<PAGE>
Prospectus Supplement to Prospectus dated October 19, 2000
Metris Master Trust
[LOGO OF METRIS COMPANIES]
$372,928,000 Class A Floating Rate Asset Backed Securities, Series 2000-3
$66,298,000 Class B Floating Rate Asset Backed Securities, Series 2000-3
Metris Receivables, Inc.
Transferor
Direct Merchants Credit Card Bank, National Association
Servicer
<TABLE>
<CAPTION>
Class A securities Class B securities
------------------ ------------------
<S> <C> <C>
Principal Amount $372,928,000 $66,298,000
Price $372,928,000(100.00%) $66,298,000(100.00%)
Underwriters'
Commissions $1,025,552(0.275%) $198,894(0.300%)
Proceeds to the
Transferor $371,902,448(99.725%) $66,099,106(99.700%)
Interest Rate one-month LIBOR + 0.26% p.a. one-month LIBOR + 0.68% p.a.
Interest Payment Dates monthly on the 20th monthly on the 20th
First Interest Payment
Date December 20, 2000 December 20, 2000
Expected Final Payment
Date October 20, 2005 November 21, 2005
</TABLE>
The Class B securities are subordinated to the Class A securities. The Trust is
also issuing an interest in the Trust called the excess collateral in the
amount of $113,260,188. The excess collateral will be subordinated to both the
Class A securities and the Class B securities.
These securities are interests in the 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 to the limited
extent described in this prospectus supplement.
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-11 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 attempt to apply to have these securities listed on the Luxembourg
Stock Exchange but we are not sure that the application will be accepted or
that the securities will be listed on the Luxembourg Stock Exchange or any
other stock exchange. Applications to have certain of the Trust's previously
issued securities listed on the Luxembourg Stock Exchange are still pending at
this time.
These securities are offered subject to availability.
We expect that these securities will be delivered in book-entry form on October
27, 2000 through The Depository Trust Company, Clearstream Banking, societe
anonyme and the Euroclear System.
Underwriters of the Class A securities
Banc of America Securities LLC
Barclays Capital
Chase Securities Inc.
Deutsche Banc Alex. Brown
Morgan Stanley Dean Witter
Underwriters of the Class B securities
Banc of America Securities LLC Chase Securities Inc.
The date of this Prospectus Supplement is October 19, 2000
<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-9
Risk Factors.............................................................. S-11
Potential Early Repayment or Delayed Payment due to Reduced Portfolio
Yield................................................................... S-11
Potential Early Repayment due to Non-Performance under Interest
Rate Caps .............................................................. S-14
Limited History of Direct Merchants Bank, the Trust and the Trust
Portfolio............................................................... S-14
Allocations of Charged-Off Receivables Could Reduce Payments to
Securityholders......................................................... S-15
Limited Ability to Resell Securities..................................... S-15
Certain Liens Could Be Given Priority Over Your Securities............... S-15
Insolvency or Bankruptcy of Metris Receivables, Inc., Direct Merchants
Bank or Metris Companies Inc. Could Result in Accelerated, Delayed or
Reduced Payments to Securityholders..................................... S-16
Negative Carry on Amounts on Deposit in Trust Accounts May Reduce Yield.. S-17
Issuance of Additional Series by the Trust May Affect the Timing of
Payments................................................................ S-17
Individual Securityholders Will Have Limited Control of Trust Actions.... S-18
Rating of Your Securities May be Reduced................................. S-18
Class B Bears Additional Credit Risk..................................... S-18
Funding Period........................................................... S-19
Trust Credit Card Portfolio............................................... S-20
General.................................................................. S-20
Growing Credit Card Portfolio by Portfolio Acquisitions.................. S-20
Assessment of Fees and Finance and Other Charges......................... S-21
Delinquency and Loss Experience.......................................... S-21
Recoveries............................................................... S-23
The Receivables........................................................... S-23
General.................................................................. S-23
Maturity Considerations................................................... S-27
Accumulation Period...................................................... S-27
</TABLE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Early Amortization Period................................................ S-28
Pay Out Events........................................................... S-29
Payment Rates............................................................ S-30
Receivable Yield Considerations........................................... S-31
Use of Proceeds........................................................... S-31
Description of the Offered Securities..................................... S-32
General.................................................................. S-32
Status of the Securities................................................. S-33
Previously Issued Series................................................. S-33
Interest Payments........................................................ S-33
Principal Payments....................................................... S-35
Pre-Funding Account and Funding Period................................... S-36
Postponement of Accumulation Period...................................... S-37
Subordination............................................................ S-37
The Interest Rate Caps................................................... S-38
Interest Rate Cap Provider............................................... S-39
Allocation Percentages................................................... S-40
Redirected Cash Flows.................................................... S-42
Redirected Principal Collections......................................... S-43
Application of Collections............................................... S-44
Coverage of Interest Shortfalls.......................................... S-49
Shared Principal Collections............................................. S-49
Defaulted Receivables; Dilution.......................................... S-50
Investor Charge-Offs..................................................... S-50
Principal Funding Account................................................ S-51
Accumulation Period Reserve Account...................................... S-51
Paired Series............................................................ S-52
Defeasance............................................................... S-53
Final Payment of Principal; Termination.................................. S-53
Pay Out Events........................................................... S-54
Servicing Compensation and Payment of Expenses........................... S-56
Reports to Securityholders............................................... S-56
Listing and General Information........................................... S-57
ERISA Considerations...................................................... S-58
Class A Securities....................................................... S-58
Class B Securities....................................................... S-58
Consultation with Counsel................................................ S-59
Underwriting.............................................................. S-59
Index of Terms for Prospectus Supplement ................................. S-62
Annex I: Previously Issued Series......................................... A-I-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 2000-3 are
described in this supplement.
This supplement begins with several introductory sections describing your
series and the 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 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) or any successor thereto
Interest Rate Cap Provider:* Barclays Bank PLC
Pricing Date: October 18, 2000
Closing Date: October 27, 2000
Clearance and Settlement: DTC/Clearstream/Euroclear
Trust Assets: receivables originated in MasterCard and VISA accounts,
including recoveries on charged-off receivables, and
amounts in the pre-funding account
Pre-Funded Amount: up to $125,000,000
Scheduled End of Funding Period: January 31, 2001
</TABLE>
<TABLE>
<CAPTION>
Series Structure: Amount % of Total Series
<S> <C> <C>
Class A $372,928,000 67.50%
Class B $66,298,000 12.00%
Excess Collateral $113,260,188 20.50%
Annual Servicing Fee: 2.0%
Class A Class B
Anticipated Ratings: Aaa/AAA/AAA A1/A/A+
(Moody's/Standard &
Poor's/Fitch)
Credit Enhancement: subordination of Class B and subordination of the excess
the excess collateral and collateral and interest rate
interest rate caps caps
Interest Rate: one-month LIBOR + 0.26% p.a. one-month LIBOR + 0.68% p.a.
Interest Accrual actual/360 actual/360
Method:
Interest Payment Dates: monthly on the 20th monthly on the 20th
Interest Rate Index 2 London business days 2 London business days
Reset Date: before each interest payment before each interest payment
date date
First Interest Payment December 20, 2000 December 20, 2000
Date:
Expected Final Payment October 20, 2005 November 21, 2005
Date:
Commencement of
Accumulation Period
(subject to
adjustment): Last day of September 2004 N/A
Series 2000-3 Legal
Final Maturity: September 21, 2009 September 21, 2009
CUSIP Number: 59159U AU 2 59159U AV 0
ISIN: US59159UAU25 US59159UAV08
Common Code: 011953115 011953140
</TABLE>
--------
* The interest rate caps will have a limited notional amount that at all times
will equal only a specified percentage of the excess collateral as described
in this prospectus supplement.
S-4
<PAGE>
Structural Summary
This summary briefly describes certain major structural components of Series
2000-3. To fully understand the terms of Series 2000-3 you will need to read
both this supplement and the attached prospectus in their entirety.
The Series 2000-3 Securities
Your securities represent the right to a portion of collections on the
underlying Trust assets and the portion of the proceeds from the sale of the
securities to be deposited into a pre-funding account on the day of closing and
used by the Trust to invest in receivables. 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 and the attached prospectus.
At the same time as the Class A securities and the Class B securities are
issued, the trust will issue an interest in the trust called the excess
collateral in the initial amount of $113,260,188 as part of Series 2000-3. The
excess collateral will have certain rights as if the excess collateral were a
subordinated class of securities. The excess collateral is not offered by this
prospectus supplement.
For further information on allocations and payments, see "Description of the
Offered 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 Offered Securities" in this supplement and "Description of
the Securities" in the attached prospectus.
Credit Enhancement
Your securities feature credit enhancement by means of the subordination of
other interests and payments under interest rate caps, which are intended to
protect you from losses and shortfalls in cash flow. Credit enhancement for
your series is for your series' benefit only. Credit enhancement is provided to
Class A by the following:
. subordination of Class B;
. subordination of the excess collateral; and
. payments under one or more interest rate caps.
Credit enhancement is provided to Class B by the following:
. subordination of the excess collateral; and
. payments under one or more interest rate caps.
The effect of subordination is that the more subordinated interests will absorb
any losses allocated to Series 2000-3, and make up any shortfalls in cash flow,
before the more senior interests are affected. On the closing date the initial
excess collateral will be $113,260,188, or 20.50% of the sum of the initial
Class A invested amount, the initial Class B invested amount and the initial
excess collateral amount. The interest rate caps provide an additional resource
for interest payments if LIBOR is greater than 10.50%. The interest rate caps
will, however, have a limited notional amount that at all times will equal only
a specified percentage of the excess collateral. If the cash flow, any
subordinated interest and the proceeds from the interest rate caps do not cover
all losses allocated to Series 2000-3, your payments of interest and principal
will be reduced and you may suffer a loss of principal.
In addition to being subject to reduction as described in "Description of the
Offered Securities-- Subordination" and "--Redirected Principal Collections" in
this supplement, if certain conditions are satisfied, the Excess Collateral
Amount may be reduced to a minimum level with the consent of the rating
agencies selected by Metris Receivables, Inc. to rate your securities.
S-5
<PAGE>
For a more detailed description of the subordination provisions of Series 2000-
3, see "Description of the Offered Securities--Subordination" in this
supplement. For a more detailed description of the other credit enhancement
provided to your series, as well as the limits of that credit enhancement, see
"Description of the Offered Securities--The Interest Rate Caps" in this
supplement. For a discussion of losses, see "Description of the Offered
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 2000-3.
Metris Master Trust
Your series is one of twelve 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 2000-3;
. securityholders of other series issued by Metris Master Trust;
. providers of credit enhancements for Series 2000-3 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 fluctuates with the total amount of receivables in the
Trust.
For more information on Metris Master Trust's assets, see "Trust Credit Card
Portfolio" and "The Receivables" in this supplement and "Direct Merchants
Credit Card Bank, N.A. Activities" and "The Receivables" in the attached
prospectus.
The Trustee
The Bank of New York (Delaware) is currently the Trustee for Metris Master
Trust. The Transferor expects that The Bank of New York (Delaware) will resign
as the Trustee, the Paying Agent and the Transfer Agent and Registrar under the
Pooling and Servicing Agreement. In such an event, the Transferor expects to
appoint U.S. Bank National Association or one of its affiliates as the
successor Trustee, Paying Agent and Transfer Agent and Registrar under the
Pooling and Servicing Agreement. See "Description of the Securities--The
Trustee" in the attached prospectus.
Scheduled Principal Payments and Potential Earlier or Later Payments
Prior to the commencement of an accumulation or early amortization period for
Series 2000-3, principal collections will be paid to Metris Receivables, Inc.
or shared with other series that are amortizing or in an accumulation period.
Metris Master Trust is expected to pay the entire principal amount of Class A
in one payment on October 20, 2005 and the entire principal amount of Class B
in one payment on November 21, 2005, in each case if the early amortization
period has not begun. In order to accumulate the funds to pay Class A on its
expected final payment date, the Trust will accumulate principal collections in
a principal funding account during an "accumulation period." Prior to the Class
A expected final payment date, 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. On the Class A expected
final payment date, funds on deposit in the Principal Funding Account will be
paid to the Class A securityholders.
If Class A is not fully repaid on its expected final payment date, Class A will
begin to amortize by means of monthly payments of all principal collections
allocated to Series 2000-3 until it is fully repaid.
After Class A is fully repaid, Class B will receive a principal payment on its
expected final payment date. If Class B is not fully repaid on its expected
final payment date, Class B will begin to amortize by means of monthly payments
of all principal collections allocated to Series 2000-3 until it is fully
repaid.
For more information on expected principal payments and the accumulation
period, see "Maturity Considerations," "Description of the
S-6
<PAGE>
Offered Securities--Principal Payments," "--Postponement of Accumulation
Period" and "--Application of Collections--Payment of Principal" in this
supplement and "Description of the Securities--Principal" and "--Accumulation
Period" in the attached prospectus.
Minimum Yield on the Receivables; Possible Early Principal Repayment of Series
2000-3
Your securities may be repaid earlier than their expected principal repayment
date if collections on the underlying receivables, together with other amounts
available for payment to securityholders, are too low. The minimum amount that
must be available for payment to Series 2000-3 in any month, referred to as the
"base rate," is the sum of the weighted average of the Class A interest rate,
the Class B interest rate and the excess collateral minimum rate, in each case
for the related interest accrual period, plus the servicing fee for the related
month. If the average yield after reduction for receivable defaults for Series
2000-3 for any three
consecutive months is less than the average base rate for the same three
consecutive months, a "pay out event" will occur with respect to Series 2000-3
and the Trust will commence an "early amortization period" for Series 2000-3,
and you may receive principal payments earlier than your expected final payment
date.
Series 2000-3 is also subject to several other pay out events, which could
cause Series 2000-3 to amortize, and which are summarized under the heading
"Description of the Offered Securities--Pay Out Events" in this supplement. If
Series 2000-3 begins to amortize, Class A will receive monthly payments of
principal until it is fully repaid and, after Class A is fully repaid, Class B
will receive monthly payments of principal until it is fully repaid. In that
event, your securities may be repaid prior to your expected final payment date.
The final payment of principal and interest on Class A and Class B will be made
no later than September 21, 2009, which is the Series 2000-3 legal final
maturity date.
For more information on pay out events, the portfolio yield and base rate,
early principal payment and early amortization, see "Maturity Considerations,"
"Description of the Offered Securities--Principal Payments," "--Final Payment
of Principal; Termination" and "--Pay Out Events" in this supplement and
"Description of the Securities--Principal," "--Early Amortization Period" and
"--Final Payment of Principal; Termination" in the attached prospectus.
Income Tax Status of Class A, Class B and Metris Master Trust
Orrick, Herrington & Sutcliffe LLP, special federal income tax counsel to
Metris Receivables, Inc., is of the opinion that:
. under existing law the Class A and the Class B securities will be
characterized as debt for U.S. federal income tax purposes; and
. Metris Master Trust will not be an association or publicly traded
partnership taxable as a corporation for U.S. federal income tax
purposes.
For more information regarding the application of U.S. federal income tax laws,
see "Income Tax Matters" in the attached prospectus.
ERISA Considerations
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
"ERISA 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.
It is not anticipated that the Class B securities will meet the criteria for
treatment as "publicly-offered securities." As such, employee benefit and other
plans subject to ERISA or Section 4975 of the U.S. Internal Revenue Code cannot
acquire Class B securities. Prohibited investors include:
. "employee benefit plans" as defined in Section 3(3) of ERISA;
. any "plan" as defined in Section 4975 of the U.S. Internal Revenue Code;
and
. any entity whose underlying assets may be deemed to include "plan assets"
under ERISA by reason of any such plan's investment in the entity,
including insurance company general accounts.
S-7
<PAGE>
By purchasing any Class B securities you certify that you are not within any of
those categories.
For more information regarding the application of ERISA, see "ERISA
Considerations" in this supplement and "ERISA Considerations" in the attached
prospectus.
Mailing Address and Telephone Number of Principal Executive Offices
The mailing address of Metris Receivables, Inc. is 10900 Wayzata Boulevard,
Room 723, Minnetonka, Minnesota 55305, and the telephone number is (952) 417-
5645.
S-8
<PAGE>
Selected Trust Portfolio Summary Data
Geographic Distribution of Accounts in Trust Portfolio
as of July 31, 2000
[GRAPH]
California 12.1%
New York 7.9%
Texas 7.0%
Flordia 7.4%
Other 65.6%
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.
Receivables in Trust Portfolio by Age of Account
as of July 31, 2000
[GRAPH]
0-6 months 2.3%
7-12 months 8.2%
13-24 months 19.6%
25+ months 69.9%
The chart above shows the percentage of the receivables in the Trust portfolio
arising under accounts within the age brackets shown. As of July 31, 2000, the
average age of the Accounts in the Trust Portfolio was approximately 40 months.
S-9
<PAGE>
[GRAPH]
Total Yield Charge-offs Payment Rate
Jan 25.21 10.42 6.68
Feb 29.82 12.26 7.07
Mar 30.45 11.34 8.04
Apr 27.17 12.84 7.16
May 27.39 11.62 7.29
Jun 27.03 12.12 7.03
Jul 25.99 11.72 7.09
Aug 26.80 10.66 7.52
Sept 25.90 10.93 6.82
Oct 27.21 10.56 7.45
Nov 28.02 10.62 7.27
Dec 26.54 10.00 7.07
Jan 25.81 10.37 6.74
Feb 29.85 11.39 7.25
Mar 28.75 11.86 7.81
Apr 27.21 10.84 7.03
May 27.69 11.07 7.37
Jun 27.35 11.25 6.94
July 23.46 11.10 6.77
The chart above shows the total yield, charge-off rate and payment rate for the
Trust portfolio for each month from January 1999 to July 2000.
"Total yield" for any month means the total amount of collected finance charge
receivables, including annual fees and other charges, allocated to the Trust
for the month, expressed as a percentage of average outstanding principal
receivables for the month.
The amount of "charge-offs" for any month is the amount of charged-off
principal receivables recorded in the month expressed as a percentage of
average outstanding principal receivables for the month.
The "payment rate" for any month is the aggregate amount collected on
receivables during the month, including recoveries on previously charged-off
receivables, expressed as a percentage of the total outstanding receivables at
the end of the previous month.
S-10
<PAGE>
Risk Factors
You should consider the following risk factors in deciding whether to
purchase the Class A or Class B 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
2000-3 for any three consecutive months is less
than the average base rate for the same three
consecutive months, a "pay out event" will occur
with respect to Series 2000-3 and the early
amortization of Series 2000-3 will commence, and
you may receive principal payments earlier than
your expected final payment date. Moreover, if
principal collections on receivables allocated to
other series are available for application to an
early amortization of any outstanding securities,
the period during which that early amortization
occurs may be substantially shortened. Because of
the potential for early repayment if collections
on the receivables fall below the minimum amount,
any circumstances that tend to reduce collections
may increase the risk of early repayment of
Series 2000-3. Conversely, any reduction in
collections may cause the period during which
collections are retained for payment of your
securities to be longer than otherwise would have
been the case.
The following factors could result in
circumstances that tend to reduce collections:
Direct Merchants Bank May Change the Terms and
Conditions of the Accounts
Direct Merchants Bank will transfer receivables
arising under specified credit card accounts to
Metris Companies Inc. which will sell those
receivables to Metris Receivables, Inc. which
will transfer those receivables to Metris Master
Trust, but Direct Merchants Bank will continue to
own those accounts. As the owner of those
accounts, Direct Merchants Bank retains the right
to change various terms and conditions of those
accounts, including finance charges and other
fees it charges and the required minimum monthly
payment. Direct Merchants Bank may change the
terms of the accounts to maintain its competitive
position in the credit card industry. Changes in
the terms of the accounts may reduce the amount
of receivables arising under the accounts, reduce
the amount of collections on those receivables,
or otherwise alter payment patterns.
Direct Merchants Bank has agreed that it will not
reduce the periodic finance charges it charges on
the receivables or other fees on any account if
that action would cause Direct Merchants Bank to
reasonably expect that the portfolio yield would
be less than the base rate for any series, unless
Direct Merchants Bank is required by law to
reduce those charges or determines that
reductions are necessary to maintain its credit
card business, based on its good faith assessment
of its business competition.
S-11
<PAGE>
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 receivables
purchased by Metris Receivables, Inc. generated
in accounts not currently designated for the
Trust may be included as additional accounts, if
certain conditions are satisfied. The account
originator's underwriting criteria may be less or
more stringent than those applied to accounts
currently designated for the Trust. 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 2000-3.
Also, if Metris Receivables, Inc.'s percentage
interest in the accounts of the Trust falls to a
minimum level, currently zero, Metris
Receivables, Inc. will be required to maintain
that level by designating additional accounts for
the Trust portfolio and transferring the
receivables in those accounts to the Trust. If
Metris Receivables, Inc. is required to add
accounts to the Trust portfolio, it may not have
any accounts available 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 the
Metris Master Trust accrue at a variable rate
above a designated prime rate. The interest rate
of your security is based on LIBOR. Changes in
LIBOR might not be reflected in the prime rate,
resulting in a higher or lower spread, or
difference, between the amount of collections of
finance charge receivables on the accounts and
the amounts of interest payable on your
securities and other amounts required to be
funded out of collections of finance charge
receivables.
S-12
<PAGE>
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 and the potential for
reduced portfolio yield, which could result in a
pay out event. See "Description of the Offered
Securities--Pay Out Events" in this supplement
and "Description of the Securities--Pay Out
Events" 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 in the attached prospectus, Metris
Receivables, Inc. must accept reassignment of
each receivable that does not comply in all
material respects with all requirements of
applicable law. However, we do not anticipate
that the trustee under the pooling and servicing
agreement will make any examination of the
receivables or the related records for the
purpose of determining the presence or absence of
defects, compliance with representations and
warranties, or for any other purpose. The only
remedy if any representation or warranty is
violated, and the violation continues beyond the
period of time Metris Receivables, Inc. has to
correct the violation, is that Metris
Receivables, Inc. must accept reassignment of the
receivables affected by the violation, subject to
certain conditions. See "Description of the
Securities--Representations and Warranties" and
"Certain Legal Aspects of the Receivables--
Consumer Protection Laws" in the attached
prospectus.
If a cardholder sought protection under federal
or state bankruptcy or debtor relief laws, a
court could reduce or discharge completely the
cardholder's obligations to repay amounts due on
its account and, as a result, the related
receivables would be written off as
uncollectible. See "Description of the Offered
Securities--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.
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
S-13
<PAGE>
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 and in the
attached prospectus.
Potential Early Repayment
due to Non-Performance
under Interest Rate Caps
Metris Receivables, Inc. will obtain and pledge
one or more interest rate caps to the Trustee for
the benefit of the holders of the Series 2000-3
securities. The interest rate caps provide an
additional resource for interest payments on the
Series 2000-3 securities if LIBOR is greater than
10.50%. If any provider of an interest rate cap
does not make any required payment under the
interest rate cap within 30 days of the date that
payment was due, a pay out event for Series 2000-
3 will occur without any notice or other action
on the part of the Trustee or the holders of the
Series 2000-3 securities. If a pay out event
occurs, holders of the Series 2000-3 securities
will begin receiving payments of principal
earlier than they otherwise would have, which may
shorten the average life and maturity of the
Series 2000-3 securities. See "Description of the
Offered Securities--The Interest Rate Caps," "--
Interest Rate Cap Provider" and "--Pay Out
Events" in this supplement.
Limited History of Direct
Merchants Bank, the Trust
and the Trust Portfolio
Direct Merchants Bank's predecessor began
originating and servicing credit card accounts in
March 1995. Direct Merchants Bank and its
predecessor have had limited underwriting and
servicing experience, and limited delinquency,
default and loss experience with respect to the
accounts. See "Trust Credit Card Portfolio" in
this supplement and "Direct Merchants Credit Card
Bank, N.A. Activities" in the attached
prospectus.
The Trust and Metris Receivables, Inc. were
formed in May 1995 and have no substantial assets
other than their interests in the receivables and
the proceeds from the receivables.
The Trust assets consist primarily of receivables
generated from accounts originated since March
1995. As of July 31, 2000, approximately 16.6% of
the accounts in the Trust portfolio had been
originated within the last 12 months and
approximately 36.1% 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 "Receivables in Trust Portfolio
by Age of Account" pie chart in "Selected Trust
Portfolio Summary Data" in this supplement.
S-14
<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 2000-3 will be
allocated a portion of those charged-off
receivables. See "Description of the Offered
Securities--Allocation Percentages" and "Trust
Credit Card Portfolio--Delinquency and Loss
Experience" in this supplement. If the amount of
charged-off receivables allocated to any class of
securities exceeds the amount of other funds
available for reimbursement of those charge-
offs--which could occur if the limited amount of
credit enhancement for those securities is
reduced to zero--the holders of those securities
may not receive the full amount of principal and
interest due to them. See "Description of the
Offered Securities--Redirected Cash Flows," "--
Application of Collections," "--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 (the "FDIC") 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's, Metris Companies Inc.'s 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 governmental lien or
other liens imposed 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-15
<PAGE>
Insolvency or Bankruptcy
of Metris Receivables,
Inc., Direct Merchants
Bank or Metris Companies
Inc. Could Result in
Accelerated, Delayed or
Reduced Payments to
Securityholders The Federal Deposit Insurance Act, as amended by
the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (the "FDIA"), provides
that a security interest granted by Direct
Merchants Bank would be respected to the extent
that--
. the grant of the security interest and the
related transaction documents comply with
the regulatory requirements of the FDIA;
. the security interest was perfected before
the FDIC is appointed as conservator or
receiver for Direct Merchants Bank; and
. the security interest was not taken in
contemplation of Direct Merchant Bank's
insolvency or with the intent to hinder,
delay or defraud Direct Merchant Bank or its
creditors.
Opinions and policy statements issued by the FDIC
suggest that, because of the manner in which
these transactions are structured, the FDIC would
respect the security interest granted by Direct
Merchants Bank in the receivables. If the FDIC
were to assert a contrary position, however,
payments of outstanding principal and interest
could be delayed or possibly reduced.
Furthermore, the FDIC could--
. require the trustee for the Trust, to go
through an administrative claims procedure
to establish its right to payments collected
on the receivables;
. request a stay of any actions by the trustee
to enforce the security interest, any
transaction document or the securities
against Direct Merchants Bank; or
. repudiate the transaction documents to which
Direct Merchants Bank is a party and limit
the Trust's resulting claim to "actual
direct compensatory damages" measured as of
the date of conservatorship or 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 or other insolvency related events of
Metris Companies Inc. or Metris Receivables,
Inc., then a "pay out event" could occur for all
outstanding series. Under the terms of the
pooling and servicing agreement, new principal
receivables would not be transferred to the Trust
and the trustee would
S-16
<PAGE>
sell the receivables (unless holders of more than
50% of the invested amount 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 bankruptcy court may
nonetheless have the power, regardless of the
terms of the pooling and servicing agreement or
the instructions of holders of the securities,
(a) to prevent or cause the beginning of an early
amortization period, (b) to prevent or cause the
early sale of the receivables and termination of
the Trust or (c) to require or prohibit the
transfer of new principal receivables to the
Trust.
In addition, a court overseeing the servicer's
bankruptcy case may have the power to prevent
either the trustee or the securityholders from
appointing a new servicer. See "Certain Legal
Aspects of the Receivables--Certain Matters
Relating to Bankruptcy or Receivership" in the
attached prospectus.
Negative Carry on Amounts
on Deposit in Trust
Accounts May Reduce Yield Any amounts deposited in the excess funding
account, the pre-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 Offered Securities--
Paired Series" in this supplement.
S-17
<PAGE>
Individual Securityholders
Will Have Limited Control
of Trust Actions Securityholders of any series or any class within
a series may need the consent or approval of a
specified percentage of the investor interest of
other series or a class of such other series to
take or direct certain actions, including to
require the appointment of a successor servicer
after Direct Merchants Bank, as servicer,
defaults on its obligations under the pooling and
servicing agreement, to amend the pooling and
servicing agreement in some cases, and to direct
a repurchase of all outstanding series after
certain violations of Metris Receivables, Inc.'s
representations and warranties. The interests of
the securityholders of any such series may not
coincide with yours, making it more difficult for
any particular securityholder to achieve the
desired results from such vote.
Rating of Your Securities
May be Reduced Your securities will only be issued if they are
rated at least "AAA" in the case of the Class A
securities, or at least "A" in the case of the
Class B securities, 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 subordinated interests for the
benefit of your securities.
Class B Bears Additional
Credit Risk If you purchase a Class B security, your right to
receive principal payments is subordinated to the
payment in full of the Class A securities. No
principal will be paid to you until the full
amount of principal has been paid on the Class A
securities.
In addition, if Class A's share of collections of
finance charge receivables and certain other
amounts allocated to Series 2000-3, excess
finance charges, transferor finance charge
collections and the excess collateral's share of
principal collections are not sufficient to
make all required payments for the Class A
securities, collections of principal receivables
allocated to Class B may be diverted to Class A.
If this occurs, the Class B invested amount and
future allocations to Class B would be reduced.
Also, if Class A's share of losses on the
receivables exceeds the collections and the
credit enhancement available to cover those
losses, and the excess collateral amount is
reduced to zero, the Class B invested amount will
be reduced to avoid reducing the Class A invested
amount. If this occurs, the Class B invested
amount and future allocations to Class B would be
reduced.
As a result of the subordination, if you hold
Class B securities you may receive payments of
interest or principal later than you expect or
you may not receive the full amount of expected
principal and interest.
S-18
<PAGE>
Funding Period Initially your interest in the receivables in the
Trust will be less than the outstanding principal
amount of your securities to the extent of the
pre-funded amount allocated to your securities.
Investment earnings on the pre-funded amount will
be used like finance charge collections allocated
to your series to make interest and other
payments, but the yield on those investments will
probably be less than the yield on the
receivables. As receivables are added to the
Trust through January 31, 2001, the pre-funded
amount will decrease and your interest in the
receivables in the Trust will increase by a
corresponding amount up to the full outstanding
amount of your interest in the Trust. If your
interest in the receivables in the Trust does not
equal the full outstanding amount of your
interest in the Trust by the end of January 2001,
the amounts remaining on deposit in the pre-
funding account will be deposited into the excess
funding account. Investment earnings on amounts
deposited in the excess funding account allocated
to your series are also likely to be less than
the yield on the receivables. In each of these
instances, the amounts available to make payments
to securityholders would be reduced.
S-19
<PAGE>
Trust Credit Card Portfolio
Capitalized items are defined in the attached prospectus or in this
supplement. Definitions are indicated by boldface type. Both the attached
prospectus and this supplement contain an index of terms listing the page
numbers where definitions can be found.
General
The receivables (the "Receivables") conveyed or to be conveyed to the Trust
pursuant to a pooling and servicing agreement (as the same may be amended from
time to time, the "Agreement"), among Metris Receivables, Inc. (the
"Transferor"), Direct Merchants Bank, as Servicer of the Receivables, and The
Bank of New York (Delaware), as trustee (together with any successors thereto,
the "Trustee"), as supplemented by the supplement relating to the Securities
(the "Series 2000-3 Supplement") (the term "Pooling and Servicing Agreement,"
unless the context requires otherwise, refers to the Pooling and Servicing
Agreement as supplemented by the Series 2000-3 Supplement) have been or will be
generated from transactions made by holders of certain designated MasterCard(R)
and VISA(R) credit card accounts (the "Accounts") and, subject to certain
conditions, may also include, although they do not currently include,
receivables generated from transactions made by holders of other general
purpose credit card accounts originated or acquired by Direct Merchants Bank.
Each Class A Floating Rate Asset Backed Security, Series 2000-3 (collectively,
the "Class A Securities"), each Class B Floating Rate Asset Backed Security,
Series 2000-3 (collectively, the "Class B Securities" and, together with the
Class A Securities, the "Offered Securities") and the Excess Collateral, Series
2000-3 (the "Excess Collateral" and, together with the Offered Securities, the
"Securities" or the "Series 2000-3 Securities") will represent the right to
receive certain payments from the Metris Master Trust, created pursuant to the
Pooling and Servicing Agreement. As used in this prospectus supplement, the
term "Securityholders" refers to holders of the Securities, the term "Class A
Securityholders" refers to holders of the Class A Securities, the term "Class B
Securityholders" refers to holders of the Class B Securities and the term
"Excess Collateral Holder" refers to the holder of the Excess Collateral. As of
July 31, 2000, the Metris Master Trust had approximately 3.2 million credit
card accounts and approximately $5.9 billion in Receivables; Fingerhut
Customers represented approximately 38% of the accounts and approximately 42%
of the Receivables.
Growing Credit Card Portfolio by Portfolio Acquisitions
In the first quarter of 1997, Direct Merchants Bank acquired a credit card
portfolio from a California based credit union which, as of August 31, 1997,
had approximately 18,500 accounts with balances of approximately $36 million.
In September 1997, Direct Merchants Bank acquired an approximately $317 million
credit card portfolio consisting of approximately 260,000 accounts from Key
Bank USA, National Association, of which approximately 197,000 accounts were
active accounts. In June 1998, Direct Merchants Bank acquired a credit card
portfolio from Huntington BancShares which had approximately 42,000 accounts
with balances of approximately $100 million. Such accounts have been designated
as Supplemental Accounts the Receivables of which have been transferred to the
Trust.
In October 1997, Direct Merchants Bank acquired a credit card portfolio
consisting of approximately 460,000 accounts from Mercantile Bank National
Association, of which approximately 240,000 accounts were active accounts. The
Transferor expects to designate approximately 177,000 of the accounts acquired
from Mercantile Bank National Association as Supplemental Accounts the
Receivables of which would be transferred to the Trust on or about the Closing
Date. As of October 18, 2000, Receivables in these Supplemental Accounts
equaled approximately $201 million.
On December 9, 1998, Direct Merchants Bank acquired a portion of the
consumer credit card portfolio of PNC National Bank. The acquired PNC National
Bank credit card portfolio had approximately 400,000 accounts and approximately
$800 million in receivables as of December 9, 1998. In June 1999, Metris
acquired a portfolio of approximately 485,000 active accounts and approximately
$1.2 billion of credit card receivables from General Electric Capital
Corporation, a unit of the General Electric Company. In August 2000, Direct
S-20
<PAGE>
Merchants Bank acquired a credit card portfolio consisting of approximately
283,000 accounts and approximately $180 million of credit card receivables from
Banco Popular North America, of which approximately 185,000 accounts were
active accounts. 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 or from other
acquisitions of accounts, if any, will be of the same credit quality as
previously designated Accounts.
Assessment of Fees and Finance and Other Charges
A billing statement is sent to cardholders at the end of each monthly
billing cycle in which the account has an outstanding balance greater than
$1.00. Direct Merchants Bank uses third party processors to process certain
cardholder payments. When an account is established, it is assigned a billing
cycle. With minor exceptions, the minimum payment due each month for each
account is equal to the greater of a minimum dollar amount or a minimum
percentage of the outstanding balance shown on the statement, plus any amount
past due, plus any amount over the cardholder's credit line. The Bank assesses
an annual fee on some credit card accounts. The Bank may waive the annual
membership fees, or a portion of those fees, in connection with the
solicitation of new accounts depending on the credit terms offered, which are
determined by the prospect's risk profile prior to solicitation or when the
Bank determines a waiver to be appropriate considering the account's overall
profitability. In addition to the annual fee, the Bank charges accounts certain
other fees including: (i) a late fee with respect to any unpaid monthly payment
if the Bank does not receive the required minimum monthly payment by the
payment due date shown on the monthly billing statement, (ii) a cash advance
fee for each cash advance, (iii) a fee with respect to each check submitted by
a cardholder in payment of an account which is not honored by the cardholder's
bank and (iv) an overlimit charge if, at any time during the billing cycle, the
total amount owed exceeds the cardholder's credit line by at least $30. Unless
otherwise arranged between the Bank and the cardholder, any cash advance fee,
late payment fee, returned check fee, overlimit fee, annual fee or other
administrative fee is added to the account and treated as a purchase.
Periodic Finance Charges are not assessed in most circumstances if the
entire balance on the account is paid by the due date, which is 25 days from
the previous cycle billing date. 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 due 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 due date.
Efforts to collect delinquent credit card receivables are primarily made
internally through the collection facilities of the Bank. For a description of
the Bank's collection practices and policies, see "Direct Merchants Credit Card
Bank, N.A. Activities--Delinquency, Collections and Charge-Offs" in the
attached prospectus.
S-21
<PAGE>
The Bank's policy is to charge off an account at the end of the month during
which the account becomes contractually one hundred eighty (180) days past due.
If the Bank receives notice that a cardholder is the subject of a bankruptcy
proceeding, the Bank charges off such account upon the earlier of (a) receipt
of such notice and (b) the time period set forth in the previous sentence.
The following tables set forth the delinquency and loss experience as of the
dates and for each of the periods shown for the Trust Portfolio. There can be
no assurance that the delinquency and loss experience for the Trust Portfolio
will be similar to the historical experience set forth in the following table
because, among other things, economic and financial conditions affecting the
ability of cardholders to make payments may be different from those that have
prevailed during the periods reflected below. In particular, reported loss and
delinquency percentages for the portfolio may be reduced as a result of the
addition of receivables in newly originated accounts. Receivables in newly
originated accounts generally have lower delinquency and loss levels than
receivables in more seasoned accounts and the addition of these receivables to
a portfolio increases the outstanding receivables balance for such portfolio
which, for the Trust, is the denominator used to calculate the percentages set
forth below. Newly originated or acquired accounts currently do not
automatically become part of the Trust Portfolio but may be added from time to
time at the option of Metris Receivables, Inc. See "Description of the
Securities--Addition of Trust Assets" in the attached prospectus.
Delinquency Experience for the Trust Portfolio
(Dollars in Thousands)
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------
As of July 31, 2000 1999 1998 1997
----------------------- ----------------------- ----------------------- -----------------------
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(1)........ $5,897,317 100.00% $5,477,524 100.00% $4,125,979 100.00% $2,854,929 100.00%
Receivables Delinquent:
30-59 Days........... $ 145,311 2.47% $ 128,542 2.35% $ 99,840 2.42% $ 64,504 2.26%
60-89 Days........... 103,958 1.76 92,035 1.68 67,959 1.65 44,078 1.54
90 or More Days...... 214,655 3.64 202,212 3.69 149,361 3.62 89,504 3.14
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total............... $ 463,924 7.87% $ 422,789 7.72% $ 317,160 7.69% $ 198,086 6.94%
========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
--------
(1) Receivables Outstanding consist of all amounts due from cardholders as
posted to the Trust Accounts as of the date shown.
S-22
<PAGE>
Loss Experience for the Trust Portfolio(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Seven Months Year Ended December 31,
Ended ----------------------------------
July 31, 2000 1999 1998 1997
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Receivables
Outstanding(2)............. $5,609,581 $4,552,813 $3,231,883 $2,067,424
Total Net Charge-Offs(3).... $ 320,360 $ 453,199 $ 355,279 $ 182,984
Total Net Charge-Offs as a
Percentage of Average
Receivables Outstanding.... 5.71% 9.95% 10.99% 8.85%
(Annualized)................ 9.81% 9.95% 10.99% 8.85%
</TABLE>
--------
(1) The Trust reports charge-offs on a gross basis, not net of recoveries.
Recoveries are treated as Finance Charge Collections and included in the
calculation of Portfolio Yield.
(2) Average Receivables Outstanding is calculated by determining the daily
average of outstanding balances for Trust Accounts for each month and then
dividing the sum of such daily averages for such months by the number of
months in such period.
(3) Total Net Charge-Offs are total charge-offs of Principal Receivables less
Recoveries and do not include the amount of any reductions in total
Principal Receivables outstanding due to fraud, returned goods, customer
disputes or other miscellaneous credit adjustments.
Recoveries
Pursuant to the terms of the Pooling and Servicing Agreement, the Bank will
be required to transfer to the Trust all of the recoveries on charged-off
Accounts in the Trust ("Recoveries"). In the event of any sale or other
disposition of Receivables in Defaulted Accounts as provided in the Pooling and
Servicing Agreement, Recoveries will not include amounts received by the
purchaser or transferee of such Receivables but will be limited to amounts
received by the Servicer from the purchaser or transferee. Collections of
Recoveries will be treated as Finance Charge Collections. See "--Delinquency
and Loss Experience" above and "Direct Merchants Credit Card Bank, N.A.
Activities--Delinquency, Collections and Charge-Offs" in the attached
prospectus.
The Receivables
General
The Receivables conveyed to the Trust arise in Accounts selected by Metris
Receivables, Inc. from the Direct Merchants Bank Portfolio on the basis of
criteria set forth in the Pooling and Servicing Agreement as applied on or
about May 30, 1995 (the "Initial Closing Date") and, with respect to
Supplemental Accounts, as of the related dates of their designations. On the
Initial Closing Date, the Transferor transferred and assigned to the Trust all
of its right, title and interest in and to the Receivables outstanding as of
the Initial Closing Date, all of the Receivables thereafter created and the
proceeds of all of the foregoing. Prior to such transfer and assignment and
pursuant to the Purchase Agreement, FCI (as predecessor to Metris under the
Purchase Agreement) contributed and sold to the Transferor all its right, title
and interest in and to the Receivables existing as of the Initial Closing Date,
all the Receivables thereafter created and all FCI's interest in the Bank
Purchase Agreement with respect to the Receivables. Prior to such sale and
contribution and pursuant to the Bank Purchase Agreement, Direct Merchants Bank
sold to FCI (as predecessor to Metris under the Bank Purchase Agreement) all
its right, title and interest in and to the Receivables existing as of the date
of such agreement and all the Receivables arising from time to time thereafter.
In connection with the realignment of FCI's subsidiaries in September 1996, FCI
assigned to Metris all of FCI's rights and Metris assumed all of FCI's
obligations under the Bank Purchase Agreement and the Purchase Agreement.
Pursuant to the Pooling and Servicing Agreement, Metris Receivables, Inc.
has the right, subject to certain limitations and conditions set forth in that
agreement, to designate from time to time Supplemental Accounts or Automatic
Additional Accounts and to transfer to the Trust all Receivables of such
Supplemental Accounts or
S-23
<PAGE>
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
after giving effect to such addition 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" set forth in the attached prospectus.
"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 2000-3 and
each previously issued Series, 0%; provided, however, that in certain
circumstances each such percentage may be increased. "Minimum Aggregate
Principal Receivables" means an amount equal to the sum of the numerators used
to calculate the Investor Percentages with respect to the allocation of
Principal Collections for each Series then outstanding. Further, pursuant to
the Pooling and Servicing Agreement, Metris Receivables, Inc. will have the
right (subject to certain limitations and conditions) to designate certain
Accounts and to require the Trustee to reconvey all Receivables in such
Accounts (the "Removed Accounts") to Metris Receivables, Inc., whether such
Receivables are then existing or thereafter created. Throughout the term of the
Trust, the Accounts from which the Receivables arise will be the Accounts
designated by Metris Receivables, Inc. on the Initial Closing Date plus any
Supplemental Accounts and Automatic Additional Accounts minus any Removed
Accounts. As of the Initial Closing Date and, with respect to Receivables in
Supplemental Accounts and Automatic Additional Accounts, as of the related date
of their initial conveyance to the Trust, and on the date any new Receivables
are created, Metris Receivables, Inc. will represent and warrant to the Trust
that the Receivables meet the eligibility requirements specified in the Pooling
and Servicing Agreement. See "Description of the Securities--Representations
and Warranties" and "--Addition of Trust Assets" in the attached prospectus.
The Receivables in the Trust Portfolio, as of the end of the day on July 31,
2000, included approximately $5,592,434,547 of Principal Receivables and
approximately $304,882,281 of Finance Charge Receivables. The Accounts had an
average Principal Receivable balance of $1,771 and an average credit limit of
$4,373. The percentage of the aggregate total Receivable balance to the
aggregate total credit limit was approximately 43%. The average age of the
Accounts was approximately 40 months. As of the end of the day on July 31,
2000, 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 July 31, 2000. Because the future composition of the
Trust Portfolio may change over time, these tables are not necessarily
indicative of the composition of the Trust Portfolio at any subsequent time.
The Transferor has added, and expects to add, to the Trust, in compliance with
the provisions of the Pooling and Servicing Agreement, Receivables in
Additional Accounts and Supplemental Accounts in addition to those reflected in
the tables below, including (i) Receivables in Supplemental Accounts equal to
approximately $66,000,000 which the Transferor added to the Trust Portfolio on
October 13, 2000 and (ii) Receivables in Supplemental Accounts (in an amount
equal to approximately $201,000,000 as of the end of the day on October 18,
2000), the accounts of which comprise a portion of the credit card portfolio
previously acquired by Direct Merchants
S-24
<PAGE>
Bank from Mercantile Bank National Association, which the Transferor expects to
add to the Trust Portfolio on or about the Closing Date. While the Transferor
believes that the addition of the Receivables in Supplemental Accounts referred
to in subparts (i) and (ii) of the immediately preceding sentence will not have
a material adverse effect on the future performance of the Trust, we cannot
assure you of this result.
Composition By Credit Limit
Trust Portfolio
<TABLE>
<CAPTION>
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Credit Limit Range Accounts Accounts Outstanding Outstanding
------------------ --------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
$0.00--$500.00............... 93,004 3.0% $ 29,690,819.67 0.5%
$500.01--$1,000.00........... 127,506 4.0 77,632,947.95 1.3
$1,000.01--$1,500.00......... 203,445 6.4 166,787,790.99 2.8
$1,500.01--$3,000.00......... 634,003 20.1 809,806,453.93 13.8
$3,000.01--$5,000.00......... 874,465 27.7 1,686,356,591.10 28.6
$5,000.01--$10,0000.00....... 1,166,106 36.9 3,007,475,618.94 51.0
$10,000.01 & Greater......... 58,997 1.9 119,566,605.56 2.0
--------- ----- ----------------- -----
Total...................... 3,157,526 100.0% $5,897,316,828.14 100.0%
========= ===== ================= =====
</TABLE>
Composition By Account Balance
Trust Portfolio
<TABLE>
<CAPTION>
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Account Balance Range Accounts Accounts Outstanding Outstanding
--------------------- --------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Credit Balance.............. 34,747 1.1% $ (2,847,120.25) (0.1)%
No Balance.................. 976,885 30.9 0.00 0.0
$0.01--$500.00.............. 316,534 10.0 64,376,931.73 1.1
$500.01--$1,000.00.......... 209,965 6.7 156,846,927.96 2.7
$1,000.01--$1,500.00........ 200,486 6.4 250,802,202.38 4.3
$1,500.01--$3,000.00........ 550,715 17.4 1,222,772,905.58 20.7
$3,000.01--$5,000.00........ 514,068 16.3 2,007,135,334.23 34.0
$5,000.01 & Greater......... 354,126 11.2 2,198,229,646.51 37.3
--------- ----- ----------------- -----
Total..................... 3,157,526 100.0% $5,897,316,828.14 100.0%
========= ===== ================= =====
</TABLE>
S-25
<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>
California................... 382,050 12.1% $ 719,215,134.43 12.2%
New York..................... 250,170 7.9 476,230,465.66 8.1
Florida...................... 235,194 7.5 451,621,955.49 7.7
Texas........................ 221,602 7.0 431,780,603.08 7.3
Ohio......................... 127,124 4.0 248,696,591.50 4.2
Illinois..................... 117,159 3.7 220,624,725.54 3.7
Pennsylvania................. 117,822 3.7 216,099,315.17 3.7
Michigan..................... 88,610 2.8 169,163,013.33 2.9
New Jersey................... 91,325 2.9 162,154,591.49 2.7
Virginia..................... 86,091 2.7 161,074,910.01 2.7
Georgia...................... 86,160 2.7 160,944,672.68 2.7
North Carolina............... 83,379 2.6 150,724,036.56 2.6
Indiana...................... 67,937 2.2 135,154,277.43 2.3
Tennessee.................... 70,543 2.2 125,329,804.49 2.1
Missouri..................... 63,087 2.0 121,091,365.37 2.1
Massachusetts................ 67,418 2.1 119,133,052.50 2.0
Maryland..................... 62,999 2.0 117,897,878.10 2.0
Other........................ 938,856 29.9 1,710,380,435.31 29.0
--------- ----- ----------------- -----
Total........................ 3,157,526 100.0% $5,897,316,828.14 100.0%
========= ===== ================= =====
</TABLE>
S-26
<PAGE>
Maturity Considerations
The Pooling and Servicing Agreement provides that Class A Securityholders
will not receive payments of principal until the October 2005 Distribution Date
(the "Class A Expected Final Payment Date"), or earlier in the event of a Pay
Out Event which results in the commencement of the Early Amortization Period.
The Pooling and Servicing Agreement also provides that the Class B
Securityholders will not receive payments of principal until the November 2005
Distribution Date (the "Class B Expected Final Payment Date"), or earlier in
the event of a Pay Out Event which results in the commencement of the Early
Amortization Period (in either case, only after the Class A Invested Amount has
been paid in full). The Pooling and Servicing Agreement also provides that the
Excess Collateral Holder will not receive payments of principal until the
November 2005 Transfer Date (the "Excess Collateral Expected Final Payment
Date"), or earlier in the event of a Pay Out Event which results in the
commencement of the Early Amortization Period (in either case, only after the
Class A Invested Amount has been paid in full and if the Class B Invested
Amount will be paid in full on the related Distribution Date).
Accumulation Period
The accumulation period (the "Accumulation Period") with respect to the
Securities is scheduled to begin at the close of business on the last day of
the September 2004 Monthly Period. Subject to the conditions set forth in this
supplement under "Description of the Offered Securities--Postponement of
Accumulation Period," the day on which the Revolving Period ends and the
Accumulation Period begins may be delayed to no later than the close of
business on the last day of the August 2005 Monthly Period. 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 2000-3 Termination Date.
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 2000-3 Principal Collections for
such Monthly Period, (b) the "Controlled Deposit Amount" for such Monthly
Period, which is equal to the sum of the Controlled Accumulation Amount for
such Monthly Period and the Accumulation Shortfall, if any, for such Monthly
Period and (c) the Class A Adjusted Invested Amount will be deposited in the
Principal Funding Account until the principal amount on deposit in the
Principal Funding Account (the "Principal Funding Account Balance") equals the
Class A Invested Amount. After the Class A Invested Amount has been paid in
full, Available Series 2000-3 Principal Collections, to the extent required,
will be distributed to the Class B Securityholders on each Distribution Date
until the earlier of the date the Class B Invested Amount has been paid in full
and the Series 2000-3 Termination Date. On the Transfer Date immediately
preceding the Distribution Date on which the Class B Invested Amount will be
paid in full and on each subsequent Transfer Date, Available Series 2000-3
Principal Collections, to the extent required, will be distributed to the
Excess Collateral Holder until the earlier of the date the Excess Collateral
Amount has been paid in full and the Series 2000-3 Termination Date. Amounts in
the Principal Funding Account are expected to be available to pay the Class A
Invested Amount in full on the Class A Expected Final Payment Date. Also, after
the payment of the Class A Invested Amount in full, Available Series 2000-3
Principal Collections are expected to be available to pay the Class B Invested
Amount in full on the Class B Expected Final Payment Date, and, after amounts
have been applied to the payment of the Class B Invested Amount in full.
Available Series 2000-3 Principal Collections are expected to be available to
pay the Excess Collateral Amount in full on the Excess Collateral Expected
Final Payment Date. Although it is anticipated that Available Series 2000-3
Principal Collections will be available during each Monthly Period in the
Accumulation Period to make a deposit to the Principal Funding Account of the
applicable Controlled Deposit Amount, that on the Class A Expected Final
Payment Date the Class A Invested Amount will be paid to the Class A
Securityholders, that on the Class B Expected Final Payment Date the Class B
Invested Amount will be paid to the Class B Securityholders and that on the
Excess Collateral Expected Final Payment Date the Excess Collateral Amount will
be paid to the Excess Collateral Holder, no assurance can be given in that
regard. If the amount required to pay the Class A Invested Amount, the Class B
Invested Amount or the Excess Collateral Amount in full is not available on the
Class A Expected Final Payment Date, the Class B Expected Final Payment Date or
the Excess
S-27
<PAGE>
Collateral Expected Final Payment Date, as applicable, or if a Pay Out Event
occurs during the Accumulation Period, the Early Amortization Period will
commence and any amount on deposit in the Principal Funding Account will be
paid to the Class A Securityholders on the next Distribution Date and an amount
equal to the Available Series 2000-3 Principal Collections will be paid to the
Class A Securityholders on each succeeding Distribution Date until the earlier
of the Distribution Date on which the Class A Invested Amount has been paid in
full and the Series 2000-3 Termination Date. After the Class A Invested Amount
has been paid in full, Available Series 2000-3 Principal Collections will be
paid to the Class B Securityholders on each Distribution Date until the earlier
of the date on which the Class B Invested Amount has been paid in full and the
Series 2000-3 Termination Date. On and after the Transfer Date immediately
preceding the Distribution Date on which the Class B Invested Amount has been
paid in full, Available Series 2000-3 Principal Collections will be paid to the
Excess Collateral Holder on each Transfer Date until the earlier of the date on
which the Excess Collateral Amount has been paid in full and the Series 2000-3
Termination Date. If the Principal Collections for any Monthly Period are less
than the applicable Controlled Deposit Amount, the amount of such deficiency
will be the applicable "Accumulation Shortfall" for the succeeding Monthly
Period. See "Description of the Offered Securities--Application of
Collections--Payment of Principal" in this supplement.
Other Series offered by the Trust may or may not have accumulation periods
like the Accumulation Period or amortization periods like the Early
Amortization Period, and such periods may have different lengths and begin on
different dates than the Accumulation Period or Early Amortization Period
described in this supplement. Thus, certain Series may be in their revolving
periods while others are in periods during which Principal Collections are
distributed to or accumulated for such other Series. In addition, other Series
may allocate Principal Collections based upon different investor percentages.
See "Description of the Securities--Exchanges" in the attached prospectus for a
discussion of the potential terms of other Series. See "Annex I: Previously
Issued Series" at the end of this supplement for a description of the terms of
the previously issued Series.
Early Amortization Period
If a Pay Out Event occurs, then the Early Amortization Period will commence
and the amounts on deposit in the Principal Funding Account or the Pre-Funding
Account will be paid to the Class A Securityholders on the Distribution Date in
the month following the commencement of such Early Amortization Period. In
addition, to the extent that the Class A Invested Amount has not been paid in
full, the Class A Securityholders will be entitled to monthly payments of
principal equal to the Available Series 2000-3 Principal Collections on each
Distribution Date with respect to such Early Amortization Period until the
earlier of the date on which the Class A Invested Amount has been paid in full
and the Series 2000-3 Termination Date. After the Class A Invested Amount has
been paid in full and if the Series 2000-3 Termination Date has not occurred,
Available Series 2000-3 Principal Collections will be paid to the Class B
Securityholders on each Distribution Date until the earlier of the date on
which the Class B Invested Amount has been paid in full and the Series 2000-3
Termination Date. On and after the Transfer Date immediately preceding the
Distribution Date on which the Class B Invested Amount will be paid in full and
if the Series 2000-3 Termination Date has not occurred, Available Series 2000-3
Principal Collections will be paid to the Excess Collateral Holder on each
Transfer Date until the earlier of the date on which the Excess Collateral
Amount has been paid in full and the Series 2000-3 Termination Date.
"Early Amortization Period" means the period beginning on the earliest of
(a) the date on which a Pay Out Event occurs or is deemed to have occurred with
respect to the Series 2000-3 Securities, (b) the Class A Expected Final Payment
Date if the Class A Invested Amount has not been paid in full on such date, (c)
the Class B Expected Final Payment Date if the Class B Invested Amount has not
been paid in full on such date and (d) the Excess Collateral Expected Final
Payment Date if the Excess Collateral Amount has not been paid in full on such
date, and ending on the earlier of (i) the date on which the Class A Invested
Amount, the Class B Invested Amount and the Excess Collateral Amount have been
paid in full and (ii) the Series 2000-3 Termination Date.
S-28
<PAGE>
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
sum of the amount on deposit in the Pre-Funding Account plus the Series 2000-3
Percentage of the sum of the total amount of Principal Receivables plus amounts
on deposit in the Excess Funding Account being less than (ii) the sum of the
aggregate outstanding principal amounts of the Class A Securities, the Class B
Securities and the Excess Collateral, (y) the total amount of Principal
Receivables and the amounts on deposit in the Excess Funding Account, the
Pre-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) failure of any Interest Rate Cap
Provider to make any payment required under any Interest Rate Cap within 30
days of the date such payment was due. See "Description of the Offered
Securities--Pay Out Events" in this supplement and "Description of
theSecurities--Pay Out Events" 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, the sum of (i)
the weighted average of the Class A Interest Rate, the Class B Interest Rate
and the Excess Collateral Minimum Rate as of the last day of such Monthly
Period (weighted based on the Class A Invested Amount, the Class B Invested
Amount and the Excess Collateral Amount, respectively, 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 2000-3 Percentage of the amount then on deposit in the Excess Funding
Account.
The term "Portfolio Yield" means, with respect to any Monthly Period, the
annualized percentage equivalent of a fraction, the numerator of which is the
sum of (i) the aggregate amount of Available Series 2000-3 Finance Charge
Collections for such Monthly Period (not including the amounts on deposit in
the Payment Reserve Account and Adjustment Payments made by the Transferor with
respect to Adjustment Payments required to be made but not made in prior
Monthly Periods, if any) plus, (ii) the Principal Funding Investment Proceeds
plus, (iii) investment earnings on amounts on deposit in the Pre-Funding
Account plus, (iv) amounts withdrawn from the Accumulation Period Reserve
Account with respect to such Monthly Period, such sum calculated on a cash
basis after subtracting the Series Default Amount and the Series 2000-3
Percentage of any Adjustment Payments which the Transferor is required but
fails to make pursuant to the Pooling and Servicing Agreement for such Monthly
Period, and the denominator of which is the sum of (i) the average daily
Invested Amount during the preceding Monthly Period plus, (ii) the average
Pre-Funded Amount during the preceding Monthly Period; provided, however, that
Excess Finance Charge Collections applied for the benefit of the
Securityholders may be added to the numerator if the Rating Agency Condition is
satisfied.
S-29
<PAGE>
Payment Rates
The following table sets forth the highest and lowest cardholder monthly
payment rates for the Trust Portfolio during any month in the period shown and
the average cardholder monthly payment rates for all months during the periods
shown, in each case calculated as a percentage of total opening monthly account
balances during the periods shown. Payment rates shown in the table are based
on amounts which would be deemed payments of Principal Receivables and Finance
Charge Receivables with respect to the Accounts.
Cardholder Monthly Payment Rates for the Trust Portfolio(1)
<TABLE>
<CAPTION>
Year Ended
Seven Months December 31,
Ended ----------------
July 31, 2000 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Highest Month..................................... 7.8% 8.0% 7.4% 7.6%
Lowest Month...................................... 6.7% 6.7% 6.1% 5.3%
Monthly Average(2)................................ 7.1% 7.2% 6.6% 6.5%
</TABLE>
--------
(1) The monthly payment rate for any month is the aggregate amount collected on
receivables during the month, including recoveries on previously charged-
off receivables, expressed as a percentage of the total outstanding
receivables at the end of the previous month.
(2) Monthly Averages shown are expressed as an arithmetic average of the
payment rate for each month for the period indicated.
The Bank generally determines the minimum monthly payment with respect to
the Accounts by multiplying the combined new balance of purchases and cash
advances, less any disputed amounts, by a minimum percentage of the outstanding
balance. If the amount so calculated is less than a minimum dollar amount, it
is increased to such minimum dollar amount. The sum of such amount and any past
due amounts equals the minimum payment amount. The minimum payment amount,
however, is never more than the new balance.
There can be no assurance that the cardholder monthly payment rates in the
future will be similar to the historical experience set forth above. The amount
of collections of Receivables may vary from month to month due to various
factors, including seasonal variations, general economic conditions, payment
habits of individual cardholders, the Credit Card Originator's monthly minimum
payment requirements and acts of God. There can be no assurance that deposits
into the Principal Funding Account or the Distribution Account, as applicable,
will be made in accordance with the applicable Controlled Accumulation Amount.
If a Pay Out Event occurs, the average life of the Securities could be
significantly reduced or increased.
Because there may be a slowdown in the payment rate below the payment rates
used to determine the Controlled Accumulation Amounts, or a Pay Out Event may
occur which would initiate the Early Amortization Period, there can be no
assurance that the actual number of months elapsed from the date of issuance of
the Class A Securities and the Class B Securities to the Class A Expected Final
Payment Date and the Class B Expected Final Payment Date, respectively, will
equal the expected number of months. As described under "Description of the
Offered 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 Class A Expected Final Payment Date or to
collect all amounts necessary to pay the Class B Invested Amount on the Class B
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 Offered Securities. See "Risk Factors"
in this supplement and "Maturity Considerations" in the attached prospectus.
S-30
<PAGE>
Receivable Yield Considerations
The gross revenues from finance charges and fees billed to accounts in the
Trust Portfolio for each of the three calendar years contained in the period
ended December 31, 1999 and for the seven-month period ended July 31, 2000, are
set forth in the following table. The historical yield figures in the following
table are
calculated and reported on a billed basis. The Portfolio Yield on Receivables
included in the Trust are calculated and reported on a cash basis. Portfolio
Yields calculated on a billed basis may differ from Portfolio Yields calculated
on a cash basis due to (a) a lag between when finance charges and fees are
billed to cardholder accounts and when such finance charges and fees are
collected, (b) finance charges and fees that are not ultimately collected from
the cardholder and (c) growth in the Trust Portfolio. The Portfolio Yield
calculated on both a billed and a cash basis will also be affected by numerous
factors, including changes in the monthly interest rate, variations in the rate
of payments and new borrowings on the Accounts, the amount of the annual
membership fee and other fees, changes in the delinquency and loss rates on the
Receivables, and the percentage of cardholders who pay their balances in full
each month and, except in the case of cash advances, do not incur periodic
finance charges, which may in turn be caused by a variety of factors including
seasonal variations, the availability of other sources of credit and general
economic conditions. See "Maturity Considerations" above. Revenues vary for
each account based on the type and volume of activity for each account.
Interchange fees are not included in the Trust assets and are not included in
the yield numbers for the Trust Portfolio in the following table.
Revenue Yield Experience for the Trust Portfolio(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Seven Months Year Ended December 31,
Ended ----------------------------------
July 31, 2000 1999 1998 1997
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Receivables
Outstanding................ $5,644,700 $4,632,272 $3,611,436 $2,204,287
Total Finance Charges and
Fees Billed(2)............. $ 798,169 $1,144,510 $ 858,196 $ 533,005
Average Revenue Yield
(Annualized)............... 24.30% 24.71% 23.76% 24.18%
</TABLE>
--------
(1) The amounts presented in the above table include a small amount of
receivables and fees billed in accounts that were newly originated and had
not yet been included in the Trust for the periods shown. Those receivable
balances were generally added to the Trust in subsequent periods in account
additions approved by the Rating Agencies.
(2) Total Finance Charges and Fees Billed include finance charges, cash advance
fees, annual membership fees, late fees, and other charges. It does not
include interchange fees. Total Finance Charges and Fees Billed are
presented net of adjustments made pursuant to the Bank's normal servicing
procedures, including removal of incorrect or disputed finance charges and
reversal of finance charges accrued on charged-off accounts.
Use of Proceeds
Metris Receivables, Inc. will apply the net proceeds from the sale of the
Offered Securities, which is expected to be approximately $438,001,554, (a) to
repay a portion of the Series 1998-1 Variable Funding Securities, (b) to fund
the Pre-Funding Account to the extent of the Pre-Funded Amount, (c) to make a
deposit to the Interest Funding Account for the payment of interest on the
Series 2000-3 Securities on the first Distribution Date and (d) to pay the
purchase price of Receivables, including Receivables in Supplemental Accounts,
the accounts of which comprise a portion of the credit card portfolio
previously acquired by Direct Merchants Bank from Mercantile Bank National
Association.
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<PAGE>
Description of the Offered Securities
The Offered 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 Offered Securities does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of the Pooling and Servicing Agreement. See
"Description of the Securities" in the attached prospectus for additional
information concerning the Securities and the Pooling and Servicing Agreement.
General
The Offered Securities will represent the right to cash flow from certain
assets of the Trust, including the right to the applicable allocation
percentage of all obligor payments on the Receivables in the Trust. Each
Offered Security represents the right to receive payments of interest at the
Class A Interest Rate or the Class B Interest Rate, as applicable, funded from
Available Series 2000-3 Finance Charge Collections and certain other sources
designated herein and the right to receive payments of principal on the Class A
Expected Final Payment Date or the Class B Expected Final Payment Date, as
applicable, or, to the extent of the Class A Invested Amount or the Class B
Invested Amount, as applicable, on each Distribution Date during the Early
Amortization Period, funded from Principal Collections allocated to Series
2000-3.
The Transferor will own the Exchangeable Transferor Security. 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 portion of the Revolving Period that
follows the Funding Period, the amount of the Invested Amount in the Trust will
remain constant except under certain limited circumstances. See "--Defaulted
Receivables; Dilution" and "--Investor Charge-Offs" in this supplement and
"Description of the Securities--Defaulted Receivables; Dilution" and "--
Investor Charge-Offs" in the attached prospectus. The amount of Principal
Receivables in the Trust, however, will vary each day as new Principal
Receivables are transferred to the Trust and others are paid. The amount of the
Transferor Interest (or the amount in the Excess Funding Account) will
fluctuate each day, therefore, to reflect the changes in the amount of the
Principal Receivables in the Trust unless and to the extent that the previously
issued Series or another Series absorb such change. During the Accumulation
Period, the Adjusted Invested Amount will decline as Principal Collections are
deposited into the Principal Account or the Principal Funding Account for
distribution to the Securityholders. During the Early Amortization Period, the
Invested Amount will decline as Principal Collections are distributed to the
related Securityholders. As a result, unless and to the extent that the
previously issued Series or another Series absorb such increase, the Transferor
Interest will generally increase each month during the Accumulation Period or
the Early Amortization Period to reflect the reductions in the Adjusted
Invested Amount or the Invested Amount of the Securities and will also change
to reflect the variations in the amount of the Principal Receivables in the
Trust. The Transferor Interest may be reduced as the result of an Exchange. See
"Description of the Securities--Exchanges" in the attached prospectus.
In addition to representing the right to payment from collections of Finance
Charge Receivables and Principal Receivables, each Offered Security also
represents the right to receive payments from funds on deposit in the Principal
Funding Account and the Accumulation Period Reserve Account and certain
investment earnings thereon, Redirected Principal Collections and Shared
Principal Collections and certain other available amounts (including, under
certain circumstances, amounts on deposit in the Excess Funding Account).
Payments of interest and principal will be made, to the extent of funds
available therefor, on each Distribution Date on which such amounts are due to
Securityholders in whose names the Securities were registered on the business
day preceding such Distribution Date, or with respect to any Definitive
Securities, the fifth day of the Monthly Period during which such Distribution
Date occurs (each, a "Record Date"). Series 2000-3 will also be allocated a
portion of the amount of Defaulted Receivables each month.
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Beneficial interests in each Class of the Offered Securities will be offered
for purchase in minimum denominations of $1,000 and integral multiples thereof.
We will attempt to apply to have the Offered Securities listed on the
Luxembourg Stock Exchange. We cannot assure you that the application will be
accepted or that the Offered Securities will be listed on the Luxembourg Stock
Exchange or any other stock exchange or, if so listed, when such listing would
occur. Applications to have certain of the Trust's previously issued securities
listed on the Luxembourg Stock Exchange are still pending at this time.
Purchasers of the Offered Securities should not rely upon the Offered
Securities being listed on the Luxembourg Stock Exchange or any other stock
exchange. If the Offered Securities are listed on the Luxembourg Stock
Exchange, the Trustee will maintain a paying agent in Luxembourg for so long as
the Offered Securities are outstanding and listed on the Luxembourg Stock
Exchange. The Luxembourg paying agent is expected to be Deutsche Bank
Luxembourg S.A., Boulevard Konrad Adenauer 2, L-1115 Luxembourg, phone number
(352) 42 12 21.
Each Class of the Offered Securities initially will be represented by
securities registered in the name of Cede & Co., as nominee of The Depository
Trust Company ("DTC"). Unless and until Definitive Securities are issued, all
references herein to actions by Securityholders of any Class of Offered
Securities shall refer to actions taken by DTC upon instructions from DTC
Participants and all references herein to distributions, notices, reports and
statements to Securityholders of any Class of Offered Securities shall refer to
distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Offered Securities of such Class, for distribution to
Security Owners of such Class in accordance with DTC procedures. With respect
to each Class of Offered Securities, Securityholders may hold their Securities
through DTC in the United States or Clearstream Banking, societe anonyme
("Clearstream") 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 certificates. Clearstream and Euroclear will hold omnibus positions on
behalf of the Clearstream Customers and the Euroclear Participants,
respectively, through customers' securities accounts in Clearstream'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 2000-3 will rank pari passu with all other outstanding
Series.
Previously Issued Series
The Trust has previously issued eleven other Series that will remain
outstanding on the date of issuance of the 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" in this
supplement.
Interest Payments
The Class A Securities will accrue interest at a rate equal to 0.26% per
annum above LIBOR, determined as set forth below, for the period from October
27, 2000 (the "Closing Date") through November 19, 2000, from November 20, 2000
through December 19, 2000 and with respect to each Interest Accrual Period
thereafter (the "Class A Interest Rate"). The Class B Securities will accrue
interest at a rate equal to 0.68% per annum above LIBOR, determined as set
forth below, for the period from the Closing Date through November 19, 2000,
from November 20, 2000 through December 19, 2000 and with respect to each
Interest Accrual Period thereafter (the "Class B Interest Rate").
The Trustee will determine LIBOR on October 25, 2000 for the period from the
Closing Date through November 19, 2000, on November 16, 2000 for the period
from November 20, 2000 through December 19, 2000 and, for each Interest Accrual
Period thereafter, on the second business day prior to the Distribution Date on
which such Interest Accrual Period commences (each, a "LIBOR Determination
Date"). For purposes of
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<PAGE>
calculating LIBOR, a business day is any day on which banks in London and New
York are open for the transaction of international business.
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 that the initial Interest Accrual
Period will be the period from and including the Closing Date through December
19, 2000.
"LIBOR" means, as of any LIBOR Determination Date, the offered rate for
deposits in United States dollars for one month (commencing on the first day
of the relevant Interest Accrual Period) which appears on Telerate Page 3750
as of 11:00 a.m., London time, on the LIBOR Determination Date for such
Interest Accrual Period. If such rate does not appear on Telerate Page 3750,
the rate for such LIBOR Determination Date will be determined on the basis of
the rates at which deposits in United States dollars are offered by the
Reference Banks at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market for a period
equal to one month (commencing on the first day of the relevant Interest
Accrual Period). The Trustee will request the principal London office of each
such bank to provide a quotation of its rate. If at least two such quotations
are provided, the rate for such LIBOR Determination Date will be the
arithmetic mean of the quotations. If fewer than two quotations are provided
as requested, the rate for such LIBOR Determination Date will be the
arithmetic mean of the rates quoted by four major banks in New York City,
selected by the Trustee, at approximately 11:00 a.m., New York City time, on
that LIBOR Determination Date for loans in United States dollars to leading
European banks for a period equal to one month (commencing on the first day of
the relevant Interest Accrual Period).
"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate Market Report (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the Servicer.
The Class A Interest Rate and the Class B Interest Rate applicable to the
then current and immediately preceding Interest Accrual Period may be obtained
by telephoning the Trustee at its Corporate Trust Office at (302) 451-2500.
Interest on the Offered Securities will be calculated on the basis of the
actual number of days in the related Interest Accrual Period and a 360-day
year.
Interest will be distributed on December 20, 2000 and on the 20th day of
each following month (or, if such 20th day is not a business day, the next
succeeding business day) (each, a "Distribution Date").
Interest payments on the Class A Securities and the Class B Securities on
any Distribution Date will be calculated on the outstanding principal balance
for the related Interest Accrual Period of the Class A Securities or Class B
Securities, as applicable, at the close of business on the first day of the
related Interest Accrual Period.
Interest payments on the Offered Securities on any Distribution Date will
be funded from Available Series 2000-3 Finance Charge Collections with respect
to the preceding Monthly Period and from certain other funds allocated as set
forth in the Pooling and Servicing Agreement to the Offered Securities and
deposited on each business day during such Monthly Period in the Interest
Funding Account.
"Available Series 2000-3 Finance Charge Collections" means, with respect to
any Monthly Period, an amount equal to the sum of (a) prior to the date on
which a Pay Out Event is deemed to occur, the Floating Percentage of the sum
of Collections of Finance Charge Receivables and the amount of overdue
Adjustment Payments made by the Transferor or, on and after the date on which
a Pay Out Event is deemed to occur, the Fixed/Floating Percentage of the sum
of Collections of Finance Charge Receivables and the amount of overdue
Adjustment Payments made by the Transferor, (b) investment earnings on amounts
on deposit in the Payment Reserve Account, the Principal Funding Account, the
Accumulation Period Reserve Account and the
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<PAGE>
Pre-Funding Account, (c) amounts on deposit in the Cap Proceeds Account, if
any, and (d) amounts on deposit in the Payment Reserve Account, if any, if and
to the extent the Transferor designates that such amounts are to be so applied.
Net investment earnings on amounts in the Excess Funding Account are treated as
Finance Charge Collections.
The Class A Interest Rate and the Class B Interest Rate as well as the
amount of Class A Monthly Interest and Class B Monthly Interest applicable to
an Interest Accrual Period will be included in a statement to the Class A and
the Class B 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, subject to certain limitations, including the
allocation of any Redirected Principal Collections with respect to the related
Monthly Period to pay the Class A Required Amount and the Class B Required
Amount, will be treated as Shared Principal Collections.
On each Distribution Date during the Accumulation Period prior to the
payment in full of the Class A Invested Amount, the Trustee will deposit in the
Principal Funding Account an amount equal to the least of (a) Available Series
2000-3 Principal Collections with respect to such Monthly Period, (b) the
applicable Controlled Deposit Amount and (c) the Class A Adjusted Invested
Amount prior to any such deposit. Amounts in the Principal Funding Account will
be paid to the Class A Securityholders on the Class A Expected Final Payment
Date. After the Class A Invested Amount has been paid in full, an amount equal
to, for each Monthly Period, the lesser of (a) the Available Series 2000-3
Principal Collections for such Monthly Period and (b) the Class B Invested
Amount will be distributed to the Class B Securityholders until the Class B
Invested Amount has been paid in full. Such amounts will be paid to the Class B
Securityholders on the Class B Expected Final Payment Date. On the Transfer
Date immediately preceding the Distribution Date on which the Class B Invested
Amount will be paid in full and on each subsequent Transfer Date, an amount
equal to, for each Monthly Period, the lesser of (a) the Available Series 2000-
3 Principal Collections for such Monthly Period and (b) the Excess Collateral
Amount will be distributed to the Excess Collateral Holder until the Excess
Collateral Amount has been paid in full. Such amounts will be paid to the
Excess Collateral Holder on the Excess Collateral Expected Final Payment Date.
During the Accumulation Period, the portion of Available Series 2000-3
Principal Collections not required to be deposited in the Principal Funding
Account or distributed to the Securityholders or the Excess Collateral Holder
will generally be treated as Shared Principal Collections.
"Available Series 2000-3 Principal Collections" means, with respect to any
Monthly Period, or portion thereof, commencing on or after the Amortization
Period Commencement Date, an amount equal to the sum of (i) an amount equal to
the Fixed/Floating Percentage of all Principal Collections (less the amount of
Redirected Principal Collections) received during such Monthly Period, (ii) any
amount on deposit in the Pre-Funding Account or in the Excess Funding Account
to the extent allocated to the Securities with respect to such Monthly Period,
(iii) the aggregate Series Default Amount and the Series 2000-3 Percentage of
overdue Adjustment Payments paid from Available Series 2000-3 Finance Charge
Collections, Transferor Finance Charge Collections, Excess Finance Charge
Collections and Redirected Principal Collections with respect to such Monthly
Period and any reimbursements from Available Series 2000-3 Finance Charge
Collections, Transferor Finance Charge Collections, Excess Finance Charge
Collections or Redirected Principal Collections of unreimbursed Class A Charge-
Offs, Class B Charge-Offs and Excess Collateral Charge-Offs, (iv) Shared
Principal Collections allocated to the Securities and (v) the proceeds of the
sale of all or a portion of an Interest Rate Cap with respect to such Monthly
Period.
On each Distribution Date during the Early Amortization Period, the Class A
Securityholders will be entitled to receive Available Series 2000-3 Principal
Collections for the preceding Monthly Period in an amount up to the Class A
Invested Amount until the earlier of the date the Class A Invested Amount is
paid in
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<PAGE>
full and the Series 2000-3 Termination Date. In addition, if a Pay Out Event
occurs during the Accumulation Period, the Early Amortization Period will
commence and any amount on deposit in the Principal Funding Account will be
paid to the Class A Securityholders on the Distribution Date following the
Monthly Period in which the Early Amortization Period commences. After payment
in full of the Class A Invested Amount, the Class B Securityholders will be
entitled to receive Available Series 2000-3 Principal Collections on each
Distribution Date during the Early Amortization Period until the earlier of the
date the Class B Invested Amount is paid in full and the Series 2000-3
Termination Date. On each Transfer Date during the Early Amortization Period
(other than the Transfer Date immediately prior to the Series 2000-3
Termination Date), beginning with the Transfer Date immediately preceding the
Distribution Date on which the Class B Invested Amount will be paid in full,
the Excess Collateral Holder will be entitled to receive Available Series 2000-
3 Principal Collections until the earlier of the date the Excess Collateral
Amount is paid in full and the Series 2000-3 Termination Date. See "--Pay Out
Events" below for a discussion of events which might lead to the commencement
of the Early Amortization Period.
In the event of a sale of the Receivables and an early termination of the
Trust due to a Trigger Event, the breach of certain representations and
warranties, an optional repurchase of the Receivables by the Transferor, a
repurchase of the Receivables in connection with a Servicer Default or a sale
of the Receivables in connection with the Termination Date distributions of
principal will be made to the Securityholders upon surrender of their
Securities. See "--Pay Out Events" and "--Final Payment of Principal;
Termination" below and "Description of the Securities--Pay Out Events," "--
Servicer Default" and "--Final Payment of Principal; Termination" in the
attached prospectus. The proceeds of any such sale or repurchase of Receivables
will be allocated first to pay amounts due with respect to the Class A
Securities, then to pay amounts due with respect to the Class B Securities and
then to pay amounts due with respect to the Excess Collateral as described in
this supplement.
Pre-Funding Account and Funding Period
During the period from and including the Closing Date to but excluding the
earliest of (x) the first day for which the Invested Amount equals the Full
Invested Amount, (y) the first day on which a Pay Out Event is deemed to occur
and (z) the first business day of the February 2001 Monthly Period (the
"Funding Period"), the Pre-Funded Amount will be maintained in a trust account
to be established with the Trustee (the "Pre-Funding Account"). The "Pre-Funded
Amount" will equal the amount of the initial deposit to the Pre-Funding
Account, less the amounts of any increases in the Invested Amount pursuant to
the Series 2000-3 Supplement in connection with an increase in the amount of
Receivables in the Trust or the deposit of the amount in the Pre-Funding
Account into the Excess Funding Account at the end of the Funding Period. On
the Closing Date a cash deposit will be made to the Pre-Funding Account such
that the amount of Principal Receivables plus the amount of such cash deposit
on such date will at least equal the sum of the initial outstanding principal
balances of the Class A Securities, the Class B Securities, the Excess
Collateral and the then current outstanding principal amount of the previously
issued Series. Funds on deposit in the Pre-Funding Account will be invested by
the Trustee at the direction of the Servicer in Cash Equivalents. On each
Transfer Date with respect to the Funding Period, all investment income (net of
investment losses and expenses) earned on amounts in the Pre-Funding Account
since the preceding Transfer Date will be applied as if such amounts were
Available Series 2000-3 Finance Charge Collections on the last business day of
the preceding Monthly Period.
During the Funding Period, funds on deposit in the Pre-Funding Account will
be withdrawn and paid to the Transferor to the extent of any increases in the
Invested Amount as a result of the increase in the amount of Receivables in the
Trust. The Transferor expects that the funds on deposit in the Pre-Funding
Account will be fully invested in Receivables by the end of the January 2001
Monthly Period. In the event of the occurrence of a Pay Out Event during the
Funding Period, the amounts remaining on deposit in the Pre-Funding Account
will be payable as principal, first to the Class A Securityholders until the
Class A Invested Amount is paid in full, then to the Class B Securityholders
until the Class B Invested Amount is paid in full, and then to the Excess
Collateral
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<PAGE>
Holder until the Excess Collateral Amount is paid in full. Should the Pre-
Funded Amount be greater than zero on the first day of the February 2001
Monthly Period, such amount will be deposited in the Excess Funding Account and
the Invested Amount will be increased in an amount equal to such deposit.
Amounts on deposit in the Excess Funding Account are treated as assets of the
Trust allocated to all Series then outstanding and the Exchangeable Transferor
Security and will be applied as described in "Description of the Securities--
Excess Funding Account" in the attached prospectus.
Postponement of Accumulation Period
The Accumulation Period is scheduled to begin at the close of business on
the last day of the September 2004 Monthly Period. Upon written notice to the
Trustee, the Servicer may elect to postpone the commencement of the
Accumulation Period, and extend the length of the Revolving Period, subject to
certain conditions including those set forth below. The Servicer may make such
election only if the Accumulation Period Length (determined as described below)
is less than twelve months. On each Determination Date beginning in July 2004
and ending when 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 to an amount equal to
the Class A Invested Amount no later than the Class A Expected Final Payment
Date, based on (a) the 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
all 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 less than one month. If the Accumulation Period
is postponed in accordance with the foregoing, and if a Pay Out Event occurs
after the date originally scheduled as the commencement date of the
Accumulation Period, it is probable that Securityholders would receive some of
their principal later than if the Accumulation Period had not been so
postponed.
Subordination
The Class B Securities will be subordinated to the extent necessary to fund
certain payments with respect to the Class A Securities. To the extent the
Class B Invested Amount is reduced, the percentage of Finance Charge
Collections allocated to the Class B Securityholders in subsequent Monthly
Periods will be reduced. Moreover, to the extent the amount of such reduction
in the Class B Invested Amount is not reimbursed, the amount of principal
distributable to the Class B Securityholders will be reduced. In addition, the
Excess Collateral will be subordinated to the extent necessary to fund certain
payments with respect to the Class A Securities and Class B Securities. To the
extent the Excess Collateral Amount is reduced, the percentage of Finance
Charge Collections allocated to the Excess Collateral Holder in subsequent
Monthly Periods will be reduced. Moreover, to the extent the amount of such
reduction in the Excess Collateral Amount is not reimbursed, the amount of
principal distributable to the Excess Collateral Holder will be reduced. In
general, principal will not be paid to the Excess Collateral Holder until the
Transfer Date immediately preceding the Distribution Date on which the Class B
Invested Amount will be paid in full. In addition to being subject to reduction
as described in "Description of the Offered Securities--Subordination" and "--
Redirected Principal Collections" in this supplement, if certain conditions are
satisfied, the Excess Collateral Amount may be reduced to a minimum level with
the consent of the Rating Agencies.
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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 2000-3
Finance Charge Collections applied to the payment thereof as described below in
clauses (v) and (vi) 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 Excess Collateral Amount (following the
reduction thereof in an amount equal to the amount of any Redirected Principal
Collections to be applied on the related Distribution Date) will be reduced by
the amount by which the sum of the aggregate Series Default Amount and the
unpaid Adjustment Payments exceeds the amount applied with respect thereto
during the preceding Monthly Period. Such reductions of the Excess Collateral
Amount will thereafter be reimbursed and the Excess Collateral Amount increased
on each business day by the amount, if any, of Available Series 2000-3 Finance
Charge Collections, Excess Finance Charge Collections and Transferor Finance
Charge Collections for such business day allocated and available for that
purpose.
In the event that any such reduction of the Excess Collateral Amount would
cause the Excess Collateral Amount to be a negative number, the Excess
Collateral Amount will be reduced to zero and the Class B Invested Amount will
be reduced by the amount by which the Excess Collateral Amount would have been
reduced below zero, but not more than the sum of the remaining Series Default
Amount and the remaining unpaid Adjustment Payments for such Monthly Period.
Such reductions of the Class B Invested Amount will thereafter be reimbursed
and the Class B Invested Amount increased on each business day by the amount,
if any, of Available Series 2000-3 Finance Charge Collections, Excess Finance
Charge Collections and Transferor Finance Charge Collections for such business
day allocated and available for that purpose.
In the event that any such reduction of the Class B Invested Amount would
cause the Class B Invested Amount to be a negative number, the Class B Invested
Amount will be reduced to zero and the Class A Invested Amount will be reduced
by the amount by which the Class B Invested Amount would have been reduced
below zero, but not more than the sum of the remaining Series Default Amount
and the remaining unpaid Adjustment Payments for such Monthly Period. Such
reductions of the Class A Invested Amount will thereafter be reimbursed and the
Class A Invested Amount increased on each business day by the amount, if any,
of Available Series 2000-3 Finance Charge Collections, Excess Finance Charge
Collections and Transferor Finance Charge Collections for such business day
allocated and available for that purpose.
The Interest Rate Caps
The Transferor will obtain and at all times prior to the Series 2000-3
Termination Date maintain one or more interest rate caps ("Interest Rate Caps")
whose notional amounts singly or taken as a group equal or exceed an amount
equal to the product of (i) the Excess Collateral Initial Amount less the
aggregate amount of principal payments made to the Excess Collateral Holder and
(ii) the Excess Collateral Notional Percentage. The Transferor will pledge to
the Trustee for the benefit of the Securityholders all of the Transferor's
right, title and interest in and to the interest rate cap agreements and the
Interest Rate Caps arising thereunder, together with the Cap Proceeds Account
and all other proceeds thereof, as collateral security for the benefit of the
Securityholders. Pursuant to the Interest Rate Caps, on each Transfer Date on
which LIBOR for the related Interest Accrual Period exceeds 10.50%, the
provider of the Interest Rate Caps will make a payment to the Trustee, on
behalf of the Trust, in an amount equal to the product of (i) such excess, (ii)
the notional amount as of such Transfer Date and (iii) the actual number of
days in the related Monthly Period divided by 360.
The Interest Rate Caps will terminate on the Series 2000-3 Termination Date;
provided, however, that the Interest Rate Caps may be terminated at an earlier
date if the Trustee has obtained a substitute interest rate cap or entered into
an alternative arrangement satisfactory to the Rating Agencies, which in each
case will not result in the reduction or withdrawal of the rating of the
Offered Securities or the securities secured by the Excess Collateral (such
substitute interest rate cap, a "Replacement Interest Rate Cap"; such
alternative arrangement, a "Qualified Substitute Arrangement").
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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 an amount not less than zero equal to the product of (i) the Excess
Collateral Initial Amount less the aggregate amount of principal payments made
to the Excess Collateral Holder times (ii) the Excess Collateral Notional
Percentage, subject to (among other things) Rating Agency confirmation of the
rating of the Offered Securities and the securities secured by the Excess
Collateral. Funds from any such sale will be applied as Principal Collections
allocable in accordance with the allocations described below in "--Application
of Collections--Payment of Principal." Each Interest Rate Cap will provide for
payments to the Trustee and the Trust's interest in respect of such payments
will be deposited into the Cap Proceeds Account.
The Trustee will establish and maintain with a Qualified Institution in the
name of the Trust, for the benefit of the 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.
"Excess Collateral Notional Percentage" means 53.66%.
Interest Rate Cap Provider
Each "Interest Rate Cap Provider" will be a third party cap provider having
a short-term rating acceptable to the Rating Agencies. The initial Interest
Rate Cap Provider is Barclays Bank PLC. Following is a description of Barclays
Bank PLC, which has been provided by the Interest Rate Cap Provider. Neither
the Transferor nor the Servicer makes any representation as to the accuracy or
completeness of such information.
Barclays Bank PLC
Barclays Bank PLC ("Barclays Bank") and its subsidiary undertakings taken
together ("Barclays Group"), are a United Kingdom based financial services
group engaged primarily in the banking and investment banking businesses. In
terms of assets employed, Barclays Group is one of the largest financial
services groups in the United Kingdom. Barclays Group also operates in the
financial markets of many other countries around the world. In addition to
servicing domestic markets, Barclays Group is a principal provider of
coordinated global services to multinational corporations and financial
institutions in the world's main financial centers. Principal activities
include retail and corporate banking, investment banking and insurance. As of
June 30, 2000, the total consolidated assets of Barclays Group were
(Pounds)286.385 million, based on the audited financial statements for the six
month period ended June 30, 2000.
Moody's currently rates Barclays Bank's long-term obligations "Aa2" and
short-term obligations as "P-1." Standard & Poor's currently rates Barclays
Bank's long-term obligations "AA" and its short-term obligations as "A-1+."
Fitch, Inc. currently rates Barclays Bank's long-term obligations "AA+" and its
short-term obligations "F1+." Further information with respect to such ratings
may be obtained from Moody's, Standard & Poor's and Fitch, Inc., respectively.
No assurances can be given that the current ratings of Barclays Bank's
instruments will be maintained.
Barclays Bank has supplied the information relating to it in this subsection
entitled "--Barclays Bank PLC." The information concerning Barclays Bank
contained herein is furnished solely to provide limited
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introductory information regarding Barclays Bank and does not purport to be
comprehensive. Such information is qualified in its entirety by the detailed
information appearing in the documents and financial statements referenced
above. The delivery of this information shall not create any implication that
there has been no change in the affairs of Barclays Bank since the date hereof
or that the information contained or referred to herein is correct as of any
time subsequent to its date.
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 Excess Collateral Holder's 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,
the Class B Securityholders' Interest and the Excess Collateral Holder's
Interest, based on the percentage equivalent of a fraction the numerator of
which is the Class A Adjusted Invested Amount, the Class B Invested Amount or
the Excess Collateral Amount, respectively, at the end of the preceding
business day and the denominator of which is the greater of (a) the sum of the
aggregate amount of Principal Receivables and amounts on deposit in the Excess
Funding Account as of the end of the preceding business day and (b) the sum of
the numerators for all classes of all Series then outstanding used to calculate
the applicable allocation percentage (the "Class A Floating Percentage," the
"Class B Floating Percentage" and the "Excess Collateral Floating Percentage,"
respectively; the sum of all such percentages, the "Floating Percentage").
During the Revolving Period, all Principal Collections allocable to the
Securities will be allocated and paid to the Transferor (except for Collections
applied as Redirected Principal Collections and Shared Principal Collections
for the benefit of the holders of securities of other Series, if any, and
except for funds deposited in the Excess Funding Account). On any business day
on or after an Amortization Period Commencement Date, Principal Collections
will be allocated to the Securityholders' Interest based on the percentage
equivalent of a fraction the numerator of which is the Class A Invested Amount,
the Class B Invested Amount, or the Excess Collateral 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 with respect
to Principal Collections for all Series (the "Class A Fixed/Floating
Percentage," the "Class B Fixed/Floating Percentage" and the "Excess Collateral
Fixed/Floating Percentage," respectively; the sum of all such percentages, the
"Fixed/Floating Percentage"). Finance Charge Collections will be allocated on
and after the date on which a Pay Out Event is deemed to occur to the
Securityholders' Interest based on the Fixed/Floating Percentage; provided,
however, that 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" below.
Finance Charge Collections, Principal Collections and the amount of all
Defaulted Receivables will be allocated to the Transferor based on the
Transferor Percentage. The term "Transferor Percentage" means (a) when used
with respect to (i) Principal Collections during the Revolving Period, (ii)
Finance Charge Collections prior to the date on which a Pay Out Event occurs
and (iii) the amount of Defaulted Receivables at all times, 100 percent minus
the sum of the Floating Percentage and the applicable Investor Percentages used
for all other Series and (b) when used with respect to (i) Principal
Collections during an Amortization Period and (ii) Finance Charge Collections
on and after the date on which a Pay Out Event occurs, 100 percent minus the
sum of the applicable Fixed/Floating Percentage and the Investor Percentages
used with respect to Principal Collections or Finance Charge Collections, as
applicable, for all other Series.
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As used in this supplement, the term "Amortization Period Commencement Date"
means the earlier of (a) the first day of the Accumulation Period and (b) the
date on which a Pay Out Event occurs or is deemed to have occurred.
As used in this supplement, the term "Class A Invested Amount" for any date
means an amount equal to (a) the Class A Initial Invested Amount less the Class
A Percentage of the initial deposit to the Pre-Funding Account, plus the Class
A Percentage of the amount of any withdrawals from the Pre-Funding Account
during the Funding Period in connection with the addition of Receivables to the
Trust and the deposit of the amounts in the Pre-Funding Account at the end of
the Funding Period into the Excess Funding Account, minus (b) the aggregate
amount of principal payments (except principal payments made from the Pre-
Funding Account) made to Class A Securityholders through and including such
date, 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," plus (d) the aggregate amount of Available Series 2000-3 Finance
Charge Collections, Transferor Finance Charge Collections, Excess Finance
Charge Collections and Redirected Principal Collections applied on all prior
Distribution Dates for the purpose of reimbursing amounts deducted pursuant to
the foregoing clause (c); provided, however, that the Class A Invested Amount
may not be reduced below zero. 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.
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
$372,928,000.
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 less the Class
B Percentage of the initial deposit to the Pre-Funding Account, plus the Class
B Percentage of the amount of any withdrawals from the Pre-Funding Account
during the Funding Period in connection with the addition of Receivables to the
Trust and the deposit of the amounts in the Pre-Funding Account at the end of
the Funding Period into the Excess Funding Account, minus (b) the aggregate
amount of principal payments (except principal payments made from the Pre-
Funding Account) made to Class B Securityholders through and including such
date, minus (c) the aggregate amount of Class B Charge-Offs for all prior
Distribution Dates, equal to the amount by which the Class B Invested Amount
has been reduced to fund the Series Default Amount and the unpaid Adjustment
Payments on all prior Distribution Dates as described below under "--Investor
Charge-Offs," minus (d) the aggregate amount of Redirected Class B Principal
Collections for which the Excess Collateral Amount has not been reduced for all
prior Distribution Dates, plus (e) the aggregate amount of Available Series
2000-3 Finance Charge Collections, Transferor Finance Charge Collections,
Excess Finance Charge Collections, Redirected Excess Collateral Principal
Collections and certain other amounts applied on all prior Distribution Dates
for the purpose of reimbursing amounts deducted pursuant to the foregoing
clauses (c) and (d); provided, however, that the Class B Invested Amount may
not be reduced below zero. The "Class B Percentage" means for any business day
during a Monthly Period a fraction the numerator of which is the Class B
Initial Invested Amount and the denominator of which is the Initial Invested
Amount.
As used in this supplement, the term "Class B Initial Invested Amount" means
$66,298,000.
As used in this supplement, the term "Excess Collateral Amount" for any date
means an amount equal to (a) the Excess Collateral Initial Amount less the
Excess Collateral Percentage of the initial deposit to the Pre-Funding Account,
plus the Excess Collateral Percentage of the amount of any withdrawals from the
Pre-Funding Account during the Funding Period in connection with the addition
of Receivables to the Trust and the deposit of the amounts in the Pre-Funding
Account at the end of the Funding Period into the Excess Funding Account, minus
(b) the aggregate amount of principal payments (except principal payments made
from the Pre-Funding Account) made to the Excess Collateral Holder through and
including such date, minus (c) the
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aggregate amount of Excess Collateral Charge-Offs for all prior Distribution
Dates, equal to the amount by which the Excess Collateral 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 Excess Collateral Principal
Collections for all prior Distribution Dates, plus (e) the aggregate amount of
Available Series 2000-3 Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections and certain other amounts
applied on all prior Distribution Dates for the purpose of reimbursing amounts
deducted pursuant to the foregoing clauses (c) and (d); provided, however, that
the Excess Collateral Amount may not be reduced below zero. The "Excess
Collateral Percentage" means for any business day during a Monthly Period a
fraction the numerator of which is the Excess Collateral Initial Amount and the
denominator of which is the Initial Invested Amount.
As used in this supplement, the term "Excess Collateral Initial Amount"
means $113,260,188.
As used in this supplement, the term "Invested Amount" means the sum of the
Class A Invested Amount, the Class B Invested Amount and the Excess Collateral
Amount.
As used in this supplement, the term "Initial Invested Amount" means the sum
of the Class A Initial Invested Amount, the Class B Initial Invested Amount and
the Excess Collateral Initial Amount.
As used in this supplement, the term "Class A Securityholders' Interest"
means the interest in the assets of the Trust allocated to the Class A
Securityholders.
As used in this supplement, the term "Class B Securityholders' Interest"
means the interest in the assets of the Trust allocated to the Class B
Securityholders.
As used in this supplement, the term "Excess Collateral Holder's Interest"
means the interest in the assets of the Trust allocated to the Excess
Collateral Holder.
The Invested Amount will, except as otherwise provided herein, increase up
to a maximum amount of $552,486,188 (the "Full Invested Amount") during the
Funding Period, remain fixed at the Full Invested Amount during the Revolving
Period and decline thereafter during any Early Amortization Period as principal
is paid on the Securities. The Invested Amount is subject to increase during
the Funding Period to the extent amounts are withdrawn from the Pre-Funding
Account and paid to the Transferor in connection with the addition of Principal
Receivables to the Trust or, at the end of the Funding Period, deposited in the
Excess Funding Account.
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 Class A Securityholders, the Class B
Securityholders and the Excess Collateral Holder will change each business day
based on the relationship of the Class A Adjusted Invested Amount, the Class B
Invested Amount and the Excess Collateral 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, the Class B
Securityholders and the Excess Collateral Holder, 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 and principal collections allocable to the Excess Collateral
are subject to possible redirection for the benefit of the Class A
Securityholders and the Class B Securityholders. See "--Redirected Principal
Collections" below.
Redirected Cash Flows
On each business day, to the extent that any amounts are on deposit in the
Excess Funding Account or the Pre-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 allocated to Series 2000-3 and the amount on deposit in the
Pre-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
and the Pre-Funding Account are invested. The Servicer will
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apply an amount equal to the lesser of (i) the Series 2000-3 Percentage of
Finance Charge Collections allocable to the Exchangeable Transferor Security
("Transferor Finance Charge Collections") on such business day and (ii) the
Negative Carry Amount for such business day in the manner specified for
application of Available Series 2000-3 Finance Charge Collections.
As used in this supplement, "Series 2000-3 Percentage" means the percentage
equivalent of a fraction the numerator of which is the Invested Amount and the
denominator of which is the sum of the Invested Amounts of all Series then
outstanding.
On each Distribution Date, the Servicer will determine the amount (the
"Required Amount"), if any, by which the full amount to be paid pursuant to
clauses (i) through (x) in "--Application of Collections-- Payment of Fees,
Interest and Other Items" below exceeds the portion of Available Series 2000-3
Finance Charge Collections and Transferor Finance Charge Collections, if any,
applied to the payment of the amounts described in such clauses. To the extent
of any Required Amount, the Servicer will apply all or a portion of the Excess
Finance Charge Collections of other Series with respect to such business day
allocable to the Series 2000-3 Securities in an amount equal to the remaining
Required Amount. Excess Finance Charge Collections from other Series allocable
to the Series 2000-3 Securities for any business day will be equal to the
product of (a) Excess Finance Charge Collections available from all other
Series for such business day and (b) a fraction, the numerator of which is the
Required Amount for such business day (as reduced by amounts applied pursuant
to the second preceding paragraph) and the denominator of which is the
aggregate amount of shortfalls in required amounts or other amounts to be paid
from available Finance Charge Collections for all Series for such business day.
"Excess Finance Charge Collections" means any Collections of Finance Charge
Receivables allocable to any Series in excess of the amounts necessary to make
required payments with respect to such Series.
Redirected Principal Collections
On each business day, the Servicer will apply or cause the Trustee to apply
an amount, not to exceed the Excess Collateral Amount, equal to the product of
(a)(i) during the Revolving Period, the Excess Collateral Floating Percentage
or (ii) during an Amortization Period, the Excess Collateral 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
Excess Collateral Principal Collections"):
(a) an amount equal to the sum of (i) the Class A Required Amount with
respect to such business day and (ii) the Class B Required Amount with
respect to such business day, will be applied first to the components of
the Class A Required Amount and then to the components of the Class B
Required Amount in the same priority as such components are applied from
Available Series 2000-3 Finance Charge Collections, 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 Excess
Collateral Principal Collections) will be applied as Shared Principal
Collections and during an Amortization Period such collections will be
included in Available Series 2000-3 Principal Collections.
On each business day, the Servicer will apply or cause the Trustee to apply
an amount, not to exceed the Class B Invested Amount, equal to the product of
(a)(i) during the Revolving Period, the Class B Floating Percentage or (ii)
during an Amortization Period, the Class B Fixed/Floating Percentage and (b)
the amount of Principal Collections with respect to such business day to the
following amounts in the following priority (such collections applied in
accordance with clause (a) below are called "Redirected Class B Principal
Collections" and the sum of Redirected Excess Collateral Principal Collections
and Redirected Class B Principal Collections is called "Redirected Principal
Collections"):
(a) an amount equal to the Class A Required Amount with respect to such
business day, will be applied to the components of the Class A Required
Amount, as described in "--Application of Collections--Payment of Fees,
Interest and Other Items" below; and
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(b) during the Revolving Period, any such collections not applied in the
foregoing manner (and therefore not constituting Redirected Class B
Principal Collections) will be applied as Shared Principal Collections and
during an Amortization Period such collections will be included in
Available Series 2000-3 Principal Collections.
On each Distribution Date, the Excess Collateral Amount will be reduced by
the amount of unreimbursed Redirected Principal Collections for the related
Monthly Period. In the event such reduction would cause the Excess Collateral
Amount to be a negative number, the Excess Collateral Amount will be reduced to
zero and the Class B Invested Amount will be reduced by the amount by which the
Excess Collateral Amount would have been reduced below zero. In the event that
the reallocation of Principal Collections would cause the Class B Invested
Amount to be a negative number on any Distribution Date, the amount of
Redirected Class B Principal Collections on such Distribution Date will be an
amount not to exceed the amount which would cause the Class B Invested Amount
to be reduced to zero.
"Class A Required Amount" means for any business day during a Monthly Period
the amount, if any, by which (a) the sum of (i) the Class A Monthly Interest
and any overdue Class A Monthly Interest on the related Distribution Date (and
additional interest thereon), (ii) the Class A Floating Percentage of the
amount of Principal Receivables in Defaulted Accounts for such Monthly Period
(to date), (iii) the Class A Percentage of the Monthly Servicing Fee for the
related Monthly Period and (iv) the Class A Floating Percentage of the Series
2000-3 Percentage of the Adjustment Payment required to be made by the
Transferor but not made on such business day and on each previous business day
during such Monthly Period exceeds (b) the Available Series 2000-3 Finance
Charge Collections plus any Excess Finance Charge Collections from other Series
and any Transferor Finance Charge Collections, in each case allocated with
respect thereto.
"Class B Required Amount" means for any business day during a Monthly Period
the amount, if any, by which (a) the sum of (i) the Class B Monthly Interest
and any overdue Class B Monthly Interest on the related Distribution Date (and
additional interest thereon), (ii) the Class B Floating Percentage of the
amount of Principal Receivables in Defaulted Accounts for such Monthly Period
(to date), (iii) the Class B Percentage of the Monthly Servicing Fee for the
related Monthly Period, (iv) the Class B Floating Percentage of the Series
2000-3 Percentage of the Adjustment Payment required to be made by the
Transferor but not made on such business day and on each previous business day
during such Monthly Period and (v) the unreimbursed amount by which the Class B
Invested Amount has been reduced on prior business days because of unreimbursed
Class B Charge-Offs and Redirected Class B Principal Collections exceeds (b)
the Available Series 2000-3 Finance Charge Collections plus any Excess Finance
Charge Collections from other Series and any Transferor Finance Charge
Collections, in each case allocated with respect thereto.
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 cash collections held by the Servicer may be
commingled and used for the benefit of the Servicer prior to each Transfer Date
and, in the event of the insolvency or bankruptcy of the Servicer or, in
certain circumstances, the
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lapse of certain time periods, the Trust may not have a first-priority
perfected security interest in such collections. In such an event, the amount
payable to you could be lower than the outstanding principal amount and accrued
interest on the Securities, thus resulting in losses to you. 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 Series 2000-3, 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 2000-3 Securities and
any amount on deposit in the Pre-Funding Account, any amounts to be paid in
respect of the Series Default Amount, unpaid Adjustment Payments, Class A
Charge-Offs, Class B Charge-Offs, Excess Collateral Charge-Offs and any
amount of Shared Principal Collections allocated to the Class A Securities,
the Class B Securities and the Excess Collateral 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 "--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 Payment Reserve Account be (a) retained therein, (b)
applied as Available Series 2000-3 Finance Charge Collections or (c) paid to
the Excess Collateral Holder.
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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
2000-3 Finance Charge Collections and will apply such amount in the following
priority:
(i) an amount equal to the lesser of (A) the Available Series 2000-3
Finance Charge Collections and (B) the excess of (a) the sum of (1) the
Class A Monthly Interest, (2) the amount of any Class A Monthly Interest
previously due but not deposited in the Interest Funding Account in prior
Monthly Periods, and (3) any additional interest (to the extent permitted
by applicable law) at the Class A Interest Rate with respect to interest
amounts that were due but not paid in a prior Monthly Period over (b) the
amount which has already been deposited in the Interest Funding Account
with respect thereto in the current Monthly Period, will be deposited in
the Interest Funding Account for distribution on the next succeeding
Distribution Date to the Class A Securityholders;
(ii) an amount equal to the lesser of (A) any Available Series 2000-3
Finance Charge Collections remaining and (B) the excess of (a) the sum of
(1) the Class B Monthly Interest, (2) the amount of any Class B Monthly
Interest previously due but not deposited in the Interest Funding Account
in prior Monthly Periods, and (3) any additional interest (to the extent
permitted by applicable law) at the Class B Interest Rate with respect to
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, which will be deposited
in the Interest Funding Account for distribution on the next succeeding
Distribution Date to the Class B Securityholders;
(iii) an amount equal to the lesser of (A) any Available Series 2000-3
Finance Charge Collections remaining and (B) the excess of (a) the sum of
(1) the Excess Collateral Minimum Monthly Interest and (2) the amount of
any Excess Collateral Minimum Monthly Interest previously due but not
distributed to the Excess Collateral Holder in prior Monthly Periods over
(b) the amount which has already been distributed to the Excess Collateral
Holder with respect thereto in the current Monthly Period, will be
distributed to the Excess Collateral Holder on such business day;
(iv) an amount equal to the lesser of (A) any Available Series 2000-3
Finance Charge Collections remaining and (B) the portion of the Monthly
Servicing Fee for the current month that has not been previously paid to
the Servicer plus any prior Monthly Servicing Fee that was due but not
previously paid to the Servicer will be distributed to the Servicer;
(v) an amount equal to the lesser of (A) the sum of any Available Series
2000-3 Finance Charge Collections remaining and, if such day is a Default
Recognition Date, an amount equal to the aggregate amount paid to the
Transferor pursuant to the Transfer and Administration Agreement on each
business day other than a Default Recognition Date to be treated as
"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 (x) during the Revolving Period, treated as Shared
Principal Collections and (y) during an Amortization Period, treated as
Available Series 2000-3 Principal Collections for the benefit of the
Securities;
(vi) an amount equal to the lesser of (A) any Available Series 2000-3
Finance Charge Collections remaining and (B) the Series 2000-3 Percentage
of any Adjustment Payment which the Transferor is required but fails to
make pursuant to the Pooling and Servicing Agreement will be (a) during the
Revolving Period, treated as Shared Principal Collections and (b) during an
Amortization Period, treated as Available Series 2000-3 Principal
Collections for the benefit of the Securities;
(vii) an amount equal to the lesser of (A) any Available Series 2000-3
Finance Charge Collections remaining and (B) unreimbursed Class A Charge-
Offs, if any, will be applied to reimburse Class A Charge-Offs and (x)
during the Revolving Period, be treated as Shared Principal Collections and
(y) during an Amortization Period, be treated as Available Series 2000-3
Principal Collections for the benefit of the Securities;
(viii) an amount equal to the lesser of (A) any Available Series 2000-3
Finance Charge Collections remaining and (B) the unreimbursed amount by
which the Class B Invested Amount has been reduced
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pursuant to clauses (c) and (d) of the definition thereof on prior business
days, if any, will be applied to reimburse such reduced amount and (x)
during the Revolving Period, be treated as Shared Principal Collections and
(y) during an Amortization Period, be treated as Available Series 2000-3
Principal Collections for the benefit of the Securities;
(ix) an amount equal to the lesser of (A) any Available Series 2000-3
Finance Charge Collections remaining and (B) the unreimbursed amount by
which the Excess Collateral 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 reduced amount and (x) during the Revolving
Period, be treated as Shared Principal Collections and (y) during an
Amortization Period, be treated as Available Series 2000-3 Principal
Collections for the benefit of the Securities;
(x) 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 2000-3 Finance Charge
Collections remaining and (B) the excess, if any, of the Required Reserve
Account Amount over the Available Reserve Account Amount will be deposited
in the Accumulation Period Reserve Account; and
(xi) any Available Series 2000-3 Finance Charge Collections remaining
will be distributed to the Excess Collateral Holder.
On each business day during a Monthly Period, any amount distributed to the
Trustee pursuant to the Transfer and Administration Agreement to be deposited
in the Payment Reserve Account shall be deposited in the Payment Reserve
Account. 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 amounts referred to in the preceding
sentence on any business day for application, at its option, as Available
Series 2000-3 Finance Charge Collections on any subsequent business day.
On each business day during a Monthly Period, any amount distributed to the
Trustee pursuant to the Transfer and Administration Agreement (i) to cover
shortfalls, if any, in amounts payable from Finance Charge Collections to
securityholders of other Series shall be applied as Excess Finance Charge
Collections and (ii) to pay the reasonable costs and expenses of a successor
Servicer shall be paid to such Servicer.
Notwithstanding the foregoing, if on any Default Recognition Date the sum of
the amount of Available Series 2000-3 Finance Charge Collections (including all
amounts on deposit in the Payment Reserve Account) remaining after application
pursuant to clause (iv) above and Transferor Retained Finance Charge
Collections is less than the amount of the aggregate Series Default Amount for
such business day, the Servicer will apply (i) amounts deposited in the
Accumulation Period Reserve Account during the then current Monthly Period and
(ii) any amount distributed to the Trustee pursuant to the Transfer and
Administration Agreement for application in accordance with the instructions of
the Servicer in respect of such shortfall, in accordance with clause (v) above
to the extent of such shortfall.
On each Transfer Date, all investment income (net of investment losses and
expenses) on funds on deposit in the Principal Funding Account, the Principal
Account, the Pre-Funding Account and the Accumulation Period Reserve Account
will be applied as if such amounts were Available Series 2000-3 Finance Charge
Collections on the last business day of the preceding Monthly Period.
"Class A Monthly Interest" with respect to any Distribution Date will equal
the product of (i) the Class A Interest Rate for the related Interest Accrual
Period, (ii) the outstanding principal balance of the Class A Securities at the
close of business on the first day of the related Interest Accrual Period and
(iii) a fraction the numerator of which is the actual number of days in such
Interest Accrual Period and the denominator of which is 360.
"Class B Monthly Interest" with respect to any Distribution Date will equal
the product of (i) the Class B Interest Rate for the related Interest Accrual
Period, (ii) the outstanding principal amount of the Class B Securities at the
close of business on the first day of the related Interest Accrual Period and
(iii) a
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fraction the numerator of which is the actual number of days in such Interest
Accrual Period and the denominator of which is 360.
"Excess Collateral Minimum Monthly Interest" with respect to any Transfer
Date will equal the product of (i) the Excess Collateral Minimum Rate for the
related Interest Accrual Period, (ii) the Excess Collateral Initial Amount less
the aggregate amount distributed to the Excess Collateral Holder in respect of
Excess Collateral Monthly Principal for all prior Transfer Dates 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.
"Excess Collateral Minimum Rate" means a rate per annum specified in the
agreement between the Transferor and the Excess Collateral Holder relating to
the transfer of the Excess Collateral to the Excess Collateral Holder (the
"Transfer and Administration Agreement") not to exceed the product of the
Excess Collateral Notional Percentage times LIBOR plus 1.50%.
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 above in clause (iv) of "--Allocations" as Shared
Principal Collections which will be applied as described above in clause (vi)
of "--Allocations." On each Transfer Date during an Amortization Period, the
Trustee, acting in accordance with instructions from the Servicer, will apply
Principal Collections on deposit in the Principal Account in the following
priority:
(i) an amount equal to the Class A Principal will be deposited on each
Transfer Date in the Principal Funding Account for distribution to the
Class A Securityholders on the Class A Expected Final Payment Date (with
respect to the Accumulation Period) or distributed to the Class A
Securityholders on each Distribution Date until the Class A Invested Amount
is paid in full (with respect to the Early Amortization Period);
(ii) for each Transfer Date after the Class A Invested Amount has been
paid in full (after taking into account payments to be made on the related
Distribution Date with respect to the Early Amortization Period), an amount
equal to Class B Principal will be distributed to the Class B
Securityholders on each Distribution Date until the Class B Invested Amount
is paid in full;
(iii) for each Transfer Date after the Class B Invested Amount has been
paid in full (after taking into account payments to be made on the related
Distribution Date), an amount equal to Excess Collateral Monthly Principal
will be distributed to the Excess Collateral Holder on each Transfer Date
until the Excess Collateral Amount is paid in full; and
(iv) on each Transfer Date with respect to the Accumulation Period, the
balance of Available Series 2000-3 Principal Collections not applied
pursuant to (i) through (iii) above, if any, 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 above
in clause (vi) of "--Allocations."
In addition to being subject to reduction as described in "Description of
the Offered Securities-- Subordination" and "--Redirected Principal
Collections" in this supplement, if certain conditions are satisfied the Excess
Collateral Amount may be reduced to a minimum level with the consent of the
Rating Agencies.
"Class A Principal" with respect to any Transfer Date relating to the
Accumulation Period or the Early Amortization Period, prior to the payment in
full of the Class A Invested Amount, will equal the least of (i) the Available
Series 2000-3 Principal Collections on deposit in the Principal Account with
respect to the related Transfer Date, (ii) for each Transfer Date with respect
to the Accumulation Period, prior to the payment in full of the Class A
Invested Amount and on or prior to the Class A Expected Final Payment Date, the
applicable Controlled Deposit Amount for such Distribution Date and (iii) the
Class A Adjusted Invested Amount on such Transfer Date.
"Class B Principal" with respect to each Transfer Date relating to the
Accumulation Period beginning with the Transfer Date following the Monthly
Period in which the Class A Invested Amount has been paid in full, or with
respect to each Transfer Date relating to the Early Amortization Period
beginning with the
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Transfer Date immediately preceding the Distribution Date on which the Class A
Securities have been paid in full (after taking into account payments to be
made on the related Distribution Date), prior to the payment in full of the
Class B Invested Amount, will equal the lesser of (i) the Available Series
2000-3 Principal Collections remaining on deposit in the Principal Account with
respect to such Transfer Date after application thereof to Class A Principal,
if any, and (ii) the Class B Invested Amount on such Transfer Date.
"Excess Collateral Monthly Principal" with respect to each Transfer Date
relating to the Accumulation Period or the Early Amortization Period beginning
with the Transfer Date immediately preceding the Distribution Date on which the
Class B Securities have been paid in full (after taking into account payments
to be made on the related Distribution Date), prior to the payment in full of
the Excess Collateral Amount, will equal the lesser of (i) the Available Series
2000-3 Principal Collections remaining on deposit in the Principal Account with
respect to such Transfer Date after application thereof to Class A Principal
and Class B Principal, if any, and (ii) the Excess Collateral Amount on such
Transfer Date.
"Controlled Accumulation Amount" means (a) for any Transfer Date with
respect to the Accumulation Period, prior to the payment in full of the Class A
Invested Amount, $31,077,334; provided, however, that if the commencement of
the Accumulation Period is delayed as described above under "--Postponement of
Accumulation Period," the Controlled Accumulation Amount may be higher than the
amount stated above for each Transfer Date with respect to the Accumulation
Period and will be determined by the Servicer in accordance with the Pooling
and Servicing Agreement based on the principal payment rates for the Accounts
and on the invested amounts of other Series (other than certain excluded
Series) which are scheduled to be in their revolving periods during the
Accumulation Period, and (b) for any Transfer Date with respect to the
Accumulation Period after the payment in full of the Class A Invested Amount,
an amount equal to the sum of the Class B Invested Amount and the Excess
Collateral Amount on such Transfer Date.
"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 for the previous Monthly
Period.
Coverage of Interest Shortfalls
To the extent of any shortfall in the amount of Available Series 2000-3
Finance Charge Collections due to the accumulation of principal in the Excess
Funding Account or the Pre-Funding Account, the Transferor Finance Charge
Collections will be made available to cover the Negative Carry Amount.
Finance Charge Collections allocable to any Series in excess of the amounts
necessary to make required payments with respect to such Series ("Excess
Finance Charge Collections") will be applied to cover any shortfalls with
respect to amounts payable from Finance Charge Collections allocable to any
other Series, pro rata based upon the amounts of the shortfalls, if any, with
respect to such other Series. Any Excess Finance Charge Collections arising
from Available Series 2000-3 Finance Charge Collections and 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 Excess Collateral Holder.
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.
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Defaulted Receivables; Dilution
Receivables in Defaulted Accounts are charged off as uncollectible in
accordance with the Servicer's customary and usual servicing procedures and the
Credit and Collection Policy. See "Direct Merchants Credit Card Bank, N.A.
Activities--Delinquency, Collections and Charge-Offs" in the attached
prospectus and "Trust Credit Card Portfolio--Delinquency and Loss Experience"
in this supplement. On each business day, the Servicer will allocate to the
Securityholders the Series Default Amount. The term "Series Default Amount"
means a portion of all Defaulted Receivables in an amount equal to (i) on any
business day other than a Default Recognition Date, an amount equal to the
product of (a) the Floating Percentage applicable on such business day and (b)
the aggregate principal amount of Defaulted Receivables identified since the
prior reporting date and (ii) on any Default Recognition Date, an amount equal
to the product of (a) the Default Recognition Percentage applicable on such
Default Recognition Date and (b) the aggregate principal amount of Defaulted
Receivables with respect to such Default Recognition Date.
If on any business day the Servicer reduces the amount of any Principal
Receivable without receiving collections therefor or charging off such amount
as uncollectible (any such reduction, a "Dilution"), then the amount of the
Transferor Interest in the Trust will be reduced by the amount of the Dilution
on such business day. In the event the Transferor Interest would be reduced
below the Minimum Transferor Interest, the Transferor will be required to pay
to the Trust the amount of such Dilution (an "Adjustment Payment") out of its
own funds or, to the extent not paid by the Transferor, out of Available Series
2000-3 Finance Charge Collections, Transferor Finance Charge Collections,
Excess Finance Charge Collections or Redirected Principal Collections
designated for such purpose. To the extent that such amounts are not sufficient
to cover the portion of the unpaid Adjustment Payments allocated to Series
2000-3, there will be an Investor Charge-Off as described below.
Investor Charge-Offs
If on the second business day preceding each Distribution Date (the
"Determination Date"), the aggregate Series Default Amount and the Series 2000-
3 Percentage of unpaid Adjustment Payments, if any, for all business days in
the preceding Monthly Period exceeds the aggregate amount of Available Series
2000-3 Finance Charge Collections, Transferor Finance Charge Collections,
Excess Finance Charge Collections, Redirected Principal Collections, Principal
Funding Investment Proceeds, Pre-Funding Account investment proceeds and any
amounts withdrawn from the Accumulation Period Reserve Account, and applied
with respect to the Series Default Amount and the Series 2000-3 Percentage of
unpaid Adjustment Payments with respect to such Monthly Period, then the Excess
Collateral Amount will be reduced by the aggregate amount of such excess, but
not by more than the sum of the remaining aggregate Series Default Amount and
the remaining Series 2000-3 Percentage of unpaid Adjustment Payments for such
Monthly Period (an "Excess Collateral Charge-Off"). The Excess Collateral
Amount thereafter will be increased (but not in excess of the unpaid principal
balance of the Excess Collateral) on any business day by the amounts allocated
and available for that purpose as described above under clause (ix) of "--
Application of Collections--Payment of Fees, Interest and Other Items."
In the event that any such reduction of the Excess Collateral Amount would
cause the Excess Collateral Amount to be a negative number, the Excess
Collateral Amount will be reduced to zero, and the Class B Invested Amount will
be reduced by the aggregate of such excess, but not by more than the sum of the
remaining aggregate Series Default Amount and the remaining Series 2000-3
Percentage of unpaid Adjustment Payments with respect to such Monthly Period (a
"Class B Charge-Off"), which will have the effect of slowing or reducing the
return of principal to the Class B Securityholders. The Class B Invested Amount
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 (viii) 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 Class A Invested Amount will be reduced
by the aggregate of such excess, but not by more than the sum of the remaining
aggregate Series Default Amount and the remaining Series 2000-3 Percentage of
unpaid Adjustment Payments with respect to such Monthly Period (a "Class A
Charge-Off"), which will have the effect of slowing or reducing the return of
principal to the Class A Securityholders. The Class A Invested Amount will
thereafter be increased (but not in excess of the unpaid principal balance of
the Class A Securities) on any business day by the amounts allocated and
available for that purpose as described above under clause (vii) of "--
Application of Collections--Payment of Fees, Interest and Other Items."
Principal Funding Account
Pursuant to the Series 2000-3 Supplement, the Servicer will establish and
maintain with a Qualified Institution a principal funding account as a
segregated trust account held for the benefit of the Securityholders (the
"Principal Funding Account"). During the Accumulation Period, the Trustee at
the direction of the Servicer will transfer from the Principal Account to the
Principal Funding Account Collections in respect of Principal Receivables
(other than Redirected Principal Collections) and Shared Principal Collections
from other Series, if any, allocated to the Securities as described 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 2000-3 Finance Charge Collections on the last
business day of the preceding Monthly Period. If, for any Interest Accrual
Period, the Principal Funding Investment Proceeds are less than an amount equal
to the Covered Amount, the amount of such deficiency will be paid from the
Accumulation Period Reserve Account to the extent of the Available Reserve
Account Amount and applied on the applicable Transfer Date as if such amount
were Available Series 2000-3 Finance Charge Collections on the last business
day of the preceding Monthly Period.
Accumulation Period Reserve Account
Pursuant to the Series 2000-3 Supplement, the Servicer will establish and
maintain with a Qualified Institution a segregated trust account held for the
benefit of the Securityholders (the "Accumulation Period Reserve Account"). The
Accumulation Period Reserve Account is established to assist with the
subsequent distribution of interest on the 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 2000-3 Finance Charge Collections allocated to the Securities (to the
extent described above under "--Application of Collections--Payment of Fees,
Interest and Other Items") to increase the amount on deposit in the
Accumulation Period Reserve Account (to the extent such amount is less than the
Required Reserve Account Amount). The "Reserve Account Funding Date" will be
the first day of the third Monthly Period prior to the commencement of the
Accumulation Period, or such earlier date as the Servicer may determine in
accordance with the Pooling and Servicing Agreement. The "Required Reserve
Account Amount" for any date on or after the Reserve Account Funding Date will
be equal to (a) 0.75 percent of the Class A Invested Amount or (b) any other
amount designated by the Transferor; provided that if such designation is of a
lesser amount, the Transferor shall have provided the Servicer and the Trustee
with evidence that the Rating Agency Condition has been satisfied and the
Transferor shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, based on the facts known to such officer at such
time, in the reasonable belief of the Transferor, such designation will not
cause a Pay Out Event or an event that, after giving of notice or the lapse of
time, would cause a Pay Out Event to occur with respect to Series 2000-3.
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"Rating Agency Condition" means the notification in writing by each Rating
Agency that a proposed action will not result in any Rating Agency reducing or
withdrawing its then existing rating of the investor securities of any
outstanding Series or class with respect to which it is a Rating Agency.
Provided that the Accumulation Period Reserve Account has not terminated as
described below, all amounts on deposit in the Accumulation Period Reserve
Account on any Transfer Date (after giving effect to any deposits to, or
withdrawals from, the Accumulation Period Reserve Account to be made on such
Transfer Date) will be invested by the Trustee at the direction of the Servicer
in Cash Equivalents maturing no later than the following Transfer Date. The
interest and other investment income (net of investment expenses and losses)
earned on such investments will be retained in the Accumulation Period Reserve
Account (to the extent the amount on deposit therein is less than the Required
Reserve Account Amount) or applied on each Transfer Date as if such amount were
Available Series 2000-3 Finance Charge Collections on the last day of the
preceding Monthly Period.
On or before each Transfer Date with respect to the Accumulation Period and
on the first Transfer Date with respect to the Early Amortization Period, a
withdrawal will be made from the Accumulation Period Reserve Account, and the
amount of such withdrawal will be applied as if such amount were Available
Series 2000-3 Finance Charge Collections on the last day of the preceding
Monthly Period in an amount equal to the lesser of (a) the Available Reserve
Account Amount with respect to such Transfer Date and (b) the excess, if any,
of (i) the product of (x) a fraction the numerator of which is the actual
number of days in the related Interest Accrual Period and the denominator of
which is 360, (y) the Class A Interest Rate as 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 Class A 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 Class A 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 2000-3 Finance Charge Collections.
Paired Series
Subject to the satisfaction of the Rating Agency Condition, prior to the
commencement of the Early Amortization Period the Securities may be paired with
one or more other Series or a portion of one or more other Series issued by the
Trust (each, a "Paired Series"). Each Paired Series either will be pre-funded
with an initial deposit to a pre-funding account in an amount up to the initial
principal balance of such Paired Series and primarily from the proceeds of the
sale of such Paired Series or will have a variable principal amount. Any such
pre-funding account will be held for the benefit of such Paired Series and not
for the benefit of the Securityholders. As amounts are deposited in the
Principal Funding Account for the benefit of the Securityholders either (i) in
the case of a pre-funded Paired Series, an equal amount of funds on deposit in
any pre-funding account for such pre-funded Paired Series will be released
(which funds will be distributed to the Transferor) or (ii) in the case of a
Paired Series having a variable principal amount, an interest in such variable
Paired Series in an equal or lesser amount may be sold by the Trust (and the
proceeds thereof will be distributed to the Transferor) and, in either case,
the invested amount in the Trust of such Paired Series will increase by up to a
corresponding amount. Upon payment in full of the Securities, assuming that
there have
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been no unreimbursed charge-offs with respect to any related Paired Series, the
aggregate invested amount of such related Paired Series will have been
increased by an amount up to an aggregate amount equal to the Invested Amount
paid to the Securityholders since the issuance of such Paired Series. The
issuance of a Paired Series will be subject to the conditions described under
"Description of the Securities--Exchanges" in the attached prospectus. There
can be no assurance, however, that the terms of any Paired Series might not
have an impact on the timing or amount of payments received by a
Securityholder. In particular, the denominator of the Fixed/Floating
Percentages for the Class A Securities and the Class B Securities may be
increased upon the occurrence of a Pay Out Event with respect to a Paired
Series resulting in a possible reduction of the percentage of Principal
Collections and Finance Charge Collections allocated to Series 2000-3 if such
event required reliance by Series 2000-3 on clause (b) of the denominator of
the applicable Fixed/Floating Percentages and, in the case of Principal
Collections, allowed payment of principal at such time to the Paired Series.
See "--Allocation Percentages" above.
Defeasance
On the date that the following conditions shall have been satisfied: (i) the
Transferor shall have deposited (x) in the Principal Funding Account an amount
equal to the sum of the outstanding principal balance of the Class A
Securities, which amount shall be invested in Cash Equivalents, (y) in the
Principal Account an amount equal to the sum of the outstanding principal
balances of the Class B Securities and the Excess Collateral and (z) 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 Class A Expected Final
Payment Date; (ii) the Transferor shall have delivered to the Trustee an
opinion of counsel to the effect that such deposit and termination of
obligations will not result in the Trust being required to register as an
"investment company" within the meaning of the Investment Company Act and an
opinion of counsel to the effect that following such deposit none of the Trust,
the Accumulation Period Reserve Account or the Principal Funding Account will
be deemed to be an association (or publicly traded partnership) taxable as a
corporation; (iii) the Transferor shall have delivered to the Trustee a
certificate of an officer of the Transferor stating that the Transferor
reasonably believes that such deposit and termination of its obligations will
not constitute a Pay Out Event or any event that, with the giving of notice or
the lapse of time, would cause a Pay Out Event to occur; and (iv) a Ratings
Event will not occur as a result of such events; then, the Securities will no
longer be entitled to the security interest of the Trust in the Receivables
and, except those set forth in clause (i) above, other Trust assets
("Defeasance"), and the percentages applicable to the allocation to the
Securityholders of Principal Collections, Finance Charge Collections and
amounts of Defaulted Receivables will be reduced to zero.
Final Payment of Principal; Termination
The Class A Securities, the Class B Securities and the Excess Collateral
will be subject to optional repurchase by the Transferor on any Distribution
Date if on such Distribution Date the sum of the Class A Invested Amount, Class
B Invested Amount and Excess Collateral Amount would be reduced to an amount
less than or equal to 10 percent of the Initial Invested Amount, if certain
conditions set forth in the Pooling and Servicing Agreement are satisfied. The
repurchase price will be equal to the unpaid Invested Amount plus accrued and
unpaid interest on the Securities, in each case after giving effect to any
payments on such date. In each case, interest will accrue through the day
preceding the Distribution Date on which the repurchase occurs.
The Securities will be retired on the day following the Distribution Date on
which the final payment of principal is scheduled to be made to the
Securityholders, whether as a result of optional reassignment to the Transferor
or otherwise. Subject to prior termination as provided above, the Pooling and
Servicing Agreement provides that the final distribution of principal and
interest on the Securities will be made on the September 2009 Distribution Date
(the "Series 2000-3 Termination Date"), except to the extent provided below. In
the event that the Invested Amount is greater than zero, exclusive of any Class
held by the Transferor, on the Series 2000-3 Termination Date, the Trustee will
sell or cause to be sold (and apply the proceeds first to the
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Class A Securities until paid in full, then to the Class B Securities until
paid in full, and then to the Excess Collateral 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
2000-3 Supplement, in an amount up to 110 percent of the Invested Amount at the
close of business on such date (but not more than the total amount of
Receivables allocable to the Securities in accordance with the Pooling and
Servicing Agreement). If the sale contemplated by the preceding sentence has
not occurred by the Series 2000-3 Termination Date, the affected
Securityholders shall remain entitled to receive proceeds of such sale when it
occurs. The net proceeds of such sale and any collections on the Receivables,
up to an amount equal to the Invested Amount plus accrued interest due on the
Securities, will be paid on the Series 2000-3 Termination Date first to the
Class A Securityholders until the Class A Invested Amount is paid in full, then
to the Class B Securityholders until the Class B Invested Amount is paid in
full and then to the Excess Collateral Holder until the Excess Collateral
Amount is paid in full.
Unless the Servicer and the holder of the Exchangeable Transferor Security
instruct the Trustee otherwise, the Trust will terminate on the earlier of (a)
the day after the Distribution Date following the date on which funds shall
have been deposited in the Distribution Account for the payment to
securityholders sufficient to pay in full the aggregate investor interest of
all Series outstanding plus interest thereon at the applicable interest rates
to the next Distribution Date and (b) a date which shall not be later than May
26, 2095. Upon the termination of the Trust and the surrender of the
Exchangeable Transferor Security, the Trustee will convey to the holder of the
Exchangeable Transferor Security all right, title and interest of the Trust in
and to the Receivables and other funds of the Trust (other than funds on
deposit in the Distribution Account and other similar bank accounts of the
Trust with respect to any Series).
Pay Out Events
As described above, the Revolving Period will continue until the
commencement of the Accumulation Period, unless a Pay Out Event occurs prior to
such date. A "Pay Out Event" refers to any of the following events:
(i) failure on the part of the Transferor (a) to make any payment or
deposit on the date required under the Pooling and Servicing Agreement (or
within the applicable grace period which will not exceed five business
days); (b) to perform in all material respects the Transferor's covenant
not to sell, pledge, assign, or transfer to any person, or grant any
unpermitted lien on, any Receivable; or (c) to observe or perform in any
material respect any other covenants or agreements of the Transferor set
forth in the Pooling and Servicing Agreement or the Purchase Agreement,
which failure has a material adverse effect on the Securityholders and
which continues unremedied for a period of 60 days after written notice of
such failure, requiring the same to be remedied, shall have been given to
the Transferor by the Trustee, or to the Transferor and the Trustee by the
Securityholders representing more than 50 percent of the Invested Amount
and continues to materially and adversely affect the interests of the
Securityholders for such period;
(ii) any representation or warranty made by the Transferor in the
Pooling and Servicing Agreement proves to have been incorrect in any
material respect when made, and as a result the interests of the
Securityholders are materially adversely affected, and such representation
or warranty continues to be incorrect for 60 days after notice to the
Transferor by the Trustee or to the Transferor and the Trustee by more than
50 percent of the Invested Amount and the Securityholders' Interest
continues to be materially adversely affected during such period; provided,
however, that a Pay Out Event pursuant to this clause (ii) will not be
deemed to occur thereunder if the Transferor has accepted reassignment of
the related Receivable or all such Receivables, if applicable, during such
period (or such longer period as the Trustee may specify) in accordance
with the provisions thereof;
(iii) certain events of bankruptcy or insolvency relating to the
Transferor, Direct Merchants Bank or Metris;
S-54
<PAGE>
(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 sum of the amount on deposit in the Pre-
Funding Account plus the Series 2000-3 Percentage of the sum of the total
amount of Principal Receivables plus amounts on deposit in the Excess
Funding Account shall be less than (II) the sum of the aggregate
outstanding principal amounts of the Class A Securities, the Class B
Securities and the Excess Collateral, (c) the total amount of Principal
Receivables and the amounts on deposit in the Excess Funding Account, the
Pre-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) failure of any Interest Rate Cap Provider to make any required
payment under an Interest Rate Cap within 30 days of the date such payment
was due.
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, and the Interest Rate Cap
Provider pursuant to the Series 2000-3 Supplement and the Servicer declare that
a Pay Out Event has occurred with respect to the Securities as of the date of
such notice. In the case of any event described in clause (iii) or (v) above, a
Pay Out Event with respect to all Series then outstanding, and in the case of
any event described in clause (iv), (vi) or (viii) a Pay Out Event with respect
only to the Securities, will be deemed to have occurred without any notice or
other action on the part of the Trustee or the Securityholders or all
securityholders, as appropriate, immediately upon the occurrence of such event.
On the date on which a Pay Out Event is deemed to have occurred, the Early
Amortization Period will commence. In such event, distributions of principal to
the Securityholders will begin on the first Distribution Date following the
month in which such Pay Out Event occurred. If, because of the occurrence of a
Pay Out Event, the Early Amortization Period begins, Securityholders will begin
receiving distributions of principal earlier than they otherwise would have,
which may shorten the average life and maturity of the Securities.
In addition to the consequences of a Pay Out Event discussed above, if,
pursuant to certain provisions of federal law, the Transferor or Metris
voluntarily enters liquidation or a trustee-in-bankruptcy is appointed for the
Transferor or Metris (an "Insolvency Event"), the Transferor will immediately
cease to transfer Principal Receivables to the Trust and promptly give notice
to the Trustee of such event. If an Insolvency Event occurs or, at any time the
Retained Percentage is equal to or less than 2 percent (a "Trigger Event"), the
Pooling and Servicing Agreement and the Trust shall be terminated, and within
15 days of notice to the Trustee, the Trustee will publish a notice of the
Insolvency Event or Trigger Event, stating that the Trustee intends to sell,
dispose of, or otherwise liquidate the Receivables in a commercially reasonable
manner. With respect to each Series outstanding at such time (or, if any such
Series has more than one class, of each class of such Series excluding any
class or portion thereof held by the Transferor), unless otherwise instructed
within a specified period by securityholders representing undivided interests
aggregating more than 50 percent of the invested amount of such Series (or
class excluding any class or portion thereof held by the Transferor) and the
holders of any Supplemental Securities or any other interest in the
Exchangeable Transferor Security other than the Transferor, the Trustee will
sell, dispose of, or otherwise liquidate the portion of the Receivables
allocable to the Series that did not vote to continue the Trust in accordance
with the Pooling and Servicing Agreement in a commercially reasonable manner
and on commercially reasonable terms. The proceeds from the sale, disposition
or liquidation of the Receivables will be treated as collections of the
Receivables allocable to such
S-55
<PAGE>
Securityholders and will be distributed to the applicable Securityholders as
provided above in "--Application of Collections."
If the only Pay Out Event to occur is either the bankruptcy or insolvency of
the Transferor or the appointment of a bankruptcy trustee or receiver for the
Transferor, the bankruptcy trustee or receiver may have the power to prevent
the early sale, liquidation, or disposition of the Receivables and the
commencement of the Early Amortization Period. In addition, a bankruptcy
trustee or receiver may have the power to cause the early sale of the
Receivables and the early retirement of the Securities.
Servicing Compensation and Payment of Expenses
The Servicer's compensation for its servicing activities and reimbursement
for its expenses will take the form of the payment to it of a servicing fee in
an amount for any Monthly Period (the "Monthly Servicing Fee") equal to the
product of (i) a fraction the numerator of which is the actual number of days
in such Monthly Period and the denominator of which is 365 or 366, (ii) the
applicable Servicing Fee Percentage and (iii) the Adjusted Invested Amount as
of the beginning of the day on the first day of such Monthly Period, or, in the
case of the first Distribution Date, the Initial Invested Amount. The Monthly
Servicing Fee will be funded from Finance Charge Collections allocated to the
Securityholders' Interest, and will be paid from the amount so allocated and on
deposit in the Collection Account. See "--Application of Collections--Payment
of Fees, Interest and Other Items" above and "Description of the Securities--
Application of Collections" in the attached prospectus. The remainder of the
servicing fee will be allocable to the Transferor Interest and the investor
interests of other Series. Neither the Trust nor the Securityholders will have
any obligation to pay such portion of the servicing fee.
"Servicing Fee Percentage" means 2.00 percent per annum, or for so long as
Direct Merchants Bank is the Servicer, a lesser rate if so specified in the
Series 2000-3 Supplement.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with servicing the Receivables including, without
limitation, payment of the fees and disbursements of the Trustee and
independent certified public accountants and other fees which are not expressly
stated in the Pooling and Servicing Agreement to be payable by the Trust or the
Securityholders other than federal, state and local income and franchise taxes,
if any, of the Trust.
Reports to Securityholders
On or after each Distribution Date, the Trustee will forward to each
Securityholder of record, a statement prepared by the Servicer setting forth
the items described in "Description of the Securities--Reports to
Securityholders" in the attached prospectus. In addition, such statement will
include (a) the amount, if any, withdrawn from the Principal Funding Account
for such Transfer Date, (b) the Transferor Interest, if any, for such Transfer
Date, (c) the aggregate Interest Rate Caps notional amount and the amount
deposited in the Cap Proceeds Account during the related Monthly Period and (d)
the Pre-Funded Amount. 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.
S-56
<PAGE>
Listing and General Information
We will attempt to apply to have the Offered Securities listed on the
Luxembourg Stock Exchange. We cannot assure you that the application will be
accepted or that the Offered Securities will be listed on the Luxembourg Stock
Exchange or any other stock exchange or, if so listed, when such listing would
occur. Applications to have certain of the Trust's previously issued securities
listed on the Luxembourg Stock Exchange are still pending at this time.
Purchasers of the Offered Securities should not rely upon the Offered
Securities being listed on the Luxembourg Stock Exchange or any other stock
exchange. You should consult with Deutsche Bank Luxembourg S.A., the Luxembourg
listing agent for the Offered Securities, Boulevard Konrad Adenauer 2, L-1115
Luxembourg, phone number (352) 42 12 21, to determine whether our listing
application has been accepted and whether the Offered Securities are listed on
the Luxembourg Stock Exchange. If the listing application is accepted, the
Certificate of Incorporation and By-laws of the Transferor, as well as legal
notice relating to the issuance of the Offered 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. If the Offered Securities
are listed, trading of the Offered Securities may be effected on the Luxembourg
Stock Exchange. The Class A Securities and the Class B Securities have been
accepted for clearance through the facilities of DTC, Clearstream and
Euroclear. The International Securities Identification Number (ISIN) for the
Class A Securities is US59159UAU25, the Common Code for the Class A Securities
is 011953115 and the CUSIP number for the Class A Securities is 59159U AU 2.
The ISIN for the Class B Securities is US59159UAV08, the Common Code for the
Class B Securities is 011953140 and the CUSIP number for the Class B Securities
is 59159U AV 0.
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 Offered Securities are listed on the Luxembourg Stock Exchange,
copies of the Pooling and Servicing Agreement, the Series 2000-3 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 Deutsche Bank Luxembourg S.A., the Luxembourg listing agent for
the Offered Securities, Boulevard Konrad Adenauer 2,L-1115 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, 1999, also available at the office of
the listing agent in Luxembourg. For so long as the Offered Securities are
outstanding and are listed on the Luxembourg Stock Exchange, copies of each
Annual Report on Form 10-K for subsequent fiscal years will also be available
at the office of the listing agent in Luxembourg.
The Transferor confirms that there has been no material adverse change in
the performance of the Trust since July 31, 2000, the date of the information
with respect to the Trust set forth in this supplement under "The Receivables."
The Pooling and Servicing Agreement provides that the Trustee shall pay to
the Transferor upon request any monies held by the Trustee for the payment of
principal and interest which remains unclaimed for two years. After payment to
the Transferor, Securityholders entitled to the money must look to the
Transferor for payment as general creditors unless an abandoned property law
designates otherwise.
The Securities, the Pooling and Servicing Agreement and the Series 2000-3
Supplement are governed by the laws of the State of Delaware.
S-57
<PAGE>
ERISA Considerations
Section 406 of the U.S. Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the U.S. Internal Revenue Code of 1986,
as amended (the "Code"), prohibit certain pension, profit sharing or other
employee benefit plans, individual retirement accounts or annuities and
employee annuity plans and Keogh plans (collectively, "Plans") from engaging in
certain transactions involving "plan assets" with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code (collectively,
"Parties in Interest") with respect to the Plan. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and Section 4975 of the Code for such persons, unless a statutory,
regulatory or administrative exemption is available. Plans that are
governmental plans (as defined in section 3(32) of ERISA) and certain church
plans (as defined in section 3(33) of ERISA) are not subject to ERISA
requirements.
Class A Securities
A violation of the prohibited transaction rules could occur if the Class A
Securities were to be purchased with assets of any Plan if the Transferor, the
Trustee, any underwriters of Series 2000-3 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 Series 2000-3 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, and
underwriters of Series 2000-3 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 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 "public-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 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 unless an
exemption were available. The five DOL class exemptions described in the
accompanying prospectus may not provide relief for all transactions involving
the assets of the Trust even if they would otherwise apply to the purchase of a
Class A Security by a Plan.
Class B Securities
The Underwriters do not expect that the Class B Securities will be held by
at least 100 investors who are independent of the issuer and of one another
and, therefore, do not expect that such Class B Securities will qualify as
"publicly-offered securities." See "ERISA Considerations" in the attached
prospectus. Accordingly,
S-58
<PAGE>
the Class B Securities may not be acquired or held by (a) any employee benefit
plan that is subject to ERISA, (b) any plan or other arrangement (including an
individual retirement account or Keogh plan) that is subject to Section 4975 of
the Code, or (c) any entity whose underlying assets include "plan assets" under
the Plan Asset Regulation by reason of any such plan's investment in the
entity. By its acceptance of a Class B Security, each Class B Securityholder
will be deemed to have represented and warranted that it is not and will not be
subject to the foregoing limitation.
Consultation with Counsel
In light of the foregoing, fiduciaries or other persons contemplating
purchasing the Class A Securities on behalf or with "plan assets" of any Plan
should consult their own counsel regarding whether the Trust assets represented
by the Class A Securities would be considered "plan assets," the consequences
that would apply if the Trust's assets were considered "plan assets," and the
possibility of exemptive relief from the prohibited transaction rules.
Underwriting
Subject to the terms and conditions set forth in an underwriting agreement
dated October 19, 2000 (the "Underwriting Agreement") among Metris Receivables,
Inc., Metris Companies 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 Securities set forth opposite its name:
<TABLE>
<CAPTION>
Principal
Amount of
Class A
Class A Underwriters Securities
-------------------- ------------
<S> <C>
Banc of America Securities LLC.................................... $186,464,000
Barclays Capital Inc. ............................................ 46,616,000
Chase Securities Inc. ............................................ 46,616,000
Deutsche Bank Securities Inc. .................................... 46,616,000
Morgan Stanley & Co. Incorporated................................. 46,616,000
------------
Total........................................................... $372,928,000
============
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount of
Class B
Class B Underwriters Securities
-------------------- -----------
<S> <C>
Banc of America Securities LLC..................................... $33,149,000
Chase Securities Inc. ............................................. 33,149,000
-----------
Total............................................................ $66,298,000
===========
</TABLE>
In the Underwriting Agreement, the Underwriters of the Class A Securities
(the "Class A Underwriters") have agreed, subject to the terms and conditions
set forth therein, to purchase all of the Class A Securities offered hereby if
any of the Class A Securities are purchased. In the Class B Underwriting
Agreement, the Underwriters of the Class B Securities (the "Class B
Underwriters") have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Class B Securities offered hereby if any of the
Class B Securities are purchased.
The Class A Underwriters propose initially to offer the Class A Securities
to the public at 100.00% of their principal amount and to certain dealers at
such price less concessions not in excess of 0.175% of the principal amount of
the Class A Securities. The Class A Underwriters may allow, and such dealers
may
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<PAGE>
reallow, concessions not in excess of 0.140% of the principal amount of the
Class A Securities to certain brokers and dealers. After the initial public
offering, the public offering price and other selling terms may be changed by
the Class A Underwriters.
The Class B Underwriters propose initially to offer the Class B Securities
to the public at 100.00% of their principal amount and to certain dealers at
such price less concessions not in excess of 0.20% of the principal amount of
the Class B Securities. The Class B Underwriters may allow, and such dealers
may reallow, concessions not in excess of 0.16% of the principal amount of the
Class B Securities to certain brokers and dealers. After the initial public
offering, the public offering price and other selling terms may be changed by
the Class B Underwriters.
Metris Receivables, Inc. will receive proceeds of approximately $438,001,554
from the sale of the Offered Securities (representing 99.725% of the principal
amount of each Class A Security and 99.700% of the principal amount of each
Class B Security) after paying the underwriting discount of $1,224,446
(representing 0.275% of the principal amount of each Class A Security and
0.300% of the principal amount of each Class B Security). Additional offering
expenses are estimated to be approximately $865,000.
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 Offered Securities to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or who is a person
to whom the document may otherwise lawfully be issued or passed on, (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 of Great Britain with respect to anything done by it in
relation to the Offered Securities in, from or otherwise involving the United
Kingdom and (c) if the Underwriter is an authorized person under the Financial
Services Act 1986, it has only promoted and will only promote (as that term is
defined in Regulation 1.02 of the Financial Services (Promotion of Unregulated
Schemes) Regulations 1991) to any person in the United Kingdom the scheme
described herein if that person is of a kind described either in Section 76(2)
of the Financial Services Act 1986 or in Regulation 1.04 of the Financial
Services (Promotion of Unregulated Schemes) Regulations 1991.
Metris Receivables, Inc. and Metris Companies Inc. will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof.
Any Underwriter will be permitted to engage in the following transactions,
to the extent permitted by Regulation M under the Securities Exchange Act of
1934:
. over-allotment transactions, which involve syndicate sales in excess of
the offering size creating a syndicate short position;
. stabilizing transactions, which permit bids to purchase the Offered
Securities so long as the stabilizing bids do not exceed a specified
maximum; and
. syndicate covering transactions, which involve purchases of the Offered
Securities in the open market after the distribution has been completed
in order to cover syndicate short positions.
Such over-allotment transactions, stabilizing transactions and syndicate
covering transactions may cause prices of the Offered Securities to be higher
than they would otherwise be in the absence of such transactions. Neither the
Trust nor 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
S-60
<PAGE>
Companies Inc. and its affiliates. Barclays Bank PLC, the Interest Rate Cap
Provider, is an affiliate of Barclays Capital Inc., a Class A Underwriter.
As discussed under "Use of Proceeds," a portion of the net proceeds from the
sale of the Offered Securities will be used to purchase Receivables in
Supplemental Accounts, the accounts of which comprise a portion of the credit
card portfolio previously acquired by Direct Merchants Bank from Mercantile
Bank National Association. Receivables in these Supplemental Accounts are
currently owned by a conduit investor that is administered by Bank of America,
National Association, an affiliate of Banc of America Securities LLC. Banc of
America Securities LLC is one of the Underwriters of the Offered Securities.
S-61
<PAGE>
Index of Terms for Prospectus Supplement
<TABLE>
<CAPTION>
Term Page
---- ----
<S> <C>
Accounts............................................................. S-20
Accumulation Period.................................................. S-27
Accumulation Period Length........................................... S-37
Accumulation Period Reserve Account.................................. S-51
Accumulation Shortfall............................................... S-28, S-49
Adjusted Invested Amount............................................. S-29
Adjustment Payment................................................... S-50
Agreement............................................................ S-20
Amortization Period Commencement Date................................ S-41
Available Reserve Account Amount..................................... S-52
Available Series 2000-3 Finance Charge Collections................... S-34
Available Series 2000-3 Principal Collections........................ S-35
Barclays Bank........................................................ S-39
Barclays Group....................................................... S-39
Base Rate............................................................ S-29
Cap Proceeds Account................................................. S-39
Class A Adjusted Invested Amount..................................... S-41
Class A Charge-Off................................................... S-51
Class A Expected Final Payment Date.................................. S-27
Class A Fixed/Floating Percentage.................................... S-40
Class A Floating Percentage.......................................... S-40
Class A Initial Invested Amount...................................... S-41
Class A Interest Rate................................................ S-33
Class A Invested Amount.............................................. S-41
Class A Monthly Interest............................................. S-47
Class A Percentage................................................... S-41
Class A Principal.................................................... S-48
Class A Required Amount.............................................. S-44
Class A Securities................................................... S-20
Class A Securityholders.............................................. S-20
Class A Securityholders' Interest.................................... S-42
Class A Underwriters................................................. S-59
Class B Charge-Off................................................... S-50
Class B Expected Final Payment Date.................................. S-27
Class B Fixed/Floating Percentage.................................... S-40
Class B Floating Percentage.......................................... S-40
Class B Initial Invested Amount...................................... S-41
Class B Interest Rate................................................ S-33
Class B Invested Amount.............................................. S-41
Class B Monthly Interest............................................. S-47
Class B Percentage................................................... S-41
Class B Principal.................................................... S-48
Class B Required Amount.............................................. S-44
Class B Securities................................................... S-20
Class B Securityholders.............................................. S-20
</TABLE>
<TABLE>
<CAPTION>
Term Page
---- ----
<S> <C>
Class B Securityholders' Interest.................................... S-42
Class B Underwriters................................................. S-59
Clearstream.......................................................... S-33
Closing Date......................................................... S-33
Code................................................................. S-58
Controlled Accumulation Amount....................................... S-49
Controlled Deposit Amount............................................ S-27
Covered Amount....................................................... S-52
Defeasance........................................................... S-53
Determination Date................................................... S-50
Dilution............................................................. S-50
Distribution Date.................................................... S-34
DOL.................................................................. S-58
DTC.................................................................. S-33
Early Amortization Period............................................ S-28
ERISA................................................................ S-58
Euroclear............................................................ S-33
Excess Collateral.................................................... S-20
Excess Collateral Amount............................................. S-41
Excess Collateral Charge-Off......................................... S-50
Excess Collateral Expected Final Payment Date........................ S-27
Excess Collateral Fixed/Floating Percentage.......................... S-40
Excess Collateral Floating Percentage................................ S-40
Excess Collateral Holder............................................. S-20
Excess Collateral Holder's Interest.................................. S-42
Excess Collateral Initial Amount..................................... S-42
Excess Collateral Minimum Monthly Interest........................... S-48
Excess Collateral Minimum Rate....................................... S-48
Excess Collateral Monthly Principal.................................. S-49
Excess Collateral Notional Percentage................................ S-39
Excess Collateral Percentage......................................... S-42
Excess Finance Charge Collections.................................... S-43, S-49
FDIA................................................................. S-16
FDIC................................................................. S-15
Fixed/Floating Percentage............................................ S-40
Floating Percentage.................................................. S-40
Full Invested Amount................................................. S-42
Funding Period....................................................... S-36
Initial Closing Date................................................. S-23
Initial Invested Amount.............................................. S-42
Insolvency Event..................................................... S-55
Interest Rate Cap Provider........................................... S-39
Interest Rate Caps................................................... S-38
Invested Amount...................................................... S-42
LIBOR................................................................ S-34
</TABLE>
S-62
<PAGE>
<TABLE>
<CAPTION>
Term Page
---- ----
<S> <C>
LIBOR Determination Date................................................... S-33
Minimum Aggregate Principal Receivables.................................... S-24
Minimum Transferor Interest................................................ S-24
Minimum Transferor Percentage.............................................. S-24
Monthly Servicing Fee...................................................... S-56
Negative Carry Amount...................................................... S-42
Offered Securities......................................................... S-20
Paired Series.............................................................. S-52
Parties in Interest........................................................ S-58
Pay Out Event.............................................................. S-54
Payment Reserve Account.................................................... S-47
Plan Asset Regulation...................................................... S-58
Plans...................................................................... S-58
Pooling and Servicing Agreement............................................ S-20
Portfolio Yield............................................................ S-29
Pre-Funded Amount.......................................................... S-36
Pre-Funding Account........................................................ S-36
Principal Funding Account.................................................. S-51
Principal Funding Account Balance.......................................... S-27
Principal Funding Investment Proceeds...................................... S-51
Qualified Substitute Arrangement........................................... S-38
Rating Agency Condition.................................................... S-52
Receivables................................................................ S-20
Record Date................................................................ S-32
Recoveries................................................................. S-23
Redirected Class B Principal Collections................................... S-43
Redirected Excess Collateral Principal Collections......................... S-43
Redirected Principal Collections........................................... S-43
Reference Banks............................................................ S-34
</TABLE>
<TABLE>
<CAPTION>
Term Page
---- ----
<S> <C>
Removed Accounts........................................................... S-24
Replacement Interest Rate Cap.............................................. S-38
Required Amount............................................................ S-43
Required Reserve Account Amount............................................ S-51
Reserve Account Funding Date............................................... S-51
Revolving Period........................................................... S-35
Securities................................................................. S-20
Securityholders............................................................ S-20
Series 2000-3 Percentage................................................... S-43
Series 2000-3 Securities................................................... S-20
Series 2000-3 Supplement................................................... S-20
Series 2000-3 Termination Date............................................. S-53
Series Default Amount...................................................... S-50
Servicing Fee Percentage................................................... S-56
Shared Principal Collections............................................... S-49
Telerate Page 3750......................................................... S-34
Transfer and Administration Agreement...................................... S-48
Transfer Date.............................................................. S-44
Transferor................................................................. S-20
Transferor Finance Charge Collections...................................... S-43
Transferor Interest........................................................ S-40
Transferor Percentage...................................................... S-40
Transferor Retained Finance Charge Collections............................. S-46
Trigger Event.............................................................. S-55
Trust Accounts............................................................. S-39
Trustee.................................................................... S-20
Underwriters............................................................... S-59
Underwriting Agreement..................................................... S-59
</TABLE>
S-63
<PAGE>
Annex I
Previously Issued Series
The Trust has previously issued eleven other Series that the Transferor
anticipates will be outstanding on the Closing Date. The table below sets forth
the principal characteristics of such Series. For more specific information
with respect to any Series, any prospective investor should contact the
Servicer at (952) 525-5094. The Servicer will provide, without charge, to any
prospective purchaser of the Offered Securities, a copy of the disclosure
documents for any previous publicly issued Series.
Series 1997-1
<TABLE>
<C> <S>
Class A Certificates
Initial Invested Amount................. $616,250,000
Interest Rate........................... 6.87%
Commencement of Accumulation Period..... Last day of March 2001 Monthly
Period or later date as determined
in the Agreement
Annual Servicing Fee Percentage......... 2.00%
Enhancement............................. Subordination of Class B
Certificates, Class C Certificates
and Class D Certificates
Series 1997-1 Termination Date.......... October 2005 Distribution Date
Series Issuance Date.................... May 8, 1997
Class B Certificates
Initial Invested Amount................. $106,250,000
Interest Rate........................... 7.11%
Commencement of Accumulation Period..... Same as above for Class A
Certificates
Annual Servicing Fee Percentage......... Same as above for Class A
Certificates
Enhancement............................. Subordination of Class C
Certificates and Class D
Certificates
Series 1997-1 Termination Date.......... Same as above for Class A
Certificates
Class C Certificates
Initial Invested Amount................. $72,250,000
Interest Rate........................... LIBOR + 0.850%
Commencement of Accumulation Period..... Same as above for Class A
Certificates
Annual Servicing Fee Percentage......... Same as above for Class A
Certificates
Enhancement............................. Subordination of Class D
Certificates and Class C Reserve
Account
Series 1997-1 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
Series 1997-1 Termination Date.......... Same as above for Class A
Certificates
</TABLE>
A-I-1
<PAGE>
<TABLE>
<C> <S>
Series 1997-2
Class A Certificates
Initial Invested Amount................. $455,000,000
Interest Rate........................... LIBOR + 0.20%
Commencement of Accumulation Period..... Last day of October 2001 Monthly
Period or later date as determined
in the Agreement
Annual Servicing Fee Percentage......... 2.00%
Enhancement............................. Subordination of Class B
Certificates, Class C Certificates
and Class D Certificates
Series 1997-2 Termination Date.......... May 2006 Distribution Date
Series Issuance Date.................... November 20, 1997
Class B Certificates
Initial Invested Amount................. $101,500,000
Interest Rate........................... LIBOR + 0.43%
Commencement of Accumulation Period..... Same as above for Class A
Certificates
Annual Servicing Fee Percentage......... Same as above for Class A
Certificates
Enhancement............................. Subordination of Class C
Certificates and Class D
Certificates
Series 1997-2 Termination Date.......... Same as above for Class A
Certificates
Class C Certificates
Initial Invested Amount................. $98,000,000
Interest Rate........................... LIBOR + 1.05%
Commencement of Accumulation Period..... Same as above for Class A
Certificates
Annual Servicing Fee Percentage......... Same as above for Class A
Certificates
Enhancement............................. Subordination of Class D
Certificates and Class C Reserve
Account
Series 1997-2 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
Series 1997-2 Termination Date.......... Same as above for Class A
Certificates
Series 1998-1
Class A Securities
Invested Amount as of October 19, 2000.. $194,006,690
Expected Invested Amount as of Closing
Date (after application of proceeds)... $0
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
Series 1998-1 Termination Date.......... August 2005 Distribution Date
(extendible)
Series Issuance Date.................... July 30, 1998
</TABLE>
A-I-2
<PAGE>
<TABLE>
<C> <S>
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
Series 1998-1 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
Series 1998-1 Termination Date.......... Same as above for Class A Securities
Class D Securities
Invested Amount as of October 19, 2000.. $24,127,000
Expected Invested Amount as of Closing
Date (after reduction of Class A
Invested Amount)....................... $10,638,000
Maximum Permitted Invested Amount....... $52,350,000
Interest Rate........................... None
Annual Servicing Fee Percentage......... Same as above for Class A Securities
Series 1998-1 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
Series 1998-2 Termination Date.......... October 2004 Distribution Date
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
Series 1998-2 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
Series 1998-3 Termination Date.......... April 2006 Distribution Date
Series Issuance Date.................... December 4, 1998
</TABLE>
A-I-3
<PAGE>
<TABLE>
<C> <S>
Class B Securities
Initial Invested Amount................. $49,450,550
Interest Rate........................... None
Annual Servicing Fee Percentage......... Same as above for Class A Securities
Series 1998-3 Termination Date.......... Same as above for Class A Securities
Series 1999-1
Class A Securities
Initial Invested Amount................. $500,000,000
Interest Rate........................... LIBOR + 0.35%
Commencement of Accumulation Period..... Last day of May 2003 Monthly Period
or later date as determined in the
Agreement
Annual Servicing Fee Percentage......... 2.00%
Enhancement............................. Subordination of Class B Securities
and Financial Guaranty Insurance
Policy
Series 1999-1 Termination Date.......... October 2007 Distribution Date
Series Issuance Date.................... July 7, 1999
Class B Securities
Initial Invested Amount................. $49,450,550
Interest Rate........................... None
Annual Servicing Fee Percentage......... Same as above for Class A Securities
Series 1999-1 Termination Date.......... Same as above for Class A Securities
Series 1999-2
Class A Securities
Initial Invested Amount................. $500,000,000
Interest Rate........................... LIBOR + 0.52%
Commencement of Accumulation Period..... Last day of June 2005 Monthly Period
or later date as determined in the
Agreement
Annual Servicing Fee Percentage......... 2.00%
Enhancement............................. Subordination of Class B Securities
and Financial Guaranty Insurance
Policy
Series 1999-2 Termination Date.......... July 2006 Distribution Date
(extendible)
Series Issuance Date.................... September 22, 1999
Class B Securities
Initial Invested Amount................. $49,450,550
Interest Rate........................... None
Annual Servicing Fee Percentage......... Same as above for Class A Securities
Series 1999-2 Termination Date.......... Same as above for Class A Securities
Series 1999-3
Class A Securities
Initial Invested Amount................. $300,000,000
Interest Rate........................... LIBOR + 0.42%
Commencement of Accumulation Period..... Last day of October 2004 Monthly
Period or later as determined in the
Agreement
Annual Servicing Fee Percentage......... 2.00%
Enhancement............................. Subordination of Class B Securities
and Financial Guaranty Insurance
Policy
Series 1999-3 Termination Date.......... April 2009 Distribution Date
Series Issuance Date.................... December 9, 1999
</TABLE>
A-I-4
<PAGE>
<TABLE>
<C> <S>
Class B Securities
Initial Invested Amount................. $29,670,330
Interest Rate........................... None
Annual Servicing Fee Percentage......... Same as above for Class A Securities
Series 1999-3 Termination Date.......... Same as above for Class A Securities
Series 2000-1
Class A Securities
Initial Invested Amount................. $447,514,000
Interest Rate........................... LIBOR + 0.30%
Commencement of Accumulation Period..... Last day of January 2004 Monthly
Period or later date as determined
in the Agreement
Annual Servicing Fee Percentage......... 2.00%
Enhancement............................. Subordination of Class B Securities
and Excess Collateral
Series 2000-1 Termination Date.......... August 2008 Distribution Date
Series Issuance Date.................... March 20, 2000
Class B Securities
Initial Invested Amount................. $67,956,000
Interest Rate........................... LIBOR + 0.68%
Commencement of Accumulation Period..... N/A
Annual Servicing Fee Percentage......... Same as above for Class A Securities
Enhancement............................. Subordination of Excess Collateral
Series 2000-1 Termination Date.......... Same as above for Class A Securities
Excess Collateral
Excess Collateral Initial Amount........ $147,513,425
Series 2000-2
Class A Securities
Initial Invested Amount................. $447,514,000
Interest Rate........................... LIBOR + 0.21%
Commencement of Accumulation Period..... Last day of July 2002 Monthly Period
or later as determined in the
Agreement
Annual Servicing Fee Percentage......... 2.00%
Enhancement............................. Subordination of Class B Securities
and Excess Collateral
Series 2000-2 Termination Date.......... January 2007 Distribution Date
Series Issuance Date.................... July 27, 2000
Class B Securities
Initial Invested Amount................. $67,956,000
Interest Rate........................... LIBOR + 0.60%
Commencement of Accumulation Period..... N/A
Annual Servicing Fee Percentage......... Same as above for Class A Securities
Enhancement............................. Subordination of Excess Collateral
Series 2000-2 Termination Date.......... Same as above for Class A Securities
Excess Collateral
Excess Collateral Initial Amount........ $147,513,425
</TABLE>
A-I-5
<PAGE>
Series 2000-A
<TABLE>
<S> <C>
Class A Securities
Invested Amount as of October 19, 2000.. $436,799,000
Expected Invested Amount as of Closing
Date.................................... $480,000,000
Maximum Permitted Invested Amount....... $500,000,000
Interest Rate........................... A1/P1 Commercial Paper/LIBOR + 0.50% Blended
Commencement of Amortization Period..... July 1, 2001 (extendible)
Annual Servicing Fee Percentage......... 2.00%
Enhancement............................. Subordination of the Class B Security
Series 2000-A Termination Date.......... October 2004 Distribution Date
Series Issuance Date.................... September 1, 2000
Class B Security
Invested Amount as of October 19, 2000.. $2,194,915
Expected Invested Amount as of Closing
Date................................... $2,412,060
Maximum Permitted Invested Amount....... $143,086,817
Annual Servicing Fee Percentage......... Same as above for Class A Securities
Series 2000-A Termination Date.......... Same as above for Class A Securities
</TABLE>
A-I-6
<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
[LOGO OF METRIS COMPANIES]
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 October 19, 2000
<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
Solicitation............................................................ 5
Pricing................................................................. 5
Credit Lines............................................................ 6
Servicing, Billing and Payment.......................................... 6
Delinquency, Collections and Charge-Offs................................ 7
Recoveries.............................................................. 7
Acquisition of Credit Card Accounts..................................... 7
The Receivables.......................................................... 7
Maturity Considerations.................................................. 8
Use of Proceeds.......................................................... 9
Metris Companies Inc..................................................... 9
Certain Litigation...................................................... 10
The Transferor........................................................... 10
Direct Merchants Credit Card Bank, National Association.................. 10
Description of the Securities............................................ 10
General................................................................. 10
Book-Entry Registration................................................. 12
Definitive Securities................................................... 15
Interest................................................................ 16
Principal............................................................... 16
Revolving Period........................................................ 17
Controlled Amortization Period.......................................... 17
Principal Amortization Period........................................... 17
Accumulation Period..................................................... 18
Early Amortization Period............................................... 18
Discount Option......................................................... 19
Transfer and Assignment of Receivables.................................. 19
Exchanges............................................................... 20
Representations and Warranties.......................................... 22
Certain Covenants....................................................... 24
Eligible Accounts....................................................... 24
Eligible Receivables.................................................... 24
Addition of Trust Assets................................................ 25
Collection and Other Servicing Procedures............................... 27
Trust Accounts.......................................................... 28
Deposits in Collection Account.......................................... 29
Investor Percentage and Transferor Percentage........................... 30
Application of Collections.............................................. 30
Shared Principal Collections............................................ 31
Shared Excess Finance Charge Collections................................ 31
Excess Funding Account.................................................. 31
Paired Series........................................................... 32
Funding Period.......................................................... 32
Defaulted Receivables; Dilution......................................... 33
Investor Charge-Offs.................................................... 34
Defeasance.............................................................. 34
Final Payment of Principal; Termination................................. 34
</TABLE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Pay Out Events........................................................... 35
Servicing Compensation and Payment of Expenses........................... 36
Certain Matters Regarding the Transferor and the Servicer................ 36
Servicer Default......................................................... 38
Reports to Securityholders............................................... 39
Evidence as to Compliance................................................ 39
Amendments............................................................... 40
List of Securityholders.................................................. 41
The Trustee.............................................................. 41
Enhancement............................................................... 42
General.................................................................. 42
Subordination............................................................ 42
Letter of Credit......................................................... 43
Cash Collateral Guaranty or Account...................................... 43
Collateral Interest...................................................... 43
Surety Bond or Insurance Policy.......................................... 44
Spread Account........................................................... 44
Reserve Account.......................................................... 44
Description of the Purchase Agreements.................................... 44
Purchases of Receivables................................................. 44
Representations and Warranties........................................... 45
Certain Covenants........................................................ 46
Purchase Termination Date................................................ 47
Security Ratings.......................................................... 47
Certain Legal Aspects of the Receivables.................................. 48
Transfer of Receivables.................................................. 48
Certain Matters Relating to Bankruptcy or Receivership................... 49
Consumer Protection Laws................................................. 51
Industry Litigation...................................................... 51
Claims and Defenses of Obligors Against the Trust........................ 52
Income Tax Matters........................................................ 52
General.................................................................. 52
Treatment of the Securities as Debt...................................... 52
Treatment of the Trust................................................... 53
Treatment of the Trust as a FASIT........................................ 55
Taxation of Interest Income of U.S. Security Owners...................... 55
Sale or Exchange of Securities........................................... 56
Foreign Security Owners.................................................. 56
Backup Withholding and Information Reporting............................. 57
State And Local Taxation................................................. 57
ERISA Considerations...................................................... 57
Plan of Distribution...................................................... 59
Legal Matters............................................................. 60
Reports to Securityholders................................................ 60
Other Information......................................................... 60
Cautionary Notice Regarding Forward-looking Statements.................... 61
Where You Can Find More Information....................................... 61
Index of Terms for Prospectus............................................. 62
Annex I................................................................... A-I-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 Prospectus" beginning on page 62 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 (together with any successors thereto,
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 Offered 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 by holders of these
accounts through purchases of merchandise or services, or through cash advances
via checks, automated teller machines or from banks. Subject to certain
conditions, receivables may also be generated from transactions made by holders
of other general purpose credit card accounts originated or acquired by Direct
Merchants Bank. Metris Direct, Inc., a subsidiary of Metris Companies Inc. and
an affiliate of the Bank, services these accounts at its facilities in Tulsa,
Oklahoma, Baltimore, Maryland, Scottsdale, Arizona and Jacksonville, Florida
under an agency contract with the Bank. Certain data processing, administrative
and other functions associated with the servicing of the Receivables are
performed on behalf of Direct Merchants Bank through First Data Resources, Inc.
("FDR"). See "--Servicing, Billing and Payment."
--------
* MasterCard(R) and VISA(R) are federally registered servicemarks of MasterCard
International Inc. and VISA USA Incorporated, respectively.
4
<PAGE>
New Account Underwriting
Direct Merchants Bank targets moderate-income consumers whom it believes are
underserved by other providers of bankcard credit. The Bank's primary sources
of prospects to solicit for credit card offers are obtained from credit bureau
queries and third party customer lists and databases. Currently, the Bank's
most significant source is credit bureau inquiries.
The Bank's most significant third party customer source is a database
maintained by the Fingerhut Corporation ("Fingerhut"), a wholly owned
subsidiary of Federated Department Stores, Inc. Fingerhut is a database
marketing firm that sells a broad range of products and services via catalogs,
telemarketing, the internet, and other media. Substantially all of Fingerhut's
sales are made using closed-end and revolving credit card loans. As customers
make payments and order new products, Fingerhut enters a variety of payment,
behavioral and other data into its database (the "Fingerhut Database").
Fingerhut uses information in the Fingerhut Database, along with sophisticated
proprietary credit scoring models, to produce its proprietary credit scores for
Fingerhut customers. The Fingerhut Database also includes Fingerhut's 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.
The Bank uses internally and externally developed proprietary models to
enhance the evaluation of prospects. These models help segment these prospects
into narrower ranges within each standard risk score provided by Fair, Isaac
and Co., allowing the Bank to better evaluate individual credit risk. The Bank
uses these models, along with the Fingerhut Suppress File, to exclude certain
individuals from the Bank's marketing solicitations. After every marketing
campaign, the Bank monitors the performance of the proprietary models and
continually re-evaluates the effectiveness of these models in segmenting credit
risk, resulting in further refinements to the Bank's selection criteria for
prospects. Over time, the Bank believes that it will capture additional credit
information on the behavioral characteristics of prospects, which will allow
the Bank to further increase the effectiveness of the proprietary models. While
the Bank believes that the proprietary models and additional analysis are
valuable tools in analyzing relative risks, it is not possible to accurately
predict which consumers will default or the overall levels of defaults.
Solicitation
Prospects for solicitation include both External Prospects and customers of
third parties. Prospects are contacted on a nationwide basis primarily through
pre-screened direct mail and telephone solicitations. The Bank receives
responses to its solicitations, performs fraud screening, verifies name and
address changes, and obtains any information which may be missing from the
application. Applications are sent to third party data entry providers which
key the application information and process the applications based on the
criteria provided by the Bank. The Bank then makes the credit decisions and
approves, denies or begins exception processing. The Bank processes exceptions
for--among other things--derogatory credit bureau information and fraud
warnings. Exception applications are processed manually by credit analysts
based on policies approved by the Bank's Credit Committee.
Pricing
Through risk-based pricing, the Bank periodically prices credit card offers
based upon a prospect's risk profile prior to solicitation and upon receipt of
an application, the Bank evaluates a prospect to determine credit needs, credit
risk, and existing credit availability and then develops a customized offer
that includes the most appropriate product, brand, pricing and credit line. The
Bank currently offers over 100 different pricing structures on its credit card
products, with annual fees ranging from $0 to $75 and annual interest rates up
to 28.99%. After credit accounts are opened, the Bank periodically monitors
customers' internal and external credit performance and recalculates
delinquency, profitability, attrition and bankruptcy predictors. As customers
evolve through the credit life cycle and are regularly re-scored, the lending
relationship may evolve to include more or less restrictive pricing and product
configurations.
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Credit Lines
Once an account is approved, an initial credit line is established based on
the individual's risk profile using automated screening and credit scoring
techniques. This process results in a portfolio (excluding portfolio
acquisitions) with average credit lines that are below the industry average due
to the Bank's risk assessment methods and higher average risk inherent in its
target market. The Bank may elect, at any time and without prior notice to a
cardholder, to prevent or restrict further credit card use by the cardholders,
usually as a result of poor payment performance or the Bank's concern over the
creditworthiness of the cardholders. Credit lines are managed based on the
results of the behavioral scoring analysis in accordance with criteria
established by the Bank. These analysis models 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 models also manage the authorization of each cardholder
transaction, as well as the collections strategies used for non-delinquent
accounts with balances above their assigned credit line.
Servicing, Billing and Payment
The Bank has established a relationship with FDR for cardholder processing
services. FDR is a subsidiary of First Data Corporation, a provider of
information processing and related services including cardholder processing
(services for financial institutions which issue credit cards to cardholders),
and merchant processing (services for financial institutions which make
arrangements with merchants for the acceptance of credit cards as methods of
payment). FDR provides data processing, credit card reissuance, monthly
statements and interbank settlement for the Bank. The Bank's processing
services agreement with FDR expires in 2006. Applications processing and back
office support for mail inquiries and fraud management are handled internally
by the Bank. In addition the Bank handles all in-bound customer service
telephone calls for its customer base through Metris Direct.
The Bank generally assesses periodic finance charges ("Periodic Finance
Charges") on an account if the cardholder has not paid the balance in full from
the previous billing cycle. These finance charges are based upon the average
daily balance outstanding on the account during the monthly billing cycle.
Payments by cardholders to the Bank on the accounts are processed by a third
party servicer and applied first to any billed and unpaid fees, next to billed
and unpaid finance charges and then to billed and unpaid transactions in the
order determined by the Bank. If a payment in full is not received prior to 25
days after the statement cycle date (the "Pay by Date"), finance charges are
imposed on all purchases from the date of the transaction to the statement
cycle date. Finance charges are also imposed on each cash advance from the day
such advance is made until the advance is paid in full. The finance charge is
applied to the average daily balance. For most cardholders, if the entire
balance on the account is paid by the due date a finance charge on purchases is
not imposed.
The Bank assesses an annual fee on some credit card accounts. The Bank may
waive the annual membership fees, or a portion thereof, in connection with the
solicitation of new accounts depending on the credit terms offered, determined
by the prospect's risk profile prior to solicitation or when the Bank
determines a waiver to be appropriate considering the account's overall
profitability. In addition to the annual fee, the Bank charges accounts certain
other fees including: (i) a late fee with respect to any unpaid monthly payment
if the Bank does not receive the required minimum monthly payment by the Pay by
Date, (ii) a cash advance fee for each cash advance, (iii) a fee with respect
to each check submitted by a cardholder in payment of an account which is not
honored by the cardholder's bank, and (iv) an overlimit charge if, at any time
during the billing cycle, the total amount owed exceeds the cardholder's credit
line by at least $30.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, the Bank reserves the
right to change or terminate certain terms, conditions, services and features
of the account (including Periodic Finance Charges, late fees, returned check
charges and any other charges or the minimum payment), subject to the
conditions set forth in the account agreement.
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Monthly billing statements are sent to cardholders by FDR on behalf of the
Bank. When an account is established, it is assigned a billing cycle.
Currently, there are 20 billing cycles and each such cycle has a separate
monthly billing date based on the respective business day the cycle represents
in each calendar month. Each month, a statement is sent to all accounts with an
outstanding balance greater than $1. All cardholders with open accounts must
make a minimum monthly payment generally of the greater of $15, 2.5% of the
outstanding balance, the finance charge or the balance of the account if the
balance is less than $15. If the minimum payment is not collected by the Pay by
Date, the account is considered delinquent.
Most merchant transactions by cardholders are authorized online. The
remaining transactions generally are low dollar amounts, typically below $50.
All authorizations are handled through the adaptive control system.
Delinquency, Collections and Charge-Offs
The Bank considers an account delinquent if a payment due is not received by
the Bank within 25 days from the closing date of the statement. Collection
activities are determined by the adaptive control system, which continually
monitors all delinquent accounts. The collections function is handled
internally. Accounts that become 60 days contractually delinquent are closed,
but not necessarily charged off. Accounts are charged off and taken as a loss
either within 60 days after formal notification of bankruptcy or at the end of
the month during which they become contractually 180 days past due. Accounts
identified as fraud losses are immediately reserved for and charged off no
later than 90 days after the last activity. Charged-off accounts are referred
to the Bank's recovery unit for coordination of collection efforts to recover
the amounts owed. When appropriate, accounts are placed with external
collection agencies or attorneys.
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 Finance Charge Collections.
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."
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,
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transaction charges, cash advance fees and similar fees and charges (excluding
fees and charges for insurance and insurance type products and interchange
fees), plus Recoveries, investment earnings on amounts credited to the Excess
Funding Account and Discount Option Receivables, if any. "Principal
Receivables" equals all other Eligible Receivables.
All new Receivables arising in the Accounts are purchased by Metris from
Direct Merchants Bank pursuant to the Amended and Restated Bank Receivables
Purchase Agreement dated as of July 30, 1998 between Direct Merchants Bank and
Metris, as such document may be amended from time to time in accordance with
its terms, and, if the context requires, the prior versions thereof, including
the Amended and Restated Bank Receivables Purchase Agreement dated as of May
26, 1995 (the "Bank Purchase Agreement," and together with the Purchase
Agreement, the "Purchase Agreements"), and subsequently are purchased by the
Transferor from Metris pursuant to the Purchase Agreement and thereafter will
be automatically transferred to the Trust. Accordingly, the amount of
Receivables fluctuates from day to day as new Receivables are generated and as
existing Receivables are collected, charged off as uncollectible, or otherwise
adjusted.
The Servicer deposits all collections of Receivables in the Collection
Account ("Collections"). The Collections on the Receivables received on any
business day are allocated by the Servicer between Principal Collections and
Finance Charge Collections in accordance with the definitions thereof. All such
amounts are then applied in accordance with the respective interests of the
Securityholders, any provider of Enhancement, the securityholders of any other
Series, and the holder of the Exchangeable Transferor Security in the Principal
Receivables and in the Finance Charge Receivables in the Trust. See
"Description of the Securities--Investor Percentage and Transferor Percentage"
in this Prospectus and "Description of the Offered Securities--Allocation
Percentages" in the related Prospectus Supplement.
Maturity Considerations
Unless otherwise specified in the related Prospectus Supplement, for each
Series, following the Revolving Period, Principal Collections are expected to
be distributed to the Securityholders of such Series or any specified Class
thereof on each specified Distribution Date during the Controlled Amortization
Period or the Principal Amortization Period, or are expected to be accumulated
for payment to Securityholders of such Series or any specified Class thereof
during the Accumulation Period and distributed on the date specified in the
related Prospectus Supplement (the "Expected Final Payment Date"); provided,
however, that, if the Early Amortization Period commences, Principal
Collections will be paid to Securityholders in the manner described herein and
in the related Prospectus Supplement. The related Prospectus Supplement will
specify the date or the method for determining the date on which the Controlled
Amortization Period, the Principal Amortization Period or a controlled
Accumulation Period, as applicable, will commence, the principal payments
expected or available to be received or accumulated during such Controlled
Amortization Period, Principal Amortization Period or controlled Accumulation
Period, or on the Expected Final Payment Date, as applicable, the manner and
priority of principal accumulations and payments among the Classes of a Series
of Securities and the Pay Out Events which, if any were to occur, would lead to
the commencement of an Early Amortization Period or, if so specified in the
related Prospectus Supplement, a rapid Accumulation Period.
The related Prospectus Supplement will provide certain historical data
relating to payments by cardholders, total charge-offs and other related
information relating to the Direct Merchants Bank Portfolio. There can be no
assurance that future events will be consistent with such historical data.
The amount of Collections may vary from month to month due to seasonal
variations, general economic conditions and payment habits of individual
cardholders. There can be no assurance that Principal Collections with respect
to the Trust Portfolio, and thus the rate at which the related Securityholders
could expect to receive or accumulate payments of principal on their Securities
during an Amortization Period, or on any Expected Final Payment Date, as
applicable, will be similar to any historical experience set forth in a related
Prospectus Supplement. If a Pay Out Event occurs, the average life and maturity
of such Series of Securities could be significantly reduced.
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Because, for any Series of Securities, there may be a slowdown in the
payment rate below the payment rate used to determine the amount of Principal
Collections scheduled or available to be distributed or accumulated for later
payment to Securityholders or a specified Class thereof during the Controlled
Amortization Period, the Principal Amortization Period or the Accumulation
Period or on the Expected Final Payment Date, as applicable, or a Pay Out Event
may occur which would initiate the Early Amortization Period or, if so
specified in the related Prospectus Supplement, the Accumulation Period, there
can be no assurance that the actual number of months elapsed from the date of
issuance of such Series of Securities to the final Distribution Date with
respect to the Securities will equal the expected number of months, that yield
to maturity will be as anticipated or that Securityholders will be able to
reinvest funds in an instrument with a comparable interest rate in the event
the Securities are paid sooner than anticipated.
"Amortization Period" shall mean, with respect to any Series, the period
following the Revolving Period for such Series, which shall be the Accumulation
Period, the Controlled Amortization Period, the Principal Amortization Period,
the Early Amortization Period, or other amortization or accumulation period, in
each case as defined with respect to such Series in the related Supplement.
Use of Proceeds
Unless otherwise specified in the related Prospectus Supplement, the net
proceeds from the sale of each Series of Securities offered hereby will be paid
to the Transferor. The Transferor will use such proceeds for its general
corporate purposes.
Metris Companies Inc.
Metris Companies Inc. ("Metris") is an information-based direct marketer of
consumer credit products and fee-based services primarily to moderate-income
consumers. Metris' consumer credit products are primarily unsecured and secured
credit cards issued by its indirect subsidiary, Direct Merchants Credit Card
Bank, National Association. Metris' customers and prospects include individuals
for whom credit bureau information is available and other third party sources
including customer lists and databases. Metris markets its fee-based services,
including debt waiver programs, membership clubs, extended service plans and
third party insurance, to its credit card customers, and customers of third
parties.
Metris is a Delaware corporation incorporated on August 20, 1996. Metris
became a publicly held company in October 1996 after completing an initial
public offering. Metris' principal subsidiaries are Direct Merchants Bank and
Metris Direct, Inc. ("Metris Direct"). During the third quarter of 1998,
Fingerhut Companies, Inc ("FCI"), which held approximately 85% of Metris'
common stock, received written approval from the Internal Revenue Service to
distribute its interest in Metris to FCI's shareholders in a tax free spin-off.
On November 13, 1998, Metris entered into agreements with affiliates of the
Thomas H. Lee Company to invest $300 million in Metris. The terms of the
transaction provided that the Thomas H. Lee Company investment would convert
into 0.8 million shares of Series C Perpetual Convertible Preferred Stock 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.
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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 10900 Wayzata Boulevard, Room 723, Minnetonka, Minnesota
55305. The Transferor's telephone number is (952) 417-5645.
Direct Merchants Credit Card Bank, National Association
Direct Merchants Bank, a wholly owned indirect subsidiary of Metris, is a
special-purpose credit card bank, established under Section 2(c)(2)(F) of the
Bank Holding Company Act of 1956, as amended by the Competitive Equality
Banking Act of 1987, as amended. Direct Merchants Credit Card Bank, National
Association, located in Salt Lake City, Utah (the "Utah Bank") was chartered as
a national banking association on February 14, 1995. On July 13, 1998, the Utah
Bank was merged into Interim National Bank, a national banking association
located in Phoenix, Arizona, and an indirect subsidiary of Metris. The name of
the surviving entity was changed to Direct Merchants Credit Card Bank, National
Association. Its principal executive offices are located in Phoenix, Arizona,
with a mailing address at 17600 North Perimeter Drive, Scottsdale, Arizona
85255, 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.
Description of the Securities
The Securities will be issued in Series. Each Series will represent an
interest in the Trust other than the interests represented by any other Series
of Securities issued by the Trust (which may include Series offered pursuant to
this Prospectus) and the Exchangeable Transferor Security. Each Series will be
issued pursuant to the Pooling and Servicing Agreement among the Transferor,
Direct Merchants Bank, as Servicer, and the Trustee, and a supplement (each, a
"Supplement") to the Pooling and Servicing Agreement. The Prospectus Supplement
for each Series will describe any provisions of the Pooling and Servicing
Agreement relating to such Series which may differ materially from the Pooling
and Servicing Agreement filed as an exhibit to the Registration Statement. The
following summaries describe certain provisions common to each Series of
Securities or which may be applicable to any Series of Securities. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Pooling and
Servicing Agreement and relevant Supplement.
General
The assets of the Trust will be allocated among the Securityholders of each
Series (the "Securityholders' Interest") and the holder of the Exchangeable
Transferor Security and, in certain circumstances, the related Enhancement
providers. The aggregate principal amount of the interest of the
Securityholders of a Series in the Trust is referred to herein as the "Invested
Amount" and is based on the aggregate amount of the Principal Receivables in
the Trust allocated to such Series. The aggregate principal amount of the
interest of the
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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 Securities will represent interests in certain assets of the Trust,
including the right to the Investor Percentage of all Obligor payments on the
Receivables in the Trust.
The Transferor currently owns the Exchangeable Transferor Security. The
Exchangeable Transferor Security represents an undivided interest in the Trust,
including the right to the Transferor Percentage of all Obligor payments on the
Receivables in the Trust equal to 100 percent minus the sum of the applicable
investor allocation percentages (which shall not exceed 100 percent) for all
Series of Securities then outstanding. See "--Certain Matters Regarding the
Transferor and the Servicer." Unless otherwise specified in the related
Prospectus Supplement, during the Revolving Period, following the Funding
Period, if any, the amount of the Invested Amount in the Trust will remain
constant except under certain limited circumstances. See "--Defaulted
Receivables; Dilution." The amount of Principal Receivables in the Trust,
however, will vary each day as new Principal Receivables are transferred to the
Trust and others are paid or charged off. The amount of the Transferor Interest
(or the amount in the Excess Funding Account) will fluctuate each day,
therefore, to reflect the changes in the amount of the Principal Receivables in
the Trust unless and to the extent that the previously issued Series or another
Series absorb such change. When a Series is amortizing, the Invested Amount
will decline as Obligor payments of Principal Receivables are collected and
distributed to the related Securityholders. As a result, unless and to the
extent that the previously issued Series or another Series absorb such
increase, the Transferor Interest will generally increase each month during an
Amortization Period for any Series to reflect the reductions in the Invested
Amount of the Securities and will also change to reflect the variations in the
amount of the Principal Receivables in the Trust. The Transferor Interest may
be also reduced as the result of an Exchange. See "--Exchanges."
Each Series of Securities may consist of one or more classes (each, a
"Class"), one or more of which may be senior Securities and one or more of
which may be subordinated Securities. Each Class of a Series will evidence the
right to receive a specified portion of each distribution of principal or
interest or both. The Invested Amount with respect to a Series with more than
one Class will be allocated among the Classes as described in the related
Prospectus Supplement. The Securities of a Class may differ from Securities of
other Classes of the same Series in, among other things, the amounts allocated
to principal payments, maturity date, Security Rate and the availability of
Enhancement. If so specified in the Prospectus Supplement relating to a Series,
a Series of Securities ("Variable Funding Securities") may be issued pursuant
to the Pooling and Servicing Agreement and a related supplement, 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
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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 Clearstream 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. Clearstream
and Euroclear will hold omnibus positions on behalf of the Clearstream
Customers and the Euroclear Participants, respectively, through customers'
securities accounts in Clearstream's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries") which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). DTC holds securities for its
participants ("DTC Participants") and facilitates the clearance and settlement
among DTC Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic book-entry changes in DTC
Participants' accounts, thereby eliminating the need for physical movement of
securities. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations, and certain other organizations, and
may include the underwriters of any Series of Securities. Indirect access to
the DTC system is also available to others such as securities brokers and
dealers, banks, and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Securities and Exchange Commission (the "SEC").
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Clearstream 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 Clearstream 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. Clearstream Customers and Euroclear Participants may not deliver
instructions directly to the Depositaries.
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Because of time-zone differences, credits of securities received in
Clearstream 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 Clearstream Customer or Euroclear Participant on such business
day. Cash received in Clearstream or Euroclear as a result of sales of
securities by or through a Clearstream 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 Clearstream or Euroclear cash account only as of
the business day following settlement in DTC.
Purchases of Securities under the DTC system must be made by or through DTC
Participants, which will receive a credit for the Securities on DTC's records.
The ownership interest of each actual Security Owner is in turn to be recorded
on the DTC Participants' and Indirect Participants' records. Security Owners
will not receive written confirmation from DTC of their purchases, but Security
Owners are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the DTC
Participant or Indirect Participant through which the Security Owner entered
into the transaction. Transfers of ownership interests in the Securities are to
be accomplished by entries made on the books of DTC Participants acting on
behalf of Security Owners. Security Owners will not receive Securities
representing their ownership interest in Securities, except in the event that
use of the book-entry system for the Securities is discontinued.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of Securities with DTC and their registration in the
name of Cede & Co. effects no change in beneficial ownership. DTC has no
knowledge of the actual Security Owners of the Securities; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Securities are credited, which may or may not be the Security Owners. The DTC
Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect Participants, and by DTC Participants and
Indirect Participants to Security Owners will be governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to Securities.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede & Co.'s consenting or voting
rights to those DTC Participants to whose accounts the Securities are credited
on the record date (identified in a listing attached thereto). Principal and
interest payments on the Securities will be made to DTC. DTC's practice is to
credit DTC Participants' accounts on the Distribution Date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payment on the Distribution Date. Payments by
DTC Participants to Security Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts
of customers in bearer form or registered in "street name," and will be the
responsibility of such DTC Participant and not of DTC, the Trustee or the
Transferor, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal and interest to DTC is the
responsibility of the Trustee, disbursement of such payments to DTC
Participants shall be the responsibility of DTC, and disbursement of such
payments to the Security Owners shall be the responsibility of DTC Participants
and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Securities at any time by giving reasonable notice to the
Transferor or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Securities are
required to be printed and delivered. The Transferor may decide to discontinue
use of the system of book-entry transfers through DTC (or a successor
securities depository). In that event, Definitive Securities will be printed
and delivered.
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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.
Clearstream Banking, societe anonyme ("Clearstream") is incorporated under
the laws of Luxembourg. Clearstream holds securities for its customers
("Clearstream Customers") and facilitates the clearance and settlement of
securities transactions between Clearstream Customers through electronic book-
entry changes in accounts of Clearstream Customers, thereby eliminating the
need for physical movement of certificates. Transactions may be settled in
Clearstream in any of 36 currencies, including United States dollars.
Clearstream provides to its Clearstream Customers, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Clearstream also deals
with domestic securities markets in over 30 countries through established
depository and custodial relationships. Clearstream is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream's Customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks trust companies, clearing
corporations and certain other organizations and may include the underwriters
of any Series of Securities. Clearstream's U.S. Customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,000 customers located in over 80 countries, including all major
European countries, Canada and the United States. Indirect access to
Clearstream is also available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream.
Clearstream has established an electronic bridge with Morgan Guaranty Trust
Company of New York as the operator of the Euroclear System in Brussels to
facilitate settlement of trades between Clearstream and Euroclear.
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.
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Distributions with respect to Securities held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream 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. Clearstream 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 Clearstream Customer or a
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC and Euroclear and customers of Clearstream, 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"). The Transfer Agent and
Registrar may resign at any time, upon 30 days' written notice to the Servicer.
The Transferor expects that The Bank of New York (Delaware) will resign as the
Trustee, as well as the Transfer Agent and Registrar under the Pooling and
Servicing Agreement. In such an event, the Transferor expects to appoint U.S.
Bank National Association or one of its affiliates as the successor Trustee and
as the Transfer Agent and Registrar under the Pooling and Servicing Agreement.
See "--The Trustee" for a discussion of the provisions of the Pooling and
Servicing Agreement relating the appointment of a successor Trustee.
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
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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 accounts of the Trust, from any applicable
Enhancement, if necessary, or certain other amounts as specified in the related
Prospectus Supplement. If the Distribution Dates for payment of interest for a
Series or Class occur less frequently than monthly, such collections or other
amounts (or the portion thereof allocable to the Securityholders' Interest of
such Class) may be deposited in one or more trust accounts (each, an "Interest
Funding Account") pending distribution to the Securityholders of such Series or
Class, as described in the related Prospectus Supplement. If a Series has more
than one Class of Securities, each such Class may have a separate Interest
Funding Account. The Prospectus Supplement relating to each Series of
Securities and each Class thereof will describe the amounts and sources of
interest payments to be made, the Security Rate, and, for a Series or Class
thereof bearing interest at a floating or a variable Security Rate, the initial
Security Rate, the dates and the manner for determining subsequent Security
Rates, and the formula, index or other method by which such Security Rates are
determined.
Principal
Except to the extent specified in the related Prospectus Supplement, during
the Revolving Period (which begins on the Closing Date relating to such Series
and ends on the day before an Amortization Period begins) for each Series of
Securities offered hereby, no principal payments will be made to the
Securityholders of such Series. During the Controlled Amortization Period,
Principal Amortization Period or controlled Accumulation Period, as applicable,
which will be scheduled to begin on the date specified or determined as
described in the related Prospectus Supplement, and during the Early
Amortization Period, which will begin upon the occurrence of a Pay Out Event
or, if so specified in the related Prospectus Supplement, following a rapid
Accumulation Period, principal will be paid to the Securityholders in the
amounts and on Distribution Dates specified in the related Prospectus
Supplement or will be accumulated in a Principal Account for later distribution
to Securityholders on the Expected Final Payment Date in the amounts specified
in the related Prospectus Supplement. During the Accumulation Period, the
Trustee at the direction of the Servicer will transfer from the Principal
Account to one or more applicable segregated trust accounts held for the
benefit of the Securityholders (each, a "Principal Funding Account")
Collections in respect of Principal Receivables (other than redirected
Principal Collections) and Shared Principal Collections from other Series, if
any, allocated to the Securities as described below under "--Application of
Collections." Principal payments for any Series or Class thereof will be funded
from Principal Collections received during the related Monthly Period or
Periods as specified in the related Prospectus Supplement and allocated to the
Securityholders' Interest of such Series or Class and from certain other
sources specified in the related Prospectus Supplement. In the case of a Series
with more than one Class of Securities, the Securityholders of one or more
Classes may receive payments of principal at different times. The related
Prospectus Supplement will describe the manner, timing and priority of payments
of principal to Securityholders of each Class.
Funds on deposit in any Principal Funding Account applicable to a Series may
be subject to a guaranteed rate or investment agreement or other arrangement
specified in the related Prospectus Supplement intended to
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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
"Description of the Offered Securities--Pay Out Events" in the related
Prospectus Supplement for a discussion of the events which might lead to early
termination of the Revolving Period.
Controlled Amortization Period
If the Prospectus Supplement relating to a Series so specifies, unless an
Early Amortization Period with respect to such Series commences, the Securities
of such Series or any Class thereof will have an amortization period (the
"Controlled Amortization Period") during which Principal Collections allocable
to the Invested Amount of such Series (and certain other amounts if so
specified in the related Prospectus Supplement) will be used on each
Distribution Date to make principal distributions in amounts determined in the
manner specified in the related Prospectus Supplement to the Securityholders of
such Series or any Class of such Series then scheduled to receive such
distributions. The amount to be distributed on any Distribution Date during the
Controlled Amortization Period will be limited to an amount (the "Controlled
Distribution Amount") equal to an amount specified in the related Prospectus
Supplement (the "Controlled Amortization Amount") plus any existing deficit
controlled amortization amount arising from prior Distribution Dates. If a
Series has more than one Class of Securities, each Class may have a separate
Controlled Amortization Amount. In addition, the related Prospectus Supplement
may describe certain priorities among such Classes with respect to such
distributions. The Controlled Amortization Period will commence at the close of
business on a date specified in the related Prospectus Supplement and continue
until the earliest of (a) the commencement of the Early Amortization Period,
(b) payment in full of the Invested Amount of the Securities of such Series or
Class and, if so specified in the related Prospectus Supplement, of the
Collateral Interest, if any, with respect to such Series and (c) the
Termination Date with respect to such Series.
Principal Amortization Period
If the Prospectus Supplement relating to a Series so specifies, unless an
Early Amortization Period with respect to such Series commences, the Securities
of such Series or any Class thereof will have an amortization period (the
"Principal Amortization Period") during which Principal Collections allocable
to the Invested Amount of such Series (and certain other amounts if so
specified in the related Prospectus Supplement) will be used on each
Distribution Date to make principal distributions in an amount specified in the
Prospectus Supplement to the Securityholders of such Series or any Class of
such Series then scheduled to receive such distributions. If a Series has more
than one Class of Securities, the related Prospectus Supplement may describe
certain priorities among such Classes with respect to such distributions. The
Principal Amortization Period will commence at the close of business on a date
specified in the related Prospectus Supplement and continue until the earliest
of (a) the commencement of the Early Amortization Period, (b) payment in full
of the Invested Amount of the Securities of such Series or Class and, if so
specified in the related Prospectus Supplement, of the Collateral Interest, if
any, with respect to such Series and (c) the Termination Date with respect to
such Series.
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Accumulation Period
If the Prospectus Supplement relating to a Series so specifies, unless an
Early Amortization Period with respect to such Series commences, the Securities
of such Series or any Class thereof will have an accumulation period (the
"Accumulation Period") during which Principal Collections allocable to the
Invested Amount of such Series (and certain other amounts if so specified in
the related Prospectus Supplement) will be transferred on the business day
immediately prior to each Distribution Date or other business day specified in
the related Prospectus Supplement (each, a "Transfer Date") from a Principal
Account to a Principal Funding Account and used to make distributions of
principal to the Securityholders of such Series or Class on the Expected Final
Payment Date. If the Prospectus Supplement relating to a Series so specifies,
the amount to be deposited in the Principal Funding Account on any Transfer
Date will be limited to an amount (the "Controlled Deposit Amount") equal to an
amount specified in the related Prospectus Supplement (the "Controlled
Accumulation Amount") plus any deficit controlled accumulation amount arising
from prior Distribution Dates. If a Series has more than one Class of
Securities, each Class may have a separate Principal Funding Account and
Controlled Accumulation Amount. In addition, the related Prospectus Supplement
may describe certain priorities among such Classes with respect to deposits of
principal into such Principal Funding Accounts. The Accumulation Period will
commence at the close of business on a date specified in or determined in the
manner specified in the related Prospectus Supplement and continue until the
earliest of (a) the commencement of the Early Amortization Period, or, if the
Accumulation Period is a controlled Accumulation Period and if so specified in
the related Prospectus Supplement, the commencement of a rapid Accumulation
Period, (b) payment in full of the Invested Amount of the Securities of such
Series or Class and, if so specified in the related Prospectus Supplement, of
the Collateral Interest, if any, with respect to such Series and (c) the
Termination Date with respect to such Series.
Funds on deposit in any Principal Funding Account may be invested in Cash
Equivalents or subject to a guaranteed rate or investment agreement or other
arrangement intended to assure a minimum return on the investment of such
funds. Investment earnings on such funds may be applied to pay interest on the
related Series of Securities. In order to enhance the likelihood of payment in
full of principal at the end of an Accumulation Period with respect to a Series
of Securities, such Series or any Class thereof may be subject to a principal
payment guaranty or other similar arrangement.
Early Amortization Period
During the period from the day on which a Pay Out Event has occurred with
respect to a Series or, if so specified in the Prospectus Supplement relating
to a Series with a controlled Accumulation Period, from such time specified in
the related Prospectus Supplement after a Pay Out Event has occurred and the
Accumulation Period has commenced, to the earlier of (a) the date on which the
Invested Amount of the Securities of such Series and the Enhancement Invested
Amount or the Collateral Interest, if any, with respect to such Series have
been paid in full and (b) the related Termination Date (the "Early Amortization
Period"), Principal Collections allocable to the Invested Amount of such Series
(and certain other amounts if so specified in the related Prospectus
Supplement) will be distributed as principal payments to the Securityholders of
such Series and, in certain circumstances, to the Enhancement provider, monthly
on or before each Distribution Date with respect to such Series in the manner
and order of priority set forth in the related Prospectus Supplement. During
the Early Amortization Period with respect to a Series, distributions of
principal will not be limited by any Controlled Deposit Amount or Controlled
Distribution Amount. In addition, upon the commencement of the Early
Amortization Period with respect to a Series, any funds on deposit in a
Principal Funding Account with respect to such Series or any Class thereof will
be paid to the Securityholders of such Series or Class on the first
Distribution Date in the Early Amortization Period. See "Description of the
Securities--Pay Out Events" in this Prospectus and "Description of the Offered
Securities--Pay Out Events" in the related Prospectus Supplement for a
discussion of the events which might lead to commencement of the Early
Amortization Period.
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Discount Option
The Transferor may designate a specified fixed or floating percentage (the
"Discount Percentage") (initially zero percent) of the amount of Receivables
arising in the Accounts on and after the date of such designation that would
otherwise be treated as Principal Receivables to be treated as Finance Charge
Receivables (the "Discount Option Receivables"). The circumstances under which
the Transferor may exercise its option to discount Principal Receivables may
include a time when the portfolio yield is declining and Principal Receivables
are available in sufficient quantity to allow for such discounting. The
Transferor may, without notice to or consent of the Securityholders, from time
to time, increase (subject to the limitations described below), reduce or
eliminate the Discount Percentage for Discount Option Receivables arising in
the Accounts on and after the date of such change. The Transferor must provide
15 days' prior written notice to the Servicer, the Trustee and each Rating
Agency of any such increase, reduction or elimination, and such increase,
reduction or elimination will become effective on the date specified therein
only if (a) the Transferor reasonably believes that such increase, reduction or
elimination will not at the time of its occurrence cause a Pay Out Event, or an
event which with notice or the lapse of time would constitute a Pay Out Event,
to occur with respect to any Series and (b) the Transferor and the Trustee
shall have received written notice from each Rating Agency that such change
will not cause such Rating Agency to reduce or withdraw its then current rating
of the Securities. After the date on which the Transferor's exercise of its
discount option takes effect and with respect to Receivables generated on and
after such date, Collections in an amount equal to the product of (i) a
fraction the numerator of which is the amount of Discount Option Receivables
and the denominator of which is the amount of all of the Principal Receivables
(including Discount Option Receivables) at the end of the prior date of
processing, (ii) Principal Collections, prior to any reduction for Finance
Charge Receivables which are Discount Option Receivables, received on such date
of processing, and (iii) a fraction the numerator of which is the aggregate
amount of Principal Receivables arising on each date of processing falling on
or after the date on which the Transferor exercises its discount option and the
denominator of which is the aggregate Principal Receivables on such date of
processing, will be deemed Collections of Finance Charge Receivables and will
be applied accordingly. Any such designation would result in an increase in the
amount of Finance Charge Receivables and a corresponding increase in the
portfolio yield, a reduction in the amount of Principal Receivables in the
Trust and a reduction in the Transferor Interest and therefore the effect on
Securityholders will be to decrease the likelihood of a Pay Out Event based
upon a reduction of the average portfolio yield for any designated period to a
rate below the average base rate for such period while increasing the
likelihood that the Transferor will be required to add Principal Receivables to
the Trust and, because of the reduction in the aggregate amount of Principal
Receivables which, if additional Principal Receivables were not available at
such time, could cause the occurrence of a Pay Out Event. Unless otherwise
specified, all references herein to Principal Receivables or Finance Charge
Receivables, or Collections with respect thereto, are references to such
Receivables, or Collections with respect thereto, as defined above after
application of the Discount Percentage.
Transfer and Assignment of Receivables
On or about May 30, 1995 (the "Initial Closing Date"), the Transferor
transferred and assigned to the Trust all of its right, title, and interest in
and to the Receivables outstanding as of the Initial Closing Date, all of the
Receivables thereafter created and the proceeds of all of the foregoing ("Trust
Portfolio"). Prior to such transfer and assignment and pursuant to the Amended
and Restated Receivables Purchase Agreement dated as of July 30, 1998 between
Metris and the Transferor (as amended from time to time in accordance with its
terms and, if the context requires, the prior versions thereof, including the
original Purchase Agreement dated as of May 26, 1995, the "Purchase Agreement,"
and together with the Bank Purchase Agreement, the "Purchase Agreements"), FCI
(as predecessor to Metris under the Purchase Agreement) contributed and sold to
the Transferor all its right, title and interest in and to the Receivables
existing as of the Initial Closing Date, all the Receivables thereafter created
and all FCI's interest in the Bank Purchase Agreement with respect to the
Receivables. Prior to such sale and contribution and pursuant to the Bank
Purchase Agreement, Direct Merchants Bank sold to FCI (as predecessor to Metris
under the Bank Purchase Agreement) all its right, title and interest in and to
the Receivables existing as of the date of such agreement and all the
Receivables arising from time to time thereafter. In connection with the
realignment of FCI's subsidiaries in September 1996, FCI
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assigned to Metris all of FCI's rights and Metris assumed all of FCI's
obligations under the Bank Purchase Agreement and the Purchase Agreement.
Direct Merchants Bank for itself and as Servicer has identified in its
computer files that the Receivables are Receivables as defined herein. Direct
Merchants Bank, as initial Servicer, retains and will not deliver to the
Trustee any other records or agreements relating to the Receivables. The
records and agreements relating to the Receivables will not be segregated from
those relating to other accounts and receivables of Direct Merchants Bank and
the physical documentation relating to Receivables will not be stamped or
marked to reflect the transfer of Receivables to the Trust. The Trustee will
have reasonable access to such records and agreements as required by applicable
law or to enforce the rights of the Securityholders. Direct Merchants Bank has
filed one or more UCC-1 financing statements in accordance with the UCC to
perfect the interest of FCI (as predecessor to Metris) in the Receivables and a
UCC-3 financing statement reflecting FCI's assignment of such interest in the
Receivables to Metris. FCI (as predecessor to Metris under the Purchase
Agreement) has filed one or more UCC-1 financing statements in accordance with
the UCC to perfect the Transferor's interest in the Receivables. The
Transferor, in turn, has filed one or more UCC-1 financing statements in
accordance with applicable state law to perfect the Trust's interest in the
Receivables. See "Certain Legal Aspects of the Receivables."
Exchanges
The Pooling and Servicing Agreement and related Supplement provide for the
Trustee to issue two types of securities: (i) one or more Series of securities,
each of which may have one or more classes of securities of which one or more
such classes may be transferable ("Investor Securities") and (ii) the
Exchangeable Transferor Security. The Exchangeable Transferor Security
evidences the Transferor Interest, is held by the Transferor, and will be
transferable only as provided in the Pooling and Servicing Agreement. The
Pooling and Servicing Agreement also provides that, pursuant to any one or more
Supplements, the holder of the Exchangeable Transferor Security may tender the
Exchangeable Transferor Security and the securities evidencing any Series of
Securities to the Trustee in exchange (the "Exchange") for one or more new
Series and a reissued Exchangeable Transferor Security. Under the Pooling and
Servicing Agreement, the holder of the Exchangeable Transferor Security may
define, with respect to any newly issued Series, certain terms including: (i)
its name or designation; (ii) its initial invested amount (or method for
calculating such amount); (iii) its interest rate (or the method of allocating
interest payments or other cash flows to such Series); (iv) the closing date;
(v) the rating agency or agencies, if any, rating the Series; (vi) the interest
payment date or dates and the date or dates from which interest shall accrue;
(vii) the name of the clearing agency, if any; (viii) the method of allocating
Principal Collections for such Series and the method by which the principal
amount of Investor Securities of such Series will amortize or accrue and the
method for allocating Finance Charge Collections; (ix) the names of any
accounts to be used by such Series and the terms governing the operation of any
such accounts; (x) the percentage used to calculate monthly servicing fees;
(xi) the Minimum Transferor Interest; (xii) the Enhancement provider, if
applicable, and the terms of any Enhancement with respect to such Series;
(xiii) the base rate applicable to such Series; (xiv) the terms on which the
securities of such Series may be repurchased or remarketed to other investors;
(xv) the termination date of such Series; (xvi) any deposit into any account
provided for such Series; (xvii) the number of classes of such Series and, if
more than one class, the rights and priorities of each such class; (xviii) the
fees, if any, to be included in funds available to securityholders of such
Series; (xix) the subordination, if any, of such new Series with respect to any
other Series; (xx) the rights, if any, of the holder of the Exchangeable
Transferor Security that have been transferred to the holders of such Series,
if any; (xxi) the pool factor; (xxii) the Minimum Aggregate Principal
Receivables; (xxiii) whether such Series will be part of a group or subject to
being paired with any other prefunded Series; (xxiv) whether such Series will
be prefunded; and (xxv) any other relevant terms, including whether or not such
Series will be pledged as collateral for an issuance of any other securities,
including commercial paper (all such terms, the "Principal Terms" of such
Series). None of the Transferor, the Servicer, the Trustee, or the Trust is
required or intends to obtain the consent of any Securityholder to issue any
additional Series or in connection with the determination of the Principal
Terms thereof. However, as a condition of an Exchange, the holder of the
Exchangeable Transferor Security will deliver to the Trustee written
confirmation that the Exchange will not result in any Rating Agency reducing or
withdrawing its rating
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of any outstanding Series. The Transferor may offer any Series to the public or
other investors in transactions either registered under the Securities Act of
1933, as amended (the "Securities Act") or exempt from registration thereunder,
directly, through one or more underwriters or placement agents, in fixed-price
offerings, in negotiated transactions or otherwise. Any such Series may be
issued in fully registered or book-entry form in minimum denominations
determined by the Transferor. The Transferor currently intends to offer, from
time to time, additional Series.
The Pooling and Servicing Agreement provides that the holder of the
Exchangeable Transferor Security may perform Exchanges and define the Principal
Terms such that each Series issued under the Trust has a period during which
amortization of the principal amount thereof is intended to occur, which period
may have a different length and begin on a different date than such period for
any other Series. Accordingly, one or more Series may be in their amortization
periods while other Series are not. Moreover, any Series may have the benefit
of an Enhancement that is available only to such Series. Under the Pooling and
Servicing Agreement, the Trustee will hold any such form of Enhancement only on
behalf of the Series with respect to which it relates. Likewise, with respect
to each such form of Enhancement, the holder of the Exchangeable Transferor
Security may deliver a different form of Enhancement agreement. The Pooling and
Servicing Agreement also provides that the holder of the Exchangeable
Transferor Security may specify different coupon rates and monthly servicing
fees with respect to each Series (or a particular class within such Series).
Collections allocated to Finance Charge Receivables not used to pay interest on
the securities, the monthly servicing fee, the investor default amount, or
investor charge-offs with respect to any Series will be allocated as provided
in such Enhancement agreement, if applicable. The holder of the Exchangeable
Transferor Security also has the option under the Pooling and Servicing
Agreement to vary between Series the terms upon which a Series (or a particular
class within such Series) may be repurchased by the Transferor or remarketed to
other investors. Additionally, certain Series may be subordinated to other
Series, and classes within a Series may have different priorities. There is no
limit to the number of Exchanges that may be performed under the Pooling and
Servicing Agreement. The Trust will terminate only as provided in the Pooling
and Servicing Agreement.
Under the Pooling and Servicing Agreement and pursuant to a Supplement, an
Exchange may occur only upon the satisfaction of certain conditions provided in
the Pooling and Servicing Agreement. Under the Pooling and Servicing Agreement,
the holder of the Exchangeable Transferor Security may perform an Exchange by
notifying the Trustee at least five business days in advance of the date upon
which the Exchange is to occur. Under the Pooling and Servicing Agreement, the
notice will state the designation of any Series to be issued on the date of the
Exchange and, with respect to each such Series: (i) its initial principal
amount (or method for calculating such amount), (ii) its interest rate (or the
method of allocating interest payments or other cash flows to such Series), and
(iii) the provider of the Enhancement, if any, which is expected to provide
credit support with respect to it. The Pooling and Servicing Agreement provides
that on the date of the Exchange the Trustee will authenticate any such Series
only upon delivery to the Trustee of the following: (i) a Supplement specifying
the Principal Terms of such Series, (ii) an opinion of counsel to the effect
that the securities of such Series will be characterized as indebtedness or as
partnership interests under existing law for federal and applicable state
income tax purposes, and that the issuance of such Series will not materially
adversely affect the federal income tax characterization of any outstanding
Series or result in the Trust being subject to tax at the entity level for
federal or applicable state tax purposes (a "Tax Opinion"), (iii) if required
by such Supplement, the form of Enhancement and an appropriate Enhancement
agreement with respect thereto executed by the Transferor and the issuer of the
Enhancement, (iv) written confirmation from each Rating Agency that the
Exchange will not result in such Rating Agency's reducing or withdrawing its
rating on any then outstanding Series rated by it, (v) the existing
Exchangeable Transferor Security and, if applicable, the securities
representing the Series to be exchanged, and (vi) an officer's certificate of
the Transferor stating that, after giving effect to such Exchange, (a) the
Transferor Interest would be at least equal to the Minimum Transferor Interest
and (b) the Retained Interest equals or exceeds the minimum Retained Interest.
"Retained Interest" means, on any Determination Date, the sum of the Transferor
Interest and the interest in the Trust represented by any class of Investor
Securities retained by the Transferor. "Determination Date" shall mean the
second business day prior to any Distribution Date.
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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 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 is in good
standing (or is exempt from such requirement) in any state required in order to
conduct its business and has obtained all necessary licenses and approvals
required under federal and Delaware law, provided, however, that no
representation or warranty is made with respect to any qualifications, licenses
or approvals which the Trustee would have to obtain to do business in any state
in which the Trustee seeks to enforce any Receivable, (iii) the execution and
delivery of the Pooling and Servicing Agreement, the related Supplement, and
the Purchase Agreement, and the consummation of the transactions provided for
therein, have been duly authorized by the Transferor by all necessary corporate
action on its part, (iv) each of the Pooling and Servicing Agreement, the
related Supplement, and the Purchase Agreement constitutes a legal, valid and
binding obligation of the Transferor, and (v) the transfer of Receivables by it
to the Trust under the Pooling and Servicing Agreement and related Supplement
constitutes either a valid transfer and assignment to the Trust of all right,
title and interest of the Transferor in and to the Receivables and the proceeds
thereof and amounts in any of the accounts established for the benefit of
securityholders free and clear of any lien of any person claiming through or
under the Transferor or any of its affiliates (except for Permitted Liens and
certain rights of the Transferor) or the grant of a first priority security
interest in such Receivables and the proceeds thereof (including amounts in any
of the accounts established for the benefit of securityholders). "Permitted
Lien" means with respect to the Receivables: (i) liens in favor of the
Transferor created pursuant to the Purchase Agreement and assigned to the
Trustee pursuant to the Pooling and Servicing Agreement; (ii) liens in favor of
the Trustee pursuant to the Pooling and Servicing Agreement; and (iii) liens
which secure the payment of taxes, assessments and governmental charges or
levies, if such taxes are either (a) not delinquent or (b) being contested in
good faith by appropriate legal or administrative proceedings and as to which
adequate reserves in accordance with generally accepted accounting principles
shall have been established. In the event of a breach of any of the
representations and warranties described in this paragraph with respect to any
Series, either the Trustee or the holders of securities evidencing undivided
interests in the Trust aggregating more than 50 percent of the invested amount
of such Series, by written notice to the Transferor (and to the Trustee and the
Servicer if given by the Securityholders of such Series), may direct the
Transferor to accept reassignment of an amount of Principal Receivables equal
to the invested amount to be reassigned (as described below) within 60 days of
such notice, or within such longer period specified in such notice. The
Transferor will thereupon be obligated to accept reassignment of such
Receivables on a Distribution Date occurring within such applicable period.
Such reassignment will not be required to be made, however, if at any time
during such applicable period, or such longer period, the representations and
warranties shall then be true and correct in all material respects. The amount
to be deposited by the Transferor for distribution to Securityholders in
connection with such reassignment will be equal to the invested amount for all
Series of Securities other than Variable Funding Securities required to be
reassigned on the last day of the Monthly Period preceding the Distribution
Date on which the reassignment is scheduled to be made, and, with respect to
the Variable Funding Securities, the invested amount as of the Distribution
Date on which the reassignment is scheduled to be made, less the amount, if
any, previously allocated for payment of principal to such Securityholders on
such Distribution Date, plus an amount equal to all interest accrued but unpaid
on such securities at the applicable interest rate through the last day of the
related Interest Accrual Period, less the amount transferred to the
Distribution Account from the Interest Funding Account in respect of interest
on such securities for the month ending on such last day of the Monthly Period.
The payment of the reassignment deposit amount and the transfer of all other
amounts deposited for the preceding month in the Distribution Account will be
considered a payment in full of the
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investor interest for all Series of securities required to be repurchased and
will be distributed upon presentation and surrender of the Securities for each
such Series. If the Trustee or the Securityholders give a notice as provided
above, the obligation of the Transferor to make any such deposit will
constitute the sole remedy available to the Trustee and the Securityholders
with respect to any breach of the Transferor's representations and warranties.
The "Interest Accrual Period," with respect to any Distribution Date, will be
the period from and including the previous Distribution Date (or, in the case
of the initial Distribution Date for a Series of Securities, from and including
an initial date set forth in the related Prospectus Supplement) through the day
preceding such Distribution Date.
Pursuant to the Pooling and Servicing Agreement, the Transferor also
represents and warrants that, among other things, subject to specified
exceptions and limitations, (i) the execution and delivery of the Pooling and
Servicing Agreement, the related Supplement, and the Purchase Agreement, and
the performance of the transactions contemplated thereby, do not contravene the
Transferor's charter or by-laws, violate any material provision of law
applicable to it or require any filing (except for filing under the UCC),
registration, consent, or approval under any such law except for such filings,
registrations, consents or approvals as have already been obtained and are in
full force and effect, (ii) except as described in the Purchase Agreement, the
Transferor and each prior owner of the Receivables has filed all material tax
returns required to be filed and has paid or made adequate provision for the
payment of all material taxes, assessments, and other governmental charges due
from the Transferor or such prior owner or is contesting any such tax,
assessment or other governmental charge in good faith through appropriate
proceedings, (iii) there are no proceedings or investigations pending or, to
the best knowledge of the Transferor, threatened against the Transferor, before
any court, regulatory body, administrative agency, or other tribunal or
governmental instrumentality asserting the invalidity of the Pooling and
Servicing Agreement, the related Supplement and the Purchase Agreement, seeking
to prevent the consummation of any of the transactions contemplated thereby,
seeking any determination or ruling that would materially and adversely affect
the performance by the Transferor of its obligations thereunder, or seeking any
determination or ruling that would materially and adversely affect the validity
or enforceability thereof or of the tax attributes of the Trust, (iv) each
Receivable is or will be an account receivable arising out of the performance
by the applicable Credit Card Originator in accordance with the terms of the
Contract giving rise to such Receivable, (v) each Account classified as an
Eligible Account in any document or report delivered pursuant to the Pooling
and Servicing Agreement satisfies the definition of Eligible Account and the
Transferor has no knowledge of any fact which should have led it to expect at
the time of the classification of any Receivable as an Eligible Receivable that
such Receivable would not be paid in full when due, and each Receivable
classified as an Eligible Receivable by the Transferor in any document or
report delivered under the Pooling and Servicing Agreement satisfies the
requirements of eligibility contained in the definition of Eligible Receivable
set forth in the Pooling and Servicing Agreement and related Supplement, (vi)
the Transferor is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act") (or
is exempt from all provisions of the Investment Company Act), (vii) the
Transferor is not insolvent and (viii) the Transferor is the legal and
beneficial owner of all right, title and interest in and to each Receivable
conveyed to the Trust by the Transferor pursuant to the Pooling and Servicing
Agreement, and each such Receivable has been or will be transferred to the
Trust free and clear of any lien other than Permitted Liens and in compliance
in all material respects with all requirements of law applicable to the
Transferor. If any representation or warranty made by the Transferor in the
Pooling and Servicing Agreement or the related Supplement proves to have been
incorrect in any material respect when made, and as a result the interests of
the Securityholders are materially adversely affected, and such representation
or warranty continues to be incorrect for 60 days after notice to the
Transferor by the Trustee or to the Transferor and the Trustee by more than 50
percent of the Invested Amount and the Securityholders' Interest continues to
be materially adversely affected during such period, then the Trustee or 50
percent of the Securityholders' Interest of any Class may give notice to the
Transferor (and to the Trustee in the latter instance) declaring that a Pay Out
Event has occurred, thereby commencing the Early Amortization Period; provided,
however, that a Pay Out Event will not be deemed to have occurred as aforesaid
if the Transferor has accepted a reassignment of the affected Receivables
during such period in accordance with the Pooling and Servicing Agreement. See
"--Pay Out Events."
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It is not required or anticipated that the Trustee will make any initial or
periodic general examination of the Receivables or any records relating to the
Receivables for the purpose of establishing the presence or absence of defects
or compliance with the Transferor's representations and warranties or for any
other purpose. The Servicer, however, will deliver to the Trustee on or before
March 31 of each year an opinion of counsel with respect to the validity of the
security interest of the Trust in and to the Receivables and certain other
components of the Trust.
Certain Covenants
Pursuant to the Pooling and Servicing Agreement, the Transferor covenants
that, among other things, subject to specified exceptions and limitations, (i)
it will take no action to cause any Receivable to be evidenced by any
instruments or to be anything other than an account, general intangible, or
chattel paper, except in connection with the enforcement or collection of a
Receivable, (ii) except for the conveyances under the Pooling and Servicing
Agreement, it will not sell any Receivable or grant a lien (other than a
Permitted Lien) on any Receivable, (iii) in the event it receives a collection
on any Receivable, it will deposit such collections to the Collection Account
within two business days, (iv) it will notify the Trust promptly after becoming
aware of any lien on any Receivable other than Permitted Liens, (v) it will
take all actions necessary to enforce its rights and claims under the Purchase
Agreement, (vi) it will promptly provide the Trustee any notices, reports or
certificates given or delivered under the Purchase Agreement and (vii) except
as permitted by the Pooling and Servicing Agreement, it will not commingle its
assets with those of Direct Merchants Bank or Metris or any affiliate thereof.
Eligible Accounts
As of the Initial Closing Date (or, with respect to Additional Accounts, on
the date the Credit Card Originator acquires rights therein, or, with respect
to Supplemental Accounts, as of the date the Receivables arising in such
Accounts are designated for inclusion in the Trust), each revolving credit
consumer credit card account owned by a Credit Card Originator and having the
following characteristics shall be an Eligible Account (each, an "Eligible
Account"): (a) which is payable in United States dollars, (b) the Obligor on
which has provided, as its initial billing address, an address located in the
United States or its territories or possessions or a United States military
address, (c) which has not been identified by a Credit Card Originator in its
computer files as stolen or lost, (d) which is not at the time of transfer to
the Trust sold or pledged to any other party and which does not have
Receivables which, at the time of transfer to the Trust, are sold or pledged to
any other party (provided that Receivables which were sold or pledged prior to
the Closing Date, but were repurchased free of all liens or where all liens
were released prior to sale, shall not be disqualified under this clause (d)),
and (e) the Receivables in which the Credit Card Originator has not charged off
in its customary and usual manner for charging off Receivables in such Accounts
as of the Initial Closing Date (or, with respect to Additional Accounts, as of
the date the Receivables of such Accounts are first designated for inclusion in
the Trust) unless such Account is subsequently reinstated.
"Credit Card Originator" means Direct Merchants Bank, including its
predecessor in interest, Utah Bank, and its successors or assigns under the
Bank Purchase Agreement and/or any transferee of the Accounts from Direct
Merchants Bank or any other originator of accounts which enters into a
receivables purchase agreement with Direct Merchants Bank or Metris (to the
extent that rights therein are granted to the Transferor directly or
indirectly) or the Transferor in accordance with the provisions of the Pooling
and Servicing Agreement and who has been identified in a prior written notice
to each Rating Agency.
Eligible Receivables
Each Receivable that satisfies each of the following criteria shall be an
Eligible Receivable (each, an "Eligible Receivable"): (a) it arises under an
Account, (b) it is not sold or pledged to any other party, (c) it constitutes
an "account," "chattel paper" or a "general intangible" as each is defined in
Article 9 of the UCC as then in effect in each Relevant UCC State, (d) it is at
the time of its transfer to the Trust the legal, valid and
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binding obligation of, or is guaranteed by, a person who is competent to enter
into a contract and incur debt and is enforceable against such person in
accordance with its terms, (e) it was created or acquired in compliance, in all
material respects, with all requirements of law applicable to the Credit Card
Originator and pursuant to a Contract that complies, in all material respects,
with all requirements of law applicable to the Credit Card Originator
(including without limitation, laws, rules and regulations relating to truth in
lending, usury, fair credit billing, fair credit reporting, equal credit
opportunity and fair debt collection practices), (f) all material consents,
licenses, or authorizations of, or registrations with, any governmental
authority required to be obtained or given in connection with the creation of
such Receivable or the execution, delivery, creation, and performance of the
related Contract have been duly obtained or given and are in full force and
effect as of the date of the creation of such Receivable and (g) immediately
prior to giving effect to the sale, the Transferor or the Trust will have good
and marketable title free and clear of all liens and security interests arising
under or through the Transferor (other than Permitted Liens). "Relevant UCC
State" means each jurisdiction in which the filing of a UCC financing statement
is necessary to perfect the ownership interest and security interest of the
Transferor pursuant to the Purchase Agreement or the ownership or security
interest of the Trustee.
"Contract" means an agreement between a Credit Card Originator and another
person for the extension of revolving credit, including pursuant to a credit
card or revolving credit agreement (but shall not include any agreement or plan
relating to the extension of credit on a closed-end basis).
Addition of Trust Assets
During the period from the Initial Closing Date through May 31, 1996 and
during the period from June 7, 1996 through November 5, 1996 all accounts which
met the definition of Additional Accounts were automatically included as
Accounts (such accounts, "Automatic Additional Accounts") from and after the
date upon which such Automatic Additional Accounts were created and all
Receivables in such Automatic Additional Accounts, whether such Receivables
were then existing or thereafter created, were transferred automatically to the
Trust upon purchase by the Transferor. The Transferor has elected to suspend
the automatic inclusion in Accounts of Automatic Additional Accounts until a
date (the "Restart Date") to be identified in writing by the Transferor, at its
option, to the Trustee, the Servicer and each Rating Agency at least ten days
prior to such Restart Date. On and prior to the Restart Date, the Transferor
may, by giving ten business days' notice to the Trustee and each Rating Agency,
but will not be obligated to, designate from time to time additional credit
card accounts ("Supplemental Accounts") to be included as Accounts. The
Transferor has periodically designated Supplemental Accounts to be included as
Accounts and intends, although no assurance can be given, to continue to
designate additional Supplemental Accounts to be included as Accounts. In
addition, prior to the Restart Date, if (i) on the tenth business day prior to
any Determination Date, the Transferor Interest for the related Monthly Period
is less than the Minimum Transferor Interest, the Transferor is required to
designate Supplemental Accounts to be included as Accounts in a sufficient
amount such that the Transferor Interest as a percentage of the aggregate
Principal Receivables for such Monthly Period after giving effect to such
addition is at least equal to the Minimum Transferor Interest or (ii) on any
Record Date, the aggregate Principal Receivables are less than the Minimum
Aggregate Principal Receivables, the Transferor is required to designate
Supplemental Accounts to be included as Accounts in a sufficient amount such
that the aggregate Principal Receivables will be equal to or greater than the
Minimum Aggregate Principal Receivables. Receivables from such Supplemental
Accounts shall be transferred to the Trust on or before the tenth business day
following such Record Date. On any day on which the Receivables in Supplemental
Accounts are to be transferred to the Trust, the Receivables in such Accounts
shall be included as Eligible Receivables if they satisfy the requirements of
the definition of "Eligible Receivables." "Minimum Transferor Interest" for any
period means the product of (a) the sum of (1) the aggregate Principal
Receivables and (2) the amounts on deposit in the Excess Funding Account and
(b) the highest Minimum Transferor Percentage for any Series. "Minimum
Transferor Percentage" for any Series will have the meaning specified in the
related Prospectus Supplement. "Minimum Aggregate Principal Receivables" means
an amount equal to the sum of the numerators used to calculate the Investor
Percentages with respect to the allocation of Principal Collections for each
Series then outstanding.
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"Excluded Accounts" means, on any date of determination (a) during any
period in which accounts are being automatically included as Accounts, any
revolving credit consumer credit card account which has been excluded from
addition to the Trust pursuant to the Pooling and Servicing Agreement or any
revolving credit consumer credit card account which the Transferor has elected
to exclude from the Trust and (b) during any period following the suspension of
the automatic addition of accounts and prior to a Restart Date, all revolving
credit consumer credit card accounts other than accounts that were Accounts on
the automatic addition suspension date and Supplemental Accounts previously
added during such period. "Additional Accounts" means (a) for the period from
the Initial Closing Date through the day preceding the Amendment Closing Date,
each revolving credit consumer credit card account owned by a Credit Card
Originator coming into existence after the Initial Closing Date which is an
Approved Account that the Transferor has not elected to exclude from the Trust
after June 7, 1996 and prior to July 30, 1998 (the "Amendment Closing Date") or
(b) on and after the Amendment Closing Date, each revolving credit consumer
credit card account in which a Credit Card Originator acquires rights that is
an Approved Account and is not an Excluded Account; provided, however, that a
revolving credit consumer credit card account that does not satisfy the
definition of Approved Account on the date of its creation shall be an
Additional Account on the date that it satisfies the definition of Approved
Account. Any such election will be made by the Transferor or the Servicer
providing to the Trustee a written notice thereof clearly identifying such
Excluded Accounts.
An "Approved Account" means (i) each Eligible Account that is a
MasterCard(R) or VISA(R) account or (ii) any other revolving credit consumer
credit card account the inclusion in the Trust of which would not cause a
Ratings Event. "Ratings Event" means, with respect to any Class of any
outstanding Series rated by a Rating Agency, a reduction or withdrawal of the
rating of any such Class by a Rating Agency.
The Transferor has conveyed, and will continue to convey, to the Trust all
Receivables arising under the Accounts, including all Supplemental Accounts and
Automatic Additional Accounts, from time to time until the termination of the
Trust.
The Transferor agrees that any such transfer of Receivables from
Supplemental Accounts will be subject to the satisfaction of the following
conditions: (i) on or before the fifth business day prior to the date as of
which Receivables under Additional Accounts or Supplemental Accounts are
included in the Trust as Accounts pursuant to the Pooling and Servicing
Agreement (each, an "Addition Date") with respect to required additions and on
or before the twentieth business day prior to the Addition Date with respect to
optional additions (as applicable, the "Notice Date"), the Transferor shall
give the Trustee, each Rating Agency and the Servicer written notice that such
Supplemental Accounts will be included, which notice will specify the
approximate aggregate amount of the Receivables to be transferred; (ii) on or
before the applicable Addition Date, the Transferor will have delivered to the
Trustee a written assignment (the "Assignment") and the Transferor will have
indicated in its computer files that the Receivables created in connection with
the Supplemental Accounts have been transferred to the Trust and, within five
business days thereafter, the Transferor will have delivered to the Trustee or
the bailee of the Trustee a computer file or microfiche list containing a true
and complete list of all Supplemental Accounts, identified by account number
and the Principal Receivables in such Supplemental Accounts, as of the Addition
Date, which computer file or microfiche list will be as of the date of such
Assignment incorporated into and made a part of such Assignment; (iii) the
Transferor will represent and warrant that (x) no selection procedure that is
materially adverse to the interests of holders of the Investor Securities was
used in selecting the Supplemental Accounts and (y) as of the applicable
Addition Date, the Transferor is not insolvent and will not be rendered
insolvent upon the transfer of Receivables to the Trust; (iv) the Transferor
will represent and warrant that, as of the Addition Date, the Assignment
constitutes either (x) a valid transfer and assignment to the Trust of all
right, title and interest of the Transferor in and to the Receivables then
existing and thereafter created and arising in connection with the Accounts and
any accounts that meet the definition of Additional Accounts, and the proceeds
thereof or (y) a grant of a security interest (as defined in the UCC as in
effect in the Relevant UCC State) in such property to the Trust, which is
enforceable with respect to the then existing Receivables of the Supplemental
Accounts and the proceeds thereof upon the conveyance of such Receivables to
the Trust, and
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which will be enforceable with respect to the Receivables thereafter created in
respect of Supplemental Accounts conveyed on such Addition Date and the
proceeds thereof upon such creation, and (z) if the Assignment constitutes the
grant of a security interest to the Trust in such property, upon the filing of
a financing statement with respect to such Supplemental Accounts and in the
case of the Receivables thereafter created in such Supplemental Accounts and
the proceeds thereof, upon such creation, the Trust will have a first priority
perfected security interest in such property, except for Permitted Liens; (v)
the Transferor will deliver to the Trustee an officer's certificate confirming
the items set forth in clause (ii) above; (vi) the Transferor will deliver to
the Trustee an opinion of counsel with respect to the Trust's security interest
in the Receivables in the Supplemental Accounts (with a copy to the Rating
Agencies); and (vii) the Transferor will have received written notice from each
Rating Agency that the inclusion of such accounts as Supplemental Accounts will
not result in the reduction or withdrawal of its then existing rating of any
class of any Series of Investor Securities then issued and outstanding and will
have delivered such notice to the Trustee.
On or after the Restart Date, Automatic Additional Accounts will be deemed
to be Accounts the Receivables of which will be designated for inclusion in the
Trust if, unless each Rating Agency otherwise consents, the following
conditions are met: the number of Accounts the Receivables of which are
automatically designated to be included in the Trust since (x) the first day of
the eleventh preceding Monthly Period minus the number of Accounts of the type
described in clause (ii) of the definition of "Approved Account" which have
been added on the initial day of the addition of such type of Account pursuant
to such clause (ii) since the first day of such eleventh preceding Monthly
Period will not exceed 20 percent of the number of Accounts on the first day of
such eleventh preceding Monthly Period, and (y) the first day of the second
preceding Monthly Period minus the number of Accounts of the type described in
clause (ii) of the definition of "Approved Accounts" which have been added on
the initial day of the addition of such type of Account pursuant to such clause
(ii) since the first day of such second preceding Monthly Period will not
exceed 15 percent of the number of Accounts on the first day of such second
preceding Monthly Period. The automatic addition of Receivables in new Accounts
may be subject to additional conditions specified from time to time by the
Rating Agencies.
The Transferor may designate revolving credit consumer credit card accounts
which would otherwise be Additional Accounts as Excluded Accounts by the
Transferor delivering to the Trustee a written notice clearly identifying such
excluded accounts. If such designation is made after the Trust acquires rights
in such Accounts, such designation will only occur in accordance with the
provisions for removals of accounts set forth in the Pooling and Servicing
Agreement.
Collection and Other Servicing Procedures
Pursuant to the Pooling and Servicing Agreement, the Servicer is responsible
for servicing, enforcing and administering the Receivables and collecting
payments due thereunder in accordance with its customary and usual servicing
procedures and the Credit and Collection Policy. Unless otherwise specified in
the Prospectus Supplement relating to the Trust, "Credit and Collection Policy"
means the written policies and procedures of the applicable Credit Card
Originator relating to the operation of its consumer revolving credit card
business, including, without limitation, the written policies and procedures
for determining the creditworthiness of credit card customers and relating to
the maintenance of credit card accounts and collection of receivables with
respect thereto, as such policies and procedures may be amended, modified or
otherwise changed from time to time. Servicing functions to be performed by the
Servicer with respect to the Receivables include statement processing and
mailing, collecting and recording payments, investigating payment
delinquencies, and communicating with cardholders. See "Direct Merchants Credit
Card Bank, N.A. Activities--Delinquency, Collections and Charge-Offs."
Managerial functions to be performed by the Servicer on behalf of the Trust
include maintaining books and records with respect to the foregoing and other
matters pertinent to the Receivables, assisting the Trustee with any
inspections of such books and records by the Trustee pursuant to the Pooling
and Servicing Agreement, preparing and delivering the monthly and annual
statements described in "--Reports to Securityholders," and causing a firm of
independent certified public accountants to prepare and deliver the annual
reports described in "--Evidence as to Compliance."
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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 Ratings Services, a division of The McGraw-Hill Companies, Inc.
("Standard & Poor's") or long-term unsecured debt obligation (other than such
obligation the rating of which is based on collateral or on the credit of a
person other than such institution or trust company) rating of at least Aaa by
Moody's and of AAA by Standard & Poor's and deposit insurance provided by the
Federal Deposit Insurance Corporation ("FDIC"), or a depository institution,
which may include the Trustee, which is acceptable to the Rating Agencies;
provided, however, that no such rating shall be required of an institution
which shall have corporate trust powers and which maintains the Collection
Account, any principal account, any interest funding account or any other
account maintained for the benefit of Securityholders as a fully segregated
trust account with the trust department of such institution which is rated at
least Baa3 by Moody's. Funds in the Trust Accounts will be invested in (a)
negotiable instruments or securities represented by instruments in bearer or
registered form which evidence (i) obligations of or fully guaranteed by the
United States of America; (ii) time deposits, promissory notes, or certificates
of deposit of any depository institution or trust company; provided, however,
that at the time of the Trust's investment or contractual commitment to invest
therein, the certificates of deposit or short-term deposits of such depository
institution or trust company shall have a credit rating from Standard & Poor's
of A-1+ and from Moody's of P-1; (iii) commercial paper having, at the time of
the Trust's investment or contractual commitment to invest therein, a rating
from Standard & Poor's of A-1+ and from Moody's of P-1; (iv) banker's
acceptances issued by any depository institution or trust company described in
clause (a)(ii) above; and (v) investments in money market funds rated AAA-m or
AAA-mg by Standard & Poor's and Aaa by Moody's or otherwise approved in writing
by Moody's and Standard & Poor's; (b) time deposits and demand deposits in the
name of the Trust or the Trustee in any depository institution or trust company
referred to in clause (a)(ii) above; (c) securities not represented by an
instrument that are registered in the name of the Trustee or its nominee (which
may not be Metris or an affiliate) upon books maintained for that purpose by or
on behalf of the issuer thereof and identified on books maintained for that
purpose by the Trustee as held for the benefit of the Trust or the
Securityholders, and consisting of (x) shares of an open end diversified
investment company which is registered under the Investment Company Act which
(i) invests its assets exclusively in obligations of or guaranteed by the
United States of America or any instrumentality or agency thereof having in
each instance a final maturity date of less than one year from their date of
purchase or other Cash Equivalents, (ii) seeks to maintain a constant net asset
value per share, (iii) has aggregate net assets of not less than $100,000,000
on the date of purchase of such shares and (iv) which each Rating Agency
designates in writing will not result in a withdrawal or downgrading of its
then current rating of any Series rated by it or (y) Eurodollar time deposits
of a depository institution or trust company that are rated A-1+ by Standard &
Poor's and P-1 by Moody's; provided, however, that at the time of the Trust's
investment or contractual commitment to invest therein, the Eurodollar deposits
of such depository institution or trust company shall have a credit rating from
Standard & Poor's of A-1+ and from Moody's of P-1; (d) a guaranteed investment
contract (guaranteed as to timely payment) which each Rating Agency designates
in writing will not result in a withdrawal or downgrading of its then current
rating of any Series rated by it; (e) repurchase agreements transacted with
either (i) an entity subject to the United States federal bankruptcy code, as
amended (the "Bankruptcy Code"), provided, however, that (A) the term of the
repurchase agreement is consistent with the requirements with regard to the
maturity of Cash Equivalents
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specified herein or in the applicable Supplement for the applicable account or
is due on demand, (B) the Trustee or a third party acting solely as agent for
the Trustee has possession of the collateral, (C) the Trustee on behalf of the
Trust has a perfected first priority security interest in the collateral, (D)
the market value of the collateral is maintained at the requisite collateral
percentage of the obligation in accordance with the standards of the Rating
Agencies, (E) the failure to maintain the requisite collateral level will
obligate the Trustee to liquidate the collateral as promptly as practicable
upon instructions from the Servicer, (F) the securities subject to the
repurchase agreement are either obligations of, or fully guaranteed as to
principal and interest by, the United States of America or any instrumentality
or agency thereof, certificates of deposit or banker's acceptances and (G) the
securities subject to the repurchase agreement are free and clear of any third
party lien or claim, or (ii) a financial institution insured by the FDIC, or
any broker-dealer with "retail-customers" that is under the jurisdiction of the
Securities Investors Protection Corporation ("SIPC"), provided, however, that
(A) the market value of the collateral is maintained at the requisite
collateral percentage of the obligation in accordance with the standards of the
Rating Agencies, (B) the Trustee or a third party (with a rating from Moody's
and Standard & Poor's of P-1 and A-1+, respectively) acting solely as agent for
the Trustee has possession of the collateral, (C) the collateral is free and
clear of third party liens and, in the case of an SIPC broker, was not acquired
pursuant to a repurchase or reverse repurchase agreement and (D) the failure to
maintain the requisite collateral percentage will obligate the Trustee to
liquidate the collateral upon instructions from the Servicer; provided,
however, that at the time of the Trust's investment or contractual commitment
to invest in any repurchase agreement the short-term deposits or commercial
paper of such entity or institution in subclauses (i) and (ii) above shall have
a credit rating of P-1 or A-1+ or their equivalent from each Rating Agency; and
(f) any other investment if each Rating Agency confirms in writing that such
investment will not adversely affect its then current rating of the Investor
Securities (such investments, "Cash Equivalents"). Any earnings (net of losses
and investment expenses) on funds in the Interest Funding Account and the
Principal Account will be paid to the Transferor. The Servicer has the
revocable power to withdraw funds from the Collection Account, and to instruct
the Trustee to make withdrawals and payments from the Interest Funding Account
and the Principal Account, in each case for the purpose of making deposits and
distributions required under the Pooling and Servicing Agreement, including the
deposits and distributions described below in "--Application of Collections"
and in "Description of the Offered 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.
Currently, the Paying Agent is The Bank of New York (Delaware), the Trustee
under the Pooling and Servicing Agreement. The Paying Agent may resign at any
time, upon 30 days' written notice to the Servicer. The Transferor expects that
The Bank of New York (Delaware) will resign as the Trustee, as well as the
Paying Agent under the Pooling and Servicing Agreement. In such an event, the
Transferor expects to appoint U.S. Bank National Association or one of its
affiliates as the successor Trustee and as the Paying Agent under the Pooling
and Servicing Agreement. See "--The Trustee" for a discussion of the provisions
of the Pooling and Servicing Agreement relating to the appointment of a
successor Trustee.
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
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Agencies covering the risk of collection of the Servicer and (ii) the
Transferor shall not have received a notice from either Rating Agency that
making payments monthly rather than daily would result in the lowering of such
Rating Agency's then-existing rating of any Series of Securities then
outstanding or (b) the Servicer has and maintains a short-term credit rating of
P-1 by Moody's and A-1 by Standard & Poor's.
If clause (a) or clause (b) set forth in the proviso to the immediately
preceding paragraph is satisfied, payments on the Receivables collected by the
Servicer will not be segregated from the assets of the Servicer. Until such
payments on the Receivables collected by the Servicer are deposited into the
Collection Account, such funds may be used by the Servicer for its own benefit,
and the proceeds of any short-term investment of such funds will accrue to the
Servicer. During such times as the Servicer holds funds representing payments
on the Receivables collected by the Servicer and is permitted to use such funds
for its own benefit, the Securityholders are subject to risk of loss, including
risk resulting from the bankruptcy or insolvency of the Servicer. The Servicer
pays no fee to the Trust or any Securityholder for any use by the Servicer of
funds representing Collections on the Receivables.
Investor Percentage and Transferor Percentage
For each Trust, the Servicer will allocate between the Invested Amount of
each Series issued by such Trust (and between each Class of each Series) and
the Transferor Interest, and, in certain circumstances, the interest of certain
Enhancement providers, all amounts collected on Finance Charge Receivables, all
amounts collected on Principal Receivables and all Receivables in Defaulted
Accounts. The Servicer will make each allocation by reference to the applicable
Investor Percentage of each Series and the Transferor Percentage, and, in
certain circumstances, the percentage interest of certain Enhancement providers
(the "Enhancement Percentage") with respect to such Series. The Prospectus
Supplement relating to a Series will specify the Investor Percentage and the
Enhancement Percentage (or the method of calculating such percentage) with
respect to the allocations of Principal Collections, Finance Charge Receivables
and Receivables in Defaulted Accounts during the Revolving Period and any
Amortization Period. In addition, for each Series of Securities having more
than one Class, the related Prospectus Supplement will specify the method of
allocation between each Class.
"Investor Percentage" shall mean, (a) with respect to Finance Charge
Collections, Receivables in Defaulted Accounts and Principal Collections, the
percentage specified in the related Prospectus Supplement. The Transferor
Percentage will, in all cases, be equal to 100% minus the aggregate Investor
Percentages and, if applicable, the Enhancement Percentages, for all Series
then outstanding.
Application of Collections
Unless otherwise specified in the related Prospectus Supplement, except as
otherwise provided below, on each business day, (i) the amount of Finance
Charge Collections available in the Collection Account allocable to each
Series, (ii) the amount of Principal Collections available in the Collection
Account allocable to each Series and (iii) the Receivables in Defaulted
Accounts allocable to each Series shall be determined in accordance with the
provisions of the related Supplement. The Servicer shall, prior to the close of
business on the day any Collections are deposited in the Collection Account,
cause the Trustee to withdraw the required amounts from the Collection Account
and cause the Trustee to deposit such amounts into the applicable Principal
Account, the applicable Interest Funding Account, the Excess Funding Account,
or any other Trust Account or pay such amounts to the holder of the
Exchangeable Transferor Security in accordance with the provisions of the
Pooling and Servicing Agreement and the related Supplement.
Throughout the existence of the Trust, unless otherwise stated in any
Prospectus Supplement, on each business day the Servicer shall allocate to the
holder of the Exchangeable Transferor Security an amount equal to the product
of (A) the Transferor Percentage as of the end of the preceding business day
and (B) the aggregate amount of Principal Collections and Finance Charge
Collections available in the Collection Account. The Servicer shall pay such
amount to the holder of the Exchangeable Transferor Security on each business
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day; provided, however, that amounts payable to the holder of the Exchangeable
Transferor Security pursuant to the Pooling and Servicing Agreement and related
Supplement shall instead be deposited in the Excess Funding Account to the
extent necessary to prevent the Transferor Interest from being less than the
Minimum Transferor Interest.
Shared Principal Collections
If specified in the related Prospectus Supplement, on each business day,
Shared Principal Collections shall be allocated to each outstanding Series pro
rata based on the Principal Shortfall, if any, for each such Series, and then,
at the option of the Transferor, any remainder may be applied as principal with
respect to the Variable Funding Securities. "Principal Shortfall" shall mean,
with respect to any business day and any outstanding Series, the amount which
the related Prospectus Supplement specifies as the principal shortfall for such
business day. The Servicer shall pay any remaining Shared Principal Collections
on such business day to the Transferor; provided that if the Transferor
Interest as determined on such business day does not exceed the Minimum
Transferor Interest, then such remaining Shared Principal Collections shall be
deposited in the Excess Funding Account to the extent necessary to increase the
Transferor Interest above the Minimum Transferor Interest; provided, further,
that if an Amortization Period has commenced and is continuing with respect to
more than one outstanding Series, such remaining Shared Principal Collections
shall be allocated to such Series pro rata based on the Investor Percentage for
Principal Receivables applicable for such Series.
In addition, if so specified in the related Prospectus Supplement, Principal
Collections otherwise payable to the Transferor may be designated to be paid to
the Securityholders of the applicable Series.
Shared Excess Finance Charge Collections
Finance Charge Collections on any business day in excess of the amounts
necessary to make required payments on such business day will be applied to
cover any shortfalls with respect to amounts payable from Finance Charge
Collections allocable to any other Series then outstanding, pro rata based upon
the amount of the shortfall, if any, with respect to such other Series. If so
specified in the related Prospectus Supplement, any Excess Finance Charge
Collections remaining after covering shortfalls with respect to all outstanding
Series will be paid to the Servicer to cover certain costs and expenses and
then to the Transferor. Unless otherwise provided in the related Prospectus
Supplement, with respect to any Series, "Excess Finance Charge Collections" for
any Monthly Period shall mean any Finance Charge Collections allocable to any
Series in excess of the amounts necessary to make required payments with
respect to such Series.
In addition, if so specified in the related Prospectus Supplement, Finance
Charge Collections otherwise payable to the Transferor may be designated to be
paid to the Securityholders of the applicable Series.
Excess Funding Account
The Trustee has established and will maintain in the name of the Trust, for
the benefit of the securityholders of all Series, a segregated account with a
Qualified Institution (the "Excess Funding Account"). The Servicer has the
power, revocable by the Trustee, to make withdrawals and payments from the
Excess Funding Account for the purpose of carrying out the Servicer's or the
Trustee's duties. At any time during which no Series is in an amortization
period (including any accumulation period or early amortization period), or for
a Series in amortization, the principal account, if any, is fully funded for an
applicable period, and the Transferor Interest does not exceed the Minimum
Transferor Interest, funds (to the extent available therefor as described
herein) otherwise payable to the Transferor will be deposited in the Excess
Funding Account on any business day until the Transferor Interest is at least
equal to the Minimum Transferor Interest. Funds on deposit in the Excess
Funding Account may, at the option of the Transferor, be withdrawn and paid to
the Transferor to the extent that on any day the Transferor Interest exceeds
the Minimum Transferor Interest. Such deposits in and withdrawals from the
Excess Funding Account may be made on a daily basis.
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Any funds on deposit in the Excess Funding Account at the beginning of an
Amortization Period for any Series will be deposited in the Principal Account
as part of principal for any Distribution Date. In the event that more than one
Series begins its accumulation period or amortization period at the same time,
amounts on deposit in the Excess Funding Account will be paid out to each such
Series pro rata based on the aggregate invested amount of each such Series. In
addition, no funds allocated to Investor Securities will be deposited in the
Excess Funding Account during any amortization period (including any
accumulation period or early amortization period) for any Series until the
Principal Funding Account for such Series for such Distribution Date has been
fully funded or the Investor Securities of such Series have been paid in full.
Funds on deposit in the Excess Funding Account will be invested by the
Trustee at the direction of the Transferor in Cash Equivalents. On each
Distribution Date, all net investment income earned on amounts in the Excess
Funding Account since the preceding Distribution Date will be withdrawn from
the Excess Funding Account and treated as Finance Charge Collections.
Paired Series
If so provided in the Prospectus Supplement relating to a Series, such
Series may be subject to being paired with another Series or a portion of that
Series (in each case, a "Paired Series"). The Prospectus Supplement for such
Series and the Prospectus Supplement for the Paired Series will each specify
the relationship between the Series. Each Paired Series either will be
prefunded with an initial deposit to a pre-funding account in an amount up to
the initial principal balance of such Paired Series and primarily from the
proceeds of the sale of such Paired Series or will have a variable principal
amount. Any such pre-funding account will be held for the benefit of such
Paired Series and not for the benefit of the Securityholders. As amounts are
deposited in the Principal Funding Account for the benefit of the
Securityholders, either (i) in the case of a prefunded Paired Series, an equal
amount of funds on deposit in any pre-funding account for such prefunded Paired
Series will be released (which funds will be distributed to the Transferor) or
(ii) in the case of a Paired Series having a variable principal amount, an
interest in such variable Paired Series in an equal or lesser amount may be
sold by the Trust (and the proceeds thereof will be distributed to the
Transferor) and, in either case, the invested amount in the Trust of such
Paired Series will increase by up to a corresponding amount. Upon payment in
full of the Securities, assuming that there have been no unreimbursed charge-
offs with respect to any related Paired Series, the aggregate invested amount
of such related Paired Series will have been increased by an amount up to an
aggregate amount equal to the Invested Amount paid to the Securityholders since
the issuance of such Paired Series. The issuance of a Paired Series will be
subject to the conditions described above under "--Exchanges." There can be no
assurance, however, that the terms of any Paired Series might not have an
impact on the timing or amount of payments received by a Securityholder.
Funding Period
For any Series of Securities, the related Prospectus Supplement may specify
that for a period beginning on the Closing Date and ending on a specified date
before the commencement of an Amortization Period with respect to such Series
(the "Funding Period"), the aggregate amount of Principal Receivables in the
Trust allocable to such Series may be less than the aggregate principal amount
of the Securities of such Series and that the amount of such deficiency (the
"Pre-Funding Amount") will be held in a trust account established with the
Trustee for the benefit of the Securityholders of such Series (the "Pre-Funding
Account") pending the transfer of additional Receivables to the Trust or
pending the reduction of the Invested Amounts of other Series. The related
Prospectus Supplement will specify the initial Invested Amount with respect to
such Series, the aggregate principal amount of such Series (the "Full Invested
Amount") and the date by which the Invested Amount is expected to equal the
Full Invested Amount. The Invested Amount will increase as Receivables are
delivered to the Trust or as the Invested Amounts of other Series are reduced.
The Invested Amount may also decrease due to Investor Charge-Offs as provided
in the related Prospectus Supplement.
During the Funding Period, funds on deposit in the Pre-Funding Account for a
Series of Securities will be withdrawn and paid to the Transferor to the extent
of any increases in the Invested Amount. In the event that
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the Invested Amount does not for any reason equal the Full Invested Amount by
the end of the Funding Period, any amount remaining in the Pre-Funding Account
and any additional amounts specified in the related Prospectus Supplement will
be payable to the Securityholders of such Series in the manner and at such time
as set forth in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, monies in the Pre-
Funding Account will be invested by the Trustee in Cash Equivalents or will be
subject to a guaranteed rate or investment agreement or other similar
arrangement, and, in connection with each Distribution Date during the Funding
Period, investment earnings on funds in the Pre-Funding Account during the
related Monthly Period will be withdrawn from the Pre-Funding Account and
deposited, together with any applicable payment under a guaranteed rate or
investment agreement or other similar arrangement, into the Collection Account
for distribution in respect of interest on the Securities of the related Series
in the manner specified in the related Prospectus Supplement.
Defaulted Receivables; Dilution
Each Account with respect to which, in accordance with the Credit and
Collection Policy or the Servicer's customary and usual servicing procedures,
the Servicer has charged off the Receivables in such Account as uncollectible
shall become a "Defaulted Account" on the day on which such Receivables are
recorded as charged off as uncollectible on the Servicer's computer master file
of consumer credit card revolving accounts. Notwithstanding any other provision
hereof, any Receivables in an Account that are ineligible Receivables shall be
treated as ineligible Receivables rather than Receivables in Defaulted
Accounts. Receivables in Defaulted Accounts are charged off as uncollectible in
accordance with the Servicer's customary and usual servicing procedures and the
Credit and Collection Policy (a "Defaulted Receivable"). See "Direct Merchants
Credit Card Bank, N.A. Activities--Delinquency, Collections and Charge-Offs" in
this Prospectus and "Trust Credit Card Portfolio--Delinquency and Loss
Experience" in the related Prospectus Supplement. On each business day, the
Servicer will allocate to the Securityholders a portion of all Defaulted
Receivables in an amount (the "Series Default Amount") equal to (i) on any
business day other than a Default Recognition Date, an amount equal to the
product of (a) the Investor Percentage applicable to Defaulted Receivables on
such business day and (b) the aggregate principal amount of Defaulted
Receivables identified since the prior reporting date and (ii) on any Default
Recognition Date, an amount equal to the product of (a) the Default Recognition
Percentage applicable on such Default Recognition Date and (b) the aggregate
principal amount of Defaulted Receivables with respect to such Default
Recognition Date. To the extent that Finance Charge Collections and certain
other amounts as more fully described in the related Prospectus Supplement for
any Series are not sufficient to cover the Series Default Amount allocated to
such Series, there will be an Investor Charge-Off. Unless otherwise specified
in the related Prospectus Supplement, the "Default Recognition Date" for each
Series shall be the last day of each calendar month; provided, however, that
with respect to any Monthly Period the "related Default Recognition Date" will
mean the Default Recognition Date occurring closest to the last day of such
Monthly Period and any amounts allocated or applied on such Default Recognition
Date will be deemed to apply to the related Monthly Period. "Default
Recognition Percentage" means, with respect to each Default Recognition Date,
the percentage equivalent of a fraction, the numerator of which is the weighted
average Invested Amount for the related Monthly Period and the denominator of
which is the weighted average Principal Receivables in the Trust for the
related Monthly Period.
If on any business day the Servicer adjusts downward the amount of any
Principal Receivable without receiving collections therefor or charging off
such amount as uncollectible (any such downward adjustment, a "Dilution"), then
the amount of the Transferor Interest in the Trust will be reduced, on a net
basis, by the amount of the Dilution on such business day. In the event the
Transferor Interest would be reduced below the Minimum Transferor Interest, the
Transferor will be required to pay to the Trust the amount of such Dilution (an
"Adjustment Payment") out of its own funds or, to the extent not paid by the
Transferor, out of Finance Charge Collections and other amounts designated for
such purpose as more fully described in the related Prospectus Supplement for
any Series. To the extent that such amounts are not sufficient to cover the
portion of
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the unpaid Adjustment Payments allocated to the related Series, there will be
an Investor Charge-Off for such Series.
Investor Charge-Offs
With respect to each Series of Securities, if the sum of the Series Default
Amount and the portion of the unpaid Adjustment Payments allocated to such
Series exceeds the Finance Charge Collections and other amounts allocated to
cover such amounts on any Distribution Date, then the Invested Amount with
respect to such Series will be reduced by the amount of such excess (an
"Investor Charge-Off"). Investor Charge-Offs will be reimbursed on any
subsequent Distribution Date to the extent of Finance Charge Collections and
other amounts allocated and amounts available therefor. Such reimbursement of
Investor Charge-Offs will result in an increase in the Invested Amount with
respect to such Series. In the case of a Series of Securities having more than
one Class, the related Prospectus Supplement will describe the manner and
priority of allocating Investor Charge-Offs and reimbursements thereof among
the Invested Amounts of the Classes.
Defeasance
The Transferor may, at its option, be discharged from its obligations with
respect to any Series or all outstanding Series (each, a "Defeased Series") on
the date that the following conditions shall have been satisfied: (i) the
Transferor shall have deposited with the Trustee, pursuant to an irrevocable
trust agreement in form and substance satisfactory to the Trustee, as trust
funds in trust for making the payments described below, Cash Equivalents which
through the scheduled payment of principal and interest in respect thereof will
provide, no later than the due date of payment thereon, a dollar amount
sufficient to pay and discharge all remaining scheduled interest and principal
payments on all outstanding Securities of the Defeased Series on the dates
scheduled for such payments and any amounts owing to any Enhancement providers
with respect to the Defeased Series; (ii) prior to any exercise of its right to
substitute Cash Equivalents for Receivables, the Transferor shall have
delivered to the Trustee an opinion of counsel to the effect that following
such deposit, none of the Trust, the Accumulation Period Reserve Account or the
Principal Funding Account will be deemed to be an association (or publicly
traded partnership) taxable as a corporation with respect to such deposit and
termination of obligations and an opinion of counsel to the effect that such
deposit and termination of obligations will not result in the Trust being
required to register as an "investment company" within the meaning of the
Investment Company Act; (iii) the Transferor shall have delivered to the
Trustee a certificate of an officer of the Transferor stating that the
Transferor reasonably believes that such deposit and termination of its
obligations will not cause a Pay Out Event or any event that, with the giving
of notice or the lapse of time, would constitute a Pay Out Event to occur with
respect to any Series; and (iv) a Ratings Effect will not occur. Subject to the
foregoing, the Transferor may cause Collections allocated to the Defeased
Series and available to purchase additional Receivables to be applied to
purchase Cash Equivalents, rather than additional Receivables.
Final Payment of Principal; Termination
With respect to each Series, the Securities will be subject to optional
repurchase by the Transferor on any Distribution Date if on such Distribution
Date the Invested Amount of such Series would be reduced to an amount less than
or equal to 10 percent of the initial Invested Amount (or such other amount
specified in the related Prospectus Supplement), if certain conditions set
forth in the Pooling and Servicing Agreement and the related Supplement are
satisfied including that all amounts owing to any Enhancement provider,
together with interest thereon, have been paid. The repurchase price will be
equal to the total Invested Amount of such Series (less the amount, if any, on
deposit in any Principal Funding Account with respect to such Series), plus
accrued and unpaid interest on the Securities, after giving effect to any
payments on such date. In each case, interest will accrue through the day
preceding the Distribution Date on which the repurchase occurs.
The Securities will be retired on the day following the Distribution Date on
which the final payment of principal is scheduled to be made to the
Securityholders, whether as a result of optional reassignment to the Transferor
or otherwise. Each Prospectus Supplement will specify the final date on which
principal and interest
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with respect to the related Series of Securities will be scheduled to be
distributed (the "Termination Date"); provided, however that the Securities may
be subject to prior termination as provided above. In the event that the
Invested Amount is greater than zero, exclusive of any Class held by the
Transferor, on the Termination Date, the Trustee will sell or cause to be sold
interests in the Receivables or certain Receivables, as specified in the
Pooling and Servicing Agreement and the related Supplement, in an amount up to
110 percent of the Invested Amount at the close of business on such date (but
not more than the total amount of Receivables allocable to the Securities in
accordance with the Pooling and Servicing Agreement). If the sale contemplated
by the preceding sentence has not occurred by the Termination Date, the
affected Securityholders shall remain entitled to receive proceeds of such sale
when it occurs.
Unless the Servicer and the holder of the Exchangeable Transferor Security
instruct the Trustee otherwise, the Trust will terminate on the earlier of (a)
the day after the Distribution Date following the date on which funds shall
have been deposited in the Distribution Account for the payment to
securityholders sufficient to pay in full the aggregate investor interest of
all Series outstanding plus interest thereon at the applicable interest rates
to the next Distribution Date and (b) a date which shall not be later than May
26, 2095. Upon the termination of the Trust and the surrender of the
Exchangeable Transferor Security, the Trustee will convey to the holder of the
Exchangeable Transferor Security all right, title and interest of the Trust in
and to the Receivables and other funds of the Trust (other than funds on
deposit in the Distribution Account and other similar bank accounts of the
Trust with respect to any Series).
Pay Out Events
Unless otherwise specified in the related Prospectus Supplement, as
described above, the Revolving Period will continue through the dates specified
in the related Prospectus Supplement unless a Pay Out Event occurs prior to
such date. A "Pay Out Event" occurs with respect to all Series issued by the
Trust upon the occurrence of any of the following events:
(i) certain events of bankruptcy or insolvency relating to the
Transferor, Direct Merchants Bank or Metris; or
(ii) the Trust shall become subject to regulation by the SEC as an
"investment company" within the meaning of the Investment Company Act.
In addition, a Pay Out Event may occur with respect to any Series upon the
occurrence of any other event specified in the related Prospectus Supplement.
On the date on which a Pay Out Event is deemed to have occurred, the Early
Amortization Period will commence. In such event, unless otherwise specified in
the related Prospectus Supplement, distributions of principal to the
Securityholders of such Series will begin on the first Distribution Date
following the month in which such Pay Out Event occurred. If, because of the
occurrence of a Pay Out Event, the Early Amortization Period begins,
Securityholders will begin receiving distributions of principal earlier than
they otherwise would have, which may shorten the average life and maturity of
the Securities.
In addition to the consequences of a Pay Out Event discussed above, unless
otherwise specified in the related Prospectus Supplement, if pursuant to
certain provisions of federal law, the Transferor or Metris voluntarily enters
liquidation or a trustee-in-bankruptcy is appointed for the Transferor (an
"Insolvency Event"), the Transferor or Metris will immediately cease to
transfer Principal Receivables to the Trust and promptly give notice to the
Trustee of such event. If an Insolvency Event occurs or, at any time the
Retained Percentage is equal to or less than 2 percent (a "Trigger Event"), the
Pooling and Servicing Agreement and the Trust shall be terminated, and within
15 days of notice to the Trustee, the Trustee will publish a notice of the
Insolvency Event or Trigger Event, stating that the Trustee intends to sell,
dispose of, or otherwise liquidate the Receivables in a commercially reasonable
manner. With respect to each Series outstanding at such time (or, if any such
Series has more than one class, of each class of such Series excluding any
class or portion thereof held by the Transferor), unless otherwise instructed
within a specified period by Securityholders representing undivided interests
aggregating more than 50 percent of the invested amount of such Series (or
class excluding
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any class or portion thereof held by the Transferor) and the holders of any
Supplemental Securities or any other interest in the Exchangeable Transferor
Security other than the Transferor, the Trustee will sell, dispose of, or
otherwise liquidate the portion of the Receivables allocable to the Series that
did not vote to continue the Trust in accordance with the Pooling and Servicing
Agreement in a commercially reasonable manner and on commercially reasonable
terms. The proceeds from the sale, disposition or liquidation of the
Receivables will be treated as collections of the Receivables allocable to such
Securityholders and will be distributed to the applicable Securityholders as
provided above in "--Application of Collections" and in the related Prospectus
Supplement. "Retained Percentage" shall mean, on any Determination Date, the
percentage equivalent of a fraction the numerator of which is the Retained
Interest and the denominator of which is the aggregate amount of Principal
Receivables at the end of the day immediately prior to such Determination Date
plus amounts on deposit in the Excess Funding Account (but not including
investment earnings on such amounts).
If the only Pay Out Event to occur is either the bankruptcy or insolvency of
the Transferor or the appointment of a bankruptcy trustee or receiver for the
Transferor, the bankruptcy trustee or receiver may have the power to prevent
the early sale, liquidation, or disposition of the Receivables and the
commencement of the Early Amortization Period. In addition, a bankruptcy
trustee or receiver may have the power to cause the early sale of the
Receivables and the early retirement of the Securities.
Servicing Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, for each
Series of Securities, the Servicer's compensation for its servicing activities
and reimbursement for its expenses will take the form of the payment to it of a
fee (the "Monthly Servicing Fee") payable at the times and in the amounts
specified in the related Prospectus Supplement. The Monthly Servicing Fee will
be funded from Finance Charge Collections allocated to the Securityholders
Interest and will be paid each month, or on such other specified periodic
basis, from amounts allocated for such purpose. The remainder of the servicing
fee will be allocable to the Transferor Interest, the Securityholders Interests
of any other Series issued by such Trust and the interest represented by the
Enhancement Invested Amount or the Collateral Interest, if any, with respect to
such Series, as described in the related Prospectus Supplement. Neither the
Trust nor the Securityholders will have any obligation to pay the portion of
the servicing fee allocable to the Transferor Interest.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with servicing the Receivables including, without
limitation, payment of the fees and disbursements of the Trustee and
independent certified public accountants and other fees which are not expressly
stated in the Pooling and Servicing Agreement to be payable by the related
Trust or the Securityholders other than federal, state and local income and
franchise taxes, if any, of the Trust.
Certain Matters Regarding the Transferor and the Servicer
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement, except upon determination that performance of
its duties is no longer permissible under applicable law. No such resignation
will become effective until the Trustee or a successor to the Servicer has
assumed the Servicer's responsibilities and obligations under the Pooling and
Servicing Agreement and related Supplement. The Servicer may delegate some or
all of its servicing duties; provided, however, such delegation will not
relieve the Servicer of its obligation to perform such duties in accordance
with the Pooling and Servicing Agreement. In addition, any affiliate of Direct
Merchants Bank may be substituted in all respects for Direct Merchants Bank as
Servicer, provided that such affiliate expressly assumes the performance of
every covenant and obligation of the Servicer under the Pooling and Servicing
Agreement.
The Pooling and Servicing Agreement provides that the Servicer will
indemnify the Trust and the Trustee from and against any reasonable loss,
liability, expense, damage, or injury suffered or sustained by reason of any
acts or omissions or alleged acts or omissions of the Servicer with respect to
the activities of the Trust or the Trustee; provided, however, that the
Servicer will not indemnify (a) the Trustee for liabilities imposed by
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reason of fraud, gross negligence, or willful misconduct by the Trustee in the
performance of its duties under the Pooling and Servicing Agreement and related
Supplement, (b) the Trust, the Securityholders, or the Security Owners for
liabilities arising from actions taken by the Trustee at the request of
Securityholders, (c) the Trust, the Securityholders, or the Security Owners for
any losses, claims, damages, or liabilities incurred by any of them in their
capacities as investors, including without limitation, losses incurred as a
result of Defaulted Receivables or Dilution, or (d) the Trust, the
Securityholders, or the Security Owners for any liabilities, costs, or expenses
of the Trust, the Securityholders, or the Security Owners arising under any tax
law, including without limitation any federal, state, or local income or
franchise tax or any other tax imposed on or measured by income (or any
interest or penalties with respect thereto or arising from a failure to comply
therewith) required to be paid by the Trust, the Securityholders or the
Security Owners in connection with the Pooling and Servicing Agreement and any
Supplement to any taxing authority.
In addition, the Pooling and Servicing Agreement provides that, subject to
certain exceptions, the Transferor will indemnify the Trust and the Trustee
from and against any reasonable loss, liability, expense, damage or injury
(other than to the extent that any of the foregoing relate to any tax law or
any failure to comply therewith) suffered or sustained by reason of any acts or
omissions or alleged acts or omissions arising out of or based upon the
arrangement created by the Pooling and Servicing Agreement as though the
Pooling and Servicing Agreement created a partnership under the Delaware
Uniform Partnership Act in which the Transferor is a general partner.
The Pooling and Servicing Agreement provides that, except for the foregoing
indemnities, neither the Transferor nor the Servicer nor any of their
respective directors, officers, employees, or agents will be under any
liability to the Trust, the Securityholders, or any other person for any action
taken, or for refraining from taking any action pursuant to the Pooling and
Servicing Agreement. Neither the Transferor nor the Servicer nor any of their
respective directors, officers, employees or agents will be protected against
any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith, or gross negligence of the Transferor, the Servicer, or
any such person in the performance of its duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Pooling and Servicing Agreement provides that the Servicer is not under any
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under the Pooling and Servicing
Agreement and which in its opinion may expose it to any expense or liability.
The Pooling and Servicing Agreement provides that, in addition to Exchanges,
the Transferor may transfer its interest in all or a portion of the
Exchangeable Transferor Security, provided that prior to any such transfer (a)
the Trustee receives written notification from each Rating Agency that such
transfer will not result in a Ratings Event and (b) the Trustee receives an
opinion of counsel that such transfer would not (i) adversely affect the
conclusions reached in any of the federal income tax opinions issued in
connection with the original issuance of any Series of Investor Securities or
(ii) result in a taxable event to the holders of any such Series.
Under the Pooling and Servicing Agreement, the Transferor will be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Securityholder in the
capacity of an investor in the Securities) arising out of or based on the
arrangement created by the Pooling and Servicing Agreement or the actions of
the Servicer taken pursuant to the Pooling and Servicing Agreement as though
the Pooling and Servicing Agreement created a partnership under the Delaware
Uniform Partnership Act in which the Transferor is a general partner. The
Transferor will also pay, indemnify and hold harmless each Securityholder for
any such losses, claims, damages or liabilities (other than those incurred by a
Securityholder in the capacity of an investor in the Securities) except to the
extent that they arise from any action by any Securityholder. In the event of a
Service Transfer, the successor Servicer will indemnify the Transferor for any
losses, claims, damages and liabilities of the Transferor as described in this
paragraph arising from the actions or omissions of such successor.
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Servicer Default
In the event of any Servicer Default (as defined below), either the Trustee
or securityholders representing undivided interests aggregating more than 50
percent of the aggregate investor interests for all outstanding Series, by
written notice to the Servicer (and to the Trustee if given by the
securityholders), may terminate all of the rights and obligations of the
Servicer as servicer under the Pooling and Servicing Agreement and in and to
the Receivables and the proceeds thereof and the Trustee may appoint a new
Servicer (a "Service Transfer"). The rights and interest of the Transferor
under the Pooling and Servicing Agreement and in the Transferor Interest will
not be affected by such termination. Upon such termination, the Trustee will as
promptly as possible appoint a successor Servicer. If no such Servicer has been
appointed and has accepted such appointment by the time the Servicer ceases to
act as Servicer, all authority, power and obligations of the Servicer under the
Pooling and Servicing Agreement will pass to and be vested in the Trustee. If
the Trustee is unable to obtain any bids from eligible servicers and the
Servicer delivers an officer's certificate to the effect that it cannot in good
faith cure the applicable Servicer Default, and if the Trustee is legally
unable to act as a successor Servicer, then the Trustee will give the
Transferor the right to accept reassignment of all of the Receivables on terms
equivalent to the best purchase offer as determined by the Trustee.
A "Servicer Default" refers to any of the following events:
(i) failure by the Servicer to make any payment, transfer, or deposit,
or to give instructions to the Trustee to make certain payments, transfers,
or deposits within five business days after the date the Servicer is
required to do so under the Pooling and Servicing Agreement or any
Supplement; provided, however, that any such failure caused by a nonwillful
act of the Servicer shall not constitute a Servicer Default if the Servicer
promptly remedies such failure within five business days after receiving
notice of such failure or otherwise becoming aware of such failure;
(ii) failure on the part of the Servicer duly to observe or perform in
any respect any other covenants or agreements of the Servicer which has a
material adverse effect on the securityholders of any Series then
outstanding and which continues unremedied for a period of 60 days after
written notice of such failure, requiring the same to be remedied, shall
have been given to the Servicer by the Trustee, or to the Servicer and the
Trustee by holders of Securities evidencing undivided interests aggregating
not less than 50 percent of the Invested Amount of any Series materially
adversely affected thereby and continues to have a material adverse effect
on the securityholders of any Series then outstanding for such period; or
the delegation by the Servicer of its duties under the Pooling and
Servicing Agreement, except as specifically permitted thereunder;
(iii) any representation, warranty, or certification made by the
Servicer in the Pooling and Servicing Agreement, or in any certificate
delivered pursuant to the Pooling and Servicing Agreement, proves to have
been incorrect when made which has a material adverse effect on the
securityholders of any Series then outstanding, and which continues to be
incorrect in any material respect for a period of 60 days after written
notice of such failure, requiring the same to be remedied, shall have been
given to the Servicer by the Trustee, or to the Servicer and the Trustee by
the holders of Securities evidencing undivided interests aggregating not
less than 50 percent of the Invested Amount of any Series materially
adversely affected thereby and continues to have a material adverse effect
on such securityholders for such period; or
(iv) the occurrence of certain events of bankruptcy, insolvency or
receivership of the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance referred
to in clause (i) above for a period of five business days, or referred to under
clause (ii) or (iii) for a period of 60 business days, will not constitute a
Servicer Default if such delay or failure could not be prevented by the
exercise of reasonable diligence by the Servicer and such delay or failure was
caused by an act of God or other similar occurrence. Upon the Servicer becoming
aware of any such event, the Servicer will not be relieved from using its best
efforts to perform its obligations in a timely manner in accordance with the
terms of the Pooling and Servicing Agreement, and the Servicer will provide the
Trustee, any provider of Enhancement, the Transferor and the
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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 2001, such customary information
(consistent with the treatment of the Securities as debt) as the Servicer or
Trustee deems necessary or desirable for tax reporting purposes.
Evidence as to Compliance
The Pooling and Servicing Agreement provides that within 100 days of the end
of each fiscal year the Servicer will cause a firm of independent certified
public accountants to furnish to the Trustee on an annual basis a report to the
effect that such firm has compared the amounts and percentages set forth in
four of the monthly settlement statements for the Monthly Periods covered by
such report with the computer reports (which may include personal computer
generated reports that summarize data from the computer reports generated by
either the Transferor, the Servicer or FDR which are used to prepare daily
reports) which were the source of such amounts and percentages and that, on the
basis of such comparison, such amounts and percentages are in agreement, except
as shall be set forth in such report. A copy of such report will be sent by the
Trustee to each Securityholder.
The Pooling and Servicing Agreement provides that within 100 days of the end
of each fiscal year, the Servicer will cause a firm of nationally recognized
independent certified public accountants to furnish a report to the effect that
such firm has applied certain procedures, as agreed upon between such firm and
the Servicer, which would re-perform certain accounting procedures performed by
the Servicer pursuant to certain documents and records relating to the
servicing of the Accounts. Each report shall set forth the agreed upon
procedures performed and the results of such procedures.
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The Pooling and Servicing Agreement also provides for delivery to the
Trustee on an annual basis, within 100 days of the end of the fiscal year, of a
statement signed by an officer of the Servicer to the effect that the Servicer
has, or has caused to be, fully performed its obligations in all material
respects under the Pooling and Servicing Agreement throughout the preceding
year or, if there has been a default in the performance of any such obligation,
specifying the nature and status of the default. A copy of such statement may
be obtained by any Securityholder upon the submission of a written request
therefor addressed to the Trustee's Corporate Trust Office.
Amendments
The Pooling and Servicing Agreement and related Supplement may be amended by
the Transferor, the Servicer and the Trustee, without the consent of
Securityholders, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement and the Supplement or of modifying in any manner the rights of such
Securityholders, unless otherwise specified in the related Prospectus
Supplement; provided that (i) the Servicer shall have provided an officer's
certificate to the effect that such action will not adversely affect in any
material respect the interests of such Securityholders, (ii) except in the case
of any amendment for the sole purpose of curing any ambiguity or correcting or
supplementing any inconsistent provision of the Pooling and Servicing Agreement
or revising any schedule thereto (other than the list of Receivables), the
Rating Agencies shall have been notified of such amendment and shall have
provided written confirmation that they would not lower the rating of the
Securities and (iii) such action will not, in the opinion of counsel
satisfactory to the Trustee, result in certain adverse tax consequences. In
addition, the Pooling and Servicing Agreement and any Supplement may be amended
from time to time by the Transferor, the Servicer and the Trustee, without the
consent of Securityholders, to add to or change any of the provisions of the
Pooling and Servicing Agreement to provide that bearer securities issued with
respect to any other Series may be registrable as to principal, to change or
eliminate any restrictions on the payment of principal of or any interest on
such bearer securities, to permit such bearer securities to be issued in
exchange for registered securities or bearer securities of other authorized
denominations or to permit the issuance of uncertificated securities.
Securityholders by purchase of their Securities will be deemed to have
consented to a modification to the bankruptcy and insolvency Pay Out Event
specified in the Pooling and Servicing Agreement such that it will be as
specified in clause (i) in "--Pay Out Events" above.
The Pooling and Servicing Agreement and any Supplement may be amended by the
Transferor, the Servicer, and the Trustee with the consent of the holders of
securities evidencing undivided interests aggregating not less than 66 2/3
percent of the investor interests of each and every Series adversely affected,
for the purpose of adding any provisions to, changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement, or
any Supplement or of modifying in any manner the rights of Securityholders of
any then outstanding Series. No such amendment, however, may (a) reduce in any
manner the amount of, or delay the timing of, distributions required to be made
on any such Series, (b) change the definition of or the manner of calculating
the interest of any securityholder of such Series, or (c) reduce the aforesaid
percentage of investor interests the holders of which are required to consent
to any such amendment, in each case without the consent of all Securityholders
of all Series adversely affected. Promptly following the execution of any
amendment to the Pooling and Servicing Agreement, the Trustee will furnish
written notice of the substance of such amendment to each Securityholder. Any
Supplement and any amendments regarding the addition or removal of Receivables
from the Trust will not be considered an amendment requiring securityholder
consent under the provisions of the Pooling and Servicing Agreement and any
Supplement.
Additionally, upon the receipt by the Transferor, the Servicer and the
Trustee of a Tax Opinion reasonably satisfactory to each of them, the Pooling
and Servicing Agreement and any Supplement may be amended by the Transferor,
the Servicer and the Trustee without the consent of any of the Securityholders
(i) to add, modify or eliminate such provisions as may be necessary or
advisable in order to enable all or a portion of the Trust to qualify as, and
to permit an election to be made to cause all or a portion of the Trust to be
treated as, a "financial asset securitization investment trust" as described in
the provisions of the FASIT legislation (see
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"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 Corporate Trust Office for The Bank of New York
(Delaware) is located at White Clay Center, Route 273, Newark, Delaware 19711.
The Transferor, the Servicer, and their respective affiliates may from time to
time enter into normal banking, lending and trustee relationships with the
Trustee and its affiliates. The Trustee, the Transferor, the Servicer, and any
of their respective affiliates may hold Securities in their own names. In
addition, for purposes of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint a co-trustee or
separate trustees of all or any part of the Trust. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Pooling and Servicing Agreement will be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or,
in any jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who will
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee may resign at any time. The Transferor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. The
Trustee at all times must not be a Related Person. In such circumstances, the
Transferor will be obligated to appoint a successor Trustee. Any resignation or
removal of the Trustee and appointment of a successor Trustee does not become
effective until acceptance of the appointment by the successor Trustee.
"Related Person" means an entity that is an affiliate of Metris, any holder of
an Investor Security, any provider of Enhancement, or any person whose status
would violate the conditions for a trustee contained in Section (4)(i) of Rule
3a-7 under the Investment Company Act.
The Transferor expects that The Bank of New York (Delaware) will resign as
the Trustee under the Pooling and Servicing Agreement. In such an event, the
Transferor expects to appoint U.S. Bank National Association or one of its
affiliates as the successor Trustee under the Pooling and Servicing Agreement.
The resignation of The Bank of New York (Delaware) would not become effective
until acceptance of the appointment by the successor Trustee. Upon the
appointment of any successor Trustee, the successor Trustee will provide the
Securityholders with notice of the succession and the location of the Corporate
Trust Office of the successor Trustee. Additionally, in connection with any
such resignation by The Bank of New York (Delaware) as the Trustee, the
Transferor expects that U.S. Bank National Association or one of its affiliates
will be appointed as the Transfer Agent and Registrar and as the Paying Agent
under the Pooling and Servicing Agreement. See "--Definitive Securities" and
"--Trust Accounts."
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If the Trustee fails to perform any of its obligations under the Pooling and
Servicing Agreement, and a securityholder delivers written notice of such
failure to the Trustee, and the Trustee shall not have corrected such failure
for 60 days thereafter, then the holders of Securities representing more than
50 percent of the aggregate invested amount of all Series (including related
commitments) shall have the right to remove the Trustee and (with the consent
of the Transferor, which shall not be unreasonably withheld) promptly appoint a
successor Trustee by written instrument, in duplicate, one copy of which
instrument shall be delivered to the Trustee so removed and one copy to the
successor Trustee.
Enhancement
General
For any Series, "Enhancement" may be provided with respect to one or more
Classes thereof. Enhancement may be in the form of the subordination of one or
more Classes of the Securities of such Series, a letter of credit, the
establishment of a cash collateral guaranty or account, a collateral interest,
a surety bond, an insurance policy, a spread account, a reserve account, the
use of cross support features or another method of Enhancement described in the
related Prospectus Supplement, or any combination of the foregoing. If so
specified in the related Prospectus Supplement, any form of Enhancement may be
structured so as to be drawn upon by more than one Class to the extent
described therein.
The type, characteristics and amount of the Enhancement for any Series or
Class will be determined based on several factors, including the
characteristics of the Receivables and Accounts included in the Trust Portfolio
as of the Closing Date with respect to such Series and the desired rating for
each Class, and will be established on the basis of requirements of each Rating
Agency rating the Securities of such Series or Class.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the Enhancement will not provide protection against all risks of loss
and will not guarantee repayment of the entire principal balance of the
Securities and interest thereon. If losses occur which exceed the amount
covered by the Enhancement or which are not covered by the Enhancement,
Securityholders will bear their allocable share of deficiencies.
If Enhancement is provided with respect to a Series, the related Prospectus
Supplement will include a description of (a) the amount payable under such
Enhancement, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount payable under such
Enhancement may be reduced and under which such Enhancement may be terminated
or replaced and (d) any material provision of any agreement relating to such
Enhancement. Additionally, the related Prospectus Supplement may set forth
information with respect to any Enhancement provider, including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies which exercise primary jurisdiction over the conduct of its
business and (iv) certain summary financial information as of the date
specified in the Prospectus Supplement. If so specified in the related
Prospectus Supplement, Enhancement with respect to a Series may be available to
pay principal of the Securities of such Series following the occurrence of
certain Pay Out Events with respect to such Series. In such event, the
Enhancement provider may have an interest in certain cash flows in respect of
the Receivables to the extent described in such Prospectus Supplement (the
"Enhancement Invested Amount").
Subordination
If so specified in the related Prospectus Supplement, one or more Classes of
any Series, including Classes that are described as "Collateralized Trust
Obligations" will be subordinated as described in the related Prospectus
Supplement to the extent necessary to fund payments with respect to the senior
Securities. The rights of the holders of any such subordinated Securities to
receive distributions of principal and/or interest on any Distribution Date for
such Series will be subordinated in right and priority to the rights of the
holders of
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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 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
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 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."
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.
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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
Permitted Liens. For a discussion of the Trust's rights arising from a breach
of these warranties, see "Description of the Securities--Representations and
Warranties."
The Transferor has represented that the Receivables are "accounts" or
"general intangibles" or "chattel paper" for purposes of the UCC. Both the
transfer and assignment of accounts and chattel paper and the transfer of
accounts and chattel paper as security for an obligation are treated under
Article 9 of the UCC as creating a security interest therein and are subject to
its provisions, and the filing of an appropriate financing statement is
required to perfect the security interest of the Trust. If a transfer of
general intangibles is deemed to create a security interest, the UCC applies
and filing of an appropriate financing statement or statements is also required
in order to perfect the Trust's security interest. Financing statements
covering the Receivables have been and will be filed with the appropriate
governmental authority to protect the interests of the Trust in the
Receivables. If a transfer of general intangibles is deemed to be a sale,
however, the UCC is not applicable and no further action under the UCC is
required to protect the Trust's interest from third parties. Nevertheless, some
other action under applicable state law may be required in order to perfect
such a sale against the interests of third parties.
There are certain limited circumstances under the UCC in which a prior or
subsequent transferee of Receivables coming into existence after the Initial
Closing Date could have an interest in the Receivables with priority over the
Trust's interest. Under the Pooling and Servicing Agreement, however, the
Transferor has represented and warranted that it transferred the Receivables to
the Trust free and clear of the lien of any third party, other than Permitted
Liens. 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.
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Nevertheless, it is anticipated that the Trust will either own or have a
perfected security interest in Receivables existing on the date of filing a
petition by or against Metris or the Transferor under the Bankruptcy Code or
after the date of appointment of a receiver or conservator with respect to
Direct Merchants Bank and will be able to make payments in respect of principal
and interest on the Securities, although there can be no assurance that any of
such payments would be timely. Because the Trust's interest in the Receivables
is dependent upon the Transferor's interest in the Receivables, which is
dependent upon Metris' or Direct Merchants Bank's interest in the Receivables,
any adverse change in the priority or perfection of the Transferor's or Metris'
security interest would correspondingly affect the Trust's interest in the
affected Receivables. In addition, if a receiver or conservator were appointed
for Direct Merchants Bank, certain administrative expenses of the receiver or
conservator also may have priority over the interest of the Trust in such
Receivables. While Direct Merchants Bank is the Servicer, certain cash
collections on the Receivables may be held by Direct Merchants Bank and
commingled with its funds for brief periods, and if an Insolvency Event occurs,
the Trust may not have a perfected interest in such commingled collections.
Certain Matters Relating to Bankruptcy or Receivership
The Transferor has been structured such that (i) the filing of a voluntary
or involuntary petition for relief by or against the Transferor under the
Bankruptcy Code or similar laws or (ii) the substantive consolidation of the
assets and liabilities of the Transferor with those of Metris is unlikely. The
Transferor is a separate, limited purpose corporation, and its certificate of
incorporation contains limitations on the nature of its business and
restrictions on its ability to commence a voluntary case or proceeding under
the Bankruptcy Code or similar laws without the prior unanimous consent of all
of its directors. Nevertheless, 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.
Direct Merchants Bank is chartered as a national banking association and is
subject to regulation and supervision by the Comptroller. If Direct Merchants
Bank becomes insolvent or is in an unsound condition or if certain other
circumstances occur, the Comptroller is authorized to appoint the FDIC as
conservator or receiver.
To the extent that (i) Direct Merchant Bank's grant of a security interest
in the receivables and the transaction documents related to this transfer
comply with the regulatory requirements of the FDIA, (ii) the security interest
was perfected before the FDIC is appointed as conservator or receiver for
Direct Merchants Bank, and (iii) the security interest was not taken in
contemplation of Direct Merchant Bank's insolvency or with the intent to
hinder, delay or defraud Direct Merchant Bank or its creditors, the FDIA
provides that the security interest should be respected. In addition, opinions
and policy statements issued by the FDIC suggest that, because of the manner in
which these transactions are structured, the FDIC would respect the security
interest granted by Direct Merchants Bank in the receivables. Nevertheless, if
the FDIC were to assert a contrary position, or were to require the Trustee to
go through the administrative claims procedure established by the FDIC in order
to obtain payments on the Securities, or were to request a stay of any actions
by the Trustee to enforce the security interest, the transaction documents or
the Securities against Direct Merchants Bank, delays in payments on the
Securities and possible reductions in the amount of those payments could occur.
In addition, the FDIC as conservator or receiver for Direct Merchants Bank
could repudiate the transaction documents related to its transfer of the
receivables. The FDIA would limit the damages for any such
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repudiation to the Trust's "actual direct compensatory damages" determined as
of the date that the FDIC were appointed as conservator or receiver for Direct
Merchants Bank. The FDIC, moreover, could delay its decision whether to
repudiate the transaction documents to which Direct Merchants Bank is a party
for a reasonable period following its appointment as conservator or receiver.
If the FDIC were to take any of these actions, the amount payable on the
Securities could be lower than the outstanding principal and accrued interest
on the Securities.
The Pooling and Servicing Agreement provides that, upon the bankruptcy or
appointment of a conservator or 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. 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 bankruptcy, 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).
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. Nevertheless, if a conservator or receiver were
appointed for Direct Merchants Bank, or if Metris or the Transferor were to
become a debtor in a case under the Bankruptcy Code or similar laws, the
conservator or receiver or the bankruptcy court may have the power to prevent
or cause the beginning of an Early Amortization Period, to prevent or cause the
early sale of the receivables and termination of the Trust, or to require or
prohibit the transfer of new principal receivables to the Trust. In addition,
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 Direct Merchants Bank and Metris have 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 conservatorship or
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.
The occurrence of certain events of insolvency, conservatorship or
receivership with respect to the Servicer will result in a Servicer Default,
which Servicer Default, in turn, could result in a Pay Out Event. If no other
Servicer Default other than the commencement of an insolvency related event
exists, a conservator or
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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. The Trust may be liable for certain violations
of consumer protection laws that apply to the Receivables, either as assignee
from the Transferor with respect to obligations arising before transfer of the
Receivables to the Trust or as a party directly responsible for obligations
arising after the transfer. In addition, a cardholder may be entitled to assert
such violations by way of set-off against his obligation to pay the amount of
Receivables owing. The Transferor has warranted and will warrant in the Pooling
and Servicing Agreement that all related Receivables have been and will be
created in compliance with the requirements of such laws. The Servicer has also
agreed in the Pooling and Servicing Agreement to indemnify the Trust, among
other things, for any liability arising from such violations caused by the
Servicer. For a discussion of the Trust's rights arising from the breach of
these warranties, see "Description of the Securities--Representations and
Warranties."
Various proposed laws and amendments to existing laws have from time to time
been introduced in Congress and certain state and local legislatures that, if
enacted, would further regulate the credit card industry, certain of which
would, among other things, impose a ceiling on the rate at which a financial
institution may assess finance charges and fees on credit card accounts that
would be substantially below the rates of the finance charges and fees the Bank
currently assesses on its accounts. The potential effect of any legislation
which limits the amount of finance charges and fees that may be charged on
credit cards could be to reduce the portfolio yield on the Accounts. If such
portfolio yield is reduced, a Pay Out Event may occur, and the Early
Amortization Period would commence.
Application of federal and state bankruptcy and debtor relief laws would
affect the interests of the Securityholders if such laws result in any
Receivables of the Trust being written off as uncollectible when the amount
available under any Enhancement is equal to zero. See "Description of the
Securities--Defaulted Receivables; Dilution."
Industry Litigation
The United States Department of Justice (the "DOJ") is currently litigating
an antitrust lawsuit in Federal court in Manhattan against VISA USA,
Incorporated, Visa International Inc. (together, "VISA") and MasterCard
International Inc. ("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
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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. Both VISA and MasterCard International
are contesting the DOJ's allegations. The Bank is unable to predict what the
effect of such lawsuit may ultimately be on the Bank's credit card business. A
final adverse decision against VISA and MasterCard International, or a similar
settlement with the DOJ by the two associations, could result in changes in the
current associations and may result in adverse consequences for members of the
two associations, such as the Bank.
Claims and Defenses of Obligors Against the Trust
The UCC provides that (a) unless an Obligor has made an enforceable
agreement not to assert defenses or claims arising out of a transaction, the
rights of the Trust, as assignee, are subject to all the terms of the Contract
between the Credit Card Originator and such Obligor and any defense or claim
arising therefrom, to rights of set-off and to any other defense or claim of
such Obligor against the Credit Card Originator that accrues before such
Obligor receives notification of the assignment and (b) any such Obligor is
authorized to continue to pay the Credit Card Originator until (i) the Obligor
receives notification, reasonably identifying the rights assigned, that the
amount due or to become due has been assigned and that payment is to be made to
the Trustee or successor Servicer and (ii) if requested by the Obligors, the
Trustee or successor Servicer has furnished reasonable proof of assignment. No
such agreement not to assert defenses has been entered into and no notice of
the assignment of the Receivables to the Trust will be sent to the Obligors on
the Accounts in connection with the transfer of the Receivables to the Trust.
Income Tax Matters
General
The following is a discussion of material federal income tax consequences
relating to the investment in a Security offered hereunder. Additional federal
income tax considerations relevant to a particular series may be set forth in
the related prospectus supplement. This discussion is based on current law,
which is subject to changes that could prospectively or retroactively modify or
adversely affect the tax consequences summarized below. The discussion does not
address all of the tax consequences relevant to a particular Security Owner in
light of that Security Owner's circumstances, and some Security Owners may be
subject to special tax rules and limitations not discussed below. Each
prospective Security Owner is urged to consult its own tax adviser in
determining the federal, state, local and foreign income and any other tax
consequences of the purchase, ownership and disposition of a Security.
For purposes of this discussion, "U.S. person" means a citizen or resident
of the United States, a corporation or partnership organized in or under the
laws of the United States, any state thereof, or any political subdivision of
either (including the District of Columbia), or an estate or trust the income
of which is includible in gross income for U.S. federal income tax purposes
regardless of its source. The term "U.S. Security Owner" means any U.S. person
and any other person to the extent that the income attributable to its interest
in a Security is effectively connected with that person's conduct of a U.S.
trade or business.
Treatment of the Securities as Debt
Except as provided in the related Supplement, the Transferor expresses in
the Pooling and Servicing Agreement the intent that for federal, state and
local income and franchise tax purposes, the Securities will be debt secured by
the Receivables. Except as provided in the related Supplement, the Transferor,
by entering into the Pooling and Servicing Agreement, and each investor, by the
acceptance of a beneficial interest in a Security, will agree to treat the
Securities as debt for federal, state and local income and franchise tax
purposes. 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
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and related Supplement, for financial accounting purposes and certain other
non-tax purposes, as causing a transfer of an ownership interest in the
Receivables and not as creating a debt obligation.
A basic premise of federal income tax law is that the economic substance of
a transaction generally determines its tax consequences. The form of a
transaction, while a relevant factor, is not conclusive evidence of its
economic substance. In appropriate circumstances, the courts have allowed
taxpayers as well as the Internal Revenue Service to treat a transaction in
accordance with its economic substance, as determined under federal income tax
law, even though the participants in the transaction have characterized it
differently for non-tax purposes.
The determination of whether the economic substance of a transfer of an
interest in property is a sale or is instead a loan secured by the transferred
property has been made by the Internal Revenue Service and the courts on the
basis of numerous factors designed to determine whether the transferor has
relinquished (and the transferee has obtained) substantial incidents of
ownership in the property. Among those factors, the primary ones examined are
whether the purchaser has the opportunity to gain if the property increases in
value, and has the risk of loss if the property decreases in value. Except to
the extent otherwise specified in the related Prospectus Supplement, Orrick,
Herrington & Sutcliffe LLP, special federal income tax counsel to the
Transferor, is of the opinion that, under current law as in effect on the
Series closing date, although no transaction closely comparable to that
contemplated herein has been the subject of any Treasury regulation, revenue
ruling or judicial decision, for federal income tax purposes the Securities
offered hereunder will not constitute an ownership interest in the Receivables
but will properly be characterized as debt. Except where indicated to the
contrary, the following discussion assumes that the Securities offered
hereunder are debt for federal income tax purposes.
Treatment of the Trust
General. The Pooling and Servicing Agreement permits the issuance of
Securities and certain other interests (including certain Collateral Interests)
in the Trust, each of which may be treated for federal income tax purposes
either as debt or as equity interests in the Trust. If all of the Securities
and other interests in the Trust (other than the Exchangeable Transferor
Security) were characterized as debt, the Trust might be characterized as a
security arrangement for debt collateralized by the Receivables and issued
directly by the Transferor (or other holder of the Exchangeable Transferor
Security). Under such a view, the Trust would be disregarded for federal income
tax purposes. Alternatively, if some of the Securities and other interests in
the Trust were characterized as equity, the Trust might be characterized as a
separate entity owning the Receivables, issuing its own debt, and jointly owned
by the Transferor or other holders of the Exchangeable Transferor Security and
any other holders of equity interests in the Trust. However, special federal
income tax counsel is of the opinion that, under the current law as in effect
on the date of issuance of a Series of Securities, any entity constituted by
the Trust will not be an association or publicly traded partnership taxable as
a corporation.
Possible Treatment of the Trust as a Partnership or a Publicly Traded
Partnership. Although, as described above, special federal income tax counsel
is of the opinion that the Securities will properly be treated as debt for
federal income tax purposes and that the Trust will not be treated as an
association or publicly traded partnership taxable as a corporation, such
opinion does not bind the Internal Revenue Service and thus no assurance can be
given that such treatment will prevail. Further, such opinion is made with
respect to current law, which is subject to change. If the Internal Revenue
Service were to contend successfully that some or all of the Exchangeable
Transferor Security, the Securities or any other interests in the Trust were
equity in the Trust for federal income tax purposes, all or a portion of the
Trust could be classified as a partnership or as a publicly traded partnership
taxable as a corporation for such purposes. Because special federal income tax
counsel is of the opinion that the Securities will be characterized as debt for
federal income tax purposes and because any holder of any other interest in the
Trust (other than the Exchangeable Transferor Security) generally will agree to
treat that interest as debt for such purposes, no attempt will be made to
comply with any tax reporting requirements that would apply as a result of such
alternative characterizations.
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If the Trust were treated in whole or in part as a partnership in which some
or all holders of interests in the publicly offered Securities were partners,
that partnership could be classified as a publicly traded partnership, and so
could be taxable as a corporation. Further, applicable Treasury regulations
(the "publicly traded partnership regulations") could cause the Trust to
constitute a publicly traded partnership even if all holders of interests in
publicly offered Securities are treated as holding debt. The publicly traded
partnership regulations generally apply to taxable years beginning after
December 31, 1995, and thus could affect the classification of then-existing
entities and the ongoing tax treatment of already completed transactions.
Although the publicly traded partnership regulations provide for a 10-year
grandfather period for a partnership actively engaged in an activity before
December 4, 1995, it is unclear whether the Trust would qualify for this
grandfather provision. If the Trust were classified as a publicly traded
partnership, whether by reason of the treatment of publicly offered Securities
as equity or by reason of the publicly traded partnership regulations, it would
avoid taxation as a corporation if its income was not derived in the conduct of
a "financial business;" however, whether the income of the Trust would be so
classified is unclear.
Under the Internal Revenue Code of 1986, as amended (the "Code") and the
publicly traded partnership regulations, a partnership will be classified as a
publicly traded partnership if equity interests therein are traded on an
"established securities market," or are "readily tradable" on a "secondary
market" or its "substantial equivalent." The Transferor intends to take
measures designed to reduce the risk that the Trust could be classified as a
publicly traded partnership by reason of interests in the Trust other than the
publicly traded Securities. Although the Transferor expects such measures will
ultimately be successful, certain of the actions that may be necessary for
avoiding the treatment of such interests as "readily tradable" on a "secondary
market" or its "substantial equivalent" are not fully within the control of the
Transferor. As a result, there can be no assurance that the measures the
Transferor intends to take will in all circumstances be sufficient to prevent
the Trust from being classified as a publicly traded partnership under the
publicly traded partnership regulations.
If the Trust were treated as a partnership other than a publicly traded
partnership taxable as a corporation, that partnership would not be subject to
federal income tax. Rather, each item of income, gain, loss and deduction of
the partnership generated through the ownership of the related Receivables
would be taken into account directly in computing taxable income of the
Transferor (or the holder of the Exchangeable Transferor Security) and any
Security Owners treated as partners in accordance with their respective
partnership interests therein. The amounts and timing of income reportable by
any Security Owners treated as partners would likely differ from that
reportable by such Security Owners had they been treated as owning debt. In
addition, if the Trust were treated in whole or in part as a partnership other
than a publicly traded partnership, income derived from the partnership by any
Security Owner that is a pension fund or other tax-exempt entity may be treated
as unrelated business taxable income. Partnership characterization also may
have adverse state and local income or franchise tax consequences for a
Security Owner. If the Trust were treated in whole or in part as a partnership
and the number of holders of interests in the publicly offered securities and
other interests in the Trust treated as partners equaled or exceeded 100, the
Transferor may cause the Trust to elect to be an "electing large partnership."
The consequence of such election to investors could include the determination
of certain tax items at the partnership level and the disallowance of otherwise
allowable deductions. No representation is made as to whether such election
will be made.
If the arrangement created by the Pooling and Servicing Agreement were
treated in whole or in part as a publicly traded partnership taxable as a
corporation, that entity would be subject to federal income tax at corporate
tax rates on its taxable income generated by ownership of the Receivables. That
tax could result in reduced distributions to Security Owners. No distributions
from the Trust would be deductible in computing the taxable income of the
corporation, except to the extent that any Securities were treated as debt of
the corporation and distributions to the related Security Owners were treated
as payments of interest thereon. In addition, distributions to Security Owners
not treated as holding debt would be dividend income to the extent of the
current and accumulated earnings and profits of the corporation (and security
owners may not be entitled to any dividends received deduction in respect of
such income).
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Treatment of the Trust as a FASIT
The Code generally provides that certain arrangements similar to the Trust
may elect to be treated as a new type of entity for federal income tax purposes
called a "financial asset securitization investment Trust" or "FASIT." Under
the FASIT provisions of the Code, a FASIT will generally avoid federal income
taxation and could issue securities substantially similar to the Securities,
and those securities would be treated as debt for federal income tax purposes.
Upon satisfying certain conditions, the Transferor will be permitted to amend
the Pooling and Servicing Agreement and any Supplement in order to enable all
or a portion of the Trust to qualify as a FASIT and to permit a FASIT election
to be made with respect thereto, and to make such modifications to the Pooling
and Servicing Agreement and any Supplement as may be permitted by reason of the
making of such election. See "Description of the Securities--Amendments" in
this prospectus. However, there can be no assurance that the Transferor will or
will not cause any permissible FASIT election to be made with respect to the
Trust or amend the Pooling and Servicing Agreement or any Supplement in
connection with any election. Further, although the Transferor is required to
deliver a Tax Opinion with respect to any such election, such election and any
related amendments to the Pooling and Servicing Agreement and any Supplement
may have tax and non-tax consequences to Security Owners. Accordingly,
prospective Security Owners should consult their tax advisors with regard to
the effects of any such election and permitted related amendments on them in
their particular circumstances.
Taxation of Interest Income of U.S. Security Owners
General. Stated interest on a beneficial interest in a Security will be
includible in gross income in accordance with a U.S. Security Owner's method of
accounting.
Original Issue Discount. If the Securities are issued with original issue
discount, the provisions of sections 1271 through 1273 and 1275 of the Code
will apply to the Securities. Under those provisions, a U.S. Security Owner
(including a cash basis holder) generally would be required to accrue the
original issue discount on its interest in a Security in income for federal
income tax purposes on a constant yield basis, resulting in the inclusion of
original issue discount in income in advance of the receipt of cash
attributable to that income. In general, a security will be treated as having
original issue discount to the extent that its "stated redemption price"
exceeds its "issue price," if such excess equals or exceeds 0.25 percent
multiplied by the weighted average life of the security (determined by taking
into account only the number of complete years following issuance until payment
is made for any partial principal payments). Under section 1272(a)(6) of the
Code, special provisions apply to debt instruments on which payments may be
accelerated due to prepayments of other obligations securing those debt
instruments. However, no regulations have been issued interpreting those
provisions, and the manner in which those provisions would apply to the
Securities is unclear. Additionally, the Internal Revenue Service could take
the position based on Treasury regulations that none of the interest payable on
a security is "unconditionally payable" and hence that all of such interest
should be included in the security's stated redemption price at maturity. If
sustained, such treatment should not significantly affect the tax liability of
most Security Owners, but prospective U.S. Security Owners should consult their
own tax advisers concerning the impact to them in their particular
circumstances. Except where indicated to the contrary, this discussion assumes
that interest payable on a Security is unconditionally payable.
Market Discount. A U.S. Security Owner who purchases an interest in a
Security at a discount that exceeds any unamortized original issue discount may
be subject to the "market discount" rules of sections 1276 through 1278 of the
Code. These rules provide, in part, that gain on the sale or other disposition
of a security and partial principal payments on a security are treated as
ordinary income to the extent of accrued market discount. The market discount
rules also provide for deferral of interest deductions with respect to debt
incurred to purchase or carry a security that has market discount.
Market Premium. A U.S. Security Owner who purchases an interest in a
Security at a premium may elect to offset the premium against interest income
over the remaining term of the Security in accordance with the provisions of
section 171 of the Code.
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Sale or Exchange of Securities
Upon a disposition of an interest in a Security, a U.S. Security Owner
generally will recognize gain or loss equal to the difference between the
amount realized on the disposition and the U.S. Security Owner's adjusted basis
in its interest in the Security. A taxable exchange of a Security could also
occur as a result of the Transferor's substitution of money or investments for
Receivables. See "Description of the Securities--Defeasance" in this
prospectus. The adjusted basis in the interest in the Security will equal its
cost, increased by any OID or market discount includible in income with respect
to the interest in the Security prior to its sale and reduced by any principal
payments previously received with respect to the interest in the Security and
any amortized premium. Subject to the market discount rules, gain or loss will
be capital gain or loss if the interest in the Security was held as a capital
asset. Capital losses generally may be used only to offset capital gains.
Foreign Security Owners
In general, a non-U.S. Security Owner who, for United States federal income
tax purposes, is a non resident alien individual or a foreign corporation (a
"Foreign Person"), generally will not be subject to U.S. federal income tax on
interest (including original issue discount) on a beneficial interest in a
Security unless (i) the Foreign Person actually or constructively owns 10
percent or more of the total combined voting power of all classes of stock of
the Transferor (or of a profits or capital interest in the Trust if
characterized as a partnership), (ii) the Foreign Person is a controlled
foreign corporation that is related to the Transferor (or the Trust if treated
as a partnership) through stock ownership, (iii) the Foreign Person is a bank
receiving interest described in Code section 881(c)(3)(A), (iv) such interest
is contingent interest described in Code section 871(h)(4), or (v) the Foreign
Person bears certain relationships to any holder of either the Exchangeable
Transferor Security other than the Transferor or any other interest in the
Trust not properly characterized as debt. To qualify for the exemption from
taxation, the last U.S. person in the chain of payment prior to payment to a
Foreign Person (the "Withholding Agent") must have received (in the year in
which a payment of interest or principal occurs or in either of the two
preceding years) a statement that (i) is signed by the Foreign Person under
penalties of perjury, (ii) certifies that the Foreign Person is not a U.S.
person and (iii) provides the name, address of, and certain additional
information concerning the Foreign Person. The statement may generally be made
on an Internal Revenue Service form W-8BEN or substantially similar substitute
form, and the Foreign Person must inform the Withholding Agent of any change in
the information on the statement within 30 days of the change. If a security is
held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in that case, the signed statement generally
must be accompanied by a form W-8BEN or substitute form provided by the Foreign
Person to the organization or institution holding the Security on behalf of the
Foreign Person. The U.S. Treasury Department recently issued final Treasury
regulations which will revise some of the foregoing procedures whereby a non-
U.S. Security Owner may establish an exemption from withholding generally
beginning January 1, 2001; non-U.S. Security Owners should consult their tax
advisors concerning the impact to them, if any, of such revised procedures.
Generally, any gain or income realized by a Foreign Person upon retirement
or disposition of an interest in a Security will not be subject to U.S. federal
income tax, provided that (i) in the case of a Security Owner that is an
individual, such Security Owner is not present in the United States for 183
days or more during the taxable year in which such retirement or disposition
occurs and (ii) in the case of gain representing accrued interest, the
conditions described in the preceding paragraph for exemption from withholding
are satisfied. Certain exceptions may be applicable, and an individual Foreign
Person should consult a tax adviser.
If the Securities were treated as an interest in a partnership, the
recharacterization could cause a non-U.S. Security Owner to be treated as
engaged in a trade or business in the United States. In that event, the non-
U.S. Security Owner would be required to file a federal income tax return and,
in general, would be subject to U.S. federal income tax (including the branch
profits tax) on its net income from the partnership. Further, certain
withholding obligations apply with respect to income allocable or distributions
made to a foreign partner. That withholding may be at a rate as high as 39.6
percent. If some or all of the Securities were treated as stock in a
corporation, any related dividend distributions to a non-U.S. Security Owner
generally would be subject to withholding of tax at the rate of 30 percent,
unless that rate were reduced by an applicable tax treaty.
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Backup Withholding and Information Reporting
Payments of principal and interest, as well as payments of proceeds from the
sale, retirement or other disposition of a Security, may be subject to "backup
withholding" tax under the Code at a rate of 31% if a recipient of such
payments fails to furnish to the payor certain identifying information. Any
amounts deducted and withheld would be allowed as a credit against such
recipient's United States federal income tax, provided appropriate proof is
provided under rules established by the IRS. Furthermore, certain penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner. Backup withholding
will not apply with respect to payments made to certain exempt recipients, such
as corporations and financial institutions. Information may also be required to
be provided to the IRS concerning payments, unless an exemption applies.
Security Owners should consult their tax advisors regarding their qualification
for exemption from backup withholding and information reporting and the
procedure for obtaining such an exemption.
State and Local Taxation
General. Except as is set forth below, the discussion herein does not
address the taxation of the Trust or the tax consequences of the purchase,
ownership or disposition of an interest in the Securities under any state or
local tax law. Each investor should consult its own tax adviser regarding state
and local tax consequences.
Florida. A rule under the Florida Income Tax Code (the "Loan Rule") provides
that a "financial organization" earning or receiving interest from loans
secured by tangible property located in Florida will be deemed to be conducting
business or earning or receiving income in Florida, and will be subject to
Florida corporate income tax regardless of where the interest was received. A
financial organization is defined to include any bank, trust company, savings
bank, industrial bank, land bank, safe deposit company, private banker, savings
and loan association, credit union, cooperative bank, small loan company, sales
finance company or investment company. The Loan Rule is not exclusive. For
example, the Florida Income Tax Code may also subject financial organizations
to corporate income tax if they earn or receive interest from loans secured by
intangible property located in Florida. If the Loan Rule were to apply to the
Securities, then a financial organization investing in the Securities would be
subject to Florida corporate income tax on a portion of its income at a maximum
rate of 5.5%, and would be required to file an income tax return in Florida,
even if it has no other Florida contacts. There are federal constitutional
issues that may undermine the State of Florida's ability to enforce this tax
rule in cases where the lender does not have any ties to Florida other than
ownership of the Securities; however, this position has not been judicially
tested. We urge you to consult your own tax advisor as to the applicability of
the Loan Rule to an investment in the Securities.
ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on those employee benefit plans to
which they apply ("Plans") and on those persons who are fiduciaries with
respect to such Plans. In accordance with ERISA's general fiduciary standards,
before investing in Securities, a Plan fiduciary should determine whether such
an investment (a) is permitted under the governing Plan instruments; (b) is
appropriate for the Plan in view of its overall investment policy and the
composition and diversification of its portfolio; and (c) is prudent
considering the factors discussed in this Prospectus.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of a Plan and persons who have certain
specified relationships to the Plan ("parties in interest" within the meaning
of ERISA or "disqualified persons" within the meaning of the Code ("Parties in
Interest")). Prohibited transactions may generate excise taxes and other
liabilities. Thus, a Plan fiduciary considering an investment in the Securities
should also consider whether such an investment might constitute or give rise
to a prohibited transaction under ERISA or Section 4975 of the Code.
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For example, regardless of whether the Trust assets are deemed to be "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 any
underwriters, or any of their affiliates, is a Party in Interest could result
in a prohibited transaction under ERISA or Section 4975 of the Code unless an
exemption is applicable. Accordingly, fiduciaries of a Plan with respect to
which the Transferor, the Trustee or any underwriter, 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 result in prohibited transactions under ERISA and Section 4975 of the
Code, if any Trust assets were deemed to be assets of an investing Plan. The
U.S. Department of Labor (the "DOL") has issued a regulation (the "Plan Asset
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 the Trust assets are deemed to be "plan assets" of an
investing Plan, any person who is a "fiduciary" 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 Plans invest in the Trust, the Trust could be
deemed to hold "plan assets" unless one of the exceptions contained in the Plan
Asset Regulation applies to the Trust.
The Plan Asset 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 who are 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, plans described in Section 4975 of the Code, and any
entity whose underlying assets include plan assets by reason of any such 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 any underwriter, 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 and investment by benefit plan investors becomes
significant and the Trust's assets are deemed to include "plan 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, the Trustee or
any underwriter of such Series may be considered to be a Party in Interest or a
fiduciary with respect to an investing Plan. Accordingly, a Plan's investment
in Securities may result in a prohibited transaction under ERISA and Section
4975 of the Code. Thus, for example, if a Plan participant 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
58
<PAGE>
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 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, Plan fiduciaries considering the purchase of
interests in securities of any series with "plan assets" of any Plan should
consult their own counsel as to whether the assets of the Trust 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, Plan 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 January 5,
2000, the DOL published final 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. The General Account Regulations do not apply to any general
account policies issued after December 31, 1998. Accordingly, insurance company
general account investors should analyze whether John Hancock, Section 401(c)
and the General Account Regulations may have an impact with respect to their
purchase of the Securities of any Series.
Plan of Distribution
The Transferor may sell Securities (a) through underwriters or dealers, (b)
directly to one or more purchasers, or (c) through agents. The related
Prospectus Supplement will set forth the terms of the offering of any
Securities offered hereby, including, without limitation, the names of any
underwriters, the purchase price of such Securities and the proceeds to the
Transferor from such sale, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed or paid to dealers.
If underwriters are used in a sale of any Securities of a Series offered
hereby, such Securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of
commitment therefor. Such Securities may be offered to the
59
<PAGE>
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 issuance of the Securities will be
passed upon for Metris, the Transferor and Direct Merchants Bank by Orrick,
Herrington & Sutcliffe LLP, Washington, D.C. Certain legal matters relating to
the issuance of the Securities under the laws of the State of Delaware will be
passed upon for Metris, the Transferor and Direct Merchants Bank by Richards,
Layton & Finger, P.A., Wilmington, Delaware. Certain legal matters relating to
the issuance of the Securities will be passed upon for the underwriters by
Brown & Wood LLP, New York, New York.
Reports to Securityholders
Unless and until Definitive Securities are issued, monthly and annual
reports, containing information concerning the Trust and prepared by the
Servicer, will be sent on behalf of the Trust to Cede & Co. as nominee of DTC
and registered holder of the related Securities, pursuant to the Pooling and
Servicing Agreement. See "Description of the Securities--Book-Entry
Registration," "--Reports to Securityholders" and "--Evidence as to
Compliance." Such reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. The Servicer does not
intend to send any financial reports of Metris Receivables, Inc. or Direct
Merchants Bank to Securityholders or to the Security Owners. The Servicer will
file with the SEC such periodic reports with respect to each Trust as are
required under the Exchange Act and the rules and regulations of the SEC
thereunder.
Other Information
Upon receipt of a request by an investor who has received an electronic
Prospectus from an underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus,
the Transferor or such underwriter will promptly deliver, or cause to be
delivered, without charge, a paper copy of the Prospectus.
60
<PAGE>
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., 10900 Wayzata Boulevard, Room 723, Minnetonka,
Minnesota 55305, (952) 417-5645.
61
<PAGE>
Index of Terms for Prospectus
<TABLE>
<CAPTION>
Term Page
---- -----
<S> <C>
Accounts.................................................................. 4
Accumulation Period....................................................... 18
Addition Date............................................................. 26
Additional Accounts....................................................... 26
Adjustment Payment........................................................ 33
Amendment Closing Date.................................................... 26
Amortization Period....................................................... 9
Approved Account.......................................................... 26
Assignment................................................................ 26
Automatic Additional Accounts............................................. 25
Bank...................................................................... 4
Bank Purchase Agreement................................................... 8
Bankruptcy Code........................................................... 28
Cash Collateral Account................................................... 43
Cash Collateral Guaranty.................................................. 43
Cash Equivalents.......................................................... 29
Change of Control......................................................... 9
Class..................................................................... 11
Clearstream............................................................... 14
Clearstream Customers..................................................... 14
Code...................................................................... 54
Collateral Interest....................................................... 43
Collateralized Trust Obligations.......................................... 42
Collection Account........................................................ 28
Collections............................................................... 8
Contract.................................................................. 25
Controlled Accumulation Amount............................................ 18
Controlled Amortization Amount............................................ 17
Controlled Amortization Period............................................ 17
Controlled Deposit Amount................................................. 18
Controlled Distribution Amount............................................ 17
Cooperative............................................................... 14
Credit and Collection Policy.............................................. 27
Credit Card Originator.................................................... 24
Default Recognition Date.................................................. 33
Default Recognition Percentage............................................ 33
Defaulted Account......................................................... 33
Defaulted Receivable...................................................... 33
Defeased Series........................................................... 34
Definitive Securities..................................................... 15
Depositaries.............................................................. 12
Depository................................................................ 11
Determination Date........................................................ 21
Dilution.................................................................. 33
Direct Merchants Bank..................................................... 4
Direct Merchants Bank Portfolio........................................... 4
Discount Option Receivables............................................... 19
Discount Percentage....................................................... 19
Distribution Account...................................................... 28
Distribution Date......................................................... 16
DOJ....................................................................... 51
DOL....................................................................... 58
DTC....................................................................... A-I-1
DTC Participants.......................................................... 12
</TABLE>
<TABLE>
<CAPTION>
Term Page
---- ------
<S> <C>
Early Amortization Period................................................ 18
Eligible Account......................................................... 24
Eligible Receivable...................................................... 24
Enhancement.............................................................. 42
Enhancement Invested Amount.............................................. 42
Enhancement Percentage................................................... 30
ERISA.................................................................... 57
Euroclear................................................................ 14
Euroclear Operator....................................................... 14
Euroclear Participants................................................... 14
Euroclear System......................................................... 14
Excess Finance Charge Collections........................................ 31
Excess Funding Account................................................... 28, 31
Exchange................................................................. 20
Exchange Act............................................................. 12
Exchangeable Transferor Security......................................... 4
Excluded Accounts........................................................ 26
Expected Final Payment Date.............................................. 8
FCI...................................................................... 9
FDIC..................................................................... 28
FDR...................................................................... 4
Finance Charge Collections............................................... 4
Finance Charge Receivables............................................... 7
Fingerhut................................................................ 5
Fingerhut Database....................................................... 5
Foreign Person........................................................... 56
Full Invested Amount..................................................... 32
Funding Period........................................................... 32
General Account Regulations.............................................. 59
Global Securities........................................................ A-I-1
Indirect Participants.................................................... 12
Initial Closing Date..................................................... 19
Insolvency Event......................................................... 35
Interest Accrual Period.................................................. 23
Interest Funding Account................................................. 16, 28
Invested Amount.......................................................... 10
Investment Company Act................................................... 23
Investor Charge-Off...................................................... 34
Investor Percentage...................................................... 30
Investor Securities...................................................... 20
John Hancock............................................................. 59
Loan Rule................................................................ 57
MasterCard International................................................. 51
Metris................................................................... 9
Metris Direct............................................................ 9
Minimum Aggregate Principal Receivables.................................. 25
Minimum Transferor Interest.............................................. 25
Minimum Transferor Percentage............................................ 25
Monthly Period........................................................... 16
Monthly Servicing Fee.................................................... 36
Moody's.................................................................. 28
Notice Date.............................................................. 26
Obligors................................................................. 7
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Term Page
---- -----
<S> <C>
Paired Series............................................................. 32
Participants.............................................................. 12
Parties in Interest....................................................... 57
Pay by Date............................................................... 6
Pay Out Event............................................................. 35
Paying Agent.............................................................. 29
Periodic Finance Charges.................................................. 6
Permitted Lien............................................................ 22
Plan Asset Regulation..................................................... 58
Plans..................................................................... 57
Pooling and Servicing Agreement........................................... 4
Pre-Funding Account....................................................... 32
Pre-Funding Amount........................................................ 32
Principal Account......................................................... 28
Principal Amortization Period............................................. 17
Principal Collections..................................................... 4
Principal Funding Account................................................. 16
Principal Receivables..................................................... 8
Principal Shortfall....................................................... 31
Principal Terms........................................................... 20
Prospectus Supplement..................................................... 4
Purchase Agreement........................................................ 19
Purchase Agreements....................................................... 8, 19
Purchase Termination Date................................................. 47
Qualified Institution..................................................... 28
Rating Agency............................................................. 48
Ratings Event............................................................. 26
Receivables............................................................... 4
Record Date............................................................... 11
Recoveries................................................................ 7
Related Person............................................................ 41
Relevant UCC State........................................................ 25
Reserve Account........................................................... 44
Restart Date.............................................................. 25
Retained Interest......................................................... 21
Retained Percentage....................................................... 36
Revolving Period.......................................................... 17
</TABLE>
<TABLE>
<CAPTION>
Term Page
---- ------
<S> <C>
SEC...................................................................... 12
Securities............................................................... 4
Securities Act........................................................... 21
Security Owner........................................................... 11
Security Rate............................................................ 16
Securityholders.......................................................... 15
Securityholders' Interest................................................ 10
Series................................................................... 4
Series Default Amount.................................................... 33
Service Transfer......................................................... 38
Servicer................................................................. 4
Servicer Default......................................................... 38
Shared Principal Collections............................................. 17
SIPC..................................................................... 29
Standard & Poor's........................................................ 28
Supplement............................................................... 10
Supplemental Accounts.................................................... 25
Tax Opinion.............................................................. 21
Termination Date......................................................... 35
Terms and Conditions..................................................... 14
Transfer Agent and Registrar............................................. 15
Transfer Date............................................................ 18, 29
Transferor............................................................... 4
Transferor Amount........................................................ 11
Transferor Interest...................................................... 11
Trigger Event............................................................ 35
Trust.................................................................... 4
Trust Accounts........................................................... 28
Trust Portfolio.......................................................... 19
Trustee.................................................................. 4
UCC...................................................................... 48
Utah Bank................................................................ 10
Variable Funding Securities.............................................. 11
VISA..................................................................... 51
Waiver Agreement......................................................... 9
Withholding Agent........................................................ 56
</TABLE>
63
<PAGE>
Annex I
Global Clearance, Settlement and
Tax Documentation Procedures
Except in certain limited circumstances, the globally offered Metris Master
Trust Asset Backed Trust Securities (the "Global Securities"), will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ("DTC"),
Clearstream 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
Clearstream 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 Clearstream or Euroclear and DTC
Participants holding Securities will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream 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, Clearstream 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 Clearstream 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 Clearstream Customers and/or Euroclear Participants.
Secondary market trading between Clearstream Customers or Euroclear
Participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading between DTC seller and Clearstream Customer or Euroclear
Participant. When Global Securities are to be transferred from the account of a
DTC Participant to the accounts of a Clearstream Customer or a Euroclear
Participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream
A-I-1
<PAGE>
Customer or Euroclear Participant at least one business day prior to
settlement. Clearstream 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 Clearstream 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
Clearstream or Euroclear cash debit will be valued instead as of the actual
settlement date.
Clearstream 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 Clearstream or Euroclear. Under this
approach, they may take on credit exposure to Clearstream or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of credit
to them, Clearstream 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, Clearstream 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 Clearstream 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 Clearstream 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 Clearstream or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Clearstream 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 Clearstream or Euroclear through a Clearstream Customer or
Euroclear Participant at least one business day prior to settlement. In these
cases, Clearstream 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 Clearstream Customer or Euroclear
Participant the following day, and receipt of the cash proceeds in the
Clearstream 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 Clearstream 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 Clearstream Customer's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
A-I-2
<PAGE>
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream 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 Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream 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 Clearstream 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 Clearstream
Customer or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding Securities through
Clearstream 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
appropriate steps to obtain an exemption or reduced tax rate. See "Income Tax
Matters" in the prospectus for additional information.
A-I-3
<PAGE>
Prospectus Supplement
[LOGO OF METRIS CO.]
Metris Master Trust
Issuer
Series 2000-3
$372,928,000
Class A Floating Rate
Asset Backed Securities
$66,298,000
Class B Floating Rate
Asset Backed Securities
Metris Receivables, Inc.
Transferor
Direct Merchants
Credit Card Bank, National Association
Servicer
Underwriters of the Class A securities
Banc of America Securities LLC
Barclays Capital
Chase Securities Inc.
Deutsche Banc Alex. Brown
Morgan Stanley Dean Witter
Underwriters of the Class B securities
Banc of America Securities LLC
Chase Securities Inc.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the prospectus. We have
not authorized anyone to provide you with different information.
We are not offering these securities in any state where the offer is
not permitted.
We do not claim the accuracy of the information in this prospectus
supplement and the prospectus as of any date other than the dates
stated on their respective covers.
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of these securities and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling
these securities will deliver a prospectus supplement and prospectus
until January 17, 2001.
