National Association, prior to July 13, 1998 are references
to the Utah Bank.
Fingerhut Corporation
Fingerhut, a wholly owned subsidiary of FCI, has been in the direct
marketing business for over 46 years and is one of the largest consumer catalog
marketers in the United States. Fingerhut sells a broad range of general
merchandise products and services to moderate income consumers, using catalogs
and other direct marketing solicitations. Fingerhut makes substantially all of
its sales using proprietary private label credit. As customers make payments
and order new products, Fingerhut enters a variety of payment, behavioral and
other data into its database (the "Fingerhut Database").
Direct Merchants Bank currently has agreements to use the information in the
Fingerhut Database for marketing general purpose credit cards to Fingerhut
Customers. These agreements generally expire in 2003, but may expire earlier
upon certain events of default or bankruptcy. In addition, in the event that a
person or group other than Fingerhut acquires 25% or more of the voting stock
of Metris or Direct Merchants Bank in a transaction during the term of one of
these agreements, Fingerhut or FCI, as the case may be, has the right to
terminate these agreements. As described above (see "Metris Companies Inc."),
in December 1998, Metris and Fingerhut amended certain of their agreements.
Pursuant to an amendment to the database access agreement, Metris' exclusive
license to use Fingerhut's customer database to market financial service
products will become non-exclusive after October 31, 2001. Although the
Transferor believes that, to the extent that it is desirable to do so, Direct
Merchants Bank will be able to extend the term of these agreements, there can
be no assurance that Direct Merchants Bank will be able to do so on terms
favorable to Direct Merchants Bank or at all.
The Fingerhut Database. The Fingerhut Database contains information on more
than 31 million individuals. This database contains up to 3,500 potential data
items in a customer record, including names, addresses, behavioral
characteristics, general demographic information and information provided by
the customer. Fingerhut uses information in the Fingerhut Database, along with
sophisticated proprietary credit scoring models, to produce proprietary credit
scores (the "Fingerhut Scores") for Fingerhut Customers. The Fingerhut Database
also includes a "suppress" file (the "Suppress File"), which contains
information on 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 February 11, 1999, FCI announced that it had agreed to be acquired by
Federated Department Stores, Inc. This transaction was completed on March 18,
1999, and the separate corporate existence of FCI ceased. Although Metris'
agreements with FCI and Fingerhut will not be terminated by this transaction,
Metris cannot predict how this change in status for FCI may impact the
relationship of Metris with FCI and Fingerhut. In addition, on March 12, 1999,
Metris' shareholders approved an amendment to Metris' Amended and Restated
Certificate of Incorporation to eliminate the detailed restrictions concerning
the business activities in which Metris is permitted to engage. These
restrictions were originally adopted to address certain potential conflicts of
interest between FCI and Metris.
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Description of the Securities
The Securities will be issued in Series. Each Series will represent an
interest in the Trust other than the interests represented by any other Series
of Securities issued by the Trust (which may include Series offered pursuant to
this Prospectus) and the Exchangeable Transferor Security. Each Series will be
issued pursuant to the Pooling and Servicing Agreement among the Transferor,
Direct Merchants Bank, as Servicer and the Trustee, and a supplement (each, a
"Supplement") to the Pooling and Servicing Agreement. The Prospectus Supplement
for each Series will describe any provisions of the Pooling and Servicing
Agreement relating to such Series which may differ materially from the Pooling
and Servicing Agreement filed as an exhibit to the Registration Statement. The
following summaries describe certain provisions common to each Series of
Securities or which may be applicable to any Series of Securities. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Pooling and
Servicing Agreement and relevant Supplement.
General
The assets of the Trust will be allocated among the Securityholders of each
Series (the "Investor Interest") and the holder of the Exchangeable Transferor
Security and, in certain circumstances, the related Enhancement providers. The
aggregate principal amount of the interest of the Securityholders of a Series
in the Trust is referred to herein as the "Invested Amount" and is based on the
aggregate amount of the Principal Receivables in the Trust allocated to such
Series. The aggregate principal amount of the interest of the Transferor in the
Trust is referred to herein as the "Transferor Interest," and is based on the
aggregate amount of Principal Receivables (the "Transferor Amount") in the
Trust not allocated to the Securityholders or any Enhancement provider. The
certificate that evidences the Transferor Interest is referred to herein as the
"Exchangeable Transferor Security."
The Securities will represent interests in certain assets of the Trust,
including the right to the Investor Percentage of all Obligor payments on the
Receivables in the Trust.
The Transferor currently owns the Exchangeable Transferor Security. The
Exchangeable Transferor Security represents an undivided interest in the Trust,
including the right to the Transferor Percentage of all Obligor payments on the
Receivables in the Trust equal to 100 percent minus the sum of the applicable
investor allocation percentages (which shall not exceed 100 percent) for all
Series of Securities then outstanding. See "--Certain Matters Regarding the
Transferor and the Servicer." Unless otherwise specified in the related
Prospectus Supplement, during the Revolving Period, following the Funding
Period, if any, the amount of the Invested Amount in the Trust will remain
constant except under certain limited circumstances. See "--Defaulted
Receivables; Dilution." The amount of Principal Receivables in the Trust,
however, will vary each day as new Principal Receivables are transferred to the
Trust and others are paid or charged-off. The amount of the Transferor Interest
(or the amount in the Excess Funding Account) will fluctuate each day,
therefore, to reflect the changes in the amount of the Principal Receivables in
the Trust unless and to the extent that the previously issued Series or another
Series absorb such change. When a Series is amortizing, the Invested Amount
will decline as Obligor payments of Principal Receivables are collected and
distributed to the related Securityholders. As a result, unless and to the
extent that the previously issued Series or another Series absorb such
increase, the Transferor Interest will generally increase each month during an
Amortization Period for any Series to reflect the reductions in the Invested
Amount of the Securities and will also change to reflect the variations in the
amount of the Principal Receivables in the Trust. The Transferor Interest may
be also reduced as the result of an Exchange. See "--Exchanges."
Each Series of Securities may consist of one or more classes (each, a
"Class"), one or more of which may be senior Securities and one or more of
which may be subordinated Securities. Each Class of a Series will evidence the
right to receive a specified portion of each distribution of principal or
interest or both. The Invested Amount with respect to a Series with more than
one Class will be allocated among the Classes as described in the related
Prospectus Supplement. The Securities of a Class may differ from Securities of
other
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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.
Indirect access to the
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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
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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,
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including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Cedelbank also deals with domestic securities market in over 30 countries
through established depository and custodial relationships. Cedelbank has
established an electronic bridge with Morgan Guaranty Trust as the Operator of
the Euroclear System ("MGT/EOC") in Brussels to facilitate settlement of trades
between Cedelbank and MGT/EOC. Cedelbank currently accepts over 110,000
securities issues on its books.
Cedelbank's customers ("Cedelbank Customers") are world-wide financial
institutions including underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations. Cedelbank's U.S. customers are
limited to securities brokers and dealers, and banks. Currently, Cedelbank has
approximately 2,000 customers located in over 80 countries, including all major
European countries, Canada, and the United States. Indirect access to Cedelbank
is available to other institutions that clear through or maintain a custodial
relationship with an account holder of Cedelbank.
The Euroclear System (the "Euroclear System") was created in 1968 to hold
securities for participants of the Euroclear System ("Euroclear Participants")
and to clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of securities and any risk from lack
of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 34 currencies, including United States dollars. The Euroclear
System includes various other services, including securities lending and
borrowing and interfaces with domestic markets in several countries generally
similar to the arrangements for cross-market transfers with DTC described
above. The Euroclear System is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator" or
"Euroclear"), under contract with Euroclear Clearance System, S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for the Euroclear System on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other
professional financial intermediaries and may include the underwriters of any
Series of Securities. Indirect access to the Euroclear System is also available
to other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission. Securities clearance accounts and cash accounts with the
Euroclear Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms
and Conditions govern transfers of securities and cash within the Euroclear
System, withdrawal of securities and cash from the Euroclear System, and
receipts of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Securities held through Cedelbank or Euroclear
will be credited to the cash accounts of Cedelbank Customers or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. Cedelbank or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the Pooling
and Servicing Agreement on behalf of a Cedelbank Customer or a Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf
through DTC.
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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.
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
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accounts of the Trust, from any applicable Enhancement, if necessary, or
certain other amounts as specified in the related Prospectus Supplement. If the
Distribution Dates for payment of interest for a Series or Class occur less
frequently than monthly, such collections or other amounts (or the portion
thereof allocable to the Securityholders' Interest of such Class) may be
deposited in one or more trust accounts (each, an "Interest Funding Account")
pending distribution to the Securityholders of such Series or Class, as
described in the related Prospectus Supplement. If a Series has more than one
Class of Securities, each such Class may have a separate Interest Funding
Account. The Prospectus Supplement relating to each Series of Securities and
each Class thereof will describe the amounts and sources of interest payments
to be made, the Security Rate, and, for a Series or Class thereof bearing
interest at a floating or a variable Security Rate, the initial Security Rate,
the dates and the manner for determining subsequent Security Rates, and the
formula, index or other method by which such Security Rates are determined.
Principal
Except to the extent specified in the related Prospectus Supplement, during
the Revolving Period (which begins on the Closing Date relating to such Series
and ends on the day before an Amortization Period begins) for each Series of
Securities offered hereby, no principal payments will be made to the
Securityholders of such Series. During the Controlled Amortization Period,
Principal Amortization Period or Accumulation Period, as applicable, which will
be scheduled to begin on the date specified or determined as described in the
related Prospectus Supplement, and during the Early Amortization Period, which
will begin upon the occurrence of a Pay Out Event or, if so specified in the
related Prospectus Supplement, following the Accumulation Period, principal
will be paid to the Securityholders in the amounts and on Distribution Dates
specified in the related Prospectus Supplement or will be accumulated in a
Principal Account for later distribution to Securityholders on the Expected
Final Payment Date in the amounts specified in the related Prospectus
Supplement. During the Accumulation Period, the Trustee at the direction of the
Servicer will transfer from the Principal Account to one or more applicable
segregated trust accounts held for the benefit of the Securityholders (each a
"Principal Funding Account"). Collections in respect of Principal Receivables
(other than redirected Principal Collections) and Shared Principal Collections
from other Series, if any, allocated to the Securities as described below under
"--Application of Collections." Principal payments for any Series or Class
thereof will be funded from 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.
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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. 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
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the earliest of (a) the commencement of the Early Amortization Period, or, if
so specified in the related Prospectus Supplement, the Accumulation Period, (b)
payment in full of the Invested Amount of the Securities of such Series or
Class and, if so specified in the related Prospectus Supplement, of the
Collateral Interest, if any, with respect to such Series and (c) the
Termination Date with respect to such Series.
Funds on deposit in any Principal Funding Account may be invested in Cash
Equivalents or subject to a guaranteed rate or investment 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
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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 (as defined in the Pooling and Servicing Agreement or
related Supplement) to a rate below the average base rate for such period (as
defined in the Pooling and Servicing Agreement or related Supplement) while
increasing the likelihood that the Transferor will be required to add Principal
Receivables to the Trust and, because of the reduction in the aggregate amount
of Principal Receivables which, if additional Principal Receivables were not
available at such time, could cause the occurrence of a Pay Out Event. Unless
otherwise specified, all references herein to Principal Receivables or Finance
Charge Receivables, or Collections with respect thereto, are references to such
Receivables, or Collections with respect thereto, as defined above after
application of the Discount Percentage.
Transfer and Assignment of Receivables
On or about May 30, 1995 (the "Initial Closing Date"), the Transferor
transferred and assigned to the Trust all of its right, title, and interest in
and to the Receivables outstanding as of the Initial Closing Date, all of the
Receivables thereafter created and the proceeds of all of the foregoing. Prior
to such transfer and assignment and pursuant to the Amended and Restated
Receivables Purchase Agreement dated as of July 30, 1998 between Metris and the
Transferor, as such documents may be amended from time to time in accordance
with their terms and, if the context requires, the prior versions thereof,
including the original Purchase Agreement dated as of May 26, 1995 (the
"Purchase Agreement", and together with the Bank Purchase Agreement, the
"Purchase Agreements"), FCI (as predecessor to Metris under the Purchase
Agreement) contributed and sold to the Transferor all its right, title and
interest in and to the Receivables existing as of the Initial Closing Date, all
the Receivables thereafter created and all FCI's interest in the Bank Purchase
Agreement with respect to the Receivables. Prior to such sale and contribution
and pursuant to the Bank Purchase Agreement, Direct Merchants Bank sold to FCI
(as predecessor to Metris under the Bank Purchase Agreement) all its right,
title and interest in and to the Receivables existing as of the date of such
agreement and all the Receivables arising from time to time thereafter. In
connection with the realignment of FCI's subsidiaries in September 1996, FCI
assigned to Metris all of FCI's rights and Metris assumed all of FCI's
obligations under the Bank Purchase Agreement and the Purchase Agreement.
Direct Merchants Bank for itself and as Servicer has identified in its
computer files that the Receivables are Receivables as defined herein. Direct
Merchants Bank, as initial Servicer, retains and will not deliver to the
Trustee any other records or agreements relating to the Receivables. The
records and agreements relating to the Receivables will not be segregated from
those relating to other accounts and receivables of Direct Merchants Bank and
the physical documentation relating to Receivables will not be stamped or
marked to reflect the transfer of Receivables to the Trust. The Trustee will
have reasonable access to such records and agreements as required by applicable
law or to enforce the rights of the Securityholders. Direct Merchants Bank has
filed one or more UCC-1 financing statements in accordance with the UCC to
perfect the interest of FCI (as predecessor to Metris) in the Receivables and a
UCC-3 financing statement reflecting FCI's assignment of such interest in the
Receivables to Metris. FCI (as predecessor to Metris under the Purchase
Agreement) has filed one or more UCC-1 financing statements in accordance with
the UCC to perfect the Transferor's interest in the Receivables. The
Transferor, in turn, has filed one or more UCC-1 financing statements in
accordance with applicable state law to perfect the Trust's interest in the
Receivables. See "Certain Legal Aspects of the Receivables."
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Exchanges
The Pooling and Servicing Agreement and related Supplement provides for the
Trustee to issue two types of securities: (i) one or more Series of securities,
each of which may have one or more classes of securities of which one or more
such classes may be transferable ("Investor Securities") and (ii) the
Exchangeable Transferor Security. The Exchangeable Transferor Security
evidences the Transferor Interest, is held by the Transferor, and will be
transferable only as provided in the Pooling and Servicing Agreement. The
Pooling and Servicing Agreement also provides that, pursuant to any one or more
Supplements, the holder of the Exchangeable Transferor Security may tender the
Exchangeable Transferor Security and the securities evidencing any Series of
Securities to the Trustee in exchange (the "Exchange") for one or more new
Series and a reissued Exchangeable Transferor Security. Under the Pooling and
Servicing Agreement, the holder of the Exchangeable Transferor Security may
define, with respect to any newly issued Series, certain terms including: (i)
its name or designation; (ii) its initial invested amount (or method for
calculating such amount); (iii) its interest rate (or the method of allocating
interest payments or other cash flows to such Series); (iv) the closing date;
(v) the rating agency or agencies, if any, rating the Series; (vi) the interest
payment date or dates and the date or dates from which interest shall accrue;
(vii) the name of the clearing agency, if any; (viii) the method of allocating
Principal Collections for such Series and the method by which the principal
amount of Investor Securities of such Series will amortize or accrue and the
method for allocating Finance Charge Collections; (ix) the names of any
accounts to be used by such Series and the terms governing the operation of any
such accounts; (x) the percentage used to calculate monthly servicing fees;
(xi) the Minimum Transferor Interest; (xii) the Enhancement provider, if
applicable, and the terms of any Enhancement with respect to such Series;
(xiii) the base rate applicable to such Series; (xiv) the terms on which the
securities of such Series may be repurchased or remarketed to other investors;
(xv) the termination date of such Series; (xvi) any deposit into any account
provided for such Series; (xvii) the number of classes of such Series and, if
more than one class, the rights and priorities of each such class; (xviii) the
fees, if any, to be included in funds available to securityholders of such
Series; (xix) the subordination, if any, of such new Series with respect to any
other Series; (xx) the rights, if any, of the holder of the Exchangeable
Transferor Security that have been transferred to the holders of such Series,
if any; (xxi) the pool factor; (xxii) the Minimum Aggregate Principal
Receivables; (xxiii) whether such Series will be part of a group or subject to
being paired with any other prefunded Series; (xxiv) whether such Series will
be prefunded; and (xxv) any other relevant terms, including whether or not such
Series will be pledged as collateral for an issuance of any other securities,
including commercial paper (all such terms, the "Principal Terms" of such
Series). None of the Transferor, the Servicer, the Trustee, or the Trust is
required or intends to obtain the consent of any Securityholder to issue any
additional Series or in connection with the determination of the Principal
Terms thereof. However, as a condition of an Exchange, the holder of the
Exchangeable Transferor Security will deliver to the Trustee written
confirmation that the Exchange will not result in any Rating Agency reducing or
withdrawing its rating of any outstanding Series. The Transferor may offer any
Series to the public or other investors in transactions either registered under
the Securities Act of 1933, as amended (the "Securities Act") or exempt from
registration thereunder, directly, through one or more underwriters or
placement agents, in fixed-price offerings, in negotiated transactions or
otherwise. Any such Series may be issued in fully registered or book-entry form
in minimum denominations determined by the Transferor. The Transferor currently
intends to offer, from time to time, additional Series.
The Pooling and Servicing Agreement provides that the holder of the
Exchangeable Transferor Security may perform Exchanges and define the Principal
Terms such that each Series issued under the Trust has a period during which
amortization of the principal amount thereof is intended to occur, which period
may have a different length and begin on a different date than such period for
any other Series. Accordingly, one or more Series may be in their amortization
periods while other Series are not. Moreover, any Series may have the benefit
of an Enhancement that is available only to such Series. Under the Pooling and
Servicing Agreement, the Trustee will hold any such form of Enhancement only on
behalf of the Series with respect to which it relates. Likewise, with respect
to each such form of Enhancement, the holder of the Exchangeable Transferor
Security may deliver a different form of Enhancement agreement. The Pooling and
Servicing Agreement also provides that the holder of the Exchangeable
Transferor Security may specify different coupon rates and
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monthly servicing fees with respect to each Series (or a particular class
within such Series). Collections allocated to Finance Charge Receivables not
used to pay interest on the securities, the monthly servicing fee, the investor
default amount, or investor charge-offs with respect to any Series will be
allocated as provided in such Enhancement agreement, if applicable. The holder
of the Exchangeable Transferor Security also has the option under the Pooling
and Servicing Agreement to vary between Series the terms upon which a Series
(or a particular class within such Series) may be repurchased by the Transferor
or remarketed to other investors. Additionally, certain Series may be
subordinated to other Series, and classes within a Series may have different
priorities. There is no limit to the number of Exchanges that may be performed
under the Pooling and Servicing Agreement. The Trust will terminate only as
provided in the Pooling and Servicing Agreement.
Under the Pooling and Servicing Agreement and pursuant to a Supplement, an
Exchange may occur only upon the satisfaction of certain conditions provided in
the Pooling and Servicing Agreement. Under the Pooling and Servicing Agreement,
the holder of the Exchangeable Transferor Security may perform an Exchange by
notifying the Trustee at least five business days in advance of the date upon
which the Exchange is to occur. Under the Pooling and Servicing Agreement, the
notice will state the designation of any Series to be issued on the date of the
Exchange and, with respect to each such Series: (i) its initial principal
amount (or method for calculating such amount), (ii) its interest rate (or the
method of allocating interest payments or other cash flows to such Series), and
(iii) the provider of the Enhancement, if any, which is expected to provide
credit support with respect to it. The Pooling and Servicing Agreement provides
that on the date of the Exchange the Trustee will authenticate any such Series
only upon delivery to the Trustee of the following: (i) a Supplement specifying
the Principal Terms of such Series, (ii) an opinion of counsel to the effect
that the securities of such Series will be characterized as indebtedness or as
partnership interests under existing law for federal and applicable state
income tax purposes, and that the issuance of such Series will not materially
adversely affect the federal income tax characterization of any outstanding
Series or result in the Trust being subject to tax at the entity level for
federal or applicable state tax purposes (a "Tax Opinion"), (iii) if required
by such Supplement, the form of Enhancement and an appropriate Enhancement
agreement with respect thereto executed by the Transferor and the issuer of the
Enhancement, (iv) written confirmation from each Rating Agency that the
Exchange will not result in such Rating Agency's reducing or withdrawing its
rating on any then outstanding Series rated by it, (v) the existing
Exchangeable Transferor Security and, if applicable, the securities
representing the Series to be exchanged, and (vi) an officer's certificate of
the Transferor stating that, after giving effect to such Exchange, (a) the
Transferor Interest would be at least equal to the Minimum Transferor Interest
and (b) the Retained Interest equals or exceeds the minimum Retained Interest,
as defined in the relevant Supplement. "Retained Interest" means, on any
Determination Date, the sum of the Transferor Interest and the interest in the
Trust represented by any class of Investor Securities retained by the
Transferor. "Determination Date" shall mean the second business day prior to
any Distribution Date.
Under the Pooling and Servicing Agreement, the Transferor may also exchange
the Exchangeable Transferor Security for a newly issued Exchangeable Transferor
Security and a second security (a "Supplemental Security") the terms of which
will be defined in a Supplement upon the satisfaction of certain conditions
provided in the Pooling and Servicing Agreement.
Representations and Warranties
Pursuant to the Pooling and Servicing Agreement, the Transferor represents
and warrants that, among other things, subject to specified exceptions and
limitations (i) the Transferor is duly organized, validly existing, and in good
standing under the laws of the State of Delaware and has the corporate power
and authority to execute, deliver, and perform its obligations under the
Pooling and Servicing Agreement, the related Supplement, and the Purchase
Agreement, (ii) the Transferor is duly qualified to do business and in good
standing (or is exempt from such requirement) in any state required in order to
conduct its business and has obtained all necessary licenses and approvals
required under federal and Delaware law, provided, however, that no
representation or warranty is made with respect to any qualifications, licenses
or approvals which the Trustee would have to obtain to do business in any state
in which the Trustee seeks to enforce any Receivable, (iii) the execution and
delivery of the Pooling and Servicing Agreement, the related Supplement, and
the
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Purchase Agreement, and the consummation of the transactions provided for
therein, have been duly authorized by the Transferor by all necessary corporate
action on its part, (iv) each of the Pooling and Servicing Agreement, the
related Series Supplement, and the Purchase Agreement constitutes a legal,
valid, and binding obligation of the Transferor, and (v) the transfer of
Receivables by it to the Trust under the Pooling and Servicing Agreement and
related Supplement constitutes either a valid transfer and assignment to the
Trust of all right, title, and interest of the Transferor in and to the
Receivables and the proceeds thereof and amounts in any of the accounts
established for the benefit of securityholders free and clear of any lien of
any person claiming through or under the Transferor or any of its affiliates
(except for Permitted Liens and certain rights of the Transferor) or the grant
of a first priority security interest in such Receivables and the proceeds
thereof (including amounts in any of the accounts established for the benefit
of securityholders). "Permitted Lien" means with respect to the Receivables:
(i) liens in favor of the Transferor created pursuant to the Purchase Agreement
and assigned to the Trustee pursuant to the Pooling and Servicing Agreement;
(ii) liens in favor of the Trustee pursuant to the Pooling and Servicing
Agreement; and (iii) liens which secure the payment of taxes, assessments and
governmental charges or levies, if such taxes are either (a) not delinquent or
(b) being contested in good faith by appropriate legal or administrative
proceedings and as to which adequate reserves in accordance with generally
accepted accounting principles shall have been established. In the event of a
breach of any of the representations and warranties described in this paragraph
with respect to any Series, either the Trustee or the holders of securities
evidencing undivided interests in the Trust aggregating more than 50 percent of
the invested amount of such Series, by written notice to the Transferor (and to
the Trustee and the Servicer if given by the Securityholders of such Series),
may direct the Transferor to accept reassignment of an amount of Principal
Receivables equal to the invested amount to be reassigned (as described below)
within 60 days of such notice, or within such longer period specified in such
notice. The Transferor will thereupon be obligated to accept reassignment of
such Receivables on a Distribution Date occurring within such applicable
period. Such reassignment will not be required to be made, however, if at any
time during such applicable period, or such longer period, the representations
and warranties shall then be true and correct in all material respects. The
amount to be deposited by the Transferor for distribution to Securityholders in
connection with such reassignment will be equal to the invested amount for all
Series of Securities other than Variable Funding Securities required to be
reassigned on the last day of the Monthly Period preceding the Distribution
Date on which the reassignment is scheduled to be made, and, with respect to
the Variable Funding Securities, the invested amount as of the Distribution
Date on which the reassignment is scheduled to be made, less the amount, if
any, previously allocated for payment of principal to such Securityholders on
such Distribution Date, plus an amount equal to all interest accrued but unpaid
on such securities at the applicable interest rate through the last day of the
related Interest Accrual Period, less the amount transferred to the
Distribution Account from the Interest Funding Account in respect of interest
on such securities for the month ending on such last day of the Monthly Period.
The payment of the reassignment deposit amount and the transfer of all other
amounts deposited for the preceding month in the Distribution Account will be
considered a payment in full of the investor interest for all Series of
securities required to be repurchased and will be distributed upon presentation
and surrender of the Securities for each such Series. If the Trustee or the
Securityholders give a notice as provided above, the obligation of the
Transferor to make any such deposit will constitute the sole remedy available
to the Trustee and the Securityholders with respect to any breach of the
Transferor's representations and warranties.
Pursuant to the Pooling and Servicing Agreement, the Transferor also
represents and warrants that, among other things, subject to specified
exceptions and limitations, (i) the execution and delivery of the Pooling and
Servicing Agreement, the related Supplement, and the Purchase Agreement, and
the performance of the transactions contemplated thereby, do not contravene the
Transferor's charter or by-laws, violate any material provision of law
applicable to it or require any filing (except for filing under the UCC),
registration, consent, or approval under any such law except for such filings,
registrations, consents, or approvals as have already been obtained and are in
full force and effect, (ii) except as described in the Purchase Agreement, the
Transferor and each prior owner of the Receivables has filed all material tax
returns required to be filed and has paid or made adequate provision for the
payment of all material taxes, assessments, and other governmental charges due
from the Transferor or such prior owner or is contesting any such tax,
assessment or other governmental charge
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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
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notices, reports or certificates given or delivered under the Purchase
Agreement and (vii) except as permitted by the Pooling and Servicing Agreement,
it will not commingle its assets with those of Direct Merchants Bank or Metris
or any affiliate thereof.
Eligible Accounts
As of the Initial Closing Date (or, with respect to Additional Accounts, on
the date the Credit Card Originator acquires rights therein, or, with respect
to Supplemental Accounts, as of the date the Receivables arising in such
Accounts are designated for inclusion in the Trust), each revolving credit
consumer credit card account owned by a Credit Card Originator and having the
following characteristics shall be an Eligible Account (each, an "Eligible
Account"): (a) which is payable in United States dollars, (b) the Obligor on
which has provided, as its initial billing address, an address located in the
United States or its territories or possessions or a United States military
address, (c) which has not been identified by a Credit Card Originator in its
computer files as stolen or lost, (d) which is not at the time of transfer to
the Trust sold or pledged to any other party and which does not have
Receivables which, at the time of transfer to the Trust, are sold or pledged to
any other party (provided that Receivables which were sold or pledged prior to
the Closing Date, but were repurchased free of all liens or where all liens
were released prior to sale, shall not be disqualified under this clause (d)),
and (e) the Receivables in which the Credit Card Originator has not charged off
in its customary and usual manner for charging off Receivables in such Accounts
as of the Initial Closing Date (or, with respect to Additional Accounts, as of
the date the Receivables of such Accounts are first designated for inclusion in
the Trust) unless such Account is subsequently reinstated. An "Approved
Account" means each (i) Eligible Account that is a MasterCard(R) or VISA(R)
account or (ii) any other revolving credit consumer credit card account the
inclusion in the Trust of which would not cause a Ratings Event. "Ratings
Event" shall mean, with respect to any class of any outstanding Series rated by
a Rating Agency, a reduction or withdrawal of the rating of any such class by a
Rating Agency.
"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.
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"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
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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.
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
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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--Collection of Delinquent Accounts." Managerial
functions to be performed by the Servicer on behalf of the Trust include
maintaining books and records with respect to the foregoing and other matters
pertinent to the Receivables, assisting the Trustee with any inspections of
such books and records by the Trustee pursuant to the Pooling and Servicing
Agreement, preparing and delivering the monthly and annual statements described
in "--Reports to Securityholders," and causing a firm of independent certified
public accountants to prepare and deliver the annual reports described in "--
Evidence as to Compliance."
Trust Accounts
Unless otherwise specified in the Prospectus Supplement relating to the
Trust, the Trustee will establish and maintain with a Qualified Institution in
the name of the Trust, for the benefit of the Securityholders of each Series,
at least three separate accounts, each in a segregated trust account,
consisting of an "Interest Funding Account," a "Principal Account," and an
"Excess Funding Account" (collectively, the "Trust Accounts"). The Trustee has
also established a "Distribution Account" for the benefit of the
securityholders of each Series which is a non-interest bearing segregated
demand deposit account established with a Qualified Institution. The Servicer
has established and maintains, in the name of the Trust, for the benefit of
securityholders of all Series, a "Collection Account," which is a segregated
account established by and maintained by the Servicer with a Qualified
Institution. A "Qualified Institution" is a depository institution, which may
include the Trustee, organized under the laws of the United States or any one
of the states thereof, which at all times has a short-term deposit rating of P-
1 by Moody's Investors Service, Inc. ("Moody's") and of A-1+ by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") or
long-term unsecured debt obligation (other than such obligation the rating of
which is based on collateral or on the credit of a person other than such
institution or trust company) rating of at least Aaa by Moody's and of AAA by
Standard & Poor's and deposit insurance provided by the Federal Deposit
Insurance Corporation ("FDIC"), or a depository institution, which may include
the Trustee, which is acceptable to the Rating
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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
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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, any
Amortization Period and the Accumulation Period, as applicable. In addition,
for each Series of Securities having more than one Class, the related
Prospectus Supplement will specify the method of allocation between each Class.
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"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 Series Account or pay such amounts to the holder of the Exchangeable
Transferor Security in accordance with the provisions of the Pooling and
Servicing Agreement and the related Supplement.
Throughout the existence of the Trust, unless otherwise stated in any
Prospectus Supplement, on each business day the Servicer shall allocate to the
holder of the Exchangeable Transferor Security an amount equal to the product
of (A) the Transferor Percentage as of the end of the preceding business day
and (B) the aggregate amount of Principal Collections and Finance Charge
Collections available in the Collection Account. The Servicer shall pay such
amount to the holder of the Exchangeable Transferor Security on each business
day; provided, however, that amounts payable to the holder of the Exchangeable
Transferor Security pursuant to the Pooling and Servicing Agreement and related
Supplement shall instead be deposited in the Excess Funding Account to the
extent necessary to prevent the Transferor Interest from being less than the
Minimum Transferor Interest.
Shared Principal Collections
If specified in the related Prospectus Supplement, on each business day,
Shared Principal Collections shall be allocated to each outstanding Series pro
rata based on the Principal Shortfall, if any, for each such Series, and then,
at the option of the Transferor, any remainder may be applied as principal with
respect to the Variable Funding Securities. "Principal Shortfall" shall mean,
with respect to any business day and any outstanding Series, the amount which
the related Prospectus Supplement specifies as the principal shortfall for such
business day. The Servicer shall pay any remaining Shared Principal Collections
on such business day to the Transferor; provided, that if the Transferor
Interest as determined on such business day does not exceed the Minimum
Transferor Interest, then such remaining Shared Principal Collections shall be
deposited in the Excess Funding Account to the extent necessary to increase the
Transferor Interest above the Minimum Transferor Interest; provided, further,
that if an Amortization Period has commenced and is continuing with respect to
more than one outstanding Series, such remaining Shared Principal Collections
shall be allocated to such Series pro rata based on the Investor Percentage for
Principal Receivables applicable for such Series.
In addition, if so specified in the related Prospectus Supplement, 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
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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 pre-
funded with an initial deposit to a pre-funding account in an amount up to the
initial principal balance of such Paired Series and primarily from the proceeds
of the sale of such Paired Series or will have a variable principal amount. Any
such pre-funding account will be held for the benefit of such Paired Series and
not for the benefit of the Securityholders. As amounts are deposited in the
Principal Funding Account for the benefit of the Securityholders, either (i) in
the case of a pre-funded Paired Series, an equal amount of funds on deposit in
any pre-funding account for such pre-funded Paired Series will be released
(which funds will be distributed to the Transferor) or (ii) in the case of a
Paired Series having a variable principal amount, an interest in such variable
Paired Series in an equal or lesser amount may be sold by the Trust (and the
proceeds thereof will be distributed to the Transferor) and, in either case,
the invested amount in the Trust of such Paired Series will increase by up to a
corresponding amount. Upon payment in full of the Securities, assuming that
there have been no unreimbursed charge-offs
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with respect to any related Paired Series, the aggregate invested amount of
such related Paired Series will have been increased by an amount up to an
aggregate amount equal to the Invested Amount paid to the Securityholders since
the issuance of such Paired Series. The issuance of a Paired Series will be
subject to the conditions described above under "--Exchanges." There can be no
assurance, however, that the terms of any Paired Series might not have an
impact on the timing or amount of payments received by a Securityholder.
Funding Period
For any Series of Securities, the related Prospectus Supplement may specify
that for a period beginning on the Closing Date and ending on a specified date
before the commencement of an Amortization Period or Accumulation Period with
respect to such Series (the "Funding Period"), the aggregate amount of
Principal Receivables in the Trust allocable to such Series may be less than
the aggregate principal amount of the Securities of such Series and that the
amount of such deficiency (the "Pre-Funding Amount") will be held in a trust
account established with the Trustee for the benefit of the Securityholders of
such Series (the "Pre-Funding Account") pending the transfer of additional
Receivables to the Trust or pending the reduction of the Invested Amounts of
other Series. The related Prospectus Supplement will specify the initial
Invested Amount with respect to such Series, the aggregate principal amount of
such Series (the "Full Invested Amount") and the date by which the Invested
Amount is expected to equal the Full Invested Amount. The Invested Amount will
increase as Receivables are delivered to the Trust or as the Invested Amounts
of other Series are reduced. The Invested Amount may also decrease due to
Investor Charge-Offs as provided in the related Prospectus Supplement.
During the Funding Period, funds on deposit in the Pre-Funding Account for a
Series of Securities will be withdrawn and paid to the Transferor to the extent
of any increases in the Invested Amount. In the event that the Invested Amount
does not for any reason equal the Full Invested Amount by the end of the
Funding Period, any amount remaining in the Pre-Funding Account and any
additional amounts specified in the related Prospectus Supplement will be
payable to the Securityholders of such Series in the manner and at such time as
set forth in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, monies in the Pre-
Funding Account will be invested by the Trustee in Cash Equivalents or will be
subject to a guaranteed rate or investment agreement or other similar
arrangement, and, in connection with each Distribution Date during the Funding
Period, investment earnings on funds in the Pre-Funding Account during the
related Monthly Period will be withdrawn from the Pre-Funding Account and
deposited, together with any applicable payment under a guaranteed rate or
investment agreement or other similar arrangement, into the Collection Account
for distribution in respect of interest on the Securities of the related Series
in the manner specified in the related Prospectus Supplement.
Defaulted Receivables; Dilution
Each Account with respect to which, in accordance with the Credit and
Collection Policy or the Servicer's customary and usual servicing procedures,
the Servicer has charged off the Receivables in such Account as uncollectible
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--Collection of Delinquent Accounts" in this
Prospectus and "Direct Merchants Bank's 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
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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
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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.
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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 Investor Interest
and will be paid each month, or on such other specified periodic basis, from
amounts allocated for such purpose. The remainder of the servicing fee will be
allocable to the Transferor Interest, the Investor Interests of any other
Series issued by such Trust and the interest represented by the Enhancement
Invested Amount or the Collateral Interest, if any, with respect to such
Series, as described in the related Prospectus Supplement. Neither the Trust
nor the Securityholders will have any obligation to pay the portion of the
servicing fee allocable to the Transferor Interest.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with servicing the Receivables including, without
limitation, payment of the fees and disbursements of the Trustee
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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
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(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
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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
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monthly settlement statements for the Monthly Periods covered by such report
with the computer reports (which may include personal computer generated
reports that summarize data from the computer reports generated by either the
Transferor, the Servicer or FDR which are used to prepare daily reports) which
were the source of such amounts and percentages and that, on the basis of such
comparison, such amounts and percentages are in agreement, except as shall be
set forth in such report. A copy of such report will be sent by the Trustee to
each Securityholder.
The Pooling and Servicing Agreement provides that within 100 days of the end
of each fiscal year, the Servicer will cause a firm of nationally recognized
independent certified public accountants to furnish a report to the effect that
such firm has applied certain procedures, as agreed upon between such firm and
the Servicer, which would re-perform certain accounting procedures performed by
the Servicer pursuant to certain documents and records relating to the
servicing of the Accounts. Each report shall set forth the agreed upon
procedures performed and the results of such procedures.
The Pooling and Servicing Agreement also provides for delivery to the
Trustee on an annual basis, within 100 days of the end of the fiscal year, of a
statement signed by an officer of the Servicer to the effect that the Servicer
has, or has caused to be, fully performed its obligations in all material
respects under the Pooling and Servicing Agreement throughout the preceding
year or, if there has been a default in the performance of any such obligation,
specifying the nature and status of the default. A copy of such statement may
be obtained by any Securityholder upon the submission of a written request
therefor addressed to the Trustee's Corporate Trust Office.
Amendments
The Pooling and Servicing Agreement and related Supplement may be amended by
the Transferor, the Servicer and the Trustee, without the consent of
Securityholders, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement and the Supplement or of modifying in any manner the rights of such
Securityholders, unless otherwise specified in the related Prospectus
Supplement; provided that (i) the Servicer shall have provided an officer's
certificate to the effect that such action will not adversely affect in any
material respect the interests of such Securityholders, (ii) except in the case
of any amendment for the sole purpose of curing any ambiguity or correcting or
supplementing any inconsistent provision of the Pooling and Servicing Agreement
or revising any schedule thereto (other than the list of Receivables), the
Rating Agencies shall have been notified of such amendment and shall have
provided written confirmation that they would not lower the rating of the
Securities, and (iii) such action will not, in the opinion of counsel
satisfactory to the Trustee, result in certain adverse tax consequences. In
addition, the Pooling and Servicing Agreement and any Supplement may be amended
from time to time by the Transferor, the Servicer, and the Trustee, without the
consent of Securityholders, to add to or change any of the provisions of the
Pooling and Servicing Agreement to provide that bearer securities issued with
respect to any other Series may be registrable as to principal, to change or
eliminate any restrictions on the payment of principal of or any interest on
such bearer securities, to permit such bearer securities to be issued in
exchange for registered securities or bearer securities of other authorized
denominations or to permit the issuance of uncertificated securities.
Securityholders by purchase of their Securities will be deemed to have
consented to a modification to the bankruptcy and insolvency Pay Out Event
specified in the Pooling and Servicing Agreement such that it will be as
specified in clause (i) in "--Pay Out Events" above.
The Pooling and Servicing Agreement and any Supplement may be amended by the
Transferor, the Servicer, and the Trustee with the consent of the holders of
securities evidencing undivided interests aggregating not less than 66 2/3
percent of the investor interests of each and every Series adversely affected,
for the purpose of adding any provisions to, changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement, or
any Supplement or of modifying in any manner the rights of Securityholders of
any then outstanding Series. No such amendment, however, may (a) reduce in any
manner the amount of, or delay the timing of, distributions required to be made
on any such Series, (b) change the definition of or the manner of calculating
the interest of any securityholder of such Series, or (c) reduce the
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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
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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
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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.
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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.
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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
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by Metris pursuant to the Purchase Agreement, and each such Receivable has been
or will be transferred to the Transferor free and clear of any lien other than
Permitted Liens and in compliance in all material respects with all
requirements of law applicable to Metris and (x) the transfer of Receivables by
it to the Transferor under the Purchase Agreement constitutes a valid sale,
transfer, assignment, set-over and conveyance to the Trust of all right, title
and interest of Metris in and to the Receivables whether existing as of the
Initial Closing Date or thereafter created (except for Permitted Liens).
If certain of the representations or warranties described above are not true
with respect to any Receivable at the time such representation or warranty was
made or any Receivable becomes an ineligible Receivable, then Metris will be
obligated to pay to the Transferor an amount equal to the principal amount of
such Receivable.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Securities, the Pooling and Servicing Agreement (i) requires the Transferor
to make a demand on Metris to repurchase Receivables in such cases where the
Transferor is required under the Pooling and Servicing Agreement to repurchase
Receivables from the Trust and (ii) permits the Transferor to consent to the
sale of Receivables to a third party only in such circumstances where the
Transferor may remove Receivables from the Trust under the Pooling and
Servicing Agreement and related Supplement.
Certain Covenants
Bank Purchase Agreement. It is the intention of Direct Merchants Bank and
Metris that the conveyance of the Receivables by Direct Merchants Bank to
Metris contemplated by the Bank Purchase Agreement be construed as an absolute
sale of the Receivables by Direct Merchants Bank to Metris. It is not intended
that such conveyance be deemed a pledge of the Receivables by Direct Merchants
Bank to Metris to secure a debt or other obligation of Direct Merchants Bank,
but the Bank Purchase Agreement shall also be deemed to be a security agreement
within the meaning of Article 9 of the UCC and the conveyance provided for in
the Bank Purchase Agreement shall be deemed to be a grant by Direct Merchants
Bank to Metris of a "security interest" within the meaning of Article 9 of the
UCC in all of Direct Merchants Bank's right, title and interest in and to the
Receivables.
In the Bank Purchase Agreement, Direct Merchants Bank covenants that, among
other things, except as required by law or as Direct Merchants Bank may
determine to be appropriate and subject to specified exceptions and
limitations, (i) it will take no action to cause any Receivable to be anything
other than an account, general intangible or chattel paper, (ii) except for the
conveyances under the Bank Purchase Agreement, it will not sell any Receivable
or grant a lien (other than a Permitted Lien) on any Receivable, (iii) except
as it deems necessary to maintain its credit card business on a competitive
basis, it will not reduce the annual percentage rates of the Periodic Finance
Charges assessed on the Receivables or other fees charged on the Accounts if,
as a result of any such reduction, either a Pay Out Event would occur or such
reduction is not also applied to any comparable segment of accounts owned by it
similar to the Accounts, (iv) it will comply with and perform its obligations
under the Contracts relating to the Accounts and the Credit and Collection
Policy and that it will not change the terms of such agreements or policies if
any such change would, in either case, materially and adversely affect the
rights of the Trust or the Securityholders, and that it will not enter into any
amendment to the Bank Purchase Agreement that would cause a Ratings Event to
occur so long as any Securities under any Series are outstanding, and (v) in
the event it receives a collection on any Receivable, it will pay such
collection to the Transferor as soon as practicable.
Purchase Agreement. It is the intention of Metris and the Transferor that
the conveyance of the Receivables by Metris be construed as an absolute sale of
the Receivables by Metris to the Transferor. It is not intended that such
conveyance be deemed a pledge of the Receivables by Metris to the Transferor to
secure a debt or other obligation of Metris, but the Purchase Agreement shall
also be deemed to be a security agreement within the meaning of Article 9 of
the UCC and the conveyance provided for in the Purchase Agreement shall be
deemed to be a grant by Metris to the Transferor of a "security interest"
within the meaning of Article 9 of the UCC in all of Metris' right, title and
interest in and to the Receivables. Pursuant to the Purchase
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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."
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Security Ratings
Any rating of the Securities by a Rating Agency will indicate:
. its view on the likelihood that Securityholders will receive required
interest and principal payments; and
. its evaluation of the Receivables and the availability of any Enhancement
for the Securities.
Among the things a rating will not indicate are:
. the likelihood that principal payments will be paid on a scheduled date;
. the likelihood that a Pay Out Event will occur;
. the likelihood that a United States withholding tax will be imposed on
non-U.S. Securityholders;
. the marketability of the Securities;
. the market price of the Securities; or
. 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
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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 Offered
Securities, although there can be no assurance that any of such payments would
be timely. Because the Trust's interest in the Receivables is dependent upon
the Transferor's interest in the Receivables, which is dependent upon Metris'
or Direct Merchants Bank's interest in the Receivables, any adverse change in
the priority or perfection of the Transferor's or Metris' security interest
would correspondingly affect the Trust's interest in the affected Receivables.
In addition, if a receiver or conservator were appointed for Direct Merchants
Bank, certain administrative expenses of the receiver or conservator also may
have priority over the interest of the Trust in such Receivables. While Direct
Merchants Bank is the Servicer, certain cash collections on the Receivables may
be held by Direct Merchants Bank and commingled with its funds for brief
periods, and if an Insolvency Event occurs, the Trust may not have a perfected
interest in such commingled collections.
Certain Matters Relating to Bankruptcy or Receivership
The Transferor will not engage in any activities except purchasing accounts
receivable from Metris or any affiliate of Metris, forming trusts, transferring
such accounts receivable to such trusts and engaging in activities incident to,
or necessary or convenient to accomplish, the foregoing. The Transferor has no
intention of filing a voluntary petition under the Bankruptcy Code or any
similar applicable state law so long as the Transferor is solvent and does not
reasonably foresee becoming insolvent.
The voluntary or involuntary application for relief under the Bankruptcy
Code or any similar applicable state law with respect to Metris should not
necessarily result in a similar voluntary application with respect to the
Transferor so long as the Transferor is solvent and does not reasonably foresee
becoming insolvent either by reason of Metris' insolvency or otherwise. Counsel
has advised Metris and the Transferor that (i) the assets and liabilities of
the Transferor would not be substantively consolidated with the assets and
liabilities of Metris in the event of a petition for relief under the
Bankruptcy Code with respect to Metris and (ii) the sale of Receivables by
Metris would constitute a valid sale and, therefore, such Receivables would not
be property of
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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." On December 18, 1998, the FDIC
proposed a statement of policy regarding the treatment of asset-backed
securitization transactions in the event of conservatorship or receivership in
which the FDIC stated that a claim for "actual direct compensatory damages" is
limited to such damages determined as of the date of appointment of the FDIC as
conservator or receiver. Since the FDIC may delay repudiation or disaffirmation
for up to 180 days following such appointment, investors may not have a claim
for interest accrued during this 180 day period. In addition, in one case
involving the repudiation by the Resolution Trust Corporation, formerly a
sister agency of the FDIC, of certain secured zero-coupon bonds issued by a
savings association, a United States Federal district court held that "actual
direct compensatory damages" in the case of a marketable security meant the
market value of the repudiated bonds as of the date of repudiation. If that
court's view were applied to determine the Trust's "actual direct compensatory
damages" in the event the FDIC repudiated the Transferor's obligations under
the Pooling and Servicing Agreement, the amount paid to Securityholders could,
depending upon circumstances existing on the date of the repudiation, be less
than the principal of the Securities and the interest accrued thereon to the
date of payment.
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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
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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. In particular, on May 5, 1999, an amendment
to the federal Truth-in-Lending Act was passed by the House of Representatives
as part of the bankruptcy reform bill and referred to the Senate. This
amendment, among other things, requires (i) disclosure as to the time it would
take the consumer to repay a balance if the consumer makes only the minimum
payments, (ii) disclosure as to when any introductory rate will expire, as well
as the rate that will then apply and (iii) disclosure in internet based
solicitations identical to that contained in direct mail solicitations. In
addition, on May 4, 1999, President Clinton proposed similar legislation to
require additional disclosure in credit card bills and solicitations. 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
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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.
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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
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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
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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.
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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 secured by the Receivables
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for federal income tax purposes. Based upon that opinion, the following
information describes the U.S. federal income tax treatment of investors in
Securities that are Foreign Persons. The term "Foreign Person" means any person
other than (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity organized in or under the laws of the United
States, or any political subdivision thereof or the District of Columbia
(unless in the case of a partnership, Treasury Regulations provide otherwise),
(iii) an estate the income of which is includible in gross income for U.S.
federal income tax purposes, regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States fiduciaries who have the authority to
control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury Regulations, certain trusts in
existence on August 20, 1996, and treated as U.S. Persons under the Code, and
applicable Treasury Regulations thereunder prior to such date, that elect to
continue to be treated as U.S. Persons under the Code or applicable Treasury
Regulations thereunder will also be considered a U.S. Person.
(a) Interest paid or accrued to a Foreign Person that is not effectively
connected with the conduct of a trade or business within the United States
by the Foreign Person, will generally be considered "portfolio interest"
and generally will not be subject to United States federal income tax and
withholding tax, as long as the Foreign Person (i) is not actually or
constructively a "10 percent shareholder" of the Transferor or a
"controlled foreign corporation" with respect to which the Transferor is a
"related person" within the meaning of the Code, and (ii) provides an
appropriate statement, signed under penalties of perjury, certifying that
the beneficial owner of the Security is a Foreign Person and providing that
Foreign Person's name and address. If the information provided in this
statement changes, the Foreign Person must so inform the Trustee within 30
days of such change. The statement generally must be provided in the year a
payment occurs or in either of the two preceding years. If such interest
were not portfolio interest, then it would be subject to United States
federal income and withholding tax at a rate of 30 percent unless reduced
or eliminated pursuant to an applicable income tax treaty.
(b) Any capital gain realized on the sale or other taxable disposition
of a Security by a Foreign Person will be exempt from United States federal
income and withholding tax, provided that (i) the gain is not effectively
connected with the conduct of a trade or business in the United States by
the Foreign Person, and (ii) in the case of an individual Foreign Person,
the Foreign Person is not present in the United States for 183 days or more
in the taxable year.
(c) If the interest, gain or income on a Security held by a Foreign
Person is effectively connected with the conduct of a trade or business in
the United States by the Foreign Person, the holder (although exempt from
the withholding tax previously discussed if an appropriate statement is
furnished) generally will be subject to United States federal income tax on
the interest, gain or income at regular federal income tax rates. In
addition, if the Foreign Person is a foreign corporation, it may be subject
to a branch profits tax equal to 30 percent of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable year,
as adjusted for certain items, unless it qualifies for a lower rate under
an applicable tax treaty.
If the IRS were to contend successfully that the Securities are interests in
a partnership (not taxable as a corporation), a Security Owner that is a
Foreign Person might be required to file a United States individual or
corporate income tax return and pay tax on its share of partnership income at
regular United States rates including, in the case of a corporate Security
Owner, the branch profits tax (and would be subject to withholding tax on its
share of partnership income). If any of the Securities were recharacterized as
interests in a "publicly traded partnership" taxable as a corporation, to the
extent distributions on the Securities were treated as dividends, a Foreign
Person would generally be subject to tax (and withholding) on the gross amount
of such dividends at a rate of 30 percent unless reduced or eliminated pursuant
to an applicable income tax treaty.
Information Reporting and Backup Withholding
The Trustee will be required to report annually to the IRS, and to each
Securityholder, the amount of interest paid on the Securities (and the amount
withheld for federal income taxes, if any) for each calendar
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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
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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
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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
63
<PAGE>
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.
64
<PAGE>
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.
65
<PAGE>
Index of Terms for the Prospectus
<TABLE>
<CAPTION>
Term Page
- ---- ----
<S> <C>
Accounts................................................................... 4
Additional Accounts........................................................ 28
Approved Account........................................................... 27
Accumulation Period........................................................ 20
Adaptive Control System.................................................... 6
Addition Date.............................................................. 29
Adjustment Payment......................................................... 36
Amendment Closing Date..................................................... 28
Amortization Period........................................................ 10
Assignment................................................................. 29
Automatic Additional Accounts.............................................. 28
Bank....................................................................... 4
Bank Purchase Agreement.................................................... 9
Bankruptcy Code............................................................ 31
Cash Collateral Account.................................................... 45
Cash Collateral Guaranty................................................... 45
Cash Equivalents........................................................... 32
Cedelbank.................................................................. 16
Cedelbank Customers........................................................ 17
Change of Control.......................................................... 11
Class...................................................................... 13
Code....................................................................... 56
Collateral Interest........................................................ 45
Collateralized Trust Obligations........................................... 44
Collection Account......................................................... 30
Collections................................................................ 9
Comptroller................................................................ 9
Contract................................................................... 28
Controlled Accumulation Amount............................................. 20
Controlled Amortization Amount............................................. 20
Controlled Amortization Period............................................. 20
Controlled Deposit Amount.................................................. 20
Controlled Distribution Amount............................................. 20
Cooperative................................................................ 17
Credit and Collection Policy............................................... 30
Credit Card Originator..................................................... 27
Default Recognition Date................................................... 36
Default Recognition Percentage............................................. 36
Defaulted Account.......................................................... 35
Defaulted Receivable....................................................... 35
Defeased Series............................................................ 36
Definitive Securities...................................................... 18
Depositaries............................................................... 14
Depository................................................................. 14
Determination Date......................................................... 24
Dilution................................................................... 36
Direct Merchants Bank...................................................... 4
Direct Merchants Bank Portfolio............................................ 4
Discount Option Receivables................................................ 21
Discount Percentage........................................................ 21
Distribution Account....................................................... 30
Distribution Date.......................................................... 18
DOJ........................................................................ 55
DOL........................................................................ 62
</TABLE>
<TABLE>
<CAPTION>
Term Page
- ---- ------
<S> <C>
DTC...................................................................... A-1-1
DTC Participants......................................................... 14
Early Amortization Period................................................ 21
Eligible Account......................................................... 27
Eligible Receivable...................................................... 27
Enhancement.............................................................. 44
Enhancement Invested Amount.............................................. 44
Enhancement Percentage................................................... 32
ERISA.................................................................... 61
Euroclear................................................................ 17
Euroclear Operator....................................................... 17
Euroclear Participants................................................... 17
Euroclear System......................................................... 17
Excess Finance Charge Collections........................................ 34
Excess Funding Account................................................... 30, 34
Exchange................................................................. 23
Exchange Act............................................................. 14
Exchangeable Transferor Security......................................... 4, 13
Excluded Accounts........................................................ 28
Expected Final Payment Date.............................................. 10
External Prospects....................................................... 11
FASIT.................................................................... 61
FASIT Provisions......................................................... 61
FCI...................................................................... 9, 11
FDIC..................................................................... 30
FDR...................................................................... 5
FICO scores.............................................................. 5
Finance Charge Collections............................................... 4
Finance Charge Receivables............................................... 9
Fingerhut................................................................ 5
Fingerhut Customers...................................................... 11
Fingerhut Database....................................................... 12
Fingerhut Scores......................................................... 12
FIRREA................................................................... 52
Foreign Person........................................................... 60
Full Invested Amount..................................................... 35
Funding Period........................................................... 35
General Account Regulations.............................................. 63
Global Securities........................................................ A-1-1
Indirect Participants.................................................... 15
Initial Closing Date..................................................... 22
Insolvency Event......................................................... 38
Interest Funding Account................................................. 19, 30
Invested Amount.......................................................... 13
Investment Company Act................................................... 26
Investor Charge-Off...................................................... 36
Investor Interest........................................................ 13
Investor Percentage...................................................... 33
Investor Securities...................................................... 23
IRS...................................................................... 56
John Hancock............................................................. 63
L/C Bank................................................................. 45
Lee Company.............................................................. 11
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Term Page
- ---- -----
<S> <C>
MasterCard International.................................................. 5
Metris.................................................................... 10
Metris Direct............................................................. 11
MGT/EOC................................................................... 17
Minimum Aggregate Principal Receivables................................... 28
Minimum Transferor Interest............................................... 28
Minimum Transferor Percentage............................................. 28
Monthly Period............................................................ 18
Monthly Servicing Fee..................................................... 38
Moody's................................................................... 30
New Regulations........................................................... 61
Notice Date............................................................... 29
Obligors.................................................................. 9
OID....................................................................... 57
OID Regulations........................................................... 57
Paired Series............................................................. 34
Participants.............................................................. 14
Pay Out Event............................................................. 37
Paying Agent.............................................................. 32
Payment Date.............................................................. 7
Periodic Finance Charges.................................................. 7
Permitted Lien............................................................ 25
Plans..................................................................... 61
Pooling and Servicing Agreement........................................... 4
Pre-Funding Account....................................................... 35
Pre-Funding Amount........................................................ 35
Prepayable Instrument..................................................... 58
Principal Account......................................................... 30
Principal Amortization Period............................................. 20
Principal Collections..................................................... 4
Principal Funding Account................................................. 19
Principal Receivables..................................................... 9
Principal Shortfall....................................................... 33
Principal Terms........................................................... 23
Proprietary Modeling System............................................... 5
Proprietary Score......................................................... 5
Prospectus Supplement..................................................... 4
PTE....................................................................... 63
Purchase Agreement........................................................ 22
Purchase Agreements....................................................... 9, 22
Purchase Termination Date................................................. 49
Qualified Institution..................................................... 30
Rating Agency............................................................. 50
Ratings Event............................................................. 27
Receivables............................................................... 4
Record Date............................................................... 14
Recoveries................................................................ 8
Regulation................................................................ 62
Related Person............................................................ 43
</TABLE>
<TABLE>
<CAPTION>
Term Page
- ---- ------
<S> <C>
Relevant UCC State....................................................... 27
Reserve Account.......................................................... 46
Restart Date............................................................. 28
Retained Interest........................................................ 24
Retained Percentage...................................................... 38
Revolving Period......................................................... 19
SEC...................................................................... 15
Securities............................................................... 4
Securities Act........................................................... 23
Security Owner........................................................... 14
Security Rate............................................................ 18
Securityholders.......................................................... 18
Series................................................................... 4
Series C Preferred....................................................... 11
Series Default Amount.................................................... 35
Service Transfer......................................................... 40
Servicer................................................................. 4
Servicer Default......................................................... 40
Shared Principal Collections............................................. 19
SIPC..................................................................... 31
Special Tax Counsel...................................................... 56
Spin Off................................................................. 11
Spread Account........................................................... 46
Standard & Poor's........................................................ 30
Supplement............................................................... 13
Supplemental Accounts.................................................... 28
Supplemental Security.................................................... 24
Suppress File............................................................ 12
Tax Certificate.......................................................... A-1-3
Tax Opinion.............................................................. 24
Termination Date......................................................... 37
Terms and Conditions..................................................... 17
Transfer Agent and Registrar............................................. 18
Transfer Date............................................................ 20, 32
Transferor............................................................... 4, 11
Transferor Amount........................................................ 13
Transferor Interest...................................................... 13
Treasury Regulations..................................................... 56
Trigger Event............................................................ 38
Trust.................................................................... 4
Trust Accounts........................................................... 30
Trustee.................................................................. 4
U.S. Person.............................................................. A-1-4
UCC...................................................................... 50
Utah Bank................................................................ 12
Variable Funding Securities.............................................. 14
Variable Funding Supplement.............................................. 14
VISA..................................................................... 5
Waiver Agreement......................................................... 11
</TABLE>
67
<PAGE>
Annex I
Global Clearance, Settlement andTax 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
A-1-1
<PAGE>
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.
A-1-2
<PAGE>
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 original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Securities
that are non-U.S. Persons can obtain a complete exemption from the withholding
tax by filing a signed Form W-8 (Certificate of Foreign Status) and a
certificate under penalties of perjury (the "Tax Certificate") that such
beneficial owner is (i) not a controlled foreign corporation (within the
meaning of Section 957(a) of the Code) that is related (within the meaning of
Section 864(d)(4) of the Code) to the Trust or the Transferor and (ii) not a 10
percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of
the Trust or the Transferor. If the information shown on Form W-8 or the Tax
Certificate changes, a new Form W-8 or Tax Certificate, as the case may be,
must be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Security Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Security). If the treaty provides only for a reduced
rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Security Owner or
such Security Owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Security Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, such Security
Owner's agent, files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
A-1-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States, any state thereof or the District of Columbia (unless, in the case of a
partnership, Treasury Regulations provide otherwise), (iii) an estate the
income of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust whose administration is subject to the
primary supervision of a United States court and which has one or more United
States Persons who have the authority to control all substantial decisions of
the trust. Notwithstanding the preceding sentence, to the extent provided in
Treasury Regulations, certain trusts in existence on August 20, 1996, and
treated as U.S. Persons under the Code, and applicable Treasury Regulations
thereunder prior to such date, that elect to continue to be treated as U.S.
Persons under the Code or applicable Treasury Regulations thereunder will also
be considered a U.S. Person. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
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.
A-1-4
<PAGE>
PRINCIPAL OFFICE OF
METRIS RECEIVABLES, INC.
600 South Highway 169
Suite 300
St. Louis Park, Minnesota 55426
SERVICER
for the Trust
Direct Merchants Credit Card Bank, National Association
6909 East Greenway Parkway
Scottsdale, Arizona 85254
TRUSTEE
The Bank of New York (Delaware)
White Clay Center
Route 273
Newark, Delaware 19711
PAYING AGENTS AND TRANSFER AGENTS
The Bank of New York
White Clay Center
Route 273
Newark, Delaware 19711
Banque Generale du Luxembourg S.A.
50, Avenue J.F. Kennedy
L-2951 Luxembourg
LISTING AGENT
Banque Generale du Luxembourg S.A.
50, Avenue J.F. Kennedy
L-2951 Luxembourg
LEGAL ADVISOR TO THE TRANSFEROR
as to United States Law
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
LEGAL ADVISOR TO THE UNDERWRITERS
as to United States Law
Orrick, Herrington & Sutcliffe LLP
3050 K Street, N.W.
Suite 200
Washington, D.C. 20007
INDEPENDENT ACCOUNTANTS TO THE TRANSFEROR
KPMG Peat Marwick LLP
4200 Norwest Center
90 South 7th Street
Minneapolis, Minnesota 55402-3900
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Prospectus Supplement
METRIS MASTER TRUST
SERIES 1999-1
$500,000,000
Class A Floating Rate
Asset Backed Securities
Metris Receivables, Inc.
Transferor
Direct Merchants
Credit Card Bank, National Association
Servicer
Banc of America Securities LLC
Salomon Smith Barney
Bear, Stearns & Co. Inc.
Credit Suisse First Boston
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 , 1999.
