METRIS COMPANIES INC, 424B1, 1996-10-25

METRIS COMPANIES INC
424B1, 1996-10-25
MISCELLANEOUS BUSINESS CREDIT INSTITUTION

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<PAGE> 1

PROSPECTUS

2,833,333 SHARES

METRIS LOGO

COMMON STOCK
------------------

All of the shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by Metris Companies Inc.
("Metris" or the "Company"), which is an indirect wholly owned subsidiary of
Fingerhut Companies, Inc. ("FCI").

Following the Offering, FCI will beneficially own indirectly approximately
84.9% (83.0% if the Underwriters exercise their over-allotment option in full)
of the outstanding shares of Common Stock. Accordingly, FCI will continue to
control the Company. See "Risk Factors -- Control by FCI and "-- Potential
Conflicts of Interest; Relationship with FCI".

Prior to the Offering, there has been no public market for the Common
Stock. The Common Stock has been approved for listing on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "MTRS".

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------

<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY (2)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Per Share.......................... $16.00 $1.12 $14.88
- -----------------------------------------------------------------------------------------------------
Total(3)........................... $45,333,328 $3,173,333 $42,159,995
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>

- ------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".

(2) Before deducting expenses estimated to be $800,000, payable by the
Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
425,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. See "Underwriting". If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $52,133,328,
$3,649,333 and $48,483,995, respectively.

------------------

The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by them
and subject to certain conditions. It is expected that certificates for the
shares of Common Stock will be available for delivery on or about October 30,
1996, at the offices of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001.

SMITH BARNEY INC.
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY

October 25, 1996

<PAGE> 2

[GRAPHIC - METRIS LOGO]

Graphic text: Consumer Credit
Extended Service Plans
Fee-Based Products and services

Metris -- inspired by the classical Latin word meaning "of or concerning
measurements" the name evokes the science and discipline of direct marketing.
Symbolizing a foundation in data and information management, Metris is intended
to denote precision in quantitative measurements resulting in a keen
understanding of consumer needs.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933 (the "Securities Act") with respect
to the Common Stock offered pursuant to this Prospectus. This Prospectus does
not contain all of the information set forth in the Registration Statement or
the exhibits thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto. Such information may be
reviewed at, or obtained by mail at prescribed rates from, the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, such information may also be reviewed at the regional offices of the
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York, New York
10048. Such information may also be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov). Statements made in
this Prospectus concerning the provisions of such documents are summaries of
such documents and each such statement is qualified in its entirety by reference
to the copy of the applicable document filed with the Commission.

Prior to this Offering, the Company has not been required to file reports
under the Securities Exchange Act of 1934 (the "Exchange Act"). However,
following the consummation of the Offering, the Company will be required to file
reports and other information with the Commission pursuant to the Exchange Act.
The Company intends to furnish its stockholders with annual reports containing
audited financial statements reported on by independent public accountants
following the end of each fiscal year. FCI is subject to the informational
requirements of the Exchange Act and in accordance therewith files reports and
other information with the Commission.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto (the
"Financial Statements"), appearing elsewhere in this Prospectus. Metris
Companies Inc., a recently formed indirect wholly owned subsidiary of Fingerhut
Companies, Inc. ("FCI"), operates certain businesses previously operated as a
division of FCI (collectively, the "Financial Services Business"). Except as
otherwise noted herein, the information in this Prospectus gives effect to the
contribution of such division to the Company, and, as used in this Prospectus,
unless the context otherwise requires, (i) "Metris" and "Company" refer, with
respect to any date prior to the effective date of such contribution, to the
Financial Services Business of FCI, and, with respect to any date on or
subsequent to the effective date of such contribution, to Metris Companies Inc.
and its subsidiaries and (ii) "FCI" refers to Fingerhut Companies, Inc., and its
subsidiaries other than the Company, including its principal operating
subsidiary, Fingerhut Corporation ("Fingerhut"). Unless the context otherwise
requires, all information contained in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised.

THE COMPANY

Metris Companies Inc. is an information-based direct marketer of consumer
credit products, extended service plans, and fee-based products and services to
moderate income consumers. Management believes the moderate income market (i.e.,
households with annual incomes of $15,000 to $35,000), which currently
represents 31% of all U.S. households, is underserved by the traditional
providers of many of the Company's products and services. The Company's strategy
is to first establish a profitable customer relationship through the issuance of
a general purpose credit card, and then to expand this customer relationship by
cross-selling additional fee-based products and services. The Company provides
credit to this market by utilizing a risk-based pricing strategy based on
proprietary databases and credit scoring systems. The Company's agreements with
FCI provide for the exclusive use of Fingerhut's proprietary database (the
"Fingerhut Database") to market the Company's products and services, including
general purpose credit cards (although Fingerhut will continue to use such
information in providing credit, through a private label credit card or
otherwise, in connection with the sale of Fingerhut products and services). The
Fingerhut Database contains demographic, behavioral and credit history
information on more than 30 million individuals, the majority of whom are
moderate income consumers. Fingerhut does not report its credit information to
the credit bureaus, which means this information is not publicly available. The
Company's management believes this access to the Fingerhut Database and the
ability to utilize Fingerhut's proprietary credit scoring models give it a
competitive advantage in targeting and lending to moderate income consumers.

The Company's consumer credit products currently are unsecured and secured
credit cards, including the Fingerhut co-branded MasterCard(R) and the Direct
Merchants Bank MasterCard. The Company's customers and prospects include both
Fingerhut's existing customers ("Fingerhut Customers") and individuals who are
not Fingerhut Customers but for whom credit bureau information is available
("External Prospects"). Once a prospective customer is targeted, the Company
utilizes its proprietary credit scoring models and a risk-based pricing strategy
to assign the annual percentage rate, annual fee and credit line based upon the
expected risk of the individual prospect. As a result of the risk profile that
is typical of the Company's customers, approximately 82% of the existing credit
card accounts carry an annual fee, annual percentage rates range from prime plus
6.45% to prime plus 14.20%, and the average initial credit line is approximately
$1,700. Management believes this average initial credit line is below the
industry average.

The Company also provides extended service plans on certain categories of
products sold by Fingerhut that extend service coverage beyond the
manufacturer's warranty. Although these plans historically have been available
only on consumer electronics, the Company has recently begun to offer these
plans for jewelry and furniture, and may offer plans on additional types of
products in the future. Through focused marketing, the Company increased the
percentage of Warrantable Products (as defined herein) sold that are covered by
its plans from 15% in 1994 to 24% in the first six months of 1996. Management
believes that opportunities for growth in extended service plans exist through
further increasing the percentage of Fingerhut Warrantable Products sold with an
extended service plan, identifying new Warrantable Product categories for
Fingerhut products, and marketing extended service plans in conjunction with
retailers other than Fingerhut.

3
<PAGE> 4

Metris markets its fee-based products and services, including third party
insurance, membership clubs, card registration and debt waiver programs, to its
credit card customers and to Fingerhut's customers. As a result of the Company's
direct marketing and cross-selling efforts, approximately 53% of the Company's
credit card customers have purchased one or more fee-based products. As an
additional service, the Company develops highly tailored marketing lists,
derived from its proprietary database, for third parties.

At year-end 1995, the Company was the 23rd largest MasterCard issuer in the
United States based on number of cards issued, with over 700,000 total credit
card accounts and $543.6 million total managed loans outstanding. At March 31,
1996, the Company was the 52nd largest credit card issuer in the United States,
based on managed credit card loan balances. As of June 30, 1996, the Company had
approximately 1.1 million total credit card accounts and $1.1 billion in total
managed loans outstanding. For the first six months of 1996, the Company had
total revenues of approximately $65.9 million and net income of approximately
$8.9 million.

HISTORY

Fingerhut, one of the largest catalog marketers in the United States, made
the strategic decision in 1993 to directly market general purpose credit cards
to its customers. The decision was based on Fingerhut's expertise in extending
closed end credit to its customers, the large amount of proprietary information
in the Fingerhut Database, and the high responsiveness of Fingerhut's customers
to direct marketing efforts. After successfully test marketing credit cards to
Fingerhut's customers, Fingerhut began to aggressively expand its credit card
business. As part of this strategy, Fingerhut hired a management team led by
Ronald Zebeck, whose more than 20 years of experience in the credit card
industry includes responsibility for the launch and management of the highly
successful GM MasterCard. This management team has since been implementing its
strategy to expand its credit card customer base of both Fingerhut Customers and
External Prospects and to grow its extended service plan and fee-based products
and services businesses.

Based upon a series of targeted credit card marketing campaigns launched
over the past 18 months, the Company's management believes that (i) the
Company's target market has been highly responsive to direct marketing, allowing
the Company to acquire new customers at lower costs than traditional credit card
issuers and to pursue marketing strategies that improve the penetration rates of
additional products and services, (ii) while the Company's target market
includes individuals with relatively high risk profiles, the Company has been
able to effectively target and evaluate the creditworthiness of moderate income
consumers using proprietary scoring models, traditional credit information and
Fingerhut Database information and (iii) the Company's risk-based pricing
strategy has allowed it to manage customer relationships based on individual
risk profiles. See "Risk Factors -- Risks Related to Target Market".

The significant growth to date of the Company's credit card accounts and
managed loan balances has been supported by funds from FCI and from the
Company's retained earnings. The Offering will provide Metris with additional
equity capital to continue to fund its growth.

BUSINESS STRATEGY

The Company's business strategy is to continue its growth by targeting new
customers through the issuance of credit cards and expanding its customer
relationships through the sale of additional products and services. The
principal components of the Company's strategy are the following:

- Increase the number of Fingerhut Customers utilizing the Company's
consumer credit products, extended service plans and fee-based products
and services.

- Identify and solicit additional External Prospects for credit cards using
the Company's proprietary risk, response and profitability models.

- Maximize the profitability of each customer relationship by cross-selling
multiple products and services and using individualized risk-based
pricing.

4
<PAGE> 5

- Expand the range of products and services offered. Management believes
the Company will make an attractive marketing partner to providers of
other financial services such as home equity loans, auto loans, student
loans, and supplemental insurance.

- Access additional customers for the Company's products and services by
establishing relationships with third parties whose customers fit the
Company's target market profile.

- Pursue acquisitions of credit card portfolios and/or other businesses
whose customers fit the Company's product and target market profile.

RELATIONSHIP WITH FCI

Metris Companies Inc. is currently an indirect wholly owned subsidiary of
FCI, the business of which historically has been operated as a division of FCI.
After completion of the Offering, FCI will beneficially own 84.9% of the
outstanding shares of Common Stock (83.0% if the Underwriters' over-allotment
option is exercised in full). Accordingly, FCI will have significant influence
over the policies and affairs of the Company and will be in a position to
determine the outcome of corporate actions requiring stockholder approval,
including the election of directors, the adoption of amendments to the Company's
Certificate of Incorporation and the approval of mergers and sales of the
Company's assets. See "Risk Factors -- Control by FCI" and "-- Potential
Conflicts of Interest; Relationship with FCI".

FCI is a direct-to-the-consumer marketing company that sells a broad range
of products and services via catalogs, telemarketing, television and other
media. FCI had net revenues of $2.1 billion and $1.9 billion, and had net
earnings of $50.9 million and $45.9 million, in 1995 and 1994, respectively. For
the nine-month period ended September 27, 1996, FCI had net revenues of $1.3
billion and had net earnings of $8.7 million. Metris had net earnings of $4.6
million and $2.2 million, in 1995 and 1994, respectively. For the nine-month
period ended September 30, 1996, Metris had net earnings of $14.7 million. FCI
had total assets of $1.3 billion and $1.1 billion at December 29, 1995, and
December 30, 1994, respectively. Its principal subsidiaries are the Company,
Fingerhut, Figi's Inc. and Infochoice USA, Inc. Fingerhut has been in the direct
mail marketing business for over 45 years and sells general merchandise using
catalogs and other direct marketing solicitations. Fingerhut's merchandise
includes a broad mix of brand name and private label products.

Metris is significantly dependent on FCI and has entered into a number of
intercompany agreements with FCI, including the Co-brand Credit Card Agreement,
the Data Sharing Agreement, the Extended Service Plan Agreement, the Database
Access Agreement and the Administrative Services Agreement. In addition to
providing the Company exclusive use of the Fingerhut Database for the marketing
of financial service products, the agreements provide for continued access to
information about Fingerhut Customers, for marketing of extended service plans
and for a variety of administrative and other services during the term
(generally seven years) of these agreements. Additionally, FCI has guaranteed
the Company's revolving bank credit facility. Breaches of covenants contained in
the guaranty, including various financial covenants of FCI, would be events of
default under the facility. Upon the occurrence of any such event the facility
would be terminable at the option of the lenders. Such events could have a
material adverse impact on the Company's financial condition and results of
operations. To the extent that the FCI guarantee contains certain financial
covenants and the cost of maintaining availability and borrowing under the
revolving credit facility is based on FCI's credit rating, the Company is
dependent on the financial strength and performance of FCI. FCI has been
impacted by the industry-wide increase in paper and postage rates which began in
early 1995 and continued into 1996. The impact of rate-based increases in paper
and postage expenses was approximately $44 million in 1995. Primarily as a
result of such increased expenses, FCI's debt rating was recently downgraded by
Standard & Poor's. FCI is currently rated BBB/Baa2 by Standard & Poor's and
Moody's Investors Service, respectively. See "Transactions Between FCI and the
Company".

5
<PAGE> 6

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered(1)................... 2,833,333 Shares
Common Stock to be outstanding after the
Offering(1)(2).......................... 18,800,000 Shares
Use of Proceeds........................... The net proceeds of the Offering will be used to
repay short-term indebtedness of the Company,
and the remainder, if any, will be used for
general corporate purposes. See "Use of
Proceeds".
Nasdaq National Market Symbol............. "MTRS".
Risk Factors.............................. See "Risk Factors" for a discussion of certain
factors that should be considered in evaluating
an investment in the Common Stock.
</TABLE>

- -------------------------
(1) Assumes the Underwriters do not exercise their option to purchase up to an
additional 425,000 shares of Common Stock to cover over-allotments, if any.

(2) Excludes 1,362,072 shares of Common Stock issuable upon exercise of
outstanding stock options granted or expected to be granted by the Company.
The Company has reserved a total of 1,976,125 shares of Common Stock for
issuance in connection with options issuable under the Company's stock
option plans. See "Management -- Compensation Programs".
------------------------

Metris Companies Inc. is a Delaware corporation incorporated on August 20,
1996, and is a wholly owned subsidiary of FFS Holdings, Inc., which is itself an
indirect wholly owned subsidiary of FCI. The Company's subsidiaries are Direct
Merchants Credit Card Bank, National Association ("Direct Merchants Bank"),
Metris Receivables, Inc. ("MRI"), DMCCB, Inc., and Metris Direct, Inc. In
anticipation of the Offering, FCI contributed the assets, liabilities and equity
of the extended service plan business and all of the outstanding stock of these
subsidiaries to the Company (the "Contribution"). The Company's principal
executive offices are located at 600 South Highway 169, Suite 1800, St. Louis
Park, Minnesota 55426, and its telephone number is (612) 525-5020.

FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements". The Company's actual
results may differ significantly from the results discussed in such
forward-looking statements, including, among others, those under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset Quality". Certain factors that might cause such differences include, but
are not limited to, the "Risk Factors" described herein.

6
<PAGE> 7

SUMMARY FINANCIAL AND OPERATING DATA

The following summary historical financial and operating data reflects the
assets, liabilities, equity, and revenues and expenses of FCI's businesses
engaged in offering certain consumer credit products, extended service plans,
and other fee-based products and services to moderate income consumers.

The Income Statement Data, Balance Sheet Data, Net Extended Service Plan
Revenues and Fee-Based Product Revenues presented below as of December 31, 1995
and 1994, and for each of the years in the three-year period ended December 31,
1995, have been derived from the audited financial statements and the notes
thereto appearing elsewhere in this Prospectus. All other summary financial and
operating data are unaudited, but reflect, in the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of such data. The results for the six months ended June 30, 1996,
are also not necessarily indicative of the results to be expected for the entire
year.

As discussed under "Risk Factors -- Lack of Prior Operating History as a
Stand-Alone Entity" and "-- Recently Commenced Credit Card Operations", the
historical financial information presented below may not be indicative of the
Company's future performance nor does it necessarily reflect what the financial
position and results of operations of the Company would have been had the
Company operated as a separate, stand-alone entity during the periods covered.
Additionally, the Company's consumer credit products business and a substantial
portion of its fee-based products and services business began operations in
February 1995 with the opening of Direct Merchants Bank. Therefore, the
financial statements and financial and operating data derived therefrom prior to
1995 are not comparable to the periods ending in 1995 and thereafter. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
the historical financial statements and notes thereto, included elsewhere in
this Prospectus.

In order to provide funds for operations and to improve liquidity, the
Company securitizes and sells substantially all of its credit card loans to
investors through a master trust. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity, Funding and Capital
Resources", and "Business -- Securitization". The effect of these transactions
is to remove credit card loans sold with limited recourse from the Company's
balance sheet and record a gain on sale for the difference between the carrying
value of the loans and the adjusted sales proceeds. The adjusted sales proceeds
are based on a present value estimate of future cash flows to be received over
the life of the loans, net of certain funding and servicing costs. The resulting
gain is further reduced for estimated loan losses over the life of the related
loans under the limited recourse provisions. Because these estimates are
influenced by factors outside of the Company's control, the uncertainty inherent
in these estimates makes it reasonably possible that these estimates could
change in the near term.

The securitization and sale of credit card loans changes the Company's
interest in such loans from that of a lender to that of a servicer. Accordingly
there is a change in how revenue is reported in the income statement. For
securitized and sold credit card loans, amounts that otherwise would have been
recorded as interest income, interest expense, fee income and provision for loan
losses are instead recorded as net securitization and credit card servicing
income, and the Company's allowance for loan losses also does not include
amounts for securitized loans. However, the information on the following table
under "Credit Card Data" includes both securitized loans and the Company's
on-balance sheet loans.

7
<PAGE> 8

SUMMARY FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------- ------------------------------
1996 1995 1995 1994 1993
---------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................................... $ 12,619 $ 1,460 $ 7,616 $ 487 $ 279
Interest expense.................................. 1,858 280 1,217 -- --
---------- -------- -------- ------- -------
Net interest income............................... 10,761 1,180 6,399 487 279
Provision for loan losses......................... 5,173 534 4,393 -- --
Other operating income............................ 53,296 16,094 51,083 14,238 10,053
Other operating expense........................... 44,422 16,602 45,640 11,222 8,333
---------- -------- -------- ------- -------
Income before income taxes........................ $ 14,462 $ 138 $ 7,449 $ 3,503 $ 1,999
Income taxes...................................... 5,568 53 2,868 1,305 737
---------- -------- -------- ------- -------
Net income........................................ $ 8,894 $ 85 $ 4,581 $ 2,198 $ 1,262
========== ========= ========= ======== ========
ADJUSTED PRO-FORMA INCOME STATEMENT DATA:(1)
Adjusted pro-forma net income per share........... $ 0.51 $ 0.34
========== =========
BALANCE SHEET DATA:
Credit card/other loans(2)........................ $ 131,963 $ 44,514 $ 95,064 $ 9,375 $ 6,160
Allowance for loan losses......................... 5,303 534 3,679 -- --
Total assets...................................... 185,784 78,036 174,428 9,856 6,615
Short-term borrowings............................. 54,318 28,205 63,482 -- --
Division equity................................... 80,212 26,822 71,318 6,737 4,539
CREDIT CARD DATA:
Average managed loans............................. $ 741,177 $ 42,576 $183,274 $ -- $ --
Period-end managed loans.......................... 1,068,018 190,069 543,619 -- --
Period-end total accounts......................... 1,122,673 319,511 702,891 -- --
Managed net interest margin(3).................... 13.85% 13.35% 13.65% 7.36% 6.16%
Managed net charge-off ratio(4)................... 5.53% -- 2.19% -- --
Managed delinquency ratio(5)...................... 3.37% 0.17% 3.95% -- --
Period-end managed allowance for loan losses...... 4.15% 1.49% 4.09% -- --
EXTENDED SERVICE PLAN DATA:
Net extended service plan revenues................ $ 8,615 $ 6,687 $ 17,779 $12,244 $ 7,935
Warrantable product sales penetration rates(6).... 23.8% 21.0% 20.4% 15.3% 12.9%
FEE-BASED PRODUCTS AND SERVICES DATA:
Fee-based product revenues........................ $ 12,067 $ 1,549 $ 6,662 $ 1,994 $ 2,118
</TABLE>

- -------------------------

(1) Pro-forma per share information is based on 18,800,000 shares assumed to be
outstanding upon consummation of the Offering. Amounts also give effect to
the adjustment to net income of $771 and $1,779 from the application of the
estimated net proceeds from the Offering to repay a portion of outstanding
short-term borrowings from FCI as if the Offering had occurred at the
beginning of the respective periods shown using average interest rates of
6.06% and 6.99% for the six months ended June 30, 1996, and the year ended
December 31, 1995, respectively, and an effective tax rate of 38.5% for both
periods. See "Use of Proceeds".

(2) Credit card/other loans for the years ended December 31, 1994, and 1993
consist exclusively of loans made to FCI. For the year ended December 31,
1995, and thereafter, credit card/other loans are exclusively credit card
loans as the Company was in a net borrowing position with FCI.

(3) Includes the Company's actual cost of funds plus all costs associated with
asset securitizations, including the interest expense paid to the
certificateholders and amortization of the discount and fees.

(4) Net charge-offs reflect actual principal amounts charged-off, less
recoveries, as a percentage of average managed credit card loans on an
annualized basis.

(5) Delinquencies represent credit card loans that were at least 30 days past
due at period end.

(6) Warrantable Product sales penetration rates reflect the percentage of
extended service plans sold to total Warrantable Products sold. Percentages
for all periods presented reflect the inclusion of jewelry and furniture
products as Warrantable Products even though extended service plans for such
products were not introduced until the middle of 1995.

8
<PAGE> 9

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following risk factors
before purchasing shares of Common Stock offered hereby.

DEPENDENCE ON FINGERHUT

As of June 30, 1996, approximately 52% of the Company's credit card
customers were Fingerhut Customers, accounting for approximately 57% of the
Company's managed loans, and Fingerhut Customers are currently the Company's
only customers for extended service plans. Moreover, until the Company further
develops its own database of information based upon its experience as an
independent, stand-alone entity, its success in the credit card business will
remain largely dependent upon its exclusive rights to use information in the
Fingerhut Database, particularly with respect to Fingerhut's credit experience
with its customers. Similarly, until the Company develops extended service plan
marketing relationships with other companies, its success in the extended
service plan business will remain largely dependent upon its right to provide
extended service plans to Fingerhut Customers and the level of Fingerhut's sales
of Warrantable Products. Metris has entered into agreements with Fingerhut
relating to (i) credit cards issued to Fingerhut Customers, (ii) use of
information in the Fingerhut Database and (iii) marketing of extended service
plans to Fingerhut Customers. See "Transactions Between FCI and the Company".
The loss of the ability to use information from the Fingerhut Database or to
market to Fingerhut Customers would have a significant adverse economic impact
on the Company's results of operations and future prospects. Significant adverse
changes which materially affect Fingerhut's ability to maintain its database or
to continue its catalog sales business would also have an adverse impact on the
Company.

FCI is a guarantor of the Company's bank revolving credit facility.
Breaches of covenants contained in the guaranty, including various financial
covenants of FCI, would be events of default under the facility. Upon the
occurrence of any such event the facility would be terminable at the option of
the lenders. Such events could have a material adverse impact on the Company's
financial condition and results of operations. To the extent that the FCI
guarantee contains certain financial covenants and the cost of maintaining
availability and borrowing under the revolving credit facility is based on FCI's
credit rating, the Company is dependent on the financial strength and
performance of FCI. FCI has been impacted by the industry-wide increase in paper
and postage rates which began in early 1995 and continued into 1996. The impact
of rate-based increases in paper and postage expenses was approximately $44
million in 1995. Primarily as a result of such increased expenses, FCI's debt
rating was recently downgraded by Standard & Poor's. FCI is currently rated
BBB/Baa2 by Standard & Poor's and Moody's Investors Service, respectively.

POTENTIAL ISSUANCE OF FINGERHUT PRIVATE LABEL CREDIT CARDS

FCI has applied with the Office of the Comptroller of the Currency (the
"OCC") and has received preliminary conditional approval to establish a limited
purpose credit card bank affiliate. Upon receipt of final approval from the OCC,
this bank affiliate will issue Fingerhut private label credit cards. Such cards
could be used only to purchase Fingerhut products and may compete with the
Company's credit cards with respect to such purchases. To the extent that a
Metris cardholder has a Fingerhut credit card or other private label credit
card, his or her use of or availability of credit under a Metris credit card may
be reduced.

The Company believes that FCI's plans to issue Fingerhut private label
credit cards will not have a material negative effect on the Company. Fingerhut
currently provides credit to its customers for their purchases of Fingerhut
products and services, and private label credit cards would be an extension of
the credit options Fingerhut currently provides. Any Fingerhut private label
credit cards could be used only to purchase Fingerhut products and services. For
the nine months ended September 30, 1996, purchases of Fingerhut products and
services using credit cards issued by the Company accounted for 0.15% (based on
total dollars of purchases) of the Company's total credit card activity.
Furthermore, the credit information derived by Fingerhut through the extension
of credit to its customers will be added to the Fingerhut Database and will
provide updated credit information and potential new customers to the Company.

9
<PAGE> 10

Fingerhut presently offers various types of credit-related insurance
products in connection with the credit it extends to its customers, and the bank
affiliate will in the future offer such products in connection with the private
label credit cards it issues. Metris does not, and cannot, offer these products
in connection with credit extended by Fingerhut or the bank affiliate because
such products can be offered only by an insurance company or the lender.
Therefore, FCI and Metris believe that these products do not compete with, and
have no material effect on, Metris.

LACK OF PRIOR OPERATING HISTORY AS A STAND-ALONE ENTITY

FCI's Financial Services Business, including Direct Merchants Bank, has
been newly consolidated within Metris Companies Inc. and therefore has never
before operated as a separate operating group. In addition, the Company's
management team has not operated the Company as a stand-alone entity. A number
of significant changes will occur in the funding and operations of the Company
in connection with the consummation of the Offering. These changes include the
establishment of the Company's bank revolving credit facility and its own
incentive compensation and stock option plans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity, Funding
and Capital Resources" and "Management -- Compensation Programs". These changes
may have a substantial impact on the financial position and future results of
operations of the Company. As a result, the historical financial information
included in this Prospectus does not necessarily reflect the financial position
and results of operations of the Company in the future or what the financial
position and results of operations of the Company would have been had it been
operated as a stand-alone entity during the periods presented. Because FCI has
guaranteed the Company's indebtedness, the Company's funding costs will not
increase in the short-term. FCI is contractually committed to guarantee the
Company's revolving credit facility for the term of that facility, but if FCI no
longer guaranteed the Company's indebtedness, the Company's funding costs would
increase and the Company's earnings on a stand-alone basis would be expected to
be lower, all other things being equal. See "Selected Historical Financial and
Operating Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations".

In connection with the Offering, Metris will enter into the Administrative
Services Agreement, under which subsidiaries of FCI will provide a variety of
administrative services to the Company on a transitional basis. See
"Transactions Between FCI and the Company -- Administrative Services Agreement".
Following the termination of the Administrative Services Agreement, the Company
will be required to provide or procure these services without the assistance
previously provided by FCI. The impact of these and other changes on the
Company's operations cannot be fully predicted.

RECENTLY COMMENCED CREDIT CARD OPERATIONS

The Company began originating and servicing credit card accounts in March
1995, and thus has limited underwriting and servicing experience, and very
limited delinquency, default and loss experience with respect to its credit card
accounts. Although the Company has experienced substantial growth in credit card
loans outstanding, revenues and net earnings, there can be no assurances that
these rates of growth will be sustainable or indicative of future results. In
addition, the Company's results of operations, financial condition and liquidity
depend, to a material extent, on its ability to manage its recently commenced
credit card business and on the performance of the credit card loans
outstanding.

LACK OF SEASONING OF CREDIT CARD PORTFOLIO

The average age of a credit card issuer's portfolio of accounts is an
indicator of the stability of delinquency and loss levels of that portfolio; a
portfolio of older accounts generally behaves more predictably than a newly
originated portfolio. Substantially all of the Company's credit card accounts
were originated within the last 18 months and over 50% were originated within
the last six months. As a result, there can be no assurance as to the levels of
delinquencies and losses, which may affect earnings through net charge-offs,
that can be expected over time with respect to the Company's portfolio. It is
likely that the levels of such delinquencies and losses will increase as the
average age of the Company's accounts increases, until the accounts become more
seasoned. Any material increases in delinquencies and losses above management's

10
<PAGE> 11

expectations would have a material adverse impact on the Company's results of
operations and financial condition.

ABILITY TO SUSTAIN AND MANAGE GROWTH

In order to meet its strategic objectives the Company must continue to
achieve growth in its credit card loan portfolio. Continued growth in the
Company's credit card loan portfolio depends on (i) the Company's ability to
attract new cardholders, (ii) growth in both existing and new account balances,
(iii) the degree to which the Company loses accounts and account balances to
competing card issuers, (iv) levels of delinquencies and losses, (v) the
availability of funding, including securitizations, on favorable terms, and (vi)
general economic and other factors beyond the control of the Company. The
Company's growth is also dependent on the level of the Company's marketing
expenditures used to solicit new customers and the number of responses the
Company receives with respect to solicitations for its consumer credit,
fee-based and other financial service products. Any increases in postal rates
could have a negative impact on the level and cost of direct mail marketing
activities. No assurance can be given as to the future growth in the Company's
loan portfolio or its profitability.

Further growth of the Company will require employment and training of new
personnel, expansion of facilities, expansion of management systems, and access
to additional capital. If the Company is unable to manage its growth
effectively, the Company's profitability and its ability to achieve its
strategic objectives may be adversely affected.

RISKS RELATED TO TARGET MARKET

The Company is targeting its consumer credit products to moderate income
consumers. Lenders historically have not solicited this market to the same
extent as more affluent market segment consumers. As a result, in addition to
higher delinquency and loss rates, there is less historical experience with
respect to the credit risk and performance of moderate income consumers. There
can be no assurance that the Company can successfully target and evaluate the
creditworthiness of moderate income consumers so as to minimize the expected
higher delinquencies and losses or that the Company's risk-based pricing system
can offset the negative impacts the expected higher delinquency and loss
experience for this market segment has on overall profitability.

Primary risks associated with unsecured lending, especially to the
Company's target market, which focuses on moderate income consumers, are that
(i) delinquencies and credit losses will increase because of future economic
downturns, (ii) an increasing number of customers will default on the payment of
their outstanding balances or seek protection under bankruptcy laws, resulting
in accounts being charged off as uncollectible, (iii) fraud by cardholders and
third parties will increase, and (iv) unfavorable changes in consumers'
attitudes toward financing purchases with debt or in cardholder payment
behavior, such as increases in discretionary repayment of account balances, will
result in diminished interest income. The American Bankers Association reported
that credit card delinquencies 30 days or more past due reached a record high
3.66% in second quarter 1996, up from 3.26% in second quarter 1995 (Washington
Post, Sept. 18, 1996 at F01). At September 30, 1996, the Company's managed
credit card loans 30 days or more delinquent were 5.15% of managed loans
compared to 3.95% at December 31, 1995, and 3.37% at June 30, 1996. A portion of
this increase is to be expected as the Company's portfolio continues to season.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset Quality". Additionally, general economic factors, such as
the rate of inflation, unemployment levels and interest rates may affect the
Company's target market customers more severely than other market segments.

INTEREST RATE RISK

The Company's credit card accounts generally have finance charges set at a
variable rate with a spread above a designated prime rate or other designated
index. Although the Company intends to manage its interest rate risk through
asset and liability management, as the interest rate environment fluctuates the
Company may be adversely affected by changes in its cost of funds as well as in
the relationship between the indices used in

11
<PAGE> 12

the Company's securitizations and other funding and the indices used to
determine the finance charges on account balances.

FUNDING AND SECURITIZATION CONSIDERATIONS

The Company depends heavily upon the securitization of its credit card
loans to fund its operations and to date has been able to complete
securitization transactions on terms that it believes are favorable. There can
be no assurance, however, that the securitization market will continue to offer
attractive funding alternatives. In addition, the Company's ability to
securitize its assets depends on the continued availability of credit
enhancement on acceptable terms and the continued favorable legal, regulatory,
accounting and tax environment for securitization transactions. While the
Company does not at present foresee any significant problems in any of these
areas, any such adverse change could force the Company to rely on other
potentially more expensive funding sources.

Adverse changes in the performance of the Company's securitized assets,
including increased delinquencies and losses, could result in a downgrade or
withdrawal of the ratings on the outstanding certificates under the Company's
securitization transactions or cause early amortization of such certificates.
This could jeopardize the Company's ability to effect other securitization
transactions on acceptable terms, thereby decreasing the Company's liquidity and
forcing the Company to rely on other funding sources to the extent available.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Funding and Capital Resources" and "Business --
Securitization".

Metris is also dependent on its bank revolving credit facility, which is
guaranteed by FCI. In the event that FCI no longer owns 51% or more of the
Company or FCI breaches its covenants, including various financial covenants
contained in its guarantee, the facility may be terminated by the lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Funding and Capital Resources".

REGULATION

The activities of Metris are, and following the consummation of the
Offering will continue to be, subject to extensive regulation under both Federal
and state laws and regulations. Such laws and regulations significantly limit
the activities in which the Company and Direct Merchants Bank will be permitted
to engage. Numerous legislative and regulatory proposals are advanced each year
which, if adopted, could adversely affect the Company's profitability or limit
the manner in which the Company conducts its activities. Moreover, the Company's
interactions with FCI pursuant to certain intercompany agreements described
herein under "Transactions Between FCI and the Company" are constrained under
those agreements by the requirements of the Fair Credit Reporting Act ("FCRA").
Failure to comply with such requirements could result in termination of such
agreements and/or the Company and/or Fingerhut becoming a consumer reporting
agency under the FCRA. The FCRA imposes a number of complex and burdensome
regulatory requirements and restrictions on a consumer reporting agency,
including restrictions on the circumstances under which a consumer reporting
agency may furnish information to others. Accordingly, if Fingerhut were to
become a consumer reporting agency, the FCRA would restrict the Company's access
to the Fingerhut Database. Similarly, if the Company were to become a consumer
reporting agency its ability to furnish information to third parties would be
restricted by the FCRA. Such restrictions on the Company's ability to access the
Fingerhut Database and/or on the Company's ability to furnish information to
third parties could have a significant adverse economic impact on the Company's
results of operations and future prospects. See "Dependence on Fingerhut" and
"Business -- Regulation -- Fair Credit Reporting Act".

Direct Merchants Bank is also subject to regulation by the Federal Reserve
Board, the Federal Deposit Insurance Corporation (the "FDIC") and the OCC. Such
regulations include limitations on the nature of the businesses Direct Merchants
Bank may conduct. See "Business -- Regulation".

12
<PAGE> 13

CONSUMER AND DEBTOR PROTECTION LAWS

Metris is subject to numerous Federal and state consumer protection laws
that impose requirements related to offering and extending credit. The United
States Congress and the states may enact laws and amendments to existing laws to
regulate further the credit card industry or to reduce finance charges or other
fees or charges applicable to credit card and other consumer revolving loan
accounts. Such laws, as well as any new laws or rulings which may be adopted,
may adversely affect the Company's ability to collect on account balances or
maintain previous levels of periodic rate finance charges and other fees and
charges with respect to the accounts. Any failure by the Company to comply with
such legal requirements also could adversely affect its ability to collect the
full amount of the account balances.

Changes in Federal and state bankruptcy and debtor relief laws could
adversely affect the Company if such changes result in, among other things,
additional administrative expenses and accounts being written off as
uncollectible.

COMPETITION

As a marketer of consumer credit products, Metris faces increasing
competition from numerous providers of financial services, many of which have
greater resources than the Company. In particular, the Company's credit card
business competes with national, regional and local bank card issuers as well as
other general purpose credit card issuers, such as American Express, Discover
Card and Diners Club. Over 6,000 issuers are affiliated with MasterCard alone.
The 20 largest issuers accounted for nearly 65% (based on receivables
outstanding) of the market for general purpose credit cards in June 1996; many
of these issuers are substantially larger and have more seasoned credit card
portfolios than the Company and often compete for customers by offering lower
interest rates and/or fee levels. In general, customers are attracted to credit
card issuers largely on the basis of price, credit limit and other product
features and customer loyalty is often limited. At March 31, 1996, the Company
was the 52nd largest credit card issuer in the United States, based on managed
credit card loan balances.

As the Company attempts to expand its extended service plan business to the
customers of third-party retailers, it will compete with manufacturers,
financial institutions, insurance companies and a number of independent
administrators, many of which have greater operating experience and financial
resources than the Company.

CONTROL BY FCI

Metris Companies Inc. is currently an indirect wholly owned subsidiary of
FCI. After completion of the Offering, FCI will own approximately 84.9% (83.0%
if the Underwriters' over-allotment option is exercised in full) of the
outstanding shares of Common Stock. After the Offering, through its ability to
elect all the directors of the Company, FCI will control all matters affecting
the Company, including the adoption of amendments to the Company's Certificate
of Incorporation, any determination with respect to the acquisition or
disposition of Company assets, future issuances of Common Stock or other
securities of the Company, the Company's incurrence of debt, and any dividend
payable on the Common Stock.

Although FCI has advised the Company it has no immediate plans to dispose
of the Common Stock held by it after the Offering, FCI has not made any decision
regarding its future plans for its ownership interest in the Company. There can
be no assurance that FCI will maintain its ownership interest in the Company or
as to the manner or timing of any disposition of Common Stock by FCI. The
Company's bank revolving credit agreement requires that FCI hold at least 51% of
the common stock of the Company.

13
<PAGE> 14

POTENTIAL CONFLICTS OF INTEREST; RELATIONSHIP WITH FCI

Corporate Opportunities

The relationship between the respective businesses of Metris and FCI may
give rise to certain conflicts of interest regarding corporate opportunities.
Because both the Company and FCI sell to the same client base, use direct mail
and provide credit, business opportunities may arise that either could pursue.
While Fingerhut will be prohibited under the Co-Brand Credit Card Agreement from
directly or indirectly issuing a competing, general purpose credit card, it
currently provides closed-end, fixed payment installment contracts to its
customers and expects to also provide closed-end or revolving credit private
label credit cards issued by a bank affiliate to its customers in the future for
use in purchasing Fingerhut products and services. As a result, and as is the
case now, FCI and Metris expect that Fingerhut Customers who are also Metris
cardholders will generally continue to use Fingerhut credit for Fingerhut
purchases and use their Metris credit cards for other purposes. In addition,
Fingerhut presently offers various types of credit-related insurance products in
connection with the credit it extends to its customers, and the bank affiliate
will in the future offer such products in connection with the private label
credit cards it issues. Metris does not, and cannot, offer these products in
connection with credit extended by Fingerhut or the bank affiliate because such
products can be offered only by an insurance company or the lender. Therefore,
FCI and Metris believe that these products do not compete with, and have no
material effect on, Metris.

To address the potential for conflicts between the Company and FCI, the
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation" or "Certificate") contains detailed provisions concerning the
business activities in which the Company is permitted to engage until the day
after the third shareholder meeting held after FCI owns less than 50% of the
Company's voting stock.

The relevant provisions are intended to permit Metris to continue all
activities in which it currently engages, and to expand into certain related
financial service products. The pertinent provisions of the Certificate of
Incorporation are set forth under "Description of Capital Stock -- Certain
Provisions of the Company's Certificate of Incorporation and By-laws" and "--
Limitations on the Company's Business Activities". These provisions generally
permit the Company to continue providing consumer credit products, extended
service plans, and fee-based products, and a variety of other financial service
products and services, provided that the Company shall not offer any closed-end
installment or revolving credit loans to Fingerhut Customers for the exclusive
purchase of Fingerhut merchandise. The Company may engage in any other business
with the consent of FCI or authorized by a majority vote of the shareholders.
Because these limitations may restrict the Company's ability to offer new
products or services, they may limit the Company's ability to compete.

The Company's Certificate of Incorporation provides that no opportunity,
transaction, agreement or other arrangement to which FCI, or an entity in which
FCI has an interest, is a party, shall be a corporate opportunity of the Company
unless such opportunity, transaction, agreement or other arrangement shall have
been initially offered to the Company before it is offered to FCI or such other
entity, and either (i) the Company has an enforceable contractual interest in
such opportunity, transaction, agreement or other arrangement or (ii) the
subject matter of such opportunity, transaction, agreement or other arrangement
is a constituent element of an activity in which the Company is then actively
engaged. Even if the foregoing conditions were met, such fact alone would not
conclusively render such opportunity the property of the Company. The
intercompany agreements limit FCI's ability to engage in the Financial Services
Business during the terms of such agreements, except through its ownership of
Common Stock of the Company.

The foregoing provisions of the Certificate of Incorporation of the Company
were determined by FCI after consultation with management of the Company but
were not the result of arm's-length negotiations.

Other Potential Conflicts of Interest

Conflicts of interest may arise in the future between Metris and FCI in a
number of areas relating to their past and ongoing relationships, including
potential acquisitions of businesses or properties, the election of new or
additional directors, dividends, incurrence of indebtedness, tax matters,
financial commitments, registration rights, administration of benefit plans,
service arrangements, issuances and sales of capital stock of the

14
<PAGE> 15

Company and public policy matters. In addition, there are overlapping directors
and executive officers between the Company and FCI. The Company's Chairman of
the Board, Theodore Deikel, is also the Chairman of the Board, Chief Executive
Officer and President of FCI. Michael P. Sherman is a director of the Company
and is also Senior Vice President and General Counsel of FCI, and Dudley C.
Mecum is a director of the Company and is also a director of FCI. In addition,
Peter G. Michielutti is Senior Vice President of Business Development of the
Company and Senior Vice President and Chief Financial Officer of FCI, and Robert
W. Oberrender is Chief Financial Officer of the Company and Vice President and
Treasurer of FCI. See "Management -- Directors and Executive Officers". The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and FCI. However, the
directors intend to exercise reasonable judgment and take such steps as they
deem necessary under all of the circumstances in resolving any specific conflict
of interest that may occur and will determine what, if any, specific measures
may be necessary or appropriate. There can be no assurance that any conflicts
will be resolved in favor of the Company.

Metris and Fingerhut have entered into a number of agreements for the
purpose of defining the ongoing relationship between them. Pursuant to these
arrangements, Fingerhut will provide benefits to the Company that it might not
provide to a third party, and there is no assurance that the terms and
conditions of any future arrangements between Fingerhut and the Company will be
as favorable to the Company as in effect now. In addition, notwithstanding the
Tax Sharing Agreement (defined herein), under ERISA and Federal income tax law
each member of a consolidated group (for Federal income tax and ERISA purposes)
is also jointly and severally liable for the Federal income tax liability,
funding and termination liabilities, certain benefit plan taxes and certain
other liabilities of each other member of the consolidated group. Similar rules
may apply under state income tax laws. See "Transactions Between FCI and the
Company" and "Principal Stockholder".

DEPENDENCE ON KEY PERSONNEL

The Company's management and operations are dependent upon the skills and
experience of a small number of senior management and operating personnel,
including Ron Zebeck, Chief Executive Officer; Peter Michielutti, Senior Vice
President, Business Development; Douglas McCoy, Vice President, Operations;
Robert Oberrender, Chief Financial Officer; Douglas Scaliti, Vice President,
Marketing; and David Reak, Vice President, Credit Risk. The Company does not
have employment agreements with its executive officers and does not maintain
key-man life insurance on any executive officer. The loss of the services of
members of senior management could have an adverse impact on the Company. See
"Management -- Directors and Executive Officers".

EXTENDED SERVICE PLAN UNDERWRITING

Historically, Metris has contracted with a third party to perform services
related to most of its extended service plans and to underwrite the risks
related to performance under those extended service plans for a fee. The Company
has terminated this agreement effective as of December 31, 1996, and intends to
administer the extended service plans internally after such date. The Company
will retain the risks associated with performance under the extended service
plans entered into after such date, but will not assume any risks already
transferred to the third party. There can be no assurance that the Company will
not experience higher than anticipated costs in connection with the internal
administration and underwriting of these plans.

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation and By-laws contain restrictions
that may discourage other persons from attempting to acquire control of the
Company, including, without limitation, a Board of Directors that has staggered
terms for its members, certain notice and supermajority voting provisions, and
certain "fair price" provisions. These provisions do not become effective until
FCI and its affiliates collectively own outstanding Common Stock representing
less than 51% of all the outstanding Common Stock. The Board of Directors has
the authorization to issue preferred stock in one or more series without the
specific approval of the holders of the Common Stock. Also, only a majority of
the Board of Directors may call a special meeting

15
<PAGE> 16

of stockholders. If the ownership of the Common Stock ceases to be concentrated
in a single holder, in certain circumstances, these devices may render more
difficult or tend to discourage a change of control of the Company or the
removal of incumbent management, which could reduce the market value of the
Common Stock. For a description of the provisions in the Company's Certificate
of Incorporation and By-laws, see "Description of Capital Stock".

LACK OF A PUBLIC MARKET FOR THE COMMON STOCK

There has been no public market for the Common Stock prior to the Offering
and there can be no assurance that a public market will develop or, if
developed, will be sustained following the Offering. The Common Stock has been
approved for listing on the Nasdaq National Market, subject to official notice
of issuance, under the symbol "MTRS". The price of the Common Stock offered
hereby has been determined through negotiation between the Company and the
Underwriters and may not necessarily reflect the market price of the Common
Stock after the Offering or the book value of the assets of the Company. See
"Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares of Common Stock for future
sale, will have on the market price for the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for shares of
the Common Stock. The shares of Common Stock beneficially owned by FCI will be
eligible for sale in the public market subject to (i) the timing, volume and
other limitations of Rule 144 promulgated under the Securities Act or
registration under the Securities Act in accordance with the Registration Rights
Agreement, (ii) covenants in FCI's and the Company's bank credit facilities that
will require FCI to maintain ownership of a majority of the Company's Common
Stock and (iii) a "lock-up" agreement between the Underwriters and FCI. Such
lock-up agreement provides that, without the prior written consent of Smith
Barney Inc., FCI will not sell, offer to sell, solicit an offer to buy, contract
to sell, grant an option to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or exchangeable for
shares of Common Stock for a period of 180 days after the date of this
Prospectus. See "Shares Eligible for Future Sale." FCI also has certain
registration rights with respect to the shares of Common Stock owned by it which
would facilitate any future dispositions. See "Transactions Between FCI and the
Company".

DILUTION

The Company's pro forma net tangible book value per share of Common Stock
as of June 30, 1996, after giving effect to the Offering (assuming that the
Underwriters do not exercise their over-allotment option), was $6.41.
Accordingly, purchasers of the Common Stock offered hereby will suffer immediate
dilution in net tangible book value per share of $9.59. See "Dilution".

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<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the Offering (after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company) are estimated to be $41.4 million (approximately $47.7 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use the net proceeds to reduce short-term indebtedness of the Company
incurred under its new bank revolving credit facility. If the Underwriters'
over-allotment option is exercised in full, the Company may reduce its
indebtedness further or retain all or a substantial part of the net proceeds for
general corporate purposes. Following the Offering, the Company will have the
capacity to reborrow under its bank revolving credit facility for general
corporate purposes, including to fund the continued growth of its businesses.
The indebtedness under the bank facility being repaid with the proceeds of the
Offering was incurred to refinance indebtedness to FCI which was originally
incurred for general corporate purposes. The bank revolving credit facility
bears interest at variable rates and will terminate in September 2001. See Note
6 to the Company's financial statements for a description of the applicable
borrowing rates. The indebtedness to FCI had a variable interest rate, which was
6.0% at June 30, 1996, and was payable on demand.

DIVIDEND POLICY

After the Offering, Metris intends to pay regular quarterly cash dividends.
The amount of such dividends is expected to be relatively nominal and the
Company expects to retain substantially all of its net earnings to fund future
growth. The declaration and payment of dividends will be subject to the
discretion of the Board of Directors. The determination of the amount of future
cash dividends, if any, to be declared and paid by the Company will depend upon,
among other things, the Company's financial condition, funds from operations,
future business prospects, and other factors deemed relevant by the Board of
Directors. Accordingly, there can be no assurance that any dividends will be
paid. Furthermore, provisions that may be contained in the Company's borrowing
agreements and banking regulations applicable to Direct Merchants Bank may
restrict the ability of the Company's subsidiaries to pay dividends to the
Company or the ability of the Company to pay dividends to its stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Funding and Capital Resources" and "Description of
Capital Stock".

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<PAGE> 18

DILUTION

As of June 30, 1996, the Company's net tangible book value was $79.2
million. FCI will have 15,966,667 shares of Common Stock. Accordingly, after the
Contribution but prior to the Offering, net tangible book value per share would
be $4.96. After giving effect to the Offering, less underwriting discounts and
commissions and estimated expenses of $0.8 million payable by the Company in
connection with the Offering, the net tangible book value of the Company at June
30, 1996, would have been $120.5 million, or $6.41 per share of Common Stock.
This represents an immediate increase in net tangible book value of $1.45 per
share to existing stockholders. There will be an immediate dilution of $9.59 per
share to purchasers of the shares of Common Stock in the Offering ("New
Investors"). Dilution is determined by subtracting adjusted net tangible book
value per share after the Offering from the amount of cash paid by a New
Investor for one common share. The following table illustrates the per share
dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $16.00
------
Net tangible book value per share before the Offering(1)..................... $4.96
-----
Increase in net tangible book value per share attributable to the Offering... 1.45
-----
Net tangible book value per share after the Offering......................... 6.41
------
Dilution per share to New Investors.......................................... $ 9.59
======
</TABLE>

- -------------------------
(1) Net tangible book value per share as of a specific date represents net
tangible assets (total tangible assets less total liabilities) divided by
the number of shares of Common Stock assumed to be then outstanding, without
giving effect to unexercised options.

The following table summarizes as of June 30, 1996, the differences between
the existing stockholders and the New Investors with respect to the number of
shares of Common Stock purchased, the total consideration paid and the average
price paid per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
---------- ------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............. 15,966,667 84.9% $ 80,212,000 63.9% $ 5.02
New Investors........................ 2,833,333 15.1% 45,333,328 36.1% $16.00
---------- ----- ------------ -----
Total................................ 18,800,000 100.0% $125,545,328 100.0%
========== ===== ============ =====
</TABLE>

- -------------------------
(1) Excludes 1,362,072 shares of Common Stock issuable upon exercise of
outstanding stock options granted or expected to be granted by the Company.
The Company has reserved a total of 1,976,125 shares of Common Stock for
issuance in connection with options issuable under the Company's stock
option plans. See "Management -- Compensation Programs".

18
<PAGE> 19

CAPITALIZATION

The following table sets forth the debt and capitalization of Metris as of
June 30, 1996, as adjusted to give effect to the borrowing in September 1996
under the Company's new bank revolving credit facility to repay borrowings from
FCI in full, and the Offering and the application of the net proceeds therefrom
(assuming the over-allotment options are not exercised) to repay a portion of
outstanding indebtedness under the Company's bank revolving credit facility. The
information set forth in the table below should be read in conjunction with the
financial statements including the notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Short-term borrowings from FCI(1).................................... $ 54,318 $ --
Revolving credit facility(1)......................................... -- 12,958
Other................................................................ 1,000 1,000
-------- ---------
Total debt........................................................... 55,318 13,958
Division equity:
Contributed capital.................................................. 60,028 --
Retained earnings.................................................... 20,184 --
-------- ---------
Total division equity............................................. 80,212 --
Stockholders' equity:
Preferred stock, par value $.01 per share, 10,000,000 shares
authorized, no shares issued and outstanding...................... -- --
Common stock, par value $.01 per share, 100,000,000 shares
authorized, 18,800,000 shares issued and outstanding as
adjusted(2)....................................................... -- 188
Additional paid-in capital........................................... -- 101,200
Retained earnings.................................................... -- 20,184
-------- ---------
Total stockholders' equity........................................... -- 121,572
-------- ---------
Total capitalization................................................... $135,530 $ 135,530
======== =========
</TABLE>

- -------------------------
(1) As of September 27, 1996, the Company had repaid borrowings from FCI in full
from borrowings under its bank revolving credit facility.

19
<PAGE> 20

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following selected historical financial and operating data reflects the
assets, liabilities, equity, and revenues and expenses of FCI's businesses
engaged in offering certain consumer credit products, extended service plans,
and other fee-based products and services to moderate income consumers.

The Income Statement Data, Balance Sheet Data, Net Extended Service Plan
Revenues and Fee-Based Product Revenues presented below as of December 31, 1995
and 1994 and for each of the years in the three-year period ended December 31,
1995, have been derived from the audited financial statements and the notes
thereto appearing elsewhere in this Prospectus. All other summary financial and
operating data are unaudited but reflect, in the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of such data. The results for the six months ended June 30, 1996,
are also not necessarily indicative of the results to be expected for the entire
year.

The securitization and sale of credit card loans changes the Company's
interest in such loans from that of a lender to that of a servicer. Accordingly,
there is a change in how revenue is reported in the income statement. For
securitized and sold credit card loans, amounts that otherwise would have been
recorded as interest income, interest expense, fee income and provision for loan
losses are instead recorded as net securitization and credit card servicing
income, and the Company's allowance for loan losses also does not include
amounts for securitized loans. However, the information on the following table
under "Credit Card Data" includes both securitized loans and the Company's
on-balance sheet loans.

20
<PAGE> 21

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- -------- -------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income.................. $ 12,619 $ 1,460 $ 7,616 $ 487 $ 279 $ 149 $ 71
Interest expense................. 1,858 280 1,217 -- -- -- --
---------- -------- -------- ------- ------- ------ ------
Net interest income.............. 10,761 1,180 6,399 487 279 149 71
Provision for loan losses........ 5,173 534 4,393 -- -- -- --
Other operating income........... 53,296 16,094 51,083 14,238 10,053 7,630 5,737
Other operating expense.......... 44,422 16,602 45,640 11,222 8,333 4,658 3,844
---------- -------- -------- ------- ------- ------ ------
Income before income taxes....... 14,462 138 7,449 3,503 1,999 3,121 1,964
Income taxes..................... 5,568 53 2,868 1,305 737 1,126 710
---------- -------- -------- ------- ------- ------ ------
Net income....................... $ 8,894 $ 85 $ 4,581 $ 2,198 $ 1,262 $1,995 $1,254
========== ======== ======== ======= ======= ====== ======
ADJUSTED PRO-FORMA INCOME STATEMENT
DATA:(1)
Adjusted pro-forma net income per
share.......................... $ 0.51 $ 0.34
========== ========
BALANCE SHEET DATA:
Credit card/other loans(2)....... $ 131,963 $ 44,514 $ 95,064 $ 9,375 $ 6,160 $4,804 $1,601
Allowance for loan losses........ 5,303 534 3,679 -- -- -- --
Total assets..................... 185,784 78,036 174,428 9,856 6,615 5,061 1,636
Short-term borrowings............ 54,318 28,205 63,482 -- -- -- --
Division equity.................. 80,212 26,822 71,318 6,737 4,539 3,277 1,282
CREDIT CARD DATA:
Average managed loans............ $ 741,177 $ 42,576 $183,274 $ -- $ -- $ -- $ --
Period-end managed loans......... 1,068,018 190,069 543,619 -- -- -- --
Period-end total accounts........ 1,122,673 319,511 702,891 -- -- -- --
Managed net interest margin(3)... 13.85% 13.35% 13.65% 7.36% 6.16% 5.97% 7.07%
Managed net charge-off
ratio(4)....................... 5.53% -- 2.19% -- -- -- --
Managed delinquency ratio(5)..... 3.37% 0.17% 3.95% -- -- -- --
Period-end managed allowance for
loan losses.................... 4.15% 1.49% 4.09% -- -- -- --
EXTENDED SERVICE PLAN DATA:
Net extended service plan
revenues....................... $ 8,615 $ 6,687 $ 17,779 $12,244 $ 7,935 $5,906 $3,864
Warrantable product sales
penetration rate(6)............ 23.8% 21.0% 20.4% 15.3% 12.9% 13.3% N/A
FEE-BASED PRODUCTS AND SERVICES
DATA:
Fee-based product revenues....... $ 12,067 $ 1,549 $ 6,662 $ 1,994 $ 2,118 $1,726 $1,873
</TABLE>

- -------------------------

(1) Pro-Forma per share information is based on 18,800,000 shares assumed to be
outstanding upon consummation of the Offering. Amounts also give effect to
the adjustment to net income of $771 and $1,779 from the application of the
estimated net proceeds from the Offering to repay a portion of short-term
borrowings from FCI as if the Offering had occurred at the beginning of the
respective periods shown using average interest rates of 6.06% and 6.99% for
the six months ended June 30, 1996, and the year ended December 31, 1995,
respectively, and an effective tax rate of 38.5% for both periods. See "Use
of Proceeds".

(2) Credit card/other loans for the year ended December 31, 1994, and for each
of the years presented prior thereto consist exclusively of loans made to
FCI. For the year ended December 31, 1995, and thereafter, credit card/other
loans are exclusively credit card loans as the Company was in a net
borrowing position with FCI.

(4) Net charge-offs reflect actual principal amounts charged-off, less
recoveries, as a percentage of average managed credit card loans on an
annualized basis.

(5) Delinquencies represent credit card loans that were at least 30 days past
due at period end.

21
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that management
believes to be relevant to understanding the financial condition and results of
operations of Metris Companies Inc. This discussion should be read in
conjunction with the financial statements and the related notes thereto included
elsewhere in this Prospectus. See Note 1 to the financial statements for further
discussion of the Company and the basis of presentation of the Company's assets,
liabilities and equity and revenues and expenses in the financial statements.

The Contribution will be completed prior to the Offering. Prior to such
time, the operations of the Company have been conducted by FCI. Accordingly, FCI
and its subsidiaries have provided significant financial and operational support
to the businesses of the Company. This support has been reflected in the
financial statements based on direct and indirect allocations of expenses, which
in the opinion of management are reasonable. Additionally, the Company's
financial statements reflect the retroactive effects of intercompany agreements
between the Company and FCI. Therefore, the historical financial statements of
the Company may not be indicative of the Company's future performance nor do
they necessarily reflect what the financial position and results of operations
of the Company would have been had the Company operated as a separate,
stand-alone entity during the periods covered.

GENERAL

Metris is an information-based direct marketer and provider of consumer
credit products, extended service plans (warranties) and other fee-based
products and services to moderate income consumers.

Consumer Credit Products

The Company's consumer credit products currently are unsecured and secured
credit cards, including the Fingerhut co-branded MasterCard and the Direct
Merchants Bank MasterCard. The primary factors affecting the profitability of
consumer credit products are credit card account and loan growth, interest
spreads on loans, credit card usage, credit quality (delinquencies and
charge-offs), the level of solicitation and marketing expenses, fraud losses,
servicing and other administrative costs. The Company generates interest and
other income through finance charges assessed on outstanding credit card loans,
credit card fees (including annual membership, cash advance, over limit,
past-due, and other credit card fee income) and interchange income. The
Company's primary related expenses are the costs of funding its loans,
provisions for loan losses, and operating expenses (including employee
compensation, account solicitation and marketing expenses), and data processing
and servicing expenses.

The Company reviews and analyzes its financial performance on a "managed
loan" portfolio basis as if the loans sold and securitized were still on the
Company's balance sheet. The following table illustrates the changes in the
Company's managed loan portfolio, changes in the number of credit card accounts
and the percentages of credit card loans to Fingerhut Customers and External
Prospects.

<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION FOR THE QUARTERS ENDED
-----------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1996 1996 1995 1995 1995
---------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total managed loans...................... $1,068,018 $676,974 $543,619 $ 298,920 $190,069
Total accounts........................... 1,122,673 768,938 702,891 344,414 319,511
As a percent of total managed loans:
Loans to Fingerhut Customers........... 56.8% 65.9% 66.5% 63.0% 66.2%
Loans to External Prospects............ 43.2% 34.1% 33.5% 37.0% 33.8%
</TABLE>

Significant marketing and credit card account acquisition expenses (e.g.,
printing, credit bureau and list processing costs, and postage) have been and
will continue to be incurred as the Company implements its strategies for
growth. See "-- Other Operating Expense". These marketing and other account
acquisition

22
<PAGE> 23

costs are expensed within the twelve-month period following the origination of a
credit card account, with the majority expensed during the solicitation period,
while the resulting revenues and net profits from these accounts are recognized
over the life of the acquired accounts. However, as the average age of the
accounts increases (generally referred to as "seasoning"), it is likely the
level of net charge-offs will increase. Account profitability is directly tied
to the response rates to the solicitations, net charge-off or loss rates, card
usage, attrition rates, credit quality, product pricing, effectiveness of
account management programs, and operating costs.

Extended Service Plans

The Company also provides extended service plans that extend warranty
service coverage beyond the manufacturer's warranty on selected products sold by
Fingerhut. Extended service plan profitability is directly impacted by the
response rates to product solicitation efforts, returns or cancel rates for the
underlying product, the retail sales price of the product on which an extended
service plan is sold, the cost of underwriting and claims servicing, and other
operating costs. Net extended service plan revenues for the six months ended
June 30, 1996, and 1995, and for the years ended December 31, 1995, 1994, and
1993, were $8.6 million and $6.7 million, and $17.8 million, $12.2 million and
$7.9 million, respectively. Third party extended service plan underwriting and
claims servicing expenses for the same periods amounted to $2.5 million and $2.2
million, and $5.9 million, $4.1 million and $3.0 million, respectively.
Historically the Company's net extended service plan revenues have represented a
material portion of the Company's other operating income. However, net extended
service plan revenues have recently declined as a percentage of other operating
income due to the growth in credit card accounts.

Fee-Based Products and Services

The Company markets its fee-based products and services, including third
party insurance, membership clubs, card registration and debt waiver programs,
to its credit card customers and to Fingerhut Customers. Profitability for
fee-based products and services is affected by the response rates to product
solicitation efforts, the targeted solicitation plans and the commission rates
received from the Company's product partners, claims rates and claims servicing
costs for certain programs, and other operating expenses. The largest revenue
producing fee-based products and services presently are the debt waiver
products. Revenues from debt waiver products for the six months ended June 30,
1996, and 1995, and for the years ended December 31, 1995, 1994, and 1993, were
$9.5 million and $0.6 million, and $4.8 million, $0 and $0, respectively. Debt
waiver products underwriting and claims servicing expenses for the same periods
amounted to $1.5 million and $0.2 million, and $0.7 million, $0 and $0,
respectively. Debt waiver products and other fee-based products and services
income is expected to increase in the future as the Company continues to
increase its credit card customer base and as the Company continues to offer and
introduce other fee-based products and services.

RECENT DEVELOPMENTS

RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995

Net income for the three months ended September 30, 1996, was $5.8 million,
an increase of $1.8 million over net income of $4.0 million for the same period
in 1995. The 45% increase in net income is the result of an increase in net
interest income and other operating income partially offset by increases in the
provision for loan losses and other operating expenses. These increases are
largely attributable to the growth in average managed loans from $248 million to
$1.2 billion at September 30, 1996, an increase of 378%.

The provision for loan losses on an owned basis increased to $5.4 million
for the quarter ended September 30, 1996, from $1.1 million for the same period
in 1995. This increase reflects an increase in on-balance sheet loans as well as
an increase in the net charge-off ratio which was expected due to industry
trends and the continued seasoning of the portfolio. See "-- Asset Quality". The
net charge-off ratio on an owned basis stood at an annualized rate of 5.70% for
the quarter ended September 30, 1996, up from 1.39% for the same period in 1995,
and up from the annualized rate of 5.61% for the quarter ended June 30, 1996.

23
<PAGE> 24

Other operating income increased $17.1 million to $32.0 million, primarily
due to the growth in average securitized credit card loans and a $6.3 million or
359% increase in fee-based product revenues driven primarily by a $5.9 million
increase in debt waiver product income to $7.5 million. Other operating expense
increased to $24.0 million for the quarter ended September 30, 1996, from $9.2
million for the same period in 1995. This increase primarily reflects the
increase in the cost of operations associated with the growth in the Company's
businesses.

Managed loans at September 30, 1996, were $1.3 billion, an increase of 135%
from December 31, 1995, and 20% from June 30, 1996. This increase reflects
growth in the average balance per account as well as an increase in the total
number of accounts from approximately 703,000 at December 31, 1995, to 1.1
million at September 30, 1996.

At September 30, 1996, managed credit card loans thirty days or more
delinquent stood at $65.8 million or 5.15% of managed loans. This compares to
3.95% at December 31, 1995, and 3.37% at June 30, 1996. This increase reflects
industry trends and the continued seasoning of the portfolio and in response
thereto, the Company has increased its allowance for loan losses. See "-- Asset
Quality". The managed net charge-off ratio stood at an annualized rate of 5.71%
for the quarter ended September 30, 1996, up from 1.42% for the same period in
1995, and up from an annualized rate of 5.36% for the quarter ended June 30,
1996. The managed allowance for loan losses at September 30, 1996, was $70.6
million or 5.53% of managed loans compared to $22.2 million or 4.09% at December
31, 1995, and $44.3 million or 4.15% at June 30, 1996.

NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995

Net income for the nine months ended September 30, 1996, was $14.7 million
compared to $4.1 million for the comparable period in the prior year. The 259%
increase in net income is the result of a significant increase in net interest
income, and other operating income, primarily driven by a $14.8 million increase
in debt waiver product income and a $1.3 million increase in card registration
income, partially offset by increases in the provision for loan losses and other
operating expenses. These increases are largely attributable to the growth in
average managed loans from $112 million to $890 million, an increase of 695%.

24
<PAGE> 25

SUMMARY FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- -------- ---------- --------
(UNAUDITED -- DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................................ $ 7,728 $ 2,508 $ 20,347 $ 3,968
Interest expense............................... 965 551 2,823 830
---------- -------- ---------- --------
Net interest income............................ 6,763 1,957 17,524 3,138
Provision for loan losses...................... 5,383 1,110 10,556 1,644
---------- -------- ---------- --------
Net interest income after provision for loan
losses...................................... 1,380 847 6,968 1,494
Other operating income......................... 32,030 14,916 85,326 31,011
Other operating expense........................ 23,976 9,183 68,398 25,786
---------- -------- ---------- --------
Income before income taxes..................... $ 9,434 $ 6,580 $ 23,896 $ 6,719
Income taxes................................... 3,632 2,533 9,200 2,587
---------- -------- ---------- --------
Net income..................................... $ 5,802 $ 4,047 $ 14,696 $ 4,132
========== ======== ========== ========
CREDIT CARD DATA:
Average managed loans.......................... $1,184,612 $248,608 $ 890,067 $112,008
Period-end managed loans....................... 1,276,687 298,920 1,276,687 298,920
Managed allowance for loan losses.............. 70,635 10,149 70,635 10,149
Managed net charge-off ratio(1)................ 5.71% 1.42% 5.61% 1.06%
Managed delinquency ratio(2)................... 5.15% 3.50% 5.15% 3.50%
Period-end managed allowance for loan losses
ratio....................................... 5.53% 3.40% 5.53% 3.40%
EXTENDED SERVICE PLAN DATA:
Net extended service plan revenues............. $ 5,174 $ 4,603 $ 13,789 $ 11,290
Warrantable product sales penetration
rates(3).................................... NA NA 24.32% 19.65%
FEE-BASED PRODUCTS AND SERVICES DATA:
Fee-based product revenues..................... $ 8,482 $ 2,212 $ 20,549 $ 3,761
</TABLE>

- -------------------------
(1) Net charge-offs reflect actual principal amounts charged-off, less
recoveries, as a percentage of average managed credit card loans on an
annualized basis.

(2) Delinquencies represent credit card loans that were at least 30 days past
due at period-end.

(3) Warrantable product sales penetration rates reflect the percentage of
extended service plans sold to total warrantable products sold. Penetration
rates are not available for the quarters ended September 30.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

Net income for the six months ended June 30, 1996, was $8.9 million, an
increase of $8.8 million over the net income of $0.1 million for the same period
in 1995. The increase in net income is largely attributable to the growth in
average managed loans from $42.6 million to $741.2 million.

Other factors affecting net income were an increase in the average
annualized yield on interest earning assets during the past six months from
11.8% for the six months ended June 30, 1995, to 17.6% for the six months ended
June 30, 1996, due to a growing percentage of credit card accounts that carried
a balance from month-to-month and as a result were assessed a finance charge
("revolved"), an increase in the provision for loan losses of $4.6 million, as
on-balance sheet credit card loans increased by $87.4 million, and an increase
in net charge-offs as the average age of the accounts increased. The Company
expects the provision for loan losses to continue to increase as more accounts
are added and the portfolio continues to season.

25
<PAGE> 26

Other operating income increased $37.2 million to $53.3 million, primarily
due to the increase in average managed loans, an $8.9 million increase in debt
waiver product income, a $1.1 million increase in credit card registration
income and a $1.9 million, or 28.8%, increase in net extended service plan
revenues. Operating expenses increased by $27.8 million to $44.4 million,
primarily reflecting the increase in marketing costs in maintaining existing and
establishing new customer relationships for the Company's products and services,
and the increase in the cost of operations associated with the growth in the
Company's businesses.

YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net income for the year ended December 31, 1995, was $4.6 million, an
increase of $2.4 million over net income of $2.2 million for the year ended
December 31, 1994. The improvement in net income was largely attributable to a
$4.8 million increase in debt waiver product income and an increase in net
extended service plan revenues of $5.5 million, or 45.2%, over 1994. This
increase was largely driven by an increase in sales of extended service plans
covering consumer electronic products and the introduction of two new extended
service plan products, "Quality Jewelry Care" and "Quality Furniture Care", in
1995. In addition, net extended service plan revenues increased as the Company
increased its sales of extended service plans on higher priced items.

The launch of the Company's credit card operations in 1995, including the
account solicitation costs and the costs of developing the fixed infrastructure
to manage these operations, did not cause a material reduction in net income
during 1995. This was primarily a result of the high response rates achieved by
the Company's credit card marketing campaigns, followed by the high rates of
activation on credit card accounts booked. Total credit card accounts (defined
as open credit card accounts, and closed accounts with balances) reached 702,891
at December 31, 1995, while total managed loans stood at $543.6 million.

YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993

Net income for the year ended December 31, 1994, was $2.2 million, an
increase of $0.9 million over net income of $1.3 million for the year ended
December 31, 1993. The increase in net income was largely attributable to the
cancellation in early 1994 of an unsuccessful discount medical and dental
program that had been offered to Fingerhut Customers. This program had an
operating loss of over $1.4 million in 1993, largely because the Company did not
have an effective method for monthly billing. While acceptance rates for this
product were high, cancellation rates were significant and fees billed and
collected were not large enough to absorb the solicitation costs incurred.

Another factor affecting the growth in net income over 1993 was the growth
in net extended service plan revenues of $4.3 million, or 54.3%, which was
attributable to the addition of a new sales telemarketing effort introduced in
the middle of 1994. Additionally, revenues grew as product sales penetration
increased in the higher priced product categories, including consumer
electronics. These efforts resulted in increased Warrantable Product sales
penetration to 15.3% for the year ended December 31, 1994, from 12.9% for the
same period in 1993. Other operating expenses were positively impacted due to
the renegotiation and extension of the contract with the extended service plan
underwriter and claims servicer in early 1994 that resulted in a reduction in
comparable contract costs of $0.7 million over what would have been incurred
under the old contract. Finally, net income was negatively impacted as the
Company began to invest in the fixed infrastructure necessary to launch its
credit card business in early 1995.

MANAGED LOAN PORTFOLIO AND THE IMPACT OF CREDIT CARD SECURITIZATIONS

Securitization

Securitizations of credit card loans have been and are expected to be a
major source of liquidity for the Company. The effect on the Company's financial
statements from securitization is to remove credit card loans sold with limited
recourse from the balance sheet and record a gain on sale for the difference
between the carrying value of the loans and the adjusted sales proceeds. The
adjusted sales proceeds are based on a present value estimate of future cash
flows to be received over the life of the loans, net of certain funding and
servicing costs. The resulting gain is further reduced for estimated loan losses
over the life of the related loans under the

26
<PAGE> 27

limited recourse provisions. Because these estimates are influenced by factors
outside of the Company's control, the uncertainty inherent in these estimates
makes it reasonably possible that these estimates could change in the near term.
Any material changes in these estimates could have a material impact on the
Company's financial condition and results of operations.

The securitization and sale of credit card loans changes the Company's
interest in such loans from that of a lender to that of a servicer. Accordingly,
there is a change in how revenue is reported in the income statement. For
securitized and sold credit card loans, amounts that otherwise would have been
recorded as interest income, interest expense, fee income and provision for loan
losses are instead reported in other operating income as net securitization and
credit card servicing income. To date, the Company has completed two credit card
securitization transactions. See "Business -- Securitization".

Managed Loan Portfolio

The Company analyzes its financial performance on a managed loan portfolio
basis. In order to do so, the income statement and balance sheet are adjusted to
reverse the effect of securitized loans. The Company's discussion of revenues,
where applicable, and provision for loan losses includes comparisons to amounts
reported in the Company's statements of income ("owned basis" or "on-balance
sheet") as well as on a managed basis.

The Company's managed loan portfolio is comprised of credit card loans held
for securitization, retained interests in loans securitized and the investors'
share of securitized credit card loans. The investors' share of securitized
credit card loans are not assets of the Company, and, therefore, are not shown
on the Company's balance sheets. The following table summarizes the Company's
managed loan portfolio.

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------- --------------------------------
1996 1995 1995 1994 1993
---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PERIOD-END BALANCES:
Credit card loans:
Loans held for securitization.......... $ 19,714 $ 19,725 $ 15,337 $ -- $ --
Retained interests in loans
securitized......................... 112,249 24,789 79,727 -- --
Investors' interests in securitized
loans............................... 936,055 145,555 448,555 -- --
---------- -------- -------- ---- ----
Total period-end managed loan
portfolio.............................. $1,068,018 $190,069 $543,619 $ -- $ --
========== ======== ======== ==== ====
AVERAGE BALANCES:
Credit card loans:
Loans held for securitization.......... $ 33,457 $ 4,965 $ 7,741 $ -- $ --
Retained interests in loans
securitized......................... 91,721 16,920 32,091 -- --
Investors' interests in securitized
loans............................... 615,999 20,691 143,442 -- --
---------- -------- -------- ---- ----
Total average managed loan portfolio..... $ 741,177 $ 42,576 $183,274 $ -- $ --
========== ======== ======== ==== ====
</TABLE>

27
<PAGE> 28

Impact of Credit Card Securitizations. The following table provides
selected financial information on a managed loan portfolio basis, as well as a
summary of the effects of credit card securitizations on selected line items of
the Company's income statements for each of the periods presented:

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
-------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (OWNED BASIS):
Net interest income................... $ 10,761 $ 1,180 $ 6,399 $ 487 $ 279
Provision for loan losses............. 5,173 534 4,393 -- --
Other operating income................ 53,296 16,094 51,083 14,238 10,053
Other operating expense............... 44,422 16,602 45,640 11,222 8,333
-------- ------- -------- ------- -------
Income before income taxes............ $ 14,462 $ 138 $ 7,449 $ 3,503 $ 1,999
======== ======= ======== ======= =======
ADJUSTMENTS FOR SECURITIZATIONS:
Net interest income................... $ 41,590 $ 1,841 $ 19,955 $ -- $ --
Provision for loan losses............. 37,301 2,297 21,841 -- --
Other operating income................ (4,289) 456 1,886 -- --
Other operating expense............... -- -- -- -- --
-------- ------- -------- ------- -------
Income before income taxes............ $ -- $ -- $ -- $ -- $ --
======== ======= ======== ======= =======
MANAGED STATEMENTS OF INCOME:
Net interest income................... $ 52,351 $ 3,021 $ 26,354 $ 487 $ 279
Provision for loan losses............. 42,474 2,831 26,234 -- --
Other operating income................ 49,007 16,550 52,969 14,238 10,053
Other operating expense............... 44,422 16,602 45,640 11,222 8,333
-------- ------- -------- ------- -------
Income before income taxes............ $ 14,462 $ 138 $ 7,449 $ 3,503 $ 1,999
======== ======= ======== ======= =======
OTHER DATA (OWNED BASIS):
Average interest earning assets....... $144,109 $24,957 $ 49,644 $ 6,615 $ 4,531
Return on average assets.............. 9.61% 0.51% 6.46% 31.06% 24.31%
Return on average division equity..... 23.77% 1.30% 15.23% 40.96% 32.32%
Net interest margin(1)................ 15.02% 9.54% 12.89% 7.36% 6.16%
MANAGED BASIS:
Average managed interest earning
assets............................. $760,108 $45,648 $193,086 $ 6,615 $ 4,531
Return on average managed assets...... 2.23% 0.32% 2.14% 31.06% 24.31%
Net interest margin(1)................ 13.85% 13.35% 13.65% 7.36% 6.16%
</TABLE>

- -------------------------
(1) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets. The amounts shown for 1993 and 1994
represent loans from the Company to FCI.

Net Interest Income

Net interest income is interest earned on the Company's loans less interest
expense on borrowings to fund the loans. Managed net interest income for the six
months ended June 30, 1996, was $52.4 million compared to $3.0 million for the
same period in 1995, an increase of $49.4 million. Managed net interest income
for the six months ended June 30, 1996, increased primarily due to a $699
million increase in average managed loans over the comparable period in 1995.
The average annualized yield on managed interest earning assets increased from
17.8% for the six months ended June 30, 1995, to 18.8% for the year ended
December 31, 1995, and to 19.1% for the six months ended June 30, 1996, as a
larger percentage of credit card accounts revolved. The Company has utilized
variable rate funding in its credit card securitization transactions and in its
short-term borrowings from FCI, or has swapped fixed rates on such transactions
to variable rates. Consequently, the managed net interest margin percentage did
not vary materially between the first six months of 1996, and the first six
months of 1995, even though interest rates declined during the first few

28
<PAGE> 29

months of 1996. See "-- Interest Rate Sensitivity" for further discussion of the
Company's interest rate risk management strategy.

Managed net interest income for the year ended December 31, 1995, was $26.4
million compared to $0.5 million in the prior year. The large increase was
predominately the result of the launch of the Company's credit card business in
early 1995, with managed loans growing to over $543.6 million at December 31,
1995.

The following table provides an analysis of interest income and expense,
net interest spread, net interest margin and average balance sheet data on an
owned basis for the six months ended June 30, 1996, and 1995, and the years
ended December 31, 1995, and 1994:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------------------------------------- ---------------------------
1996 1995 1995
---------------------------- --------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ ------- -------- ------ ------- -------- ------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:(1)
Federal funds sold.................... $ 16,410 $ 436 5.3% $ 1,462 $ 43 5.9% $ 8,501 $ 487 5.7%
Short-term investments................ 2,521 64 5.1% 1,610 46 5.8% 1,311 75 5.7%
Credit card loans..................... 125,178 12,119 19.5% 21,885 1,371 12.6% 39,832 7,054 17.7%
Loans to FCI.......................... -- -- -- -- -- -- -- -- --
-------- -------- ------ -------- ------ ---- - ------ ------ ---- --
Total interest-earning assets..... $144,109 $ 12,619 17.6% $24,957 $1,460 11.8% $49,644 $7,616 15.3%
-------- -------- ------ -------- ------ ---- - ------ ------ ---- --
Cash and due from banks............... 3,197 509 1,572
Accrued interest and fees............. 2,475 1,848 1,497
Other amounts due from
securitizations..................... 16,490 3,033 12,235
Other assets.......................... 25,011 3,079 7,122
Allowance for loan losses............. (5,078) (233) (1,149)
-------- -------- ------
Total assets...................... $186,204 $33,193 $70,921
======== ======== ======
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Interest-bearing
deposit............................. $ 1,000 $ 24 4.8% $ 394 $ 11 5.5% $ 700 $ 36 5.2%
Due to FCI............................ 63,351 1,834 5.8% 9,588 269 5.6% 20,822 1,181 5.7%
-------- -------- ------ -------- ------ ---- - ------ ------ ---- --
Total............................. 64,351 $ 1,858 5.8% 9,982 $ 280 5.7% 21,522 $1,217 5.7%
Other liabilities..................... 46,598 10,109 19,316
-------- -------- ------
Total liabilities................. 110,949 20,091 40,838
Division equity....................... 75,255 13,102 30,083
-------- -------- ------
Total liabilities and equity...... $186,204 $33,193 $70,921
======== ======== ======
Net interest income and interest
margin(2)........................... $ 10,761 15.0% $1,180 9.5% $6,399 12.9%
Net interest rate spread(3)........... 11.8% 6.1% 9.6%

<CAPTION>
1994
---------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
------- -------- ------
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:(1)
Federal funds sold.................... $ -- $ -- --
Short-term investments................ -- -- --
Credit card loans..................... -- -- --
Loans to FCI.......................... 6,615 487 7.4%
------ ---- --- -
Total interest-earning assets..... $6,615 $487 7.4%
------ ---- --- -
Cash and due from banks............... 33
Accrued interest and fees............. --
Other amounts due from
securitizations..................... --
Other assets.......................... 428
Allowance for loan losses............. --
------
Total assets...................... $7,076
======
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Interest-bearing
deposit............................. $ -- $ -- --
Due to FCI............................ -- -- --
------ ---- --- -
Total............................. --
Other liabilities..................... 1,711
------
Total liabilities................. 1,711
Division equity....................... 5,365
------
Total liabilities and equity...... $7,076
======
Net interest income and interest
margin(2)........................... $487 7.4%
Net interest rate spread(3)........... 7.4%
</TABLE>

- -------------------------
(1) There were no taxable equivalent adjustments necessary for the periods
presented.

(2) Net interest margin is computed by dividing annualized net interest income
by average total interest-earning assets.

(3) The interest rate spread is the annualized yield on average interest-earning
assets minus the funding rate on average interest-bearing liabilities.

29
<PAGE> 30

Interest Variance Analysis

Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the interest rate paid on interest-bearing
liabilities, in addition to changes in the volume of interest-earning assets and
interest-bearing liabilities. The following table presents the effects of
changes in average volume and interest rates on individual financial statement
line items on an owned basis:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
1996 VS. 1995 1995 VS. 1994
----------------------------- ---------------------------
CHANGE DUE TO* CHANGE DUE TO*
----------------- ---------------
INCREASE VOLUME RATE INCREASE VOLUME RATE
-------- ------- ------ -------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Federal funds sold....................... $ 393 $ 397 $ (4) $ 487 $ 487 $ --
Short-term investments................... 18 23 (5) 75 75 --
Credit card loans........................ 10,748 9,642 1,106 7,054 7,054 --
Loans to FCI............................. -- -- -- (487) (244) (243)
------- ------- ------ ------ ------ -----
Total interest income.................... 11,159 10,114 1,045 7,129 6,638 491
INTEREST EXPENSE:
Interest-bearing deposit................. 13 14 (1) 36 36 --
Short-term borrowings from FCI........... 1,565 1,556 9 1,181 1,181 --
------- ------- ------ ------ ------ -----
Total interest expense................... 1,578 1,570 8 1,217 1,217 --
------- ------- ------ ------ ------ -----
Net interest income*.................. $ 9,581 $ 8,544 $1,037 $5,912 $5,421 $ 491
======= ======= ====== ====== ====== =====
</TABLE>

- -------------------------
* The change in interest due to both volume and rates has been allocated in
proportion to the relationship of the absolute dollar amounts of the change in
each. The changes in income and expense are calculated independently for each
caption in the analysis. The totals for the volume and rate columns are not
the sum of the individual lines.

OTHER OPERATING INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ -----------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING INCOME:
Net extended warranty revenues................. $ 8,615 $ 6,687 $17,779 $12,244 $ 7,935
Net securitization and credit card servicing
income....................................... 20,536 3,154 16,003 -- --
Credit card fees, interchange and other credit
card income.................................. 12,078 4,704 10,639 -- --
Fee-based product revenues..................... 12,067 1,549 6,662 1,994 2,118
------- ------- ------- ------- -------
Total..................................... $53,296 $16,094 $51,083 $14,238 $10,053
======= ======= ======= ======= =======
</TABLE>

Other operating income contributes substantially to the Company's results
of operations, although the percentage of revenues from other operating income
has declined from 87% for the year ended December 31, 1995, to 81% for the six
months ended June 30, 1996, as a larger percentage of the Company's credit card
accounts revolved, generating increased interest income. Fee-based product
revenues continue to provide an increasing percentage of other operating income,
particularly from debt waiver products. Debt waiver products and other fee-based
product revenues are expected to increase with increases in credit card accounts
and as the Company continues to offer other fee-based products to its customer
base.

30
<PAGE> 31

The following definitions may be helpful when reading the discussion of the
changes in other operating income found below for the periods presented:

Net extended warranty revenues -- Net extended warranty revenues include
revenues received from sales of extended service plans, net of a provision for
service plan returns.

Net securitization and credit card servicing income -- Due to the
securitization of credit card loans, activity from securitized account balances
normally reported as net interest income and provision for loan losses is
reported in net securitization and credit card servicing income. Net
securitization income is the excess of interest and fee income earned over the
related securitization trust expenses, including interest payments to
certificateholders in the trusts, charge-offs, servicing costs and transaction
expenses related to securitized loans. Credit card servicing income is also
included in this amount and represents fees paid to the Company from the trust
for servicing the securitized loans. Such fees generally approximate 2% of
average securitized loans on an annualized basis.

Credit card fees, interchange and other credit card income -- Credit card
fees include annual membership, cash advance, overlimit, past-due, and other
credit card fee income derived from on-balance sheet loans. Also included in
this amount is interchange income which represents fees that are payable by
merchants to the credit card issuer for sales transactions. This amount
presently represents about 1.4% of all net credit card purchases.

Fee-based product revenues -- Fee-based product revenues presently include
revenues from sales of third party insurance, programs such as card
registration, shopping and dining clubs, debt waiver protection for
unemployment, disability, and death, and revenues from targeted list programs.

SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

Other operating income increased $37.2 million for the six months ended
June 30, 1996, over the comparable period in 1995, primarily due to income
generated from the growth in average securitized credit card loans. Other
factors contributing to the increase in other operating income were net extended
service plan revenues, which increased by $1.9 million, or 28.8%, over the
comparable period in 1995. The increase in net extended service plan revenues is
primarily the result of increased extended service plan sales and the
introduction of the two new warranty products in 1995. Net securitization and
credit card servicing income increased by $17.4 million over the comparable
period in 1995, primarily due to the increase in average securitized loans and,
to a lesser extent, an increase in the managed net interest margin. Credit card
fees, interchange and other credit card income, increased by $7.4 million
primarily due to a $5.2 million increase in interchange income and an increase
in the number of credit card accounts outstanding over the comparable period in
1995. Fee-based product revenues also increased by $10.5 million as the
Company's marketing efforts to cross-sell other products and services to its and
Fingerhut's customer base were successful. Specifically, debt waiver product
income increased by $8.9 million as the Company continued to add new credit card
customers with debt waiver protection.

YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994

Other operating income increased by $36.8 million over the prior year,
largely due to the Company's launch of its credit card business in early 1995
and the corresponding generation of new accounts and loans during 1995. Net
extended service plan revenues grew by $5.5 million, attributable primarily to
new marketing methods developed during mid-1994, and fully implemented during
1995, designed to optimize extended service plan sales penetration. In addition,
extended service plan revenues increased due to increased sales of extended
service plans on higher priced items.

YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993

Other operating income increased by $4.2 million over the prior year due to
the growth in net extended service plan revenues resulting from the addition of
a new sales telemarketing effort introduced in mid-1994, partially offset by a
decline in fee-based product revenues as a result of the cancellation in early
1994 of an unsuccessful discount medical and dental program.

31
<PAGE> 32

OTHER OPERATING EXPENSE

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING EXPENSE:
Credit card account and other product
solicitation and marketing expenses........... $16,461 $ 9,338 $23,089 $ 3,739 $4,092
Employee compensation........................... 7,723 764 2,466 442 300
Data processing services and communications..... 5,196 880 3,090 109 11
Third party servicing expenses.................. 4,613 1,178 5,300 473 356
Warranty and debt waiver underwriting and claims
servicing expenses............................ 4,061 2,423 6,552 4,109 3,033
Credit card fraud losses........................ 1,066 281 775 -- --
Other........................................... 5,302 1,738 4,368 2,350 541
------- ------- ------- ------- ------
Total...................................... $44,422 $16,602 $45,640 $11,222 $8,333
======= ======= ======= ======= ======
</TABLE>

Other operating expenses include direct and allocated expenses from FCI for
administrative services provided to the Company under the Administrative
Services Agreement (as defined herein). Additionally, other operating expenses
reflect the retroactive effects of additional intercompany agreements and
contracts between FCI and its subsidiaries. See Notes 2 and 10 to the Company's
financial statements and "Transactions Between FCI and the Company", shown
elsewhere in this Prospectus.

SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

Other operating expenses increased $27.8 million over the comparable period
in 1995, primarily due to costs incurred in the Company's business development
activities. Credit card account and other product solicitation and marketing
expenses rose by $7.1 million over the same period in the prior year. New credit
card account solicitation programs were implemented in the first six months of
1996, increasing the number of credit card accounts and loans outstanding.
Additionally, increased solicitation costs were incurred in efforts to increase
the penetration of extended service plan sales on Warrantable Products sold by
Fingerhut and fee-based products sold to the Company's customers. The Company
expects that its product solicitation costs will continue to increase during the
remainder of 1996 and into 1997 as the Company continues its efforts to expand
its customer base and product penetration rates. These opportunities, however,
are subject to a variety of external and internal factors such as competition,
market interest rates and consumer credit quality, which may affect ultimate
product solicitation costs incurred, and the realization of corresponding
revenue opportunities.

Additionally, other operating expenses increased due to increases in data
processing services and communications and third party servicing expenses of
$4.3 million and $3.4 million, respectively, over those incurred for the six
months ended June 30, 1995. These cost increases were largely due to the
increased number of credit card accounts, transaction volumes and loan balances.
Employee compensation also increased $7.0 million to $7.7 million for the six
months ended June 30, 1996, due to increased staffing needs to support the
increase in credit card accounts and the internalization of credit card
collections and other functions, and increased management incentive plan
expenses. The Company expects that it will need to continue to expand its fixed
infrastructure during the remainder of 1996 and into 1997 as it continues to
expand and diversify its financial service product offerings. Warranty and debt
waiver underwriting and claims servicing expenses increased $1.6 million,
primarily due to an increase in debt waiver products sold over the same period
in the prior year and, to a lesser extent, the increase in net extended service
plans sold. Credit card fraud losses and other operating expenses increased $0.8
million and $3.6 million, respectively, largely due to the overall increase in
credit card and other transaction volumes over the comparable period in 1995.

32
<PAGE> 33

YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994

Other operating expenses increased by $34.4 million, largely due to the
Company's launch of its credit card business in early 1995 and the corresponding
generation of new accounts and transaction and loan volumes during 1995.
Additionally, product solicitation and marketing expenses also increased over
the prior year in efforts to increase sales of extended service plans. Employee
compensation and other expenses also increased during the year as the Company
incurred costs related to the launch of its credit card business in early 1995
and the establishment of the infrastructure to support this business. Warranty
and debt waiver underwriting and claims servicing expenses increased $2.4
million primarily due to the introduction of the debt waiver product in early
1995 and, to a lesser extent, the increase in net extended service plans sold
for the year ended December 31, 1995.

YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993

Other operating expenses increased by $2.9 million primarily due to
increases in warranty underwriting and claims servicing expenses and allocated
administrative expenses from FCI. The Company's account and other product
solicitation and marketing expenses decreased by $0.4 million, largely due to
$1.8 million in product solicitation costs incurred in 1993 for an unsuccessful
discount medical and dental program that was discontinued in 1993, partially
offset by a new extended service plan telemarketing effort introduced in the
middle of 1994. Finally, employee compensation and other operating expenses also
increased over 1993, as the Company began to expand its fixed infrastructure to
launch its credit card business.

INCOME TAXES

The Company's provision for income taxes includes both federal and state
income taxes. Applicable income tax expense was $5.6 million and $0.1 million,
respectively, for the six months ended June 30, 1996 and 1995 and was $2.9
million, $1.3 million, and $0.7 million, respectively, for the years ended
December 31, 1995, 1994 and 1993. This tax expense represents an effective tax
rate of 38.5% and 38.5% for the six months ended June 30, 1996 and 1995,
respectively, and 38.5%, 37.26%, and 36.88%, for the years ended December 31,
1995, 1994, and 1993, respectively. The increases in the effective tax rate for
1995 over 1994 and 1994 over 1993 are principally due to increases in state
income taxes caused by the launch of the credit card operations, and the
Company's expansion of its facilities and operations into other states which
caused the Company to incur additional state income taxes. See Note 9 to the
financial statements for a reconciliation of reported income taxes to the amount
computed by applying the federal statutory rate to income before income taxes.

ASSET QUALITY

The Company's delinquency and net loan charge-off rates at any point in
time reflect, among other factors, the credit risk of loans, the average age of
the Company's various credit card account portfolios, the success of the
Company's collection and recovery efforts, and general economic conditions. The
average age of the Company's credit card portfolio affects the stability of
delinquency and loss rates of the portfolio. The Company believes that, based on
the industry experience of its management and its analysis of the behavior of
its newly originated accounts versus the behavior of older accounts in its
portfolio, and absent unexpected adverse changes in the economy, the delinquency
and loss rates of groups of new accounts are generally predictable. The Company
believes that typical new credit card accounts generally experience rising
levels of delinquency and loss rates which tend to peak 18-36 months from the
origination date. The Company believes the peaks of the delinquency and loss
rates for its accounts may occur earlier than those of typical new credit card
accounts. However, the absolute levels at which delinquencies and loss rates may
peak and then stabilize are not specifically known. At June 30, 1996, 76.6% of
managed accounts and 62.9% of managed loans were less than 12 months old.
Accordingly, the Company believes that its managed loan portfolio will
experience increased levels of delinquency and loan losses as the average age of
the Company's accounts increases.

33
<PAGE> 34

This trend is reflected in the increase in the Company's ratio of net
charge-offs to average managed loans over the past six months. For the quarter
ended June 30, 1996, this ratio stood at an annualized rate of 5.36% down from
5.78% for the quarter ended March 31, 1996, but up from the annualized rate of
3.14% for the quarter ended December 31, 1995. The Company believes, consistent
with its statistical models and other credit analyses, that this rate will
continue to fluctuate but generally rise over the next twelve to eighteen
months.

The Company's strategy for managing loan losses to maximize profitability
consists of credit line management and risk-based pricing so that an acceptable
profit margin is maintained based on the perceived risk of each credit card
account. Under this strategy, interest margins are established for each credit
card account based on its perceived risk profile. Loan losses are further
managed through the offering of credit lines which are generally lower than is
currently standard in the industry. Individual accounts and their related credit
lines are also continually managed using various marketing, credit and other
management processes in order to continue to maximize the profitability of each
account.

Delinquencies

Delinquencies not only have the potential to impact earnings in the form of
net loan losses, but are also costly in terms of the personnel and resources
dedicated to resolving them. Delinquency levels are monitored on a managed
basis, since delinquency on either an owned or managed basis subjects the
Company to credit loss exposure. A credit card account is contractually
delinquent if the minimum payment is not received by the specified date on the
cardholder's statement. It is the Company's policy to continue to accrue
interest and fee income on all credit card accounts, except in limited
circumstances, until the account and all related loans, interest and other fees
are charged-off. The following table presents the delinquency trends of the
Company's credit card loan portfolio on a managed portfolio basis over the
previous six quarters:

MANAGED LOAN DELINQUENCY

<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
--------------------------------------------------------------------------------------------------------
JUNE 30, % OF MAR. 31, % OF DEC. 31, % OF SEPT. 30, % OF JUNE 30, % OF
1996 TOTAL 1996 TOTAL 1995 TOTAL 1995 TOTAL 1995 TOTAL
---------- ----- -------- ----- -------- ----- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Managed loan
portfolio........... $1,068,018 100% $676,974 100% $543,619 100% $298,920 100% $190,069 100%
Loans delinquent:
30 to 59 days....... 14,882 1.39% 9,677 1.43% 7,546 1.39% 5,142 1.72% 320 0.17%
60 to 89 days....... 7,332 0.69% 5,879 0.87% 4,952 0.91% 3,039 1.02% 1 0.00%
90 or more.......... 13,750 1.29% 10,046 1.48% 8,996 1.65% 2,288 0.76% -- 0.00%
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total............. $ 35,964 3.37% $ 25,602 3.78% $ 21,494 3.95% $ 10,469 3.50% $ 321 0.17%
========== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>

The above numbers reflect the lack of seasoning of the Company's managed
loan portfolio as the large growth in loans has primarily come from the newer
accounts with lower delinquency rates. As the portfolio seasons and industry
loss and delinquency rates continue to experience negative trends, the Company
expects general delinquency levels to increase from the levels at June 30, 1996.
The Company intends to continue to focus its resources on its collection efforts
to minimize the negative impact to net loan losses that result from increased
delinquency levels.

Net charge-offs

Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balance, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees which are charged against the related income at the
time of charge-off. Losses from those accounts that are identified as fraudulent
are also excluded from net charge-offs and are included separately in other
operating expenses. Loans are generally charged-off at the end of the month
during which the loan becomes contractually 180 days past due, with the
exception of bankrupt accounts, which are charged-off immediately upon formal
notification of bankruptcy, and deceased cardholders (without a surviving,
contractually liable individual or an estate large enough to pay the debt in
full) which are also

34
<PAGE> 35

charged-off immediately upon notification. The managed net charge-off rate stood
at an annualized rate of 5.36% for the quarter ended June 30, 1996, down from
5.78% for the quarter ended March 31, 1996, and up from the annualized rate of
3.14% for the quarter ended December 31, 1995. The Company believes this rate
will continue to fluctuate but generally rise over the next twelve to eighteen
months. Additionally, consistent with the credit card industry, the Company has
recently experienced a rise in bankruptcy filings. This industry trend, if it
continues at its present pace into the second half of 1996, could also lengthen
the peak loss period before net charge-offs tend to stabilize with the overall
maturation of the portfolio. The Company plans to continue to focus its
resources on refining its credit underwriting standards for new accounts in the
second half of 1996, and to increase its focus on collection and post charge-off
recovery efforts to minimize increased losses from these negative industry
trends. The following table presents the Company's net charge-offs for the
periods indicated as reported in the financial statements and on a managed
portfolio basis:

<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1996 1996 1995 1995 1995 1995
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ON-BALANCE SHEET PORTFOLIO:
Average loans outstanding....... $137,900 $ 112,456 $ 69,840 $ 45,151 $ 43,529 $ --
Net charge-offs................. 1,925 1,624 556 158 -- --
Net charge-offs as a percentage
of average loans
outstanding(1)............... 5.61% 5.81% 3.16% 1.39% -- --
======== ======== ======== ======== ======= ===
MANAGED LOAN PORTFOLIO:
Average loans outstanding....... $872,594 $ 609,759 $394,764 $ 248,608 $ 84,685 $ --
Net charge-offs................. 11,627 8,761 3,125 890 -- --
Net charge-offs as a percentage
of average loans
outstanding(1)............... 5.36% 5.78% 3.14% 1.42% -- --
======== ======== ======== ======== ======= ===
</TABLE>

- -------------------------
(1) Annualized

Provision and allowance for loan losses

The allowance for loan losses is maintained for on-balance sheet loans. For
securitized loans, anticipated losses and related recourse reserves are
reflected in the calculations of net securitization and credit card servicing
income. Provisions for loan losses are made in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 5 which requires provisions in
amounts necessary to maintain the allowance at a level estimated to be
sufficient to absorb probable future losses of principal and earned interest,
net of recoveries (including recovery of collateral, if applicable), inherent in
the existing on-balance sheet loan portfolio. In evaluating the adequacy of the
allowance for loan losses, the Company takes into consideration several factors,
including (i) historical charge-off and recovery activity by loan portfolio,
(ii) recent and expected delinquency and collection trends by loan portfolio,
(iii) current economic conditions and recent trends in such conditions and the
impact such conditions might have on borrowers' ability to repay, (iv) the risk
characteristics of the portfolios, and (v) other factors. The Company segments
its loan portfolio into several individual pools with similar credit risk and
time since solicitation and estimates the amounts of loans in each thirty-day
delinquency bucket that will not be collected and therefore "roll" into the next
thirty day bucket and ultimately to charge-off. These homogenous risk pools are
continually evaluated using a statistical model which utilizes historical
delinquency levels, loan seasoning and other measures of asset quality to
estimate charge-offs. However, as the Company has limited operating history,
historical loss information from third parties has been used to refine estimated
delinquency patterns by credit risk pool. This external data consists of the
results from a test conducted with a third party which targeted a customer base
very similar to the Company's target market and additional credit risk data
obtained from two other external portfolios.

Additionally, in evaluating the adequacy of the allowance for loan losses,
the Company also takes into consideration several subjective factors in
determining the ultimate loan loss reserve necessary at every reporting period,
including (i) national and economic trends and business conditions, including
the condition of various market segments, (ii) changes in lending policies and
procedures, including those for underwriting,

35
<PAGE> 36

collection, charge-off and recovery, and in the experience, ability, and depth
of lending management and staff, (iii) trends in volume and the product pricing
of accounts, including any concentrations of credit, and (iv) the effect of
external factors such as competition and legal and regulatory requirements on
the level of estimated credit losses in the current portfolio. These judgmental
factors are used to supplement the amount deemed necessary to cover probable
loan losses based on the statistical models to ensure that the allowance is
adequate in accordance with SFAS No. 5 at each reporting period.

The provision for loan losses on an owned basis for the six months ended
June 30, 1996 and 1995, and for the year ended December 31, 1995, totaled $5.2
million and $0.5 million, and $4.4 million, respectively. The amount and level
of the provision for loan losses on an owned basis may vary from period to
period, depending on the amount of credit card loans sold and securitized in a
particular period. However, the increase from June 30, 1995, to June 30, 1996,
is primarily reflective of the large increase in on-balance sheet loans
outstanding and the overall maturation of the portfolio during the six month
period ended June 30, 1996, versus the comparable period in 1995. The provision
for loan losses on a managed portfolio basis totaled $42.5 million for the six
months ended June 30, 1996, up from $2.8 million for the six months ended June
30, 1995.

At June 30, 1996, the Company's allowance for loan losses as a percentage
of loans on an owned basis stood at 4.02%, compared to 3.87% and 1.20% at
December 31, 1995, and June 30, 1995, respectively. The total managed credit
card loan loss allowance at June 30, 1996, which includes an allowance for
recourse obligations for loans sold, stood at 4.15% of total managed credit card
loans or $44.3 million, up from 4.09% of managed loans or $22.2 million at
December 31, 1995. The allowance for loan losses on a managed basis at June 30,
1996, as a percentage of total managed loans 30 days or more delinquent stood at
123.2%, up from 103.4% at December 31, 1995. The following table presents the
change in the Company's allowance for loan losses and other ratios on both an
owned and a managed portfolio basis for the periods presented:

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1996 1996 1995 1995 1995 1995
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OWNED BASIS:
Balance at beginning of period........ $ 6,745 $ 3,679 $ 1,486 $ 534 $ -- $ --
Provision for loan losses............. 483 4,690 2,749 1,110 534 --
------- ------- ------- ------- ------ ---
Loans charged-off..................... 1,969 1,660 562 158 -- --
Recoveries............................ 44 36 6 -- -- --
------- ------- ------- ------- ------ ---
Net loan charge-offs.................. 1,925 1,624 556 158 -- --
------- ------- ------- ------- ------ ---
Balance at end of period.............. $ 5,303 $ 6,745 $ 3,679 $ 1,486 $ 534 $ --
======= ======= ======= ======= ====== ===
Ending allowance as a percent of loans
on an owned basis................... 4.02% 4.10% 3.87% 3.07% 1.20% --
======= ======= ======= ======= ====== ===
</TABLE>

<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1996 1996 1995 1995 1995 1995
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MANAGED BASIS:
Balance at beginning of period........ $ 28,426 $22,219 $ 10,149 $ 2,831 $ -- $ --
Provision for loan losses............. 27,506 14,968 15,195 8,208 2,831 --
------- ------- ------- ------- ------ ---
Loans charged-off..................... 11,870 8,944 3,157 890 -- --
Recoveries............................ 243 183 32 -- -- --
------- ------- ------- ------- ------ ---
Net loan charge-offs.................. 11,627 8,761 3,125 890 -- --
------- ------- ------- ------- ------ ---
Balance at end of period.............. $ 44,305 $28,426 $ 22,219 $ 10,149 $2,831 $ --
======= ======= ======= ======= ====== ===
Ending managed allowance as a percent
of managed loans.................... 4.15% 4.20% 4.09% 3.40% 1.49% --
======= ======= ======= ======= ====== ===
</TABLE>

36
<PAGE> 37

Management believes that the allowance for loan losses on both an owned and
a managed basis is adequate to cover anticipated losses in the loan portfolio
under current conditions and expected trends. However, there can be no assurance
as to the future credit losses that may be incurred in connection with the
Company's loan portfolio, nor can there be any assurance that the loan loss
allowance that has been established by the Company will be sufficient to absorb
such future loan losses. Management will continue to monitor the allowance for
loan losses and make additional provisions to the allowance as it deems
appropriate and necessary given the circumstances.

INTEREST RATE SENSITIVITY

Interest rate sensitivity refers to the volatility in income resulting from
fluctuations in interest rates, variability in spread relationships between
asset and liability indices (basis risk) and the mismatch of repricing intervals
between assets and liabilities (gap risk).

The Company attempts to minimize the impact of market interest rate
fluctuations on net interest income and net income by regularly evaluating the
risk inherent in its asset and liability structure, including its off-balance
sheet assets and liabilities such as securitized loans and derivative financial
instruments. This risk arises from continuous changes in the Company's asset and
liability mix, changes in market interest rates, including changes affected by
fluctuations in the yield curve, payment trends on the Company's interest-
bearing assets and payment requirements on the Company's interest-bearing
liabilities, and the general timing of all other cash flows.

In managing its interest rate sensitivity position, the Company has the
flexibility to respond to current market conditions by lengthening or shortening
its period of perceived interest rate sensitivity. This is accomplished through
adjusting the pricing of its current loans or its future loan offerings,
changing its positions in its other interest-bearing assets, changing its
funding mix for such interest bearing assets, or using derivative financial
instruments, although there can be no assurance that the Company will be able to
effectively manage its interest rate sensitivity position in all future
circumstances. Derivative financial instruments are only used for the express
purpose of managing exposures to changes in interest rates. Derivative financial
instruments, by policy, are not used for any speculative purposes (see further
discussion under "Derivatives Activities").

The Company has utilized variable rates in pricing its securitization
transactions or has used interest rate swaps to synthetically alter fixed rate
securitization transactions to variable rates in an attempt to match the
variable rate pricing of the underlying loans sold to the trust. In addition,
the Company follows an asset/liability management policy of match-funding its
variable rate assets with variable rate liabilities. At June 30, 1996, all $1.1
billion of the Company's credit card loans and other interest-bearing assets had
variable rate pricing, with loans carrying annual percentage rates at a spread
over the prime rate, subject to certain interest rate floors. These interest
rate floors have the impact of converting credit card loans to fixed rate loans
in a low interest rate environment, however, at June 30, 1996, none of the
currently outstanding loans on a managed basis were at their interest rate
floors. At June 30, 1996, the Company had $991 million in variable rate,
interest-bearing liabilities, both on-balance sheet and through securitizations.
Since both managed interest-bearing assets and liabilities reprice every 30
days, the Company believes that the impact of a change in interest rates on the
gap risk of the Company would not be material to the financial performance of
the Company.

The Company incurs basis risk when it funds managed assets at a spread over
LIBOR and the rates on the underlying assets are indexed to the prime rate. This
basis risk results from the potential variability in the spread between the
prime rate and LIBOR over time. The Company has not currently hedged or altered
this basis risk due to the cost of hedging such risk versus the benefits from
elimination of this risk.

DERIVATIVES ACTIVITIES

The Company utilizes derivative financial instruments for the purpose of
managing its exposure to interest rate risks. The Company has a number of
mechanisms in place to monitor and control both market and credit risk from
these derivatives activities. All derivatives strategies and transactions are
managed under a

37
<PAGE> 38

hedging policy approved by the Board of Directors of FCI that details the use of
such derivatives and the individuals authorized to execute such transactions. In
addition, all derivatives strategies must currently be approved by FCI's senior
management.

Under these policies, the Company has entered into interest rate cap and
swap agreements to hedge its economic exposure to fluctuating interest rates
associated with the floating and fixed rate certificates issued by the Master
Trust. In connection with the issuance of the $512.6 million Master Trust Series
1995-1 variable rate certificates in May 1995, the Company entered into an
eight-year agreement capping the certificates' interest rate at 11.2%.
Additionally, the Company entered into two interest rate swap agreements in
April 1996 to synthetically alter the fixed rate of the Master Trust Series
1996-1 certificates to a floating rate. Total notional amounts of these swap
transactions amounted to $605.5 million. The obligations of the Company and the
counterparties under these swap agreements are settled on a monthly basis.

LIQUIDITY, FUNDING AND CAPITAL RESOURCES

The Company's goal is to maintain an adequate level of liquidity, both
short-term and long-term, through active management of assets and liabilities.
Because the characteristics of the Company's assets and liabilities change,
liquidity management is a dynamic process affected by the pricing and maturity
of the Company's assets and liabilities. This process is also affected by
changes in the relationship between short-term and long-term interest rates.
Therefore, to facilitate liquidity management, the Company utilizes a variety of
funding sources to establish a maturity pattern that provides a mix of
short-term and long-term funds. These funding sources are available, or are
committed to the Company through programs established either by FCI or by the
Company.

A significant source of liquidity for the Company has been the
securitization of credit card loans. During the year ended December 31, 1995,
and for the first six months of 1996, the Company received net proceeds of over
$900 million from sales of credit card loans. Cash generated from these
transactions was used to reduce short-term borrowings and to fund further credit
card loan growth.

The maturity terms of these securitizations vary, with the earliest
amortization (repayment) period beginning in August of 1998. Once these
repayment terms begin, payments from customers on credit card loans are
accumulated for the trust certificate holders and are no longer reinvested in
new loans. At that time, the Company's funding requirements for such new loans
will increase accordingly. The occurrence of certain events, including a decline
in the securitized loan portfolio's annual yield (the sum of interest, annual
membership and other credit card fees, less net credit losses) below a base rate
(generally equal to the sum of the weighted average certificate and credit
enhancement rates and loan servicing fees), may also cause the securitization
transactions to amortize earlier than scheduled. These events would accelerate
the need to utilize alternative funding sources. The Company believes that
securitization will continue to be a reliable source of funding, however no
assurance can be given to that effect. See the statements of cash flows for more
information regarding liquidity, funding and capital resources.

The Company operated as a division of FCI for the periods presented and
therefore, with the exception of the asset securitization transactions, has had
no direct funding from outside sources to date. Instead, the Company has either
directly loaned money to or borrowed money from FCI in an effort to effectively
manage such liquidity position. Since 1995, the Company has regularly borrowed
funds from FCI to fund on-balance sheet loan growth, to purchase premises and
equipment, and for other general business purposes. Such borrowings have been
made from FCI's cash balances and borrowings under FCI's revolving credit
facility. At June 30, 1996, and at December 31, 1995, the Company had borrowed
$54.3 million and $63.5 million, respectively, from FCI. In September 1996, the
Company repaid its short-term borrowings from FCI with borrowings under its new
bank revolving credit facility.

The interest rate on borrowings from FCI is based on FCI's borrowing rate,
which may be at prime or at a spread over LIBOR depending on the timing and
maturity of the funds borrowed. At June 30, 1996, and December 31, 1995, the
interest rate on the Company's borrowings was 6.0% and 7.1%, respectively.

38
<PAGE> 39

The Company's liquidity needs and funding sources may change over time. On
September 16, 1996, Metris executed agreements for the following credit
facilities: (i) a $300 million, five year revolving credit facility for the
Company (the "Revolving Credit Facility") guaranteed by FCI; (ii) a $400 million
increase of the current $800 million commercial paper liquidity facility which
matures in May 1999 and supports the Fingerhut Owner Trust Commercial Paper
program in which the Company participates and (iii) approximately $112 million
of additional asset-backed certificates to support the aforementioned increase
in the Fingerhut Owner Trust asset-backed commercial paper program. As of
October 17, 1996, Metris had $20 million outstanding and $280 million currently
available under the Revolving Credit Facility.

The Revolving Credit Facility is guaranteed by FCI and is further supported
by the pledge of the stock of certain subsidiaries of the Company and certain
accounts receivable and interests held therein by the Company. The Revolving
Credit Facility also has Alternate Base Rate ("ABR") and LIBOR borrowing
options. The interest rates paid on the Company's borrowings under this facility
in the future may differ from the comparable interest rates paid on the
historical borrowings from FCI. The Revolving Credit Facility also contains
certain financial covenants standard for revolving credit facilities of this
type including minimum net worth, minimum equity to managed assets ratio,
maximum leverage and a limitation on indebtedness. In addition, the FCI
guarantee includes certain covenants including interest coverage, leverage and
minimum net worth for FCI.

The Federal Reserve Act imposes various legal limitations on the extent to
which banks that are members of the Federal Reserve System can finance or
otherwise supply funds to certain of their affiliates. In particular, Direct
Merchants Bank is subject to certain restrictions on any extensions of credit to
the Company or its subsidiaries. Additionally, Direct Merchants Bank is limited
in its ability to declare dividends to the Company. Therefore, Direct Merchants
Bank's investments in federal funds sold are generally not available for the
general liquidity needs of the Company and its other subsidiaries. Such
restrictions were not material to the operations of the Company at June 30,
1996, and December 31, 1995.

As managed loans amortize or are otherwise paid, the Company's funding
needs will increase accordingly. The Company believes that its asset
securitization transactions, together with the Revolving Credit Facility, will
provide adequate liquidity to the Company for meeting its on-going cash needs,
although no assurance can be given to that effect.

Capital Expenditures

The Company has invested $1.2 million in capital expenditures for each of
the six months ended June 30, 1996, and the year ended December 31, 1995,
primarily for furniture and fixtures, office and voice communication equipment,
and computer hardware at the Company's new operations facility in Tulsa,
Oklahoma, and for the Company's corporate headquarters in St. Louis Park,
Minnesota. In addition, for the six months ended June 30, 1996, and the year
ended December 31, 1995, the Company has invested $0.5 million and $0.1 million,
respectively, in software development costs for the Company's extended service
plans business. Capital expenditures for the year ended December 31, 1994, were
$0.3 million and were primarily for furniture and fixtures and computer hardware
and software.

For the remainder of 1996, the Company anticipates capital expenditures to
equal or exceed those expended in the first half of 1996, as the Company
continues to expand its facilities and operations.

Capital Adequacy

The Company has increased its capital position through retained earnings
and $60.0 million in capital contributions from FCI in 1995.

Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC and the Federal Reserve Board, and monitored by the FDIC and
the OCC. At June 30, 1996, and December 31, 1995, Direct Merchants Bank exceeded
the minimum required capital levels and was considered a "well-capitalized"
depository institution under regulations of the OCC.

39
<PAGE> 40

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement is effective for
fiscal years beginning after December 15, 1995, and requires that an employer's
financial statements include certain disclosures about stock-based employee
compensation arrangements. SFAS No. 123 also provides for an optional method for
calculating stock-based employee compensation cost based on the fair market
value of the stock award at the date of grant. The Company currently follows the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", in accounting for stock-based employee compensation
arrangements. Under the guidelines of Opinion 25, compensation cost for
stock-based employee compensation plans is recognized based on the difference,
if any, between the quoted market price of the stock on the date of grant and
the amount an employee must pay to acquire the stock. The Company currently
plans to implement the disclosure requirements of SFAS No. 123 in 1996, when
applicable, and retain its current accounting method for stock-based employee
compensation.

In June 1996, the FASB also issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". This
statement is effective for all such transactions occurring after December 31,
1996, and supersedes and amends several FASB Statements, including SFAS No. 77,
"Reporting by Transferors for Transfers of Receivables with Recourse". The
statement provides consistent standards for distinguishing transfers of
financial assets that are sales (such as financial assets sold through a
securitization ) from transfers that are secured borrowings with a pledge of
collateral. The statement also provides accounting and reporting standards for
these types of transactions based on a consistent application of a
financial-components approach that focuses on control. Under the financial
components approach, upon transfer of financial assets that are to be recorded
as a sale, an entity must recognize all financial and servicing assets that it
still controls and liabilities that it has incurred, and derecognize financial
assets (or a portion thereof) it no longer controls, and liabilities that have
been extinguished. Additionally, the statement requires that the previous
carrying amount of financial assets transferred (sold) be allocated between
retained and derecognized (sold) assets based on their relative fair values at
the date of transfer, and a gain or loss be recognized for the difference
between the proceeds of the sale (defined as the fair value of all assets
obtained and liabilities incurred in consideration for the sale), and the
allocated cost of the assets sold. Subsequent to the sale, the carrying value of
retained assets subject to a risk that could prevent recovery of substantially
all of the recorded amount is to be adjusted to fair value in a manner
consistent with the classification of investments in debt securities under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".

The Company has reviewed this statement and believes that it will affect
the classification and valuation of certain financial assets and liabilities on
its balance sheets relating to its current credit card securitization program,
including excess servicing assets, retained interests in loans securitized,
derivative financial instruments related to such financial assets and
liabilities, and other receivables due from credit card securitizations, net.
However, the Company has not completed all of the complex analyses and reviews
necessary to determine the definitive impact to its current accounting methods
for transfers and servicing of financial assets and extinguishments of
liabilities. The Company intends to adopt this statement prospectively when
required as no early or retroactive application is permitted.

40
<PAGE> 41

BUSINESS

Metris Companies Inc. is an information-based direct marketer of consumer
credit products, extended service plans, and fee-based products and services to
moderate income consumers. Management believes the moderate income market (i.e.,
households with annual incomes of $15,000 to $35,000), which currently
represents 31% of all U.S. households, is underserved by the traditional
providers of many of the Company's products and services. The Company's strategy
is to first establish a profitable customer relationship through the issuance of
a general purpose credit card, and then to expand this customer relationship by
cross-selling additional fee-based products and services. The Company provides
credit to this market by utilizing a risk-based pricing strategy based on
proprietary databases and credit scoring systems. The Company's agreements with
FCI provide for the exclusive use of the Fingerhut Database to market the
Company's products and services, including general purpose credit cards
(although Fingerhut will continue to use such information in providing credit,
through a private label credit card or otherwise, in connection with the sale of
Fingerhut products and services). The Fingerhut Database contains demographic,
behavioral and credit history information on more than 30 million individuals,
the majority of whom are moderate income consumers. To date, the Company has
solicited approximately 4 million individuals out of the more than 30 million
total individuals in the Fingerhut Database, including approximately 3.5 million
individuals who have purchased products from Fingerhut in the past 24 months,
with the remaining 0.5 million having purchased products from Fingerhut as long
ago as 60 months. These 4 million individuals were selected based on expected
responsiveness and perceived credit quality. Fingerhut does not report its
credit information to the credit bureaus, which means this information is not
publicly available. The Company's management believes this access to the
Fingerhut Database and the ability to utilize Fingerhut's proprietary credit
scoring models give it a competitive advantage in targeting and lending to
moderate income consumers.

The Company's consumer credit products currently are unsecured and secured
credit cards, including the Fingerhut co-branded MasterCard and the Direct
Merchants Bank MasterCard. The Company's customers and prospects include both
Fingerhut Customers and External Prospects. Once a prospective customer is
targeted, the Company utilizes its proprietary credit scoring models and a
risk-based pricing strategy to assign the annual percentage rate, annual fee and
credit line based upon the expected risk of the individual prospect. As a result
of the risk profile that is typical of the Company's customers, approximately
82% of the existing credit card accounts carry an annual fee, annual percentage
rates range from prime plus 6.45% to prime plus 14.20%, and the average initial
credit line is approximately $1,700. Management believes this average initial
credit line is below the industry average.

The Company also provides extended service plans on certain categories of
products sold by Fingerhut that extend service coverage beyond the
manufacturer's warranty. Under the Extended Service Plan Agreement, Fingerhut
will agree not to offer any extended service plans for products sold by
Fingerhut other than those provided by the Company. Although these plans
historically have been available only on consumer electronics, the Company has
recently begun to offer these plans for jewelry and furniture, and may offer
plans on additional types of products in the future. Through focused marketing,
the Company increased the percentage of Warrantable Products sold that are
covered by its plans from 15% in 1994 to 24% in the first six months of 1996.
Management believes that opportunities for growth in extended service plans
exist through further increasing the percentage of Fingerhut warrantable
products sold with an extended service plan, identifying new warrantable product
categories for Fingerhut products, and marketing extended service plans in
conjunction with retailers other than Fingerhut, although the Company presently
has no contractual relationships or pending negotiations with any such
retailers. See "-- Businesses -- Extended Service Plans" and "Transactions
Between FCI and the Company -- Extended Service Plan Agreement".

41
<PAGE> 42

Management believes there is a distinct market that is underserved by the
general purpose credit card industry and by other providers of financial service
products. Traditional credit card solicitations, which rely on risk evaluation
scoring techniques utilizing publicly available data, focus on higher scoring
consumers. A significant portion of the households in the U.S. are typically
solicited on a less frequent basis for general purpose credit cards, most likely
because traditional scoring methods assign lower scores to individuals who have
less credit history. This has resulted in an underserved market of over 30
million households with annual incomes of $15,000 to $35,000, who are solicited
by traditional credit card issuers or other providers of financial service
products on a significantly less frequent basis than more affluent households.
Therefore, moderate income consumers are often highly responsive to credit card
solicitations.

CREDIT CARD INDUSTRY OVERVIEW

Types of Credit Cards

Unsecured Credit Cards. Unsecured credit cards can be broadly divided into
two categories: private label credit cards and general purpose credit cards.
Private label cards are issued by or on behalf of, and are typically accepted
only by, a particular merchant, such as gasoline or department store credit
cards. These private label cards are typically not accepted by other merchants.
General purpose cards are accepted by a wide variety of merchants. Cardholders
may use their cards to make purchases at participating merchants or to obtain
cash advances at participating financial institutions and automated teller
machines. Most credit cards are revolving credit cards (for example, MasterCard,
Visa, Discover, and Optima), where the cardholder has the option to pay less
than the full balance due, in which case the cardholder borrows the unpaid
balance from the card issuer who then charges interest on the loan.

Secured Credit Cards. A rapidly emerging type of credit card is the
"secured card", which requires the customer to deposit funds into an
interest-bearing account as collateral for all or part of the line of credit.
Secured cards are primarily targeted to U.S. households with limited or damaged
credit histories. MasterCard sources estimate that the potential secured card
market includes approximately 17 million U.S. consumers and that the number of
secured card accounts has grown from approximately 0.7 million in 1992 to
between 2.5 million and 3.5 million in 1995.

Industry Growth

In recent years, a growing proportion of consumer expenditures have been
made through credit cards, a trend which is projected by the Nilson Report, an
industry periodical, to continue over the next decade. This increase is due to a
rising number of consumers who use credit cards, an upsurge in the number and
types of merchants who accept credit cards, and a basic shift in consumer
behavior favoring the use of credit cards for convenience. Additionally, because
the industry as a whole has introduced a large number of credit cards that
encourage the cardholder to earn points, rewards, or discounts by using a
particular card for purchases, many consumers have begun to substitute the use
of credit cards for cash and checks. Of the various payment mechanisms in the
U.S., including cash, checks, credit cards and electronic payments, credit cards
have grown the fastest since 1990, at a rate three times as fast as cash and
checks.

Credit Scoring

The credit card industry has developed sophisticated techniques for
"prescreening" potential applicants for creditworthiness, then soliciting via
direct mail or outbound telemarketing only those individuals whose profiles meet
certain criteria. The primary sources of the information used in the
prescreening process are the three major credit bureau companies. A credit
bureau maintains information on an individual's credit history, with up to 400
potential data elements for each individual, including number of reported open
accounts, number of bank cards, number of credit inquiries received by the
credit bureau, historical delinquency, events of bankruptcy, credit scores, and
limited demographic data. Many, but not all, credit grantors regularly report
information about their customers to the credit bureau companies, and as result
a credit bureau report does not necessarily include an individual's complete
borrowing history.

42
<PAGE> 43

Credit card issuers use the information contained in the credit bureaus, in
combination with proprietary information, in a variety of modeling and scoring
techniques which allow them to score and then rank the names in their mailing
lists based upon the individuals' expected creditworthiness, responsiveness, and
profitability. Many issuers purchase "scorecards" from third parties who
specialize in predicting consumer risk. The predominant third party provider of
risk scorecards is Fair Isaac & Company, which uses information contained within
the major credit bureaus to assign scores to consumers, commonly referred to as
"FICO scores". Although Fair Isaac & Company does not disclose the variables it
uses to determine FICO scores, the Company believes that FICO scores are based
on a number of factors including, but not limited to, the individual's current
level of debt, number of credit experiences, delinquency experience, level of
utilization of available credit and the frequency of the individual's credit
requests. Higher FICO scores are intended to indicate greater creditworthiness,
and most credit card issuers concentrate their marketing efforts on the
households which have higher FICO scores.

Solicitation

Although solicitations of moderate income consumers have been increasing
recently, in general higher income consumers receive more credit card
solicitations than do moderate income consumers. A survey by Payment Systems
Inc. ("PSI"), an independent research firm, indicates that 34-41% of moderate
income consumers received zero to three solicitations for bankcards in a given
six-month period.

MASTERCARD/VISA MAIL SOLICITATIONS RECEIVED BY HOUSEHOLD INCOME(1)

<TABLE>
<CAPTION>
ANNUAL HOUSEHOLD INCOME
------------------------------------------------------------------
$0- $15,000- $25,000- $35,000- $50,000-
14,000 24,000 34,000 49,000 74,000 $75,000+ TOTAL
------ -------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
0-3 Solicitations.................... 63% 41% 34% 26% 18% 15% 31%
4-6 Solicitations.................... 20% 28% 26% 25% 32% 26% 27%
7 or more Solicitations.............. 17% 30% 41% 48% 51% 59% 42%
</TABLE>

- -------------------------

(1) MasterCard and Visa solicitations received during the six-month period prior
to survey.

Source:PSI's 1995 Card Services & Strategies Research Program. Survey of 2,692
consumers conducted July-August 1995. Column percentages do not add up to
100% due to rounding. Excludes consumers who did not respond to question.

Few credit card issuers target moderate income consumer segments due to the
lack of credit history and/or lower FICO scores associated with this segment.
The credit card lenders that target such segments tend to be retailers that
offer their own private label credit cards or finance companies that offer
check-accessed revolving lines of credit. The following table shows that the
households less likely to be solicited also are likely to own fewer general
purpose credit cards:

CREDIT CARD PENETRATION BY INCOME SEGMENT

<TABLE>
<CAPTION>
ANNUAL HOUSEHOLD INCOME
-------------------------------------------------------------------
$0- $15,000- $25,000- $35,000- $50,000-
14,000 24,000 34,000 49,000 99,000 $100,000+ TOTAL
------ -------- -------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Households (000s)...... 23,901 16,488 14,846 16,539 21,832 4,782 98,388
Percent of Total Households...... 24.3% 16.8% 15.1% 16.8% 22.2% 4.9% 100.0%
Percent of Households with at
least one Credit Card*......... 35.6% 55.9% 67.5% 77.2% 85.1% 86.4% 64.3%
Estimated Number of Credit Cards
Per Household*................. 1.25 2.50 3.41 4.12 5.46 6.81 3.72
</TABLE>

- -------------------------
* Includes MasterCard, Visa, Diners Club, American Express, and Discover cards.
Source: 1996 Survey of the American Household, Simmons Market Research Bureau,
Inc.

43
<PAGE> 44

Because moderate income consumers are less likely to be solicited for
general purpose credit cards, their response rates to such offers tend to be
greater than those of higher income consumers. As a result, the response rates
of moderate income consumers to general purpose credit card solicitations is
approximately double that of consumers with higher household incomes.

Response Rates Graph

<TABLE>
<CAPTION>
Household Income Response Rate (%)
<S> <C>
Under $20,000 2%
$20,000-34,999 1.9%
$35,000-49,999 1.4%
$50,000-74,999 1.1%
$75,000+ 1%

</TABLE>
- -------------------------
Source: Mail Monitor, Behavioral Analysis, Inc., 12 Months Ending First Quarter
1996. Includes MasterCard, Visa, Discover and American Express.

HISTORY OF THE COMPANY

Fingerhut Corporation

Metris is an indirect wholly owned subsidiary of FCI, a
direct-to-the-consumer marketing company that sells a broad range of products
and services via catalogs, telemarketing, television and other media. Fingerhut,
having been in the direct marketing business for over 45 years, is one of the
largest catalog marketers in the United States and sells a broad range of
general merchandise products and services to moderate income consumers, using
catalogs and other direct marketing solicitations.

Fingerhut makes substantially all of its sales using its own closed-end
credit, offering extended payment terms on all purchases under fixed-term, fixed
payment installment contracts. Fingerhut expects to continue to offer credit to
its customers both through closed-end installment payment contracts and in the
future through closed-end and revolving credit private label credit cards issued
by a bank affiliate. FCI has applied with the OCC and has received preliminary
conditional approval to establish a limited purpose credit card bank affiliate
to issue Fingerhut private label credit cards. Fingerhut presently offers
various types of credit-related insurance products in connection with the credit
it extends to its customers, and in the future the bank affiliate will offer
such products in connection with the private label credit cards it issues.
Fingerhut presently offers various types of credit-related insurance products in
connection with the credit it extends to its customers, and the bank affiliate
will in the future offer such products in connection with the private label
credit cards it issues. Metris does not, and cannot, offer these products in
connection with credit extended by Fingerhut or the bank affiliate because such
products can be offered only by an insurance company or the lender. Therefore,
FCI and Metris believe that these products do not compete with, and have no
material effect on, Metris.

As customers make payments and order new products, Fingerhut enters a
variety of payment, behavioral and other data into its database. Fingerhut uses
this database, along with sophisticated and highly automated proprietary
modeling techniques, to evaluate each customer's creditworthiness. Fingerhut
then tailors marketing campaigns and merchandising strategies to customers based
on such evaluation.

44
<PAGE> 45

The Fingerhut Database

Fingerhut is a leader in the development and use of information-based
marketing concepts in the direct mail industry, using computer technology,
proprietary software and the Fingerhut Database. The Fingerhut Database contains
information on more than 30 million individuals, including approximately 10
million customers who have made a purchase from Fingerhut within the past 24
months. This database contains up to 1,400 potential data items in a customer
record, including names, addresses, behavioral characteristics, payment
histories, general demographic information and other information provided by the
customer. Fingerhut uses information in the Fingerhut Database, along with
sophisticated proprietary credit scoring models, to produce its proprietary
credit scores (the "Fingerhut Scores") for each Fingerhut customer. The
Fingerhut Database and Fingerhut's use of computer-based credit screening
techniques have been continually refined and updated over the past 20 years.
Additionally, the Fingerhut Database includes Fingerhut's "suppress" file (the
"Suppress File"), which contains information on 8 million individuals about whom
it has information relating to fraud, bad debt and other indicators of
unacceptably high risk. As Fingerhut or an affiliate continues to grant private
label credit to its new and existing customers for purchases of Fingerhut
products and services, the information in the Fingerhut Database will be updated
with current information on these customers. Fingerhut does not report its
credit information to the credit bureaus, which means this information is not
publicly available. The Company has an exclusive seven year license with
Fingerhut to use the information in the Fingerhut Database for marketing its
financial service products, including general purpose credit cards (although
Fingerhut will continue to use such information in providing credit, through a
private label credit card or otherwise, in connection with the sale of Fingerhut
products and services). The Company's management believes that this access to
the Fingerhut Database and the ability to utilize the Fingerhut Scores give it a
competitive advantage in lending to moderate income consumers.

Financial Services Business

FCI's management believed that Fingerhut's expertise in granting credit to
the moderate income market had application and value beyond extending credit for
Fingerhut merchandise purchases. Moreover, FCI believed that its customers
wanted additional sources of credit and that issuing general purpose credit
cards to its customers in addition to Fingerhut's private label credit would be
a natural extension of Fingerhut's business. As a result, in 1993, through a
joint venture with a third party, Fingerhut began testing a co-branded
MasterCard issued by an affiliate of the third party. A random selection of
Fingerhut Customers was solicited and the results were evaluated using
Fingerhut's risk scoring models and behavioral data. The profitability
performances of the resulting accounts were correlated to Fingerhut's risk
scoring models and behavioral data. FCI's management believed the test results
showed that during the period of the test Fingerhut had more accurately
evaluated relative levels of credit risk of a given pool of Fingerhut Customers
than the scoring models widely used in the credit card industry.

After the success of its initial test, Fingerhut began to aggressively
expand its Financial Services Business. As part of this strategy, Fingerhut
hired a management team, led by Ronald Zebeck, whose more than 20 years of
experience in the credit card industry includes responsibility for the launch
and management of the highly successful GM MasterCard. This management team,
which assumed management in 1994 of the new credit card business and of the
previously existing extended service plan and fee based product businesses, has
since been implementing its strategy to expand its credit card customer base to
both Fingerhut Customers and External Prospects and to grow its extended service
plan and fee-based products and services businesses.

In early 1995, FCI formed Direct Merchants Bank, a special purpose credit
card bank. In March 1995, after evaluating the results of the co-branding test,
the Company began to directly solicit Fingerhut Customers and External Prospects
for MasterCards. These campaigns originated 335,000 new accounts and introduced
the Company's risk-based pricing strategy under which individual prospects are
matched with specific pricing based upon their risk profiles as determined by
the Company's credit models. In the Fall 1995 campaign, the Company used
predictive response models that incorporated the response data from the Spring
1995 campaign. In September 1995, the Company also purchased the test credit
card portfolio from the third party issuer. In January 1996 and March 1996, the
Company launched additional solicitations from which it generated approximately
92,000 and 430,000 accounts, respectively, as of June 30, 1996. At December 31,
1995, the Company had over 700,000 accounts with $543.6 million in managed loans
and was the 23rd largest MasterCard issuer in the United States based on the
number of cards issued, according to the Nilson Report.

45
<PAGE> 46

At March 31, 1996, the Company was the 52nd largest credit card issuer in the
United States, based on managed credit card loan balances. As of June 30, 1996,
the Company had 1.1 million credit card accounts and $1.1 billion in managed
loans; Fingerhut Customers represented 52% of the accounts and 57% of the
managed loans.

The Company's new management has also focused on marketing extended service
plans and fee-based products and cross selling these to its customer base and
Fingerhut Customers, which has led to an increase in the number of plans and
products sold and the penetration rates of such products.

STRATEGY

The Company is targeting moderate income consumers whom the Company
believes are underserved by traditional providers of many of the Company's
products and services. "Moderate income" refers to those households in the
United States that have annual incomes of between $15,000 and $35,000
(approximately 31 million households according to a 1994 U.S. Census Bureau
report). The Company intends to serve this target market using its proprietary
scoring techniques together with information from credit bureaus and the
Fingerhut Database to determine a potential customer's creditworthiness. The
Company uses sophisticated modeling techniques to evaluate the expected risk,
responsiveness, and profitability of each prospective customer and to offer and
price the products and services it believes to be appropriate for each customer.

The Company's strategy is to continue its growth by targeting new customers
through the issuance of general purpose credit cards and expanding its customer
relationships through the sale of additional products and services. The Company
believes it has the following competitive advantages in serving this segment:
(i) its exclusive access to the Fingerhut Database, (ii) its unique, proprietary
scoring models that utilize both external information sources and data contained
within the Fingerhut Database for marketing the Company's products and services,
and (iii) Fingerhut's extensive experience in extending credit to moderate
income consumers. The Company intends to build upon these competitive advantages
to maximize its penetration into the moderate income segment and to maximize the
profitability of each of its customer relationships.

The principal components of the Company's strategy are the following:

Increase the number of Fingerhut Customers utilizing the Company's products
and services. The Company's strategy is to continue to use its unique predictive
risk, response, and profitability models to solicit Fingerhut Customers for
general purpose credit cards, and to focus its cross-selling activities in order
to increase the volume of fee-based services and extended service plans
purchased by these customers. The Fingerhut Database contains information about
an individual's propensity to pay, purchasing behavior, and other data elements
that management believes enables the Company to better evaluate each Fingerhut
Customer's credit profile. The Company believes that many Fingerhut Customers
have minimal external credit experiences and, consequently, minimal available
credit bureau information. Therefore, they are often undersolicited for credit,
especially credit cards, by other financial institutions.

Identify and solicit additional External Prospects for general purpose
credit cards. The Company intends to continue adding moderate income consumers
who are currently not Fingerhut Customers through the use of its own internally
developed risk models. The Company, through a joint endeavor with Equifax, Inc.
("Equifax"), has developed its own proprietary credit risk modeling system (the
"Proprietary Modeling System") which management believes is more effective in
segmenting and evaluating the credit risk of External Prospects than the use of
FICO scores alone. By incorporating individual credit information from the major
credit bureaus into this Proprietary Modeling System and eliminating those
individuals who are contained in the Suppress File, the Company believes that it
will continue to generate a significant number of customer relationships from
External Prospects.

Cross-sell multiple products and services to each customer. The Company
intends to maximize the profitability of each customer relationship by
cross-selling additional products, thereby leveraging its account acquisition
costs and infrastructure. In addition to direct marketing solicitations, the
Company uses monthly statements and its customer service voice-response unit to
cross-sell additional products to its customers. Currently the Company focuses
its cross-selling efforts on selling fee-based products to its credit card
customers, and as of June 30, 1996, approximately 53% of the Company's credit
card customers had at least one other relationship with the Company. Management
also believes that opportunities for growth in extended

46
<PAGE> 47

service plans exist through increases in the percentage of Warrantable Products
covered by these plans, identification of new Warrantable Product categories,
and through marketing extended service plans in partnership with other third
party retailers.

Utilize risk-based pricing. The specific pricing for each individual's
credit card offer is determined by the prospective customer's risk profile and
expected responsiveness prior to solicitation, a practice known as "risk-based
pricing". Management believes that the use of risk-based pricing allows it to
maximize the profitability of each customer relationship. Over time, as
customers demonstrate their creditworthiness, their annual fees and interest
rates may be lowered or their credit lines may be increased on an individual
basis. The Company currently offers 39 different pricing structures on its
credit card products, with annual fees ranging from $0 to $48 ($60 for some
secured cards) and annual percentage rates ranging from prime plus 6.45% to
prime plus 14.20%.

Expand the range of products and services offered. The Company's expertise
in evaluating the responsiveness and creditworthiness of moderate income
consumers potentially makes it an attractive marketing partner to providers of
other financial services such as home equity loans, auto loans, student loans,
and supplemental insurance. After viable products and services are identified
and tested through marketing partners, the Company may invest in such
opportunities directly.

Access additional customers for the Company's products and services by
establishing relationships with third parties. The Company intends to access new
customers by forming relationships with third parties to market its products and
services (i.e., co-branded credit cards, extended service plans and fee-based
products). The Company believes that it will be an attractive partner to those
companies whose customers fit the Company's target market profile (for example,
retailers whose customers are primarily moderate income consumers).

Pursue portfolio acquisitions. The Company intends to opportunistically
acquire additional customer relationships and supplement its growth in the
financial services business by making selective acquisitions of credit card
portfolios and/or other businesses whose customers fit its target market
profile.

The Company is currently implementing the first four strategies listed
above and the costs to date associated therewith are reflected in the Company's
historical financial statements presented in this Prospectus. The ongoing costs
of these strategies would be expected to increase as the Company continues to
grow. The Company has not yet established any third party relationships through
which it could expand the range of products and services offered or access
additional customers for credit cards or extended service plans. The primary
initial costs of those strategies would be the marketing costs of initial tests
to evaluate the potential profitability of any proposed new products or business
relationships. Depending on the nature of the product or business relationship,
full implementation could involve additional marketing costs or infrastructure
investments. The Company is not able to predict the level of such costs at this
time. The Company also has not yet made a material acquisition of a credit card
portfolio and cannot predict the amount of premiums involved in any such future
acquisition.

BUSINESSES

The Company currently operates three businesses: (i) consumer credit
products, (ii) extended service plans, and (iii) fee-based products and
services.

Consumer Credit Products

Products. Consumer credit products currently are unsecured and secured
credit cards, including the Fingerhut co-branded MasterCard and the Direct
Merchants Bank MasterCard. The Company began testing credit cards secured by
deposit accounts in April 1996. Management believes that secured credit cards
are a natural product extension for the Company, given the Company's focus on
the moderate income consumer market and the Company's co-branding opportunities
outside of Fingerhut. Existing secured card customers can qualify for an
unsecured credit card after they have demonstrated their creditworthiness for a
reasonable period of time. In the future the Company may offer other co-branded
credit cards, and may also offer other consumer credit products either directly
or through alliances with other companies. Such consumer credit products could
include home equity loans, auto loans, student loans, and other credit products
that can be

47
<PAGE> 48

marketed directly to moderate income consumers. Although the Company has not
reached any agreement, or definitive contract negotiations, with any providers
of such other consumer credit products, the Company intends to pursue such
alliances as they become available in the future.

Credit Scoring. For over 25 years, Fingerhut has used credit risk models to
evaluate the likelihood that its catalog customers will repay their fixed term,
fixed payment installment sales contracts. For each customer in the Fingerhut
Database, a Fingerhut Score has been developed utilizing sophisticated
statistical modeling techniques. The Company also requests credit bureau
information, including FICO scores, for all Fingerhut Customers. For those
Fingerhut Customers who have FICO scores, the Company uses the Fingerhut Score
to further segment Fingerhut Customers into narrower ranges within each FICO
score subsegment, allowing the Company to better evaluate individual credit risk
and to tailor its risk-based pricing accordingly. Additionally, the Fingerhut
Score is used to target individuals who have no credit bureau information and
consequently no FICO scores, allowing the Company to target Fingerhut Customers
who would not typically be solicited by other credit card issuers. The Company
believes that its ability to use a combination of Fingerhut Scores and FICO
scores allows it to more effectively evaluate credit risk than it could using
either score alone, providing a competitive advantage in lending to Fingerhut
Customers.

In 1995, the Company and Equifax applied the credit risk evaluation
techniques and knowledge developed in creating the Fingerhut Score models to
publicly available credit bureau information in order to develop the Proprietary
Modeling System for External Prospects. The Proprietary Modeling System, which
is owned and available for use exclusively by the Company, consists of
sophisticated models which produce a credit risk score (a "Proprietary Score")
for each prospect. This Proprietary Score allows the Company to select those
External Prospects the Company believes are likely to be most profitable. The
Proprietary Score, like the Fingerhut Score, segments External Prospects into
narrower ranges within each FICO score subsegment, allowing the Company to
better evaluate individual credit risk and to tailor its risk-based pricing
accordingly. The Company also uses this segmentation to exclude certain
individuals from its marketing solicitations. The Proprietary Modeling System
has enabled the Company to be more selective in screening and targeting its
External Prospects than would be possible if only FICO scores were used.

The Company generates External Prospects from lists directly obtained from
the major credit bureaus based on criteria established by the Company. The
Company establishes the range of FICO scores that it plans to target for a
specific campaign, and receives files from the credit bureaus which contain
individual credit records of the External Prospects who fall within this range.
The files are incorporated into the Proprietary Modeling System, which further
segments External Prospects based upon their Proprietary Scores. The mailing
lists that are generated from the Proprietary Modeling System are then checked
against the Suppress File and any matching names are excluded. The Company
currently does not solicit External Prospects who do not have FICO scores.

Credit Scoring Evaluation -- Fingerhut Customers. In the Company's test
results to date, the Fingerhut Score has been effective in evaluating the
likelihood of delinquency of Fingerhut Customers who have responded to the
Company's MasterCard solicitations. The following chart illustrates an analysis
performed in June 1996 by the Company on Fingerhut Customers who responded to
the Company's Spring 1995 MasterCard solicitations. The chart shows the
comparative delinquencies of one 20-point FICO subsegment of Fingerhut
Customers. Each Fingerhut Customer in the campaign was assigned a Fingerhut
Score, and the Company tracked each customer's delinquency over time. For
purposes of the evaluation, "delinquency" was defined as credit card customers
who ever attained a status of 90 days past due on their account. The average
delinquency of the 20-point FICO subsegment shown was assigned an index of 100;
then the average delinquency of each group of Fingerhut Scores was compared, on
a percentage basis, to such average delinquencies for the entire 20-point FICO
subsegment. In the example shown, those customers who had Fingerhut Scores of
between 1 and 10 achieved an average delinquency rate that was only 46% of the
average for the whole 20-point FICO subsegment.

48
<PAGE> 49

CREDIT SCORING EVALUATION - FINGERHUT CUSTOMERS

Delinquency
Index

H 180
i
g
h 169 170
e 160
r

D
e 140
l
i
n
q 120 124 127
u
e
n
c 109
y 100----------------------------------------------------------------------------------------------------- Average Delinquency
96 of FICO Subsegment

86
80

L 77
o
w 62
e 60
r

D 46
e
l 40
i
n
q
u 20
e
n
c
y 0

1-10 11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100
Lower Risk Score ----------------------------------Higher Risk Score

</TABLE>

FINGERHUT SCORE

Note: 100 = average delinquency of Fingerhut Customers who were solicited during
the Spring of 1995 and had FICO scores within one 20-point subsegment.

Similar analyses were performed on Fingerhut Customers across all of the
FICO subsegments solicited by the Company, and the results consistently showed
that the Fingerhut Score was effective in further segmenting and evaluating
relative risk of delinquency for the customers tested within the testing period.
While the Company believes that the Fingerhut Score is a valuable tool in
analyzing relative risks, it is not possible to accurately predict which
consumers will default or the overall level of defaults, and there can be no
assurances as to the levels of actual delinquencies or losses or as to the
effectiveness of the Fingerhut Scores in evaluating this likelihood of
delinquency for different periods or under different conditions. The results of
these analyses have been utilized by the Company to determine its risk-based
pricing strategies and to exclude certain combinations of Fingerhut Scores and
FICO scores from subsequent direct marketing efforts.

Credit Scoring Evaluation -- External Prospects. The following chart
illustrates a similar analysis performed by the Company on External Prospects
who responded to the Company's MasterCard offers in the Spring of 1995. Like the
previous chart, this chart shows the comparative delinquencies, of one 20-point
FICO subsegment of External Prospects. The Company assigned a Proprietary Score
to all External Prospects and tracked their delinquency over time. In the
example shown those External Prospects who were assigned the lowest Proprietary
Score achieved a delinquency rate that was only 45% of the average of the
20-point FICO subsegment.

49
<PAGE> 50

CREDIT SCORING EVALUATION CHART - EXTERNAL PROSPECTS

Delinquency
Index
H 220
i
g
h
e 200 208
r

D
e 180
l
i
n
q 160
u 155
e
n
c 140
y

120 118

100-------------------------------------------------------------------------------------------------- Average Delinquency
95 96 of FICO Subsegment
88 88 89

80 81
L
o
w 62
e 60
r 51
46
D 45
e 40
l
i
n
q 20
u
e
n
c 0
y

1 2 3 4 5 6 7 8 9 10 11 12 13
Lower Risk Score -------------------------------Higher Risk Score

</TABLE>

PROPRIETARY SCORE

Note: 100 = average delinquency of the External Prospects who were solicited
during the Spring of 1995 and had FICO scores within one 20-point subsegment.

Similar analyses were performed on External Prospects across all of the
FICO subsegments solicited by the Company, and the results consistently showed
that the Proprietary Score was effective in further segmenting and evaluating
risk within all ranges of FICO scores for the customers tested within the
testing period. The results of these analyses have been utilized by the Company
to determine the pricing for various segments and to exclude certain segments
from subsequent direct marketing efforts. While the Company believes that the
Proprietary Score, like the Fingerhut Score, is a valuable tool in analyzing
relative risks, it is not possible to accurately predict which consumers will
default or the overall level of defaults, and there can be no assurances as to
the levels of actual delinquencies or losses or as to the effectiveness of the
Proprietary Scores in evaluating the likelihood of delinquency for different
periods or under different conditions.

The Company believes that both the Fingerhut Score and its Proprietary
Modeling System, in conjunction with the Suppress File, give it a competitive
advantage in evaluating the credit risk of moderate income consumers. Management
believes that due to the amount and type of credit information available in the
Fingerhut Database, the Fingerhut Score is currently more effective than the
Proprietary Modeling System in allowing the Company to evaluate the credit risk
of prospects having lower FICO scores. Therefore, the Company has been willing
to solicit consumers who have lower levels of FICO scores if they also have an
appropriate Fingerhut Score. As a result, the Company's Fingerhut-sourced credit
card customers generally have lower FICO scores than do External Prospects.
After every marketing campaign, the Company monitors the performance of the
Proprietary Modeling System and continually re-evaluates the effectiveness of
the Proprietary Score in segmenting credit risk, resulting in further
refinements to its selection criteria for External Prospects. Over time the
Company believes that it will capture additional credit information on the
behavioral characteristics of External Prospects which will allow it to further
increase the effectiveness of the Proprietary Modeling System and solicit
External Prospects with lower FICO scores than it currently solicits.

Solicitation. Prospects for solicitation include both Fingerhut Customers
and External Prospects and are contacted on a nationwide basis through
prescreened direct mail and telephone solicitations. The Company receives
responses to its prescreened solicitations, performs fraud screening, verifies
name and address changes, and obtains any information which may be missing from
the application. Applications are then sent to third party data entry providers,
which key the application information and process the applications based

50
<PAGE> 51

on the criteria provided by the Company. Applications are approved, denied or
referred to the Company for exception processing. The Company processes
exceptions for, among other things, derogatory credit bureau information and
fraud warnings. Exception applications are processed manually by a credit
analyst based on policies approved by the Company's credit committee.

Pricing. The Company's strategy to maximize customer profitability relies
on its risk-based pricing. The specific pricing for each credit card offer is
determined primarily based on the prospect's risk profile prior to solicitation.
Each prospect is evaluated to determine credit needs, credit risk, and existing
credit availability. A customized offer is developed that includes the most
appropriate product, brand, pricing, and credit line. Terms of the credit card
offers range from no annual fee and an annual percentage of prime plus 6.45% to
a $48 annual fee and an annual percentage rate of prime plus 14.20%. Once the
account is opened, the customer's internal and external credit performance are
actively monitored and their behavior and risk scores are periodically
recalculated. As the customer evolves through the credit lifecycle and is
regularly rescored, the lending relationship can evolve to include more
competitive (or more restrictive) pricing and product configurations.

Age of Portfolio. The following table sets forth, as of June 30, 1996, the
number of total accounts and amount of outstanding loans based upon the age of
the managed accounts.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER PERCENTAGE LOANS LOANS
AGE SINCE ORIGINATION OF ACCOUNTS OF ACCOUNTS OUTSTANDING OUTSTANDING
- ----------------------------------------------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
0-6 Months..................................... 563,173 50.2% $ 370,945 34.7%
7-12 Months.................................... 296,545 26.4% 301,093 28.2%
13-18 Months................................... 251,399 22.4% 380,319 35.6%
19-24 Months................................... 107 0.0% 134 0.0%
25-36 Months................................... 11,449 1.0% 15,527 1.5%
--------- ------ ---------- ------
Total..................................... 1,122,673 100.0% $ 1,068,018 100.0%
========= ====== ========== ======
</TABLE>

Geographic Distribution. The Company solicits credit card customers on a
national basis and, therefore, maintains a geographically diversified portfolio.
The following table shows the distribution of total accounts and amount of
outstanding loans by state as of June 30, 1996.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER PERCENTAGE LOANS LOANS
STATE OF ACCOUNTS OF ACCOUNTS OUTSTANDING OUTSTANDING
- ----------------------------------------------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California..................................... 133,897 11.9% $ 129,923 12.2%
New York....................................... 88,716 7.9% 84,320 7.9%
Texas.......................................... 83,774 7.5% 80,758 7.6%
Florida........................................ 82,949 7.4% 78,428 7.3%
Ohio........................................... 50,437 4.5% 47,217 4.4%
Pennsylvania................................... 48,304 4.3% 45,176 4.2%
Illinois....................................... 45,043 4.0% 42,231 4.0%
Michigan....................................... 36,809 3.3% 35,440 3.3%
Indiana........................................ 30,518 2.7% 28,939 2.7%
North Carolina................................. 31,428 2.8% 27,661 2.6%
All Others(1).................................. 490,798 43.7% 467,925 43.8%
--------- ------ ---------- ------
Total..................................... 1,122,673 100.0% $ 1,068,018 100.0%
========= ====== ========== ======
</TABLE>

- -------------------------
(1) No other state accounts for more than 2.5% of loans outstanding.

The Adaptive Control System. The Company utilizes First Data Resources
Inc.'s ("FDR") adaptive control system (the "Adaptive Control System") which
uses statistical models and basic account financial

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<PAGE> 52

information to automatically and regularly assign appropriate credit line
increases and decreases to individual customers, as well as to determine the
systematic collection steps to be taken at the various stages of delinquency.
The Adaptive Control System manages the authorization of each transaction; in
addition, it determines the collections strategies to be used for non-delinquent
accounts that have balances above their assigned credit line (referred to as
"overlimit" accounts). The Adaptive Control System uses a number of data
elements in determining credit lines, authorizations, and collections
strategies, including the customer's FICO score, Fingerhut Score and other
proprietary data elements, each of which is periodically updated based on the
individual's performance.

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 with average
credit lines that are below the industry average due to the higher average risk
elements inherent in the Company's target market. The Company may elect, at any
time and without prior notice to the cardholder, to preclude or restrict further
credit card use by the cardholder, usually as a result of poor payment
performance or the Company's concern over the creditworthiness of the
cardholder. Credit lines are managed based on the results of the behavioral
scoring analysis in accordance with criteria established by the Company. The
analysis, which is updated regularly and implemented by the Adaptive Control
System, identifies individuals whose credit and payment behavior suggest that
they have either too much credit exposure or additional credit capacity, and
their lines are decreased or increased accordingly. Credit lines may also be
adjusted at the request of the cardholder, subject to the Company's evaluation
of the cardholder's payment and usage history.

The following table sets forth information with respect to account balance
and credit limit ranges of the Company's managed portfolio as of June 30, 1996:

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER PERCENTAGE LOANS LOANS
ACCOUNT BALANCE RANGE OF ACCOUNTS OF ACCOUNTS OUTSTANDING OUTSTANDING
- ----------------------------------------------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT FOR ACCOUNT BALANCE RANGE)
<S> <C> <C> <C> <C>
Credit Balance................................. 8,484 0.8% $ (377) --
No Balance..................................... 173,625 15.5% 0 --
Less than or equal to $1,000................... 506,872 45.1% 225,124 21.1%
$1,001-$2,000.................................. 276,667 24.6% 406,708 38.1%
$2,001-$3,500.................................. 134,625 12.0% 344,160 32.2%
Over $3,500.................................... 22,400 2.0% 92,403 8.6%
--------- ------ ---------- ------
Total..................................... 1,122,673 100.0% $ 1,068,018 100.0%
========= ====== ========== ======
</TABLE>

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER PERCENTAGE LOANS LOANS
CREDIT LIMIT RANGE OF ACCOUNTS OF ACCOUNTS OUTSTANDING OUTSTANDING
- ----------------------------------------------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT FOR CREDIT LIMIT RANGE)
<S> <C> <C> <C> <C>
Less than or equal to $1,000................... 320,287 28.5% $ 139,950 13.1%
$1,001-$2,000.................................. 414,859 37.0% 394,168 36.9%
$2,001-$3,500.................................. 283,641 25.2% 371,693 34.8%
$3,501-$5,000.................................. 100,554 9.0% 154,598 14.5%
Over $5,000.................................... 3,332 0.3% 7,609 0.7%
--------- ------ ---------- ------
Total..................................... 1,122,673 100.0% $ 1,068,018 100.0%
========= ====== ========== ======
</TABLE>

Delinquency, Collections and Charge-offs. The Company considers an account
delinquent if a payment due thereunder is not received by the Company within 25
days from the closing date of the statements. Collection procedures are
determined by the Adaptive Control System, which continually monitors all
delinquent accounts. The collections function has been handled internally since
January 1996. The Company made the strategic decision to internalize its
collections function due to the critical impact that this function can
potentially have on the Company's profitability. The Company's collections
department generates letters through a proprietary letter system when
appropriate. Delinquent customers receive automatic collection

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<PAGE> 53

letters at various stages in their delinquency, from 5-90 days past due. The
Company's collections personnel attempt a minimum of two contacts each 30-day
delinquency cycle, unless special arrangements have been made with the customer.
Accounts that become 90 days delinquent are closed but not necessarily charged
off. Accounts can be closed prior to being 90 days delinquent after a manual
review and determination that the cardholder is not able to remedy a delinquent
or overlimit status. Accounts are charged off and taken as a loss either after
formal notification of bankruptcy or at the end of the month during which they
become contractually 180 days past due. Accounts identified as fraud losses are
reserved for immediately and charged off no later than 90 days after the last
activity. Accounts identified as deceased without a surviving, contractually
liable individual or an estate large enough to pay the debt in full are charged
off immediately upon notification. Charged-off accounts are referred to the
Company's recovery unit in Salt Lake City, Utah, for coordination of collection
efforts to recover the amounts owed. When appropriate, accounts are placed with
external collection agencies or attorneys.

The Company uses FDR's fraud protection system to improve the rate of early
detection of fraudulent activity on a cardholder account. The system also
provides work flow management that is used to investigate potentially fraudulent
transactions and to take prompt immediate action to reduce further losses. A
fraud score is established based on the details of the authorization request and
the previous behavior pattern of the cardholder. This score is used in the
determination of actions to be taken for potentially fraudulent transactions.

The Company reserves the right to cancel charge privileges at any time,
usually as a result of violating the contractual terms (delinquency, overlimit,
etc.) of the credit account. Activity on lost, stolen, or fraudulent accounts is
blocked immediately upon notification by the cardholder or upon determination by
FDR that a card is lost or stolen or being used fraudulently.

Servicing, Billing and Payment. The Company has established a long-term
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 these services for
approximately 1,400 card issuers, and is the largest commercial credit card
processor in the world.

FDR provides data processing, credit card reissuance, statementing, inbound
customer service telephone calls and interbank settlement for the Company.
Applications processing has been handled internally by the Company since
September 1995. Back office support for mail inquiries and fraud management were
internalized in April 1996. The Company believes that its relationship with FDR
allows it to achieve operational efficiencies while remaining flexible enough to
handle additional growth. Furthermore, the Company's agreement with FDR allows
the Company to internalize specific operational functions if the Company
desires.

The Company generally assesses periodic finance charges on an account if
the cardholder has not paid the balance in full from the previous billing cycle.
These finance charges are based upon the average daily balance outstanding on
the account during the monthly billing cycle. Payments by cardholders to the
Company 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 the Company. If a payment in full is not
received prior to 25 days after the statement cycle date (the "Payment Date"),
finance charges are imposed on all purchases from the date of the transaction to
the statement cycle date. Finance charges are also imposed on each cash advance
from the day such advance is made until the advance is paid in full. The finance
charge is applied to the average daily balance. The average daily balance is the
sum of the daily unpaid balances of purchases and cash advances on each day of
the monthly billing cycle divided by the number of days in such monthly billing
cycle. Such unpaid balances are determined by deducting payments and credits,
adding any unpaid finance charges and late charges and adding new purchases,
cash advances and other charges, in each case as of the date of the transaction.
Many cardholders are given a grace period. For most cardholders, if the entire
balance on the account is paid during the grace period, a finance charge is not

53
<PAGE> 54

imposed. Certain cardholders are not given a grace period, depending on the
credit card terms offered, which are determined by the prospect's risk profile
prior to solicitation.

The Company generally assesses an annual fee of $30; however, annual fees
may range from zero to $48, depending on the specific offer received by the
cardholder ($60 for some secured cards). For most accounts, the annual fee is
billed 90 days after the account is opened and annually on each anniversary
thereafter. The Company may waive the annual membership fees, or a portion
thereof, in connection with the solicitation of new accounts depending on the
credit terms offered, which are determined by the prospect's risk profile prior
to solicitation or when the Company determines a waiver to be necessary in order
to be competitive. In addition to the annual fee, the Company may charge
accounts certain other fees including: (i) a late fee with respect to any unpaid
monthly payment if the Company does not receive the required minimum monthly
payment by the Payment Date, (ii) a cash advance fee for each cash advance,
(iii) a fee with respect to each check submitted by a cardholder in payment of
an account which is not honored by the cardholder's bank, and (iv) an overlimit
charge if, at any time during the billing cycle, the total amount owed exceeds
the cardholder's credit line by at least $30 due to transaction activity.

Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, the Company reserves
the right to change or terminate certain terms, conditions, services and
features of the account (including periodic finance charges, late fees, returned
check charges and any other charges or the minimum payment), subject to the
conditions set forth in the account agreement.

Monthly billing statements are sent to cardholders by FDR on behalf of the
Company. When an account is established, it is assigned a billing cycle.
Currently, there are 21 billing cycles and each such cycle has a separate
monthly billing date based on the respective business day the cycle represents
in each calendar month. On a set billing date each month, a statement is sent to
all accounts with an outstanding balance greater than $1.00. Cardholders must
make a minimum monthly payment of the greater of $10.00 or 2.0% of the
outstanding balance, or the balance of the account if the balance is less than
$10. Payment is due upon receipt of the statement. If the minimum payment is not
collected within 25 days after the statement cycle date, the account is
considered delinquent.

Most merchant transactions by cardholders are authorized online. The
remaining transactions generally are low dollar amounts, typically below $50.00.
Transactions are automatically rejected if delinquency exceeds 10 days on
unsecured accounts. Transactions are allowed up to 10 days of delinquency
depending on the length of time that the account has been open and the behavior
score of the account. All authorizations are handled through the Adaptive
Control System.

Extended Service Plans

Fingerhut has offered extended service plans that provide warranty service
coverage beyond the manufacturer's warranty to its catalog merchandise customers
since 1990. These plans were historically marketed to customers who purchase
consumer electronics from Fingerhut, but the Company has recently begun to offer
these plans for jewelry and furniture. In general, the Company's extended
service plans provide customers with the ability to have their purchases
repaired, cleaned or replaced within certain parameters determined by the
Company. Under the Extended Service Plan Agreement, Fingerhut will agree not to
offer any extended service plans for products sold by Fingerhut other than those
provided by the Company.

Types of Plans. Within the warranty industry, extended service plans are
available for a wide variety of products, including consumer electronics,
furniture, jewelry, automotive products, and household mechanical systems such
as heating, plumbing and electrical systems. Currently the Company is focusing
on consumer electronics, furniture, and jewelry ("Warrantable Products")
purchased through Fingerhut's catalogs.

For consumer electronics (e.g., video and VCR equipment, home and car
stereos, televisions, computers, and vacuum cleaners) Fingerhut Customers may
purchase extended service plans that give them the ability to have their
purchases repaired or replaced in the case of electrical or mechanical failure
or defects in materials and workmanship. Currently the Company has contracted
with a third party to provide customer service and claims fulfillment. Customers
who need to obtain repair service for their purchase first must call the third

54
<PAGE> 55

party's customer service center to arrange for such service. The third party
locates the authorized repair center closest to the customer, contacts the
repair center to give them an authorization number, and directly reimburses the
repair center for the customer's claim. For most consumer electronics, the
customer must deliver the merchandise to the repair center and pick up the
merchandise after the repair is complete, but certain purchases may be repaired
in the customer's home.

Quality Jewelry Care(TM), the Company's extended service plan for jewelry,
was launched in July 1995. The services provided to Quality Jewelry Care
customers include repair, soldering, ring sizing, and cleaning, for which the
Company contracts with Fingerhut. To submit a claim, the customer must mail the
item to the Company, which returns the item to the customer after it has been
repaired or cleaned, typically within 4 to 6 weeks.

The Company's extended service plan program for furniture is called Quality
Furniture Care(R) and was launched in November 1995. The services provided to
Quality Furniture Care customers include stain cleaning, structural defect or
damage repair, or replacement if the merchandise cannot be fixed. Customers who
need to have their furniture purchase repaired or cleaned first go to any repair
or service provider and receive an estimated cost for the service. If the
estimated cost does not exceed $100, the customer pays for the service and
submits the bill to the Company for reimbursement. If the estimated cost exceeds
$100, the customer must call the Company's customer service representatives and
receive authorization to have the service performed. Once authorization is
received, the customer pays for the service and submits the bill to the Company
for reimbursement.

Sales and Marketing. When Fingerhut Customers purchase Warrantable
Products, they have the option to buy an extended service plan. For consumer
electronics, approximately 30% of the Company's extended service plans are
originated through the on-page print advertisement located within Fingerhut's
catalogs and other direct marketing materials; the remainder are originated
through telemarketing. Substantially all of the Quality Furniture Care and
Quality Jewelry Care plans are originated through telemarketing and other direct
marketing programs. In order to maximize the efficiency of its marketing
programs, the Company has developed proprietary targeting models which enable it
to predict which customers will be most responsive to its extended service plan
direct marketing efforts. The Company was able to increase its penetration rates
in the extended service plan business during 1994 and 1995 by implementing a
program of both inbound and outbound telemarketing to buyers of Fingerhut
merchandise. The Company further increased penetration rates during the latter
part of 1995 and the first half of 1996 by introducing two new extended service
plan products covering furniture and jewelry purchases. These efforts have
enabled the Company to increase the number of extended service plans sold by
Fingerhut and provided by the Company from approximately 359,000 plans in 1994
(15% of Warrantable Products) to approximately 322,000 plans for the first six
months of 1996 (24% of Warrantable Products). See "Transactions Between FCI and
the Company -- Extended Service Plan Agreement" and Note 6 of "Selected
Historical Financial and Operating Data".

Most of the Company's extended service plans continue for two years from
the date of the product purchase (three to five years in limited cases). The
customer pays Fingerhut a one-time fee for this coverage based on the price of
the product and the expected claims. The Company also offers customers the
opportunity to renew their coverage in one-year extensions upon payment of an
additional fee for each renewal.

For Fingerhut's consumer electronics products, the cost of the initial
purchase of a two-year extended service plan ranges from $19.99 to $139.99 and
the cost to renew the extended service plan after the first two years ranges
from $29.99 to $199.99 per year. Customers may purchase a two-year service plan
for a fee which ranges from $29.99 to $69.99 for Quality Furniture Care, or from
$14.99 to $49.99 for Quality Jewelry Care. The Company charges Fingerhut a fee
for each extended service plan sold by Fingerhut based on the retail price and
the method of sale.

Operations. Currently claims risk and claims processing for electronics
items are the responsibility of a third party, but the Company is responsible
for claims risk and claims processing for furniture and jewelry. In 1997, the
Company will internalize all operations related to extended service plans for
consumer electronics, and will incur the resulting claims risk. Initially a
third party was responsible for the customer service, claims liability, and
claims fulfillment of Quality Furniture Care; however, in February of 1996, the
Company

55
<PAGE> 56

assumed responsibility for all customer service, claims liability, and claims
fulfillment related to this program. The Company has been responsible for
customer service, claims liability, and claims risk for Quality Jewelry Care
since its inception.

Strategic Opportunities. Management believes that extended service plans
present a strategic opportunity beyond the Fingerhut customer base. Many
extended service plans are sold by retailers at the point of sale, but few
retailers follow up their point of sale efforts with direct marketing programs
aimed at increasing their penetration rates. Although the Company has not
reached any definitive agreement and is not currently in negotiations with any
third-party retailers, the Company intends to seek relationships with
third-party retailers that would allow the Company to market extended service
plans to the retailers' customers. The Company believes that it is well
positioned to integrate its systems capabilities, customer service and
operations infrastructure, and direct marketing expertise in order to augment
the sale of extended service plans to customers of third-party retailers.

Fee-based Products

Metris currently sells a variety of fee-based products and services both to
its credit card customers and to Fingerhut Customers, including (i) third-party
insurance, (ii) programs such as card registration, shopping and dining clubs,
and (iii) debt waiver protection for unemployment, disability, and death. In
addition, the Company develops customized targeted mailing lists, utilizing both
the Company's and Fingerhut's databases, for external companies to use in their
own financial service product solicitation efforts that do not directly compete
with those of the Company. However, current sales of these marketing lists are
not material to the Company's business. The Company has achieved a penetration
rate of approximately 53% for fee-based products.

The Company currently markets the following programs:

Account Protection Plus. The Company has developed a proprietary debt
waiver program that protects customers from interest charges on the Company's
credit cards in the event that they become disabled, unemployed, or deceased. In
the event of unemployment or disability, the customer's account is "frozen" for
six months, with no payments due or interest accruing during this time. In the
event of death, the amount due is waived and the account is closed. Because this
is an internally administered program, the Company is responsible for all of the
program's associated costs. Account Protection Plus currently contributes a
material portion of the Company's other operating income.

Account Benefit Plan. This debt waiver program, an alternative to Account
Protection Plus, forgives the customer's balance due in the event of death but
does not provide benefits in the event of unemployment or disability.

Card Registration. The Company has an agreement with a third-party vendor
to offer a card registration service to the Company's credit card customers. In
addition to keeping track of all of the customer's credit card accounts and
reporting lost or stolen cards as the need arises, the service also provides
safekeeping of important documents. Under the current agreement, the Company and
the third party vendor share billed revenues for this program; however, the
Company intends to internalize this program and will then be responsible for all
of its associated costs and revenues.

Membership Clubs. The Company has a cooperative marketing arrangement with
a third party to market the third party's memberships in discount clubs, which
are automobile purchase, shopping and dining clubs, in conjunction with its new
credit card account acquisitions. The Company's arrangement with this third
party enables the Company to acquire new credit card customers at a
substantially reduced cost.

Accidental Death Insurance. The Company earns a commission from a
third-party insurance administrator for the marketing of an accidental death
insurance program. The Company markets the insurance program to its credit card
customers. Although the Company markets the program, the third-party
administrator fulfills and underwrites the policies.

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<PAGE> 57

Tailored List Development. The Company currently works with several
companies to develop targeted mailing lists and earns revenue for each name that
is solicited by the companies from these mailing lists. The Company also earns
revenue from the sale of advertising space included in its monthly billing
statements.

SECURITIZATION

The Company finances the growth in its credit card accounts receivable
through a commonly used form of asset backed securitization known as a master
trust. A securitization involves the transfer by the Company of loans generated
by a pool of credit card accounts to the master trust. Direct Merchants Bank
sells its loans to the Company, which then sells them to a bankruptcy-remote
special purpose subsidiary (the "Transferor"), which in turn transfers the loans
to the master trust. The trust is authorized to sell multiple series and classes
of certificates of beneficial ownership interests in the loans and other assets
that are part of the trust. Both the loans and the certificates held by third
parties are removed from the Company's balance sheet for financial and
regulatory accounting purposes. For tax purposes, the certificates are treated
as secured debt of the special purpose subsidiary.

The master trust was formed pursuant to a pooling and servicing agreement
between the Transferor, Direct Merchants Bank as servicer, and a bank trustee.
The master trust has two series of certificates outstanding: Series 1995-1
variable funding certificates with maximum proceeds of $1,025.2 million, and
Series 1996-1 with proceeds of $655.5 million.

Subject to limitations on the number of new accounts that may be added in
any year without rating agency approval, all loans in substantially all Direct
Merchants Bank credit card accounts are transferred to the master trust. The
loans transferred to the trust include those outstanding in the selected
accounts at the time certificates representing participation interests in the
trust are sold, and those arising under the accounts from time to time. The
Company also transfers to the trust for the benefit of the certificateholders
the cash collected in payment of the loans, interest and fees. The credit
quality of the loans is supported by a credit enhancement, generally in the form
of a subordinated interest in the trust or a cash collateral account. The
Company may be required to designate additional accounts to the extent they are
available and transfer present and future loans relating to such additional
accounts to the trust if the amount of the loans in the trust declines below a
minimum dollar amount. All additional accounts transferred to the trust must
meet the same eligibility standards imposed on the existing accounts. All
proceeds of the loans and the annual fees, cash advance fees, late fees and
similar fees received or to be received for each account are similarly
transferred to the trust. Interchange fees have not been transferred to the
trust in the Company's existing transactions.

Certificates representing beneficial ownership interests in the master
trust assets are sold to investors. The Transferor receives the proceeds of the
sale and uses the proceeds to purchase more loans from the Company. The amount
of loans transferred to the trust for the benefit of the certificateholders
always exceeds the initial principal amount of the certificates sold to
investors. Consequently, the Company retains an interest in the trust in an
amount equal to the amount of the retained subordinated certificates of each
series held by the Transferor plus the amount equal to the loans in excess of
the principal balance of the certificates. The Company's interest in the trust
varies as the credit card account holders make principal payments and incur new
charges on the designated accounts.

Direct Merchants Bank acts as servicer and receives servicing fees
generally equal to 2% per annum of the certificates sold to investors and
collateralized by the securitized loans. As servicer, Direct Merchants Bank
continues to provide customer service and all other services typically performed
for its customers. Accordingly, its relationship with its credit card customers
is not affected by the securitization.

During the revolving period relating to a series of certificates, the
certificateholders are entitled to receive periodic interest payments at a fixed
rate, a floating rate or a variable rate. The interest rate on the existing
fixed rate certificate is substantially below the yield on the pool of loans.
The existing floating rate certificates are based on a LIBOR calculation and the
existing variable rate certificates are based on a commercial paper cost of
funds rate. Certificates may contain built-in interest rate caps, although the
master trust has issued only uncapped certificates to date. The Company has
purchased interest rate caps for certain certificates. Since all of the
Company's credit card accounts currently have variable rates of interest, the
floating rate issuance also

57
<PAGE> 58

has a rate substantially below the yield on the pool of loans. Cardholder
payments in excess of the amount needed to pay the rate of interest are used to
pay the servicing fee, to absorb the investors' share of credit losses and to
pay other master trust expenses, and, finally, paid to the Transferor.

After the revolving period relating to a series of certificates, the
amortization period for that series commences. Certificateholders are entitled
to receive principal payments either through monthly payments during an
amortization period or in one lump sum after an accumulation period.
Amortization may begin sooner in certain circumstances, including if the
annualized portfolio yield (consisting, generally, of interest, annual fees and
other credit card fees) net of credit losses for a three-month period drops
below the sum of the certificate rate payable to investors and loan servicing
fees during the period or if certain other events occur.

Prior to the commencement of the amortization period relating to a series
of certificates, all principal payments received on the trust receivables are
reinvested in new loans of the selected accounts for the benefit of the trust.
During an amortization period, the investors' share of principal payments are
paid to the certificateholders until they are paid in full. Acceleration of the
amortization period would accelerate the Company's funding requirement with
respect to the underlying loans. The trust will continue in existence until the
earliest of the date on which all certificateholders of all series are repaid
the principal amounts of their certificates, at which time all remaining loans
and funds held in the trust are reassigned to the Transferor, the occurrence of
an insolvency event (as defined therein), and May 26, 2095.

COMPETITION

As a marketer of consumer credit products, the Company faces increasing
competition from numerous providers of financial services, many of which have
greater resources than the Company. In particular, the Company competes with
national, regional and local bank card issuers as well as other general purpose
credit card issuers, such as American Express, Discover Card and Diners Club.
Over 6,000 issuers are affiliated with MasterCard alone. The 20 largest issuers
accounted for nearly 65% (based on receivables outstanding) of the market for
general purpose credit cards in June 1996; many of these issuers are
substantially larger and have more seasoned credit card portfolios than the
Company and often compete for customers by offering lower interest rates and/or
fee levels. In general, customers are attracted to credit card issuers largely
on the basis of price, credit limit and other product features and customer
loyalty is often limited. However, the Company believes that its strategy of
focusing on an underserved market and its access to information from the
Fingerhut Database, not available to other credit card issuers, will allow it to
more effectively compete in the market for moderate income cardholders. See
"Business -- Strategy". At March 31, 1996, the Company was the 52nd largest
credit card issuer in the United States, based on managed credit card loan
balances.

During the term of the Extended Service Plan Agreement, Fingerhut will only
offer its customers extended service plans provided by Metris. As the Company
attempts to expand its business to market extended service plans to the
customers of third-party retailers, it will compete with manufacturers,
financial institutions, insurance companies and a number of independent
administrators, many of which have greater operating experience and financial
resources than the Company.

There are numerous competitors in the fee-based products market, including
insurance companies, financial service institutions and other membership-based
consumer services providers, many of which are larger, better capitalized and
more experienced than the Company. During the term of the Database Access
Agreement, Metris has the exclusive right to use the Fingerhut Database to
market these products to Fingerhut Customers. The Company believes that its
relationship with its customers and its experience in direct marketing will
enable it to maintain and grow its fee-based products business.

REGULATION

The Company and Direct Merchants Bank

Direct Merchants Bank is a limited purpose credit card bank chartered as a
national banking association and a member of the Federal Reserve System, the
deposits of which are insured by the Bank Insurance Fund of the FDIC. Direct
Merchants Bank is subject to comprehensive regulation and periodic examination
by the

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<PAGE> 59

OCC, Federal Reserve Board and the FDIC. Direct Merchants Bank is not a "bank"
as defined under the Bank Holding Company Act of 1956, as amended (the "BHCA")
because it (i) engages only in credit card operations, (ii) does not accept
demand deposits or deposits that the depositor may withdraw by check or similar
means for payment to third parties or others, (iii) does not accept any savings
or time deposit of less than $100,000, (iv) maintains only one office that
accepts deposits and (v) does not engage in the business of making commercial
loans. As a result, the Company is not a bank holding company under the BHCA. If
Direct Merchants Bank failed to meet the credit card bank criteria described
above, Direct Merchants Bank's status as an insured bank would make the Company
subject to the provisions of the BHCA. The Company believes that becoming a bank
holding company would adversely affect FCI's ability to engage in its current
activities and would limit the Company's ability to pursue future opportunities.

Due to Direct Merchants Bank's status as a limited purpose credit card
bank, any non-credit card operations conducted by the Company in the future must
be conducted through other subsidiaries of the Company. The Company may in the
future establish additional non-bank subsidiaries that will enable it to
originate various non-credit card products. In addition, for purposes of the
BHCA, if Direct Merchants Bank failed to qualify as a credit card bank, any
entity that acquired direct or indirect control of the Company and also engaged
in activities not permitted for bank holding companies could be required either
to discontinue the impermissible activities or to divest itself of control of
the Company.

Exportation of Interest Rates and Fees

Under current judicial interpretations of Federal law, national banks such
as Direct Merchants Bank may charge interest at the rate allowed by the laws of
the state where the bank is located, and may "export" interest rates by charging
the interest rate allowed by the laws of the state where the bank is located on
loans to borrowers in other states, without regard to the laws of such other
states.

The Supreme Court of the United States recently held that national banks
may also impose late-payment fees allowed by the laws of the state where the
national bank is located on borrowers in other states, without regard to the
laws of such other states. The Supreme Court based its opinion largely on its
deference to a regulation adopted by the Comptroller of the Currency that
includes certain fees, including late fees, overlimit fees, annual fees, cash
advance fees and membership fees, within the term "interest" under the provision
of the National Bank Act that has been interpreted to permit national banks to
export interest rates. As a result, national banks such as Direct Merchants Bank
may impose such fees.

Dividends and Transfers of Funds

There are various Federal limitations on the extent to which Direct
Merchants Bank can finance or otherwise supply funds to the Company and its
affiliates through dividends, loans or otherwise. These limitations include
minimum regulatory capital requirements and restrictions concerning the payment
of dividends out of net profits or surplus, Sections 23A and 23B of the Federal
Reserve Act governing transactions between a bank and its affiliates, and
general Federal regulatory oversight to prevent unsafe or unsound banking
practices. In general, Federal law prohibits a national bank such as Direct
Merchants Bank from making dividend distributions if such distributions are not
paid out of available earnings or would cause the bank to fail to meet
applicable capital adequacy standards. The right of the Company, its
shareholders and its creditors to participate in any distribution of the assets
or earnings of Direct Merchants Bank is further subject to the prior claims of
creditors of Direct Merchants Bank.

Comptroller of the Currency

Capital Adequacy. The Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the Federal banking agencies to implement systems
for "prompt corrective action" for insured depository institutions that are not
at least adequately capitalized. FDICIA imposes progressively more restrictive
constraints on operations, management and capital distributions, depending upon
the category in

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which an institution is classified. Failure to meet the capital guidelines could
also subject a bank to capital raising requirements. In addition, FDICIA
requires the banking agencies to prescribe certain non-capital standards for
safety and soundness relating generally to operations and management, asset
quality and executive compensation. FDICIA also provides that regulatory action
may be taken against a bank that does not meet such standards.

The OCC, Direct Merchants Bank's primary Federal regulator, has adopted
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leveraged capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6 percent, a total capital ratio of at
least 10 percent and a leverage ratio of at least 5 percent and not be subject
to a capital directive order. An "adequately capitalized" institution must have
a Tier 1 capital ratio of at least 4 percent, a total capital ratio of at least
8 percent and a leverage ratio of at least 4 percent (3 percent in some cases).
Under these guidelines, Direct Merchants Bank is considered well capitalized.

The OCC has also adopted a final rule amending risk-based capital standards
to consider explicitly a bank's exposure to declines in the economic value of
its capital due to changes in interest rates when evaluating a bank's capital
adequacy. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from adverse movements in interest rates.
The evaluation will be made as a part of the institution's regular safety and
soundness examination. The banking agencies also have sought public comment on a
proposed interagency policy statement regarding the measurement and assessment
of interest rate risk. This proposal, while still under consideration, would
require banks with interest rate risk in excess of defined thresholds to
maintain additional capital beyond that generally required.

FDICIA. FDICIA revised sections of the Federal Deposit Insurance Act
affecting bank regulation, deposit insurance and provisions for funding of the
Bank Insurance Fund administered by the FDIC. FDICIA (i) revised bank regulatory
schemes embodied in several other Federal banking statutes, (ii) linked
explicitly the bank regulators' authority to intervene to the deterioration of a
bank's capital level, (iii) required each company having control of a bank to
guarantee an undercapitalized bank's compliance with a capital restoration plan,
(iv) imposed new safety and soundness standards on management and operations of
a bank, (v) placed limits on real estate lending and (vi) tightened audit
requirements. FDICIA also requires the FDIC to implement a system of risk-based
premiums for deposit insurance pursuant to which the premiums paid by a
depository institution will be based on the probability that the FDIC will incur
a loss in respect of such institution. The FDIC has since adopted a system that
imposes insurance premiums based upon a matrix that takes into account a bank's
capital level and supervisory rating. Accordingly, given Direct Merchants Bank's
capital level and supervisory rating, Direct Merchants Bank pays the lowest rate
on deposit insurance premiums.

Direct Merchants Bank may accept brokered deposits as part of its funding.
Under FDICIA, only "well capitalized" and "adequately capitalized" banks may
accept brokered deposits. "Adequately capitalized" banks, however, must first
obtain a waiver from the FDIC before accepting brokered deposits and such
deposits may not pay rates that significantly exceed the rates paid on deposits
of similar maturity from the bank's normal market area or the national rate on
deposits of comparable maturity, as determined by the FDIC, for deposits from
outside the bank's normal market area. Direct Merchants Bank does not at present
rely on brokered deposits to fund its operations.

Changes in Directors and Senior Executive Officers. Direct Merchants Bank
is required to give written notice at least 30 days prior to the effective date
of any new director or senior executive officer (as well as the employment or
change in responsibilities of any individual to a position as a senior executive
officer) in the event the bank has undergone a change in control within two
years or in the event the bank is not in compliance with certain minimum capital
requirements or is otherwise in a troubled condition. A proposed director (or
senior executive officer) may begin service upon the expiration of the 30-day
period following acceptance of a completed notice, unless the OCC issues a
notice of disapproval before the end of the 30-day period.

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Lending Activities

Direct Merchants Bank's activities as a credit card lender are also subject
to regulation under various Federal laws including the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Community
Reinvestment Act (the "CRA") and the Soldiers' and Sailors' Civil Relief Act.
Regulators are authorized to impose penalties for violations of these statutes
and, in certain cases, to order Direct Merchants Bank to pay restitution to
injured cardmembers. Cardholders may also bring actions for certain alleged
violations of such regulations. Federal and state bankruptcy and debtor relief
laws also affect Direct Merchants Bank's ability to collect outstanding balances
owed by cardholders who seek relief under these statutes.

The OCC and other Federal banking agencies have recently revised their
regulations under the CRA that could affect the activities of Direct Merchants
Bank. These regulations subject limited purpose banks, including Direct
Merchants Bank, to a "community development" test for evaluating required CRA
performance. The community development performance of a limited purpose bank is
evaluated pursuant to various criteria involving community development lending,
qualified investments and community development services.

Legislation

From time to time legislation has been proposed in Congress to limit
interest rates that could be charged on credit card accounts; however, the
Company does not anticipate any serious effort by Congress to enact such a
limitation in the current session of Congress.

Investment in the Company and Direct Merchants Bank

Certain acquisitions of capital stock may be subject to regulatory approval
or notice under Federal law. Investors are responsible for insuring that they do
not directly or indirectly acquire shares of capital stock of the Company in
excess of the amount which can be acquired without regulatory approval.

Although Direct Merchants Bank qualifies as a credit card bank under the
BHCA, it is an "insured depository institution" within the meaning of the Change
in Bank Control Act. Consequently, Federal law and regulations will prohibit any
person or persons acting in concert from acquiring control of the Company
without, in most cases, prior written approval of the OCC. Control is
conclusively presumed if, among other things, a person acquires more than 25% of
any class of voting stock of the Company. However, under certain circumstances,
a notice may be required if a person or persons acting in concert acquire or
control 10% of any class of voting stock.

Interstate Taxation

Several states have passed legislation which attempts to tax the income
from interstate financial activities, including credit cards, derived from
accounts held by local state residents. Based on current interpretations of the
enforceability of such legislation, coupled with the volume of its business in
these states, the Company believes that this will not materially affect Direct
Merchants Bank.

Fair Credit Reporting Act

The Fair Credit Reporting Act ("FCRA") regulates "consumer reporting
agencies". Under the FCRA, an entity risks becoming a consumer reporting agency
if it furnishes "consumer reports" to its affiliates or third parties. A
"consumer report" is a communication of information which bears on a consumer's
creditworthiness, credit capacity, credit standing or certain other
characteristics and which is collected or used or expected to be used to
determine the consumer's eligibility for credit, insurance, employment or
certain other purposes. The FCRA explicitly excludes from the definition of
"consumer report" a report containing information solely as to transactions or
experiences between the consumer and the entity making the report.

It is the objective of the Company and Fingerhut to conduct their
operations in a manner which would fall outside the definition of "consumer
reporting agency" under the FCRA. If the Company or Fingerhut

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<PAGE> 62

were to become a consumer reporting agency, however, it would be subject to a
number of complex and burdensome regulatory requirements and restrictions,
including restrictions limiting the Company from using information from the
Fingerhut Database and furnishing information to third parties. Such
restrictions could have a significant adverse economic impact on the Company's
results of operations and future prospects. See "Risk Factors -- Regulation" and
"-- Dependence on Fingerhut".

EMPLOYEES

As of July 31, 1996, the Company had approximately 350 employees located in
Minnesota, Utah and Oklahoma. None of the Company's employees are represented by
a collective bargaining agreement. The Company considers its relations with its
employees to be good.

PROPERTIES

The Company's principal executive offices are located in leased premises in
St. Louis Park, Minnesota. The Company also leases office space for Direct
Merchants Bank in Salt Lake City, Utah and for the Company's operations in
Tulsa, Oklahoma. The Company believes that its facilities are suitable to its
businesses and that it will be able to lease or purchase additional facilities
as its needs require.

LEGAL PROCEEDINGS

The Company is not involved in any legal proceeding that management
believes may have a material adverse effect on the Company's financial position
or results of operations.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning the persons
who currently serve as directors or executive officers of the Company. Each
executive officer has been elected to the indicated office with the Company in
connection with its incorporation in 1996 and serves at the discretion of the
Board of Directors of the Company. Two of the Company's executive officers
currently are executive officers of FCI.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ---- --------------------------------------------
<S> <C> <C>
Theodore Deikel............. 60 Chairman of the Board
Ronald N. Zebeck............ 41 President, Chief Executive Officer and
Director
Peter G. Michielutti........ 40 Senior Vice President, Business Development
Douglas B. McCoy............ 49 Vice President, Operations
Robert W. Oberrender........ 36 Vice President, Chief Financial Officer
Douglas L. Scaliti.......... 38 Vice President, Marketing
David R. Reak............... 37 Vice President, Credit Risk
Dudley C. Mecum............. 61 Director
Michael P. Sherman.......... 44 Director
Frank D. Trestman........... 61 Director
</TABLE>

Theodore Deikel is the non-executive Chairman of the Board of Directors of
the Company. He has been Chairman of the Board, Chief Executive Officer and
President of FCI since 1989. Prior to that he was Executive Vice President of a
predecessor of The Travelers Inc. and Chairman of its specialty retailing
division (which included FCI) and was Chief Executive Officer of Fingerhut from
1975 to 1983. Mr. Deikel also serves as a director of FCI.

Ronald N. Zebeck is President and Chief Executive Officer and a director of
the Company. He has been President of a subsidiary of the Company since March
1994 and has served as Chief Executive Officer of Direct Merchants Bank since
July 1995. Mr. Zebeck was Managing Director, GM Card Operations of General
Motors Corporation from 1991 to 1993, Vice President, Marketing and Strategic
Planning of Advanta Corporation (Colonial National Bank USA) from 1987 to 1991,
Director of Strategic Planning of TSO Financial (later Advanta Corporation) from
1986 to 1987 and held various credit card and credit-related positions at
Citibank affiliates from 1976 to 1986. He is also a director of MasterCard
International, Inc.

Peter G. Michielutti is Senior Vice President, Business Development. He is
also Senior Vice President, Chief Financial Officer of FCI, a position he has
held since July 1995. For 16 years prior to joining FCI, he held various
positions with divisions/subsidiaries of Household International Inc. (consumer
finance services): Executive Director and Chief Financial Officer of Household
Credit Services from May 1992 to July 1995, Vice President -- Financial
Administration -- Canada of Household Financial Corporation Limited from March
1991 to May 1992, Vice President -- Financial Administration of Household Bank
FSB from August 1990 to March 1991, and various controller and finance positions
from 1979 to 1991.

Douglas B. McCoy is Vice President, Operations and has held that position
with a subsidiary of the Company since January 1995. In addition, he has been
President of Direct Merchants Bank since July, 1995. Prior to joining the
Company, he was Vice President, Credit Administration of USAA Federal Savings
Bank from September 1994 to January 1995, Assistant Vice President, Credit
Administration, of Bank of Oklahoma from July 1984 to September 1994, Assistant
Vice President, Operations of First National Bank of Tulsa from May 1982 to July
1984 and Assistant Vice President, Credit Card Marketing, of The Bank of New
Orleans from April 1978 to April 1982.

Robert W. Oberrender is Vice President, Chief Financial Officer of the
Company. He is also Vice President, Treasurer of FCI, a position he has held
since July 1994, and was Assistant Treasurer of FCI from February 1993 until
1994. Mr. Oberrender was Vice President, Corporate Finance & Banking Group of
Chemical Bank (now The Chase Manhattan Bank) for more than five years before
joining FCI.

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Douglas L. Scaliti is Vice President, Marketing and has held that position
with a subsidiary of the Company since September 1994. For the 12 years prior to
joining the Company, he held several positions at Advanta Corporation (Colonial
National Bank USA): Senior Marketing Manager, Credit Cards from 1987 to 1994,
Operations Consultant, Profit Improvement from 1985 to 1987 and Credit
Operations Manager from 1982 to 1985. Prior to that he was Assistant Branch
Manager of Avco Financial Services from 1980 to 1982. Mr. Scaliti also serves on
the First Data Resources Advisory Group.

David L. Reak is Vice President, Credit Risk and has held that position
with a subsidiary of the Company since December 1995. For 12 years prior to
joining the Company, he had several positions at American Express, Travel
Related Services Company, including: Senior Manager, Credit Risk Management
European and Middle East from 1994 to December 1995, Senior Manager, Credit Risk
Management U.S. Consulting Group from 1992 to 1994, Project Manager, Credit
Research and Analysis from 1990 to 1992.

Dudley C. Mecum is a director of the Company. He has been a partner in the
firm of G.L. Ohrstrom & Co., a merchant banking firm, since 1989 and was
Chairman of Mecum Associates, Inc., a management consulting company, from 1987
to 1989. Mr. Mecum is also a director of FCI, The Travelers Inc., Lyondell
Petrochemical Corporation, Vicorp Restaurants, Inc., DynCorp, Roper Industries,
Inc. and Harrow Industries, Inc.

Michael P. Sherman is a director and is also Secretary of the Company. He
has been Senior Vice President, Business Development, General Counsel and
Secretary of FCI since May 1996. Prior to joining FCI, he was Executive Vice
President, Corporate Affairs, General Counsel and Secretary of Hanover Direct,
Inc., a catalog retailer, for more than the previous five years.

Frank D. Trestman is a director of the Company and is President of Trestman
Enterprises, an investment and business development firm. He has been a
consultant to McKesson Corporation and is the former Chairman of the Board and
Chief Executive Officer of Mass Merchandisers, Inc., a distributor of non-food
products to grocery retailers and now a subsidiary of McKesson Corporation. Mr.
Trestman is also a director of Insignia Systems, Inc. and Best Buy, Inc.

Officers of the Company are elected by, and hold office at the will of, the
Board of Directors and do not serve a "term of office" as such.

BOARD OF DIRECTORS

The Board of Directors of the Company currently consists of the individuals
listed above as directors, three of whom are currently directors and/or officers
of FCI. Each of these individuals was appointed a director in connection with
the Company's incorporation in 1996. At or following the Offering, the Company
will appoint one additional director not affiliated with the Company or FCI.

The new director to be appointed to the Board at the time of or following
the Offering will be appointed by a majority vote of the directors then in
office as specified in the Company's Certificate of Incorporation. It is
contemplated that the size of the Board of Directors will be increased from its
current size to such number as the Board of Directors may determine to be
appropriate in connection with the Offering.

In accordance with the terms of the Certificate of Incorporation, so long
as FCI beneficially owns at least 51% of the voting power of the then
outstanding stock of the Company, directors will hold office for one year terms
and be elected at each annual meeting of the shareholders of the Company. At the
time that FCI no longer beneficially owns 51% or more of the voting power of the
then outstanding stock of the Company entitled to vote generally in the election
of directors (the "Voting Stock"), the Board of Directors will be divided into
three classes, designated as Class I, Class II and Class III, respectively, with
staggered three-year terms of office. At each annual meeting thereafter,
directors who are elected to succeed the class of directors whose terms expire
at that meeting will be elected for three-year terms.

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<PAGE> 65

COMMITTEES OF THE BOARD OF DIRECTORS

The Bylaws of the Company provide that the Board of Directors may establish
committees which may exercise the powers delegated to such committees by the
Board of Directors. After the consummation of the Offering, the newly
constituted Board of Directors is expected to consider the establishment of
certain committees, including an Audit Committee and a Compensation Committee.

The Audit Committee will be composed entirely of outside directors who are
independent of the management of the Company and are free from any relationship
that in the opinion of the Board of Directors would interfere with their
exercise of independent judgment. The Audit Committee will supervise and review
the Company's accounting and financial services, make recommendations to the
Board of Directors as to nomination of independent auditors, confer with the
independent auditors and internal auditors regarding the scope of their proposed
audits and their audit findings, reports and recommendations, review the
Company's financial controls, procedures and practices, approve all nonaudit
services by the independent auditors and review transactions between the Company
and its affiliates.

The Compensation Committee will set the compensation of all the Company's
executive officers, approve, adopt and administer compensation plans, administer
and grant stock options under the Company's stock option plans, review
administration of the Company's benefit plans and the Company's employee benefit
policies and also review and make recommendations to the Board of Directors on
matters relating to compensation of all officers.

COMPENSATION OF DIRECTORS

Members of the Board of Directors who are not employees of the Company or
FCI will receive an annual retainer of $15,000 for membership on the Board of
Directors, including service on committees of the Board, and an attendance fee
of $1,000 for each regular or special meeting attended of the Board of Directors
or any committee thereof. The directors designated and serving as the
chairpersons of the Audit Committee and of the Compensation Committee also will
receive annual retainers of $2,000 each for service as chairpersons of such
committees. Non-employee directors will receive an initial grant of 5,000 stock
options with an exercise price per share equal to the price to the public in
connection with the Offering and will receive annual grants of 1,000 stock
options with exercise prices equal to the fair market value of the Common Stock
on the respective grant date for each subsequent year they serve as directors of
the Company. Directors employed by the Company or FCI will receive no directors'
fees or directors' stock options. In addition, the Company will reimburse
reasonable travel, lodging and other incidental expenses incurred by directors
in attending meetings of the Board of Directors and committees. The Chairman of
the Board will be granted options to purchase 275,000 shares of Common Stock at
the public offering price.

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth cash and noncash compensation paid for each
of the last three fiscal years to the Chief Executive Officer and each of the
four other most highly compensated executive officers who were serving as
executive officers at December 31, 1995. Prior to the Offering, executive
compensation was established by the FCI Compensation Committee. It is
anticipated that, following the Offering, the Compensation Committee of the
Board of Directors of the Company will review the compensation established

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<PAGE> 66

for the executive officers and may revise such compensation based upon such
standards and peer company comparisons as the Committee deems appropriate at
such time.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($) ($)(2) (#)(3) ($)(4)
- ------------------------------ ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald N. Zebeck.............. 1995 $ 358,481 $496,272 $ 55,008 105,000 $ 16,500
Chief Executive Officer 1994 $ 275,962 $211,735 $ 53,060 75,000 $790,000
1993 -- -- -- -- --
Peter G. Michielutti.......... 1995 $ 108,173 $143,000 $ 44,188 30,000 $ 35,453
Sr. Vice President, Business 1994 -- -- -- -- --
Development 1993 -- -- -- -- --
Douglas B. McCoy.............. 1995 $ 134,616 $175,000 $ 10,279 13,500 $ 8,607
Vice President, Operations 1994 -- -- -- -- --
1993 -- -- -- -- --
Robert W. Oberrender.......... 1995 $ 122,512 $109,452 $ 21,473 20,000 $ 16,500
Vice President, Chief 1994 $ 111,731 $ 65,766 $ 10,651 8,500 $ 10,620
Financial Officer 1993 $ 88,077 $ 40,797 $ 20,178 19,000 $ 34,365
Douglas L. Scaliti............ 1995 $ 108,654 $105,635 $ 250 3,500 $ 5,038
Vice President, Marketing 1994 $ 33,462 $ 15,000 $ 22,508 2,500 $ 7,257
1993 -- -- -- -- --
</TABLE>

- -------------------------
(1) Mr. Zebeck commenced employment with the Company in March 1994; Mr.
Michielutti commenced employment with Fingerhut and became an officer of the
Company in July 1995; Mr. McCoy commenced employment with the Company in
January 1995; and Mr. Scaliti commenced employment with the Company in
September 1994. Mr. Oberrender is employed by Fingerhut. The amounts shown
for Mr. Michielutti and Mr. Oberrender were paid to them as Fingerhut
employees. The allocations paid by the Company to FCI under the
Administrative Services Agreement for treasury and finance services reflect
services provided by Mr. Michielutti and Mr. Oberrender to the Company.

(2) Amounts reported under "Other Annual Compensation" represent perquisites or
other personal benefits, cash payments designated as an auto allowance and
tax reimbursement payments. In accordance with rules of the Securities and
Exchange Commission, certain perquisites and other personal benefits
totaling less than $50,000 or 10% of a named executive officer's salary and
bonus have been omitted.

(3) All amounts represent option grants under option plans of FCI. These options
will terminate if the Company ceases to be a subsidiary of FCI.

(4) Amounts disclosed in this column represent the following amounts contributed
under the Fingerhut Corporation Profit Sharing Plan: $16,500 for Mr. Zebeck
and $4,379 for Mr. Scaliti for 1995, and $10,620 and $16,500 for Mr.
Oberrender for 1994 and 1995, respectively. Mr. Michielutti and Mr. McCoy
were not eligible to participate in that plan in 1995 as they had not
completed one year of employment. The 1994 amount for Mr. Zebeck consisted
of the amount paid to him as a signing payment and to cover expenses
incurred in connection with his relocation to Minnesota. The 1995 amounts
paid to Messrs. Michielutti and McCoy, the 1994 amount and $659 of the 1995
amount paid to Mr. Scaliti, and the 1993 amount paid to Mr. Oberrender
represent reimbursement of relocation expenses.

Severance Arrangements. In the event Mr. Zebeck voluntarily resigns his
employment prior to March 21, 1997, he is obligated to repay the Company
$490,500 (adjusted for taxes) reduced by an amount equal to 1/36 of the adjusted
$490,500 for each completed month of employment with the Company.

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<PAGE> 67

Three other executive officers, including Messrs. McCoy and Scaliti, have
severance provisions in their offer letters providing that if their employment
is involuntarily terminated for other than cause within two years of their dates
of hire, they will receive one or more severance payments equal to one year of
base salary.

COMPENSATION UNDER RETIREMENT PLANS

Profit Sharing Plan. Fingerhut maintains a defined contribution profit
sharing plan (the "Profit Sharing Plan") for certain nonunion employees of
Fingerhut and other subsidiaries of FCI who have been employed by the
participating employer for at least one year. Prior to the Offering, certain of
the Company's executive officers were eligible to participate in the Profit
Sharing Plan, subject to completing one year of service.

Pension Plan. Fingerhut maintains a noncontributory defined benefit plan
(the "Pension Plan") for substantially all of its nonunion employees (and the
nonunion employees of certain of FCI's other subsidiaries) who have completed at
least one year of service. Under the Pension Plan, the current service pension
credit of each participant for each year is equal to the sum of (i) .82% of his
or her certified earnings not in excess of Social Security covered compensation
for that plan year and (ii) 1.40% of the balance of his or her certified
earnings for that year. Retirement benefits under the Pension Plan are the sum
of the pension credits for each year of service. Participants are 100% vested
after completion of at least five years of service. Certain of the Company's
executive officers are participants in the Pension Plan. The estimated combined
annual benefit payable at age 65 for the named executives under the Pension Plan
is: Mr. Zebeck, $43,702; Mr. Michielutti, $43,063; Mr. McCoy, $28,641; Mr.
Oberrender, $53,195; and Mr. Scaliti, $41,325.

COMPENSATION PROGRAMS

The Company's executive officers are eligible for 1996 bonuses under a
bonus plan applicable to subsidiaries of FCI. The Company expects to implement a
similar plan for 1997 and succeeding years.

Bonus Plan. The Bonus Plan is intended to provide incentives to management
to achieve or exceed the Company's financial goals for that year. All the
Company's executive officers other than the Chief Executive Officer, as well as
other management level employees, are eligible to participate in the 1996 Bonus
Plan. The 1996 Bonus Plan has five components: paid base salary, targeted bonus
percentage (based on job level), FCI performance factor, Company performance
factor and individual performance objectives. The targeted bonus is based 15% on
individual performance, 10% on FCI's 1996 earnings per share and 75% on the
Company's contribution to FCI's 1996 earnings per share. The 1996 Bonus Plan
established target and maximum bonuses of 75% and 97.5%, respectively, of paid
base salaries for vice presidents, 110% and 143%, respectively, of paid base
salary for senior executives other than the Chief Executive Officer, and 125%
and 162.5%, respectively, of paid base salaries for the Chief Executive Officer.
The Company performance factor is based on one of more of the following factors,
depending on the individual's area of responsibility: FCI 1996 earnings per
share or Company 1996 pre-tax earnings. In addition, the Bonus Plan provides for
special President's Awards for extraordinary service.

Stock Option Plan. In connection with the Offering, the Company will adopt
the Metris Companies Inc. Long-Term Incentive and Stock Option Plan (the "Stock
Option Plan"), which will permit a variety of stock-based grants and awards and
give the Company flexibility in tailoring its long-term compensation programs.
It will provide that up to 1,880,000 shares of Common Stock, subject to
adjustment in certain circumstances, are available for awards of stock options
or other stock-based awards. The Company anticipates granting options to
purchase an aggregate of approximately 625,000 shares of Common Stock to
officers and employees of the Company and the Chairman of the Board in addition
to the options granted to the Chief Executive Officer under the Tandem Plan (as
defined hereafter).

The Stock Option Plan will be administered by the Compensation Committee of
the Board of Directors, the composition of which will satisfy the requirements
of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
The Compensation Committee has the authority, subject to the terms of the plan,
to determine the employees to whom awards are granted, the type of option or
award, the number of shares of Common Stock with respect to such options or
awards and the terms of such options or awards, including the purchase or
exercise price, vesting periods (and the authority to accelerate vesting) and

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expiration dates. The Stock Option Plan will permit the Compensation Committee
to grant options that are either nonqualified stock options or incentive stock
options ("ISOs") that qualify under Section 422A of the Code, as well as stock
appreciation rights, restricted stock or performance awards.

The Compensation Committee has the authority to determine the exercise
prices, vesting dates or conditions, expiration dates and other material
conditions upon which options or awards may be exercised, except that the option
price for ISOs may not be less than 100% of the fair market value of the Common
Stock on the date of grant (and not less than 110% of the fair market value in
the case of an ISO granted to any employee owning more than 10% of the Common
Stock) and the terms of nonqualified stock options may not exceed 15 years from
the date of grant (not more than 10 years for ISOs and five years for ISOs
granted to any employee owning more than 10% of the Common Stock). Full or
part-time employees, consultants or independent contractors to the Company or
one of its subsidiaries are eligible to receive nonqualified options and awards
(only full or part-time employees in the case of ISOs).

The exercise price of shares being acquired under an option or award must
be paid in full in cash at the time of exercise unless the Compensation
Committee in its sole discretion permits payment by tendering to the Company
shares of Common Stock already owned by the optionee having a fair market value
equal to the exercise price of the shares being acquired or by delivering the
optionee's promissory note in such amount, which note shall provide for interest
at a rate not less than the minimum rate required to avoid the imputation of
income, original issue discount or a below-market rate loan pursuant to Sections
483, 1274 or 7872 of the Code or any successor provisions thereto. At the time
of exercise, the optionee must pay, or have withheld, the amount requested by
the Company for the purpose of satisfying any liability to withhold federal or
state income or other taxes. The Compensation Committee may permit a participant
holding a nonqualified stock option or award to satisfy the tax obligation by
withholding a portion of the shares otherwise to be delivered upon exercise with
a fair market value equal to such taxes or by delivering to the Company shares
of Common Stock already owned by the optionee with such value. In the case of an
ISO, the right to make payment by tender or currently owned shares of Common
Stock must be authorized at the time of the grant.

The Stock Option Plan authorizes the Compensation Committee, at its
discretion, to grant a replacement (or reload) option to an optionee who tenders
previously owned shares to pay all or a portion of the exercise price of stock
options under the Stock Option Plan. Such replacement or reload option would
have as its exercise price the market price of the Common Stock on the date of
exercise of the original options and cover the same number of shares as tendered
by the participant in payment of the exercise price and, if applicable, the
withholding taxes.

The number or kind of shares issuable under the Stock Option Plan, or the
number or kind of shares subject to, or in the exercise price per share under,
outstanding options may be adjusted in the event of certain corporate events
affecting the Company's capital structure.

The Stock Option Plan may be amended by the Board of Directors, but no
amendment may increase the maximum number of shares of Common Stock issuable
under the Stock Option Plan, decrease the minimum exercise price, extend the
maximum option term or modify the eligibility requirement for participation in
the Stock Option Plan, unless it is approved by the Company's shareholders.

The Stock Option Plan will terminate in 2006. No termination of the Stock
Option Plan will alter or impair any of the rights or obligations of any person,
without his or her consent, under any previously granted option or award.

Tandem Plan. Effective as of March 21, 1994, FCI granted the Chief
Executive Officer a tandem option (as amended through the date hereof, the
"Tandem Plan") exercisable for either (i) 55,000 shares of FCI common stock at
an exercise price of $15.00 per share or (ii) an interest in the Company.
Exercise of either option terminates the other. Prior to the Offering, the
interest in the Company is for the value of 3.3% of the Company in excess of two
times the estimated fair value of the Company in March 1994 plus an adjustment
for capital contributions, to be settled in cash upon termination of employment
or termination of the Tandem Plan. Concurrently with the Offering, the interest
in the Company will be converted to options to purchase 641,572 shares (656,075
if the Underwriters' over-allotment option is exercised) of Common Stock with an

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exercise price of $2.76 per share. Approximately one-half of the options granted
pursuant to the Tandem Plan are fully vested, with the remainder to vest by
March 31, 1999.

The following table shows information concerning options to purchase FCI
common stock granted to the named executives under FCI's stock option plans
during the fiscal year ended December 31, 1995.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTS 1995(1) ($/SH.) DATE 5% 10%
- ------------------------------ ---------- ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald N. Zebeck.............. 50,000(3) 3.4% $15.00 6/16/05 $471,500 $1,195,500
55,000(3) 3.7% $15.00 3/21/01 $518,650 $1,315,050
Peter G. Michielutti.......... 30,000(3) 2.0% $15.00 6/16/05 $282,900 $ 717,300
Douglas B. McCoy.............. 10,000(4) (5) $19.03 1/31/02 $ 91,200 $ 231,100
3,500(3) (5) $15.00 6/16/05 $ 33,005 $ 83,685
Robert W. Oberrender.......... 20,000(3) 1.4% $15.00 6/16/05 $188,600 $ 478,200
Douglas L. Scaliti............ 3,500(3) (5) $15.00 6/16/05 $ 33,005 $ 83,685
</TABLE>

- -------------------------
(1) The percentages reflect the percent of total options granted under FCI
option plans in 1995.

(2) These dollar amounts are the result of calculations at the 5% and 10% rates
required by the Securities and Exchange Commission from the market price on
the date of grant and are not intended to forecast possible future
appreciation of the FCI common stock price. The actual gains, if any, on
stock option exercises will depend on the future performance of FCI's common
stock.

(3) All of the options listed are options to purchase FCI common stock granted
under the Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock
Option Plan. They vest 33 1/3% on the anniversary of the grant date and
33 1/3% annually thereafter. These options will expire on the earlier of the
date that the Company is no longer a subsidiary of FCI or ten years from the
grant date. The shares listed for Mr. Zebeck include 55,000 shares granted
in tandem with his Company stock options. These options vest 25% per year
commencing March 21, 1994 and expire on the earlier of (i) exercise of any
of his Company stock options granted under the Tandem Plan or (ii) March 21,
2001. In addition, exercise of any of these 55,000 options terminates his
Company stock options under the Tandem Plan.

(4) All of the options listed are options to purchase FCI common stock granted
under the Fingerhut Companies, Inc. Performance Enhancement Investment Plan.
They vest 25% on the anniversary of the grant date and 25% annually
thereafter. These options will expire seven years after the grant date or,
to the extent not vested, the date on which the Company is no longer a
subsidiary of FCI, if earlier.

(5) Less than 1%.

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<PAGE> 70

FISCAL YEAR-END OPTION VALUES

The following table shows information concerning options to purchase FCI
common stock granted to the named executives under FCI's stock option plans as
of December 31, 1995. None of the named executives exercised any options during
the fiscal year ended December 31, 1995.

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald N. Zebeck............................... 13,750 91,250 $ -- $ --
Peter G. Michielutti........................... -- 30,000 $ -- $ --
Douglas B. McCoy............................... -- 13,500 $ -- $ --
Robert W. Oberrender........................... 2,900 28,600 $ -- $ --
Douglas L. Scaliti............................. 500 5,500 $ -- $ --
</TABLE>

- -------------------------
(1) All of the listed options are FCI options. The value of unexercised
in-the-money options represents the aggregate difference between the market
value on December 31, 1995, based on the closing price of FCI common stock
as reported on the New York Stock Exchange, and the applicable exercise or
in-the-money prices. All of the listed options were out-of-the-money on such
date.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table indicates the numbers of shares of Common Stock that
will be owned beneficially upon consummation of the Offering by all persons
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, each director, prospective director and executive
officer of the Company. Prior to the Offering, no director, prospective director
or executive officer will beneficially own any Common Stock.

<TABLE>
<CAPTION>
COMMON STOCK FCI COMMON STOCK
-------------------------------------- --------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
NAME BENEFICIALLY OWNED PERCENT OF CLASS BENEFICIALLY OWNED PERCENT OF CLASS
- --------------------------------- ------------------ ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Fingerhut Companies, Inc.(1)..... 15,966,667 84.9%
Theodore Deikel.................. --(2) -- 5,669,651(3) 11.2%
Ronald N. Zebeck................. 320,786(4) 1.7% 39,763(5) *
Dudley C. Mecum.................. -- -- 6,000(6) *
Michael P. Sherman............... -- -- -- --
Frank D. Trestman................ -- -- -- --
Peter G. Michielutti............. --(2) -- 25,091(6) *
Douglas B. McCoy................. --(2) -- 5,385(6) *
Robert W. Oberrender............. --(2) -- 11,364(6) *
Douglas L. Scaliti............... --(2) -- 5,848(6) *
All directors and executive
officers as a group (10
persons)....................... 320,786(2)(8) 1.7% 5,763,102(7) 11.4%
</TABLE>

- -------------------------
* Less than 1%.

(1) FCI owns 100% of the outstanding common stock of Fingerhut, whose wholly
owned subsidiary is the holder of record of the shares.

(2) Excludes shares of Common Stock issuable upon exercise of stock options
expected to be granted to certain officers and the Chairman of the Board in
connection with the Offering. See "Management -- Compensation Programs."

(3) Includes 4,227,535 shares of FCI common stock that Mr. Deikel has the right
to acquire within 60 days of October 7, 1996 through the exercise of stock
options. Share ownership does not include shares held by Mr. Deikel's son,
as to which he disclaims beneficial ownership.

(4) Includes 320,786 shares (328,037 if the Underwriters' over-allotment option
is exercised) of Common Stock that Mr. Zebeck has the right to acquire
within 60 days of October 7, 1996 through the exercise of stock options.
Does not include 320,786 (328,038 if the Underwriters' over-allotment option
is exercised) shares of Common Stock related to unvested stock options to be
granted to Mr. Zebeck under the Tandem Plan.

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<PAGE> 71

(5) Includes 16,666 shares of FCI common stock that Mr. Zebeck has the right to
acquire within 60 days of October 7, 1996 through the exercise of stock
options but does not include those stock options related to the Tandem Plan,
the exercise of which would cancel Mr. Zebeck's options to purchase Company
Common Stock.

(6) The numbers of shares of FCI common stock beneficially owned by each of
Messrs. Mecum, Michielutti, McCoy, Oberrender and Scaliti include 5,000,
10,000, 3,166, 5,866 and 1,666 shares, respectively, that such individuals
have the rights to acquire within 60 days of October 7, 1996 through the
exercise of stock options.

(7) Includes 4,269,899 shares of FCI common stock that the directors and
executive officers have the right to acquire within 60 days of October 7,
1996 through the exercise of stock options.

(8) Includes 320,786 shares of Company Common Stock that the officers and
directors have the right to acquire within 60 days of October 7, 1996
through the exercise of stock options.

TRANSACTIONS BETWEEN FCI AND THE COMPANY

Prior to the Offering, the Company has been wholly owned by FCI.
Historically, the Company and FCI have maintained a number of financial and
administrative arrangements and regularly engaged in transactions with each
other and their affiliates. In anticipation of the Offering, the Company and FCI
have entered into a number of intercompany agreements for the purpose of
defining the ongoing relationship between them. As a result of FCI's ownership
interest in the Company, the terms of such agreements were not, and the terms of
any future amendments to those agreements may not be, the result of arm's-length
negotiation.

The following is a summary of certain agreements between the Company and
FCI, each of which is qualified in its entirety by reference to the forms of
such agreements filed as exhibits to the Registration Statement of which this
Prospectus is a part. See "Available Information."

TRANSFER AGREEMENT

Transfer of Assets and Assumption of Liabilities

Prior to the Offering, the Company and FCI will enter into a Transfer
Agreement. Under the Agreement, FCI will transfer to the Company all of the
stock of Metris Direct, Inc.; Metris Receivables, Inc.; Direct Merchants Credit
Card Bank, National Association; and DMCCB, Inc. FCI will also transfer other
specified assets related to the Financial Services Business. The Company has
agreed that the Uniform Commercial Code will not apply to the transfer, and to
accept each asset "as is."

The Company will assume certain balance sheet liabilities, and all
liabilities to which transferred assets are subject that have been booked for
financial accounting purposes on or before the date of transfer. The Transfer
Agreement allocates contingent liabilities based on the nature of the claim.
Contingent liabilities arising out of the Offering are generally allocated to
the Company. Employment related claims are allocated to the party that employed
the employee at the time of the events giving rise to the claim. The allocation
of contingent liabilities arising out of the acts or omissions of employees
depends on which party employed the employee and which party, if any, benefitted
from such acts or omissions. In certain circumstances, the contingent liability
is allocated to the party named as a defendant in the claim. The agreement
provides that these allocation rules only apply to the extent that claims exceed
insurance coverage. The Company and FCI release each other from any claims
arising from events on or before the transfer not provided for in the Transfer
Agreement or the other intercompany agreements.

Employee Benefits, Expenses and Liabilities

The Transfer Agreement also provides for employee benefits, expenses, and
liabilities. The agreement provides that Company employees who currently are
Fingerhut employees will become Company employees in 1997. The Company will pay
Fingerhut salaries, expenses, and other liabilities accrued with respect to
these employees until they are transferred to the Company. Company employees
will continue to participate in

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<PAGE> 72

certain of Fingerhut's employee benefit plans at least through 1996. The Company
will be responsible for the associated costs. The Transfer Agreement will
provide that FCI and the Company will work to determine the appropriate actions
to be taken with respect to employee benefit plans for 1997 and beyond.

Insurance and Other Provisions

The Company will continue to be covered by FCI's insurance policies for the
foreseeable future. The Company will be subject to the coverage limits and terms
and conditions of such policies and will pay an allocated portion of the related
premiums.

The Company and FCI have each agreed to indemnify the other against any
losses arising out of its breach or alleged breach of the Transfer Agreement.
FCI has represented and warranted that it knows of no pending legal action
relating to the transferred subsidiaries which is reasonably likely to be
adversely determined and would have a material adverse effect on their business.

CO-BRAND CREDIT CARD AGREEMENT

Fingerhut and the Company will enter into a Co-Brand Credit Card Agreement
prior to the Offering. Under the agreement, the Company will have the right to
issue general purpose credit cards with the Fingerhut name and logo ("Fingerhut
Cards"). Fingerhut and the Company will jointly develop lists of prospects from
Fingerhut Customers and Fingerhut will provide the Company with the Fingerhut
Score and other information about each individual. The Company will be
responsible for screening, solicitation, account origination, administration,
and compliance. All solicitation, advertising, and marketing materials for the
Fingerhut Card will be subject to review by both the Company and Fingerhut.
Fingerhut will have the right, without cost, to use certain space on the
Company's billing statements and inserts.

Fingerhut will covenant not to issue, directly or through a third party, a
competing general purpose credit card, but may issue a private label open or
closed end credit card. The Company will covenant not to offer a general purpose
credit card to direct competitors of Fingerhut.

The Company will develop, itself or through third parties, fee-based
products to offer to Fingerhut Card cardholders, the revenues from which will
belong solely to the Company, but will not offer fee-based products of a direct
competitor of Fingerhut or enter into contracts with affinity participants who
are direct competitors of Fingerhut.

The Company will pay Fingerhut a fee for each Fingerhut Card account booked
plus a non-cumulative fee based on a percentage of card usage. The initial term
of the agreement is seven years, and it will automatically renew for an
additional three years unless either party gives at least one year notice of its
intent not to renew. In the event that a third party acquires control of the
Company, Fingerhut will have the option to terminate the agreement.

Upon termination, the Company will own and have all rights to the
cardholder list and will have the right to reissue the Fingerhut Card under any
other name or logo it may choose. At the end of the initial term, and at the end
of the renewal term, Fingerhut will have the right to purchase the Fingerhut
Card accounts and the Fingerhut Card cardholder list for a purchase price equal
to the sum of (i) the book value excluding loan loss reserves, (ii) any earned
or unbilled interest or fees, (iii) the preceding three year amortized cost to
acquire the accounts, and (iv) a premium based on an independent third party
evaluation. If Fingerhut does purchase the accounts, the Company will have the
right to sell certain fee-based products to the cardholders for three years.

Subject to certain rights of a defaulting party to cure, a non-defaulting
party may terminate the agreement upon the occurrence of an event of default
including the loss by the Company of its MasterCard, Visa or other material
membership or either party causing significant harm to the goodwill of the
other, by giving 120 days prior written notice to the other party.

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<PAGE> 73

The Company and Fingerhut have each agreed to indemnify the other against
certain claims by third parties arising out of its breach or alleged breach of
the agreement by the Company, and, in the case of the Company, any claim of a
cardholder or affinity participant based on an act or omission by the Company
with respect to the Fingerhut Card.

DATA SHARING AGREEMENT

Fingerhut and the Company will enter into a Data Sharing Agreement prior to
the Offering. Under the agreement, Fingerhut will work with the Company to
market Direct Merchants Bank credit cards and related fee-based products to
Fingerhut Customers and will provide Fingerhut Scores and other information from
the Fingerhut Database for the Company to use in soliciting and offering credit
cards to External Prospects, including prospects from other co-branding
partners. In addition, Fingerhut will periodically provide the Company with
updated information on Fingerhut Customers who are the Company's cardholders.
The Company will provide to Fingerhut the Company's own transaction and
experience data on its consumer credit customers including behavior models for
Fingerhut to use in soliciting those cardholders for merchandise and other
non-financial service products.

The Company will pay Fingerhut a fee for each account booked (other than an
account under the Co-Brand Credit Card Agreement) plus a non-cumulative fee
based on a percentage of card usage. The agreement is effective January 1, 1995
and the initial term will end on August 23, 2003. The Company will provide its
cardholder information to Fingerhut and Fingerhut will update its information
provided to the Company, each at no charge. The agreement will automatically
renew for successive one year terms unless either party gives 90 days notice of
its intent not to renew. A party may terminate the agreement if there is a
material breach and the breaching party fails to cure the breach within 30 days
after receiving written notice of the breach from the non-breaching party. In
addition, in the event that a third party acquires control of the Company,
Fingerhut will have the option to terminate the agreement.

The Company and Fingerhut have each agreed to indemnify the other against
certain claims by third parties arising out of its breach or alleged breach of
the Data Sharing Agreement.

EXTENDED SERVICE PLAN AGREEMENT

Fingerhut and the Company will enter into an Extended Service Plan
Agreement prior to the Offering. Under the agreement, Fingerhut will agree not
to offer any extended service plans for products sold by Fingerhut other than
those provided by the Company. The Company will be responsible for developing
marketing plans, including direct mail solicitations and telemarketing, for the
extended service plans. Fingerhut's direct mail solicitation or telemarketing
media may be used only upon subsequent agreement of the Company and Fingerhut.
The Company will charge Fingerhut a fee for each extended service plan sold by
Fingerhut based on the retail price of the extended service plan and the
solicitation method used to sell the plan, with a decrease in the price after
achieving specified sales increases. The agreement provides for full or pro rata
credit to Fingerhut in the case of complete or partial cancellation of an
extended service plan. The Company will reimburse Fingerhut for its advertising
costs in offering extended service plans.

The initial term of the agreement is seven years, and it will automatically
renew for an additional three years unless either party gives at least one year
notice of its intent not to renew. Subject to certain rights of a defaulting
party to cure, a non-defaulting party may terminate the agreement upon the
occurrence of an event of default by giving written notice to the other party.
In addition, in the event that a third party acquires control of the Company,
Fingerhut will have the option to terminate the agreement.

The Company and Fingerhut have each agreed to indemnify the other against
certain claims by third parties arising out of its breach or alleged breach of
the Extended Service Plan Agreement.

DATABASE ACCESS AGREEMENT

Fingerhut and the Company will enter into a Database Access Agreement prior
to the Offering. Under the agreement, Fingerhut will grant to the Company an
exclusive license to use information in the Fingerhut

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<PAGE> 74

Database, including Fingerhut's transaction and experience data, the Fingerhut
Score, the Suppress File, and other related information for the sole purpose of
marketing the Company's Financial Service Products (as defined in the agreement,
which definition excludes Fingerhut closed-end and revolving private label
credit and credit-related insurance products offered in connection therewith),
other than credit cards, and for use in developing marketing lists for third
parties offering such products. Fingerhut is not required to disclose (i)
confidential information that it is prohibited to disclose by written agreement,
or (ii) information Fingerhut reasonably believes it cannot disclose under
applicable laws, regulations or other requirements. Fingerhut also will not give
the Company any information that would cause it to become a consumer reporting
agency under the FCRA.

Although the Company's right to access the Fingerhut Database will not
survive the agreement's termination, the Company will own any behavioral or
credit scoring models developed by the Company, or developed by Fingerhut
expressly for the Company prior to termination. The Company will have the sole
right to use such models and will retain sole ownership upon termination.

Fingerhut will retain the right to use for itself, and to license to third
parties, the Fingerhut Database for merchandise and other products and services
that are not Financial Service Products. However, Fingerhut may not use or
license the Fingerhut Database to offer Financial Services Products (as defined
in the agreement) without the consent of the Company. If Fingerhut notifies the
Company that it intends to offer such a product, the Company must either agree
to provide the same service itself or provide its consent within ten days.

The Company will pay Fingerhut an annual license fee plus a fee for each
consumer name eliminated from a solicitation by the Suppress File and a fee for
each consumer solicited through use of the Fingerhut Database.

The initial term of the agreement is seven years, and it will automatically
renew for an additional three years unless either party gives at least one
year's notice of its intent to terminate. The agreement does not establish an
annual fee for the three year renewal term. Subject to certain rights of a
defaulting party to cure, non-defaulting party may terminate the agreement upon
the occurrence of an event of default by giving written notice to the other
party. In addition, in the event that a third party acquires control of the
Company, Fingerhut will have the option to terminate the agreement.

The Company and Fingerhut have each agreed to indemnify the other against
certain claims by third parties arising out of its breach or alleged breach of
the Database Access Agreement.

ADMINISTRATIVE SERVICES AGREEMENT

FCI and the Company will enter into an Administrative Services Agreement
prior to the Offering. Under the agreement, FCI will perform the following
services for the Company: (i) treasury, (ii) general accounting and
administration, (iii) human resources, (iv) legal, (v) auditing, (vi) marketing
analysis, and (vii) information systems. FCI will provide the Company with
certain space and fixed assets, including computer access and use. The agreement
also requires the Company to perform services for FCI related to credit
insurance management.

The Company has paid FCI $5.1 million, plus incremental third party
expenses and lease payments, for services rendered during the years 1991 through
1996. The Company will pay additional amounts, to be negotiated, for 1997. FCI
has paid the Company $3.0 million, plus incremental third party expenses, for
insurance and warranty services rendered during the years 1991 through 1996. The
lump sum payments between the Company and FCI for services rendered prior to the
Offering are reflected in the Financial Statements appearing elsewhere in this
Prospectus.

The initial term of the agreement is two years, and it will automatically
renew for an additional year, with the charges for services to be determined at
that time, unless either party gives notice at least six months before the end
of the initial term of its intent not to renew. Subject to certain rights of a
defaulting party to cure, a non-defaulting party may terminate the agreement
upon the occurrence of an event of default by giving

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<PAGE> 75

30 days written notice to the other party. In addition, in the event that a
third party acquires control of the Company, FCI will have the option to
terminate the agreement.

The Company and FCI have each agreed to indemnify the other against certain
claims by third parties arising out of its breach or alleged breach of the
Administrative Services Agreement.

TAX SHARING AGREEMENT

The Company is, and after the Offering will continue to be, included in
FCI's Federal consolidated income tax group, and the Company's Federal income
tax liability will be included in the consolidated Federal income tax liability
of FCI and its subsidiaries. In certain circumstances, the Company or certain of
the Company's subsidiaries will also be included with FCI or certain FCI
subsidiaries in combined, consolidated or unitary income tax groups for state
and local tax purposes. The Company and FCI intend to enter into a tax
allocation agreement (the "Tax-Sharing Agreement"), effective as of December 31,
1993 pursuant to which the Company and FCI will make payments between them such
that, with respect to any period, the amount of taxes to be paid by the Company,
subject to certain adjustments, will be determined as though the Company were to
file its own Federal, state and local income tax returns as the common parent of
an affiliated group of corporations. In addition, with respect to certain tax
items, such as net operating losses, foreign tax credits and other credits and
deductions, the Company may also have a right to reimbursement determined based
on the usage of such items by the consolidated group, provided that FCI and its
other subsidiaries do not have similar tax items that can be so used.

In determining the amount of tax-sharing payments under the Tax-Sharing
Agreement, FCI will prepare pro forma returns with respect to Federal and
applicable state and local income taxes that reflect the same positions and
elections used by FCI in preparing the returns for FCI's consolidated group and
other applicable groups. FCI will continue to have all the rights of the common
parent of a consolidated group (and similar rights provided for by applicable
state and local law with respect to the common parent of a combined,
consolidated or unitary group), will be the sole and exclusive agent for the
Company in any and all matters relating to the income, franchise and similar
liabilities of the Company, will have sole and exclusive responsibility for the
preparation and filing of consolidated Federal and consolidated or combined
state and local income tax returns (or amended returns), and will have the
power, in its sole discretion, to contest or compromise any asserted tax
adjustment or deficiency and to file, litigate or compromise any claim for
refund on behalf of the Company. In addition, FCI has agreed to undertake to
provide the aforementioned services with respect to the Company's separate state
and local returns and the Company's foreign returns.

The Tax Sharing Agreement will expire upon the occurrence of any event that
makes the Company no longer includible in the FCI consolidated group. In
general, a subsidiary is includible in a parent's consolidated group for Federal
income tax purposes if the parent beneficially owns at least 80% of the total
voting power and value of the outstanding stock of the subsidiary. Each member
of a consolidated group is jointly and severally liable for the Federal income
tax liability of each other member of the consolidated group. Accordingly,
although the Tax-Sharing Agreement allocates tax liabilities between the Company
and FCI, during the period in which the Company is included in FCI's
consolidated group, the Company could be liable in the event that any Federal
tax liability is incurred, but not discharged, by any other member of FCI's
consolidated group.

REGISTRATION RIGHTS AGREEMENT

Pursuant to a registration rights agreement between FCI and the Company
(the "Registration Agreement"), FCI has the right to require that the Company
register under the Securities Act or qualify for sale (in either case, a "demand
registration") any securities of the Company that FCI owns, including shares of
Common Stock, and the Company is required to use reasonable efforts to cause
such registration to occur, subject to certain limitations and conditions,
including that the Company shall not be obligated to register or qualify such
securities more than two times in any 18-month period and then only if the
request is to register at least 5% of the total number of shares of Common Stock
at the time issued and outstanding. In addition, if the Company proposes to
register shares of Common Stock under the Securities Act, FCI has the right to
request

75
<PAGE> 76

the inclusion of their securities in such registration statement, subject to
certain limitations and conditions, among them the right of the underwriters of
such registered offering to exclude or limit the number of their shares included
in such offering. The Company will bear the entire cost of the first three
demand registrations attributable to FCI, and FCI will bear one-half of the
costs of any subsequent demand registrations. These costs include legal fees and
expenses of counsel for the Company, registration fees, printing expenses and
other related costs. FCI will pay any underwriting discounts and commissions
associated with the sale of its securities and the fees and expenses of its
counsel.

The Company has agreed that in the event of any registration of shares of
securities pursuant to the Registration Agreement, it will indemnify FCI against
certain liabilities incurred in connection with such registration, including
liabilities under the Securities Act. FCI will provide a similar indemnity for
liabilities incurred as a result of information jointly identified in writing by
the Company and FCI as concerning FCI and its security holdings in the Company
and as identified for use in such registration statement by FCI.

Subject to certain limitations and conditions, the registration rights held
by FCI may be transferred with its securities. The Registration Agreement also
contains various covenants imposing certain obligations upon the Company in
connection with its performance under such agreement including, among other
things, furnishing copies of any prospectus to FCI, entering into an
underwriting agreement, listing the securities as requested and taking such
other necessary actions.

PRINCIPAL STOCKHOLDER

The Company is currently wholly owned by FCI. After completion of the
Offering, FCI will own approximately 84.9% (83.0% if the Underwriters'
over-allotment option is exercised in full) of the outstanding shares of Common
Stock. After the Offering, through its ability to elect all the directors of the
Company, FCI will control all matters affecting the Company, including the
adoption of amendments to the Company's Certificate of Incorporation, any
determination with respect to the acquisition or disposition of Company assets,
future issuances of Common Stock or other securities of the Company, the
Company's incurrence of debt, and any dividend payable on the Common Stock.

Although FCI has advised the Company that it has no immediate plans to
dispose of the Common Stock held by it after the Offering, FCI has not made any
decision regarding its future plans for its ownership interest in the Company.
There can be no assurance that FCI will maintain its ownership interest in the
Company or as to the manner or timing of any disposition of Common Stock by FCI.
Any disposition of Common Stock by FCI that results in a change in control may
have significant consequences for the Company.

Conflicts of interest may arise in the future between the Company and FCI
in a number of areas relating to their past and ongoing relationships, including
potential acquisitions of businesses or properties, the election of new or
additional directors, dividends, incurrence of indebtedness, tax matters,
financial commitments, registration rights, administration of benefit plans,
service arrangements, issuances and sales of capital stock of the Company and
public policy matters. In addition, there are overlapping directors and
executive officers between the Company and FCI. The Company's Chairman of the
Board, Theodore Deikel, is also the Chairman of the Board, Chief Executive
Officer and President of FCI. Michael P. Sherman is a director of the Company
and is also Senior Vice President and General Counsel of FCI, and Dudley C.
Mecum is a director of the Company and is also a director of FCI. In addition,
Peter G. Michielutti is Senior Vice President of Business Development of the
Company and Senior Vice President and Chief Financial Officer of FCI, and Robert
W. Oberrender is Chief Financial Officer of the Company and Vice President and
Treasurer of FCI. See "Management -- Directors and Executive Officers". The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and FCI. However, the
directors intend to exercise reasonable judgment and take such steps as they
deem necessary under all of the circumstances in resolving any specific conflict
of interest that may occur and will determine what, if any, specific measures
may be necessary or appropriate. There can be no assurance that any conflicts
will be resolved in favor of the Company.

76
<PAGE> 77

Metris and Fingerhut have entered into a number of agreements for the
purpose of defining the ongoing relationship between them. Pursuant to these
arrangements, Fingerhut will provide benefits to the Company that it might not
provide to a third party and there is no assurance that the terms and conditions
of any future arrangements between Fingerhut and the Company, will be as
favorable to the Company as in effect now. In addition, notwithstanding the Tax
Allocation Agreement, under ERISA and Federal income tax law each member of a
consolidated group (for Federal income tax and ERISA purposes) is also jointly
and severally liable for the Federal income tax liability, funding and
termination liabilities, certain benefit plan taxes and certain other
liabilities of each other member of the consolidated group. Similar rules may
apply under state income tax laws. See "Transactions Between FCI and the
Company".

Metris is dependent on its bank revolving credit facility, which is
guaranteed by FCI. Breaches of covenants contained in the guaranty, including
various financial covenants of FCI, would be events of default under the
facility. Upon the occurrence of any such event, the facility would be
terminable at the option of the lenders. In addition, the lenders would have the
right to terminate the facility if FCI no longer owns at least 51% of the
Company.

The principal executive offices of FCI are located at 4400 Baker Road,
Minnetonka, Minnesota 55343.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Under the Amended and Restated Certificate of Incorporation, adopted in
October 1996, the Company's authorized capital stock consists of 100,000,000
shares of Common Stock, par value $.01 per share, and 10,000,000 shares of
preferred stock (the "Preferred Stock"), par value $.01 per share. The following
description is a summary and is qualified in its entirety by the provisions of
the Company's Certificate and By-laws, which are included as exhibits to the
Company's Registration Statement of which this Prospectus is a part.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share of Common
Stock held on each matter submitted to a vote of stockholders including the
election of directors, and have no preemptive rights to subscribe for additional
shares from the Company. Voting rights are not cumulative, with the result that
holders of more than 50% of the shares of Common Stock are able to elect all of
the Company's directors. Holders of Common Stock are entitled to receive
dividends out of funds legally available therefor when, as and if declared by
the Board of Directors and to receive pro rata the net assets of the Company
legally available for distribution upon liquidation or dissolution. See
"Dividend Policy".

PREFERRED STOCK

The Certificate authorizes the issuance of up to 10,000,000 shares of
Preferred Stock. The Company's Board of Directors is authorized to issue
Preferred Stock in one or more series and to fix the voting rights, liquidation
preferences, dividend rights, repurchase rights, conversion rights, redemption
rights and terms and certain other rights and preferences of the Preferred
Stock. No shares of Preferred Stock are issued or outstanding. There is no
current intention to issue any shares of Preferred Stock; however, the Board of
Directors may issue any or all of such shares without approval of the holders of
the Common Stock.

The issuance in the future of shares of Preferred Stock with presently
unspecified voting and other rights, which may be established by the Company's
Board of Directors in its discretion, could be used by the Company to create
voting impediments or to frustrate persons seeking to gain control of the
Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A.

77
<PAGE> 78

CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS

The following description is a summary and is qualified in its entirety by
the provisions of the Company's Certificate and By-laws, which are included as
exhibits to the Company's Registration Statement of which this Prospectus is a
part.

DIRECTORS' LIABILITY

The Certificate provides that, to the fullest extent permitted by the
Delaware General Corporation Law, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
any breach of the director's fiduciary duty as a director to the corporation or
its stockholders. In addition, the By-laws include certain provisions whereby
directors and officers of the Company generally shall be indemnified against
certain liabilities to the fullest extent permitted or required by the Delaware
General Corporation Law. Insofar as these provisions permit indemnification for
liabilities arising under the Securities Act of 1933, the Company has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable.

As a result of these provisions, the Company and its stockholders may be
unable to obtain monetary damages from a director for breach of duty of care.
Although stockholders may continue to seek injunctive or other equitable relief
for an alleged breach of fiduciary duty by a director, stockholders may not have
any effective remedy against the challenged conduct if equitable remedies are
unavailable.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CERTIFICATE AND BY-LAWS

Certain provisions of the Company's Certificate and By-laws could have an
anti-takeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Company's Board of Directors
and in the policies formulated by the Board and to discourage an unsolicited
takeover of the Company if the Board determines that such takeover is not in the
best interests of the Company and its stockholders. However, these provisions
could have the effect of discouraging certain attempts to acquire the Company or
remove incumbent management even if some or a majority of stockholders deemed
such an attempt to be in their best interests.

Insofar as FCI will retain control of the Company after the Offering, the
Company is not at present vulnerable to a takeover without the approval of FCI.
Because of this, the Certificate and By-laws provide that certain provisions
thereof which could have an anti-takeover effect will not be effective until
such time (the "Threshold Time") as FCI shall no longer beneficially own 51% or
more of the Voting Stock. Pursuant to the Certificate, after the Threshold Time
the Board of Directors of the Company will be divided into three classes serving
staggered three-year terms. After the Threshold Time, Directors can be removed
from office only for cause and only by the affirmative vote of the holders of a
majority of the then outstanding shares of Voting Stock together as a single
class. Prior to the Threshold Time, directors will not be classified, will serve
one-year terms and will be removable without cause. Vacancies on the Board of
Directors may be filled only by the remaining directors and not by the
stockholders.

The By-laws establish an advance notice procedure, to take effect after the
Threshold Time, for the nomination, other than by or at the direction of the
Board of Directors, of candidates for election as directors as well as for other
stockholder proposals to be considered at the annual meeting of stockholders. In
general, notice must be received by the Company not less than 50 days nor more
than 75 days prior to the meeting and must contain certain specified information
concerning the persons to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.

Certain transactions with the Company may be subject to Section 203 of the
Delaware General Corporation Law. Section 203 prohibits certain "business
combinations" between an "interested stockholder" and a corporation for three
years after a stockholder becomes interested, unless one of the statute's
exceptions applies. Section 203(c)(5) defines an interested stockholder as a
person, broadly defined to include a group, who owns at least 15% of a company's
outstanding voting stock. The statute defines business combinations expansively
to include any merger or consolidation of, with, or caused by the interested
stockholder.

78
<PAGE> 79

Section 203(a) provides three exceptions to the business combination
prohibition. First, there is no constraint if the interested stockholder obtains
prior board approval for the business combination or the transaction resulting
in ownership of 15% of the target's voting stock. Second, the statute does not
apply if, in completing the transaction that crosses the 15% threshold, the
stockholder becomes the owner of 85% of the corporation's voting stock
outstanding as of the time the transaction commenced. Any shares owned by
directors who are officers, and shares owned by certain stock option plans are
excluded from the calculation. This exception applies most particularly to a
tender offeror who has less than 15% of the target's stock and receives tenders
that satisfy the 85% requirement. Finally, the statute does not apply if the
interested stockholder's business combination is approved by the board of
directors and affirmed by at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder.

LIMITATIONS ON THE COMPANY'S BUSINESS ACTIVITIES

The Company's Certificate provides that, at any time prior to the date
immediately following the third annual meeting of stockholders to be held after
FCI no longer beneficially owns in the aggregate 50% or more of the Company's
voting stock, the Company shall not, directly or indirectly (through a
subsidiary of, or any other person controlled by, the Company) for its own
account or that of another, engage in managing, selling, distributing,
marketing, administering, leasing or otherwise providing products or services
other than the following: (i) general purpose payment cards including without
limitation, credit cards, secured bank credit cards, prepaid cards, debit cards,
co-branded cards, and affinity bank credit cards; (ii) extended service plans
and warranties; (iii) credit card registration; (iv) car buying services,
shopping club memberships and dining club memberships; (v) insurance products;
(vi) mailing lists and other lists of prospects for solicitation; (vii)
advertising on or accompanying monthly billing statements sent to customers of
the Company; (viii) tax preparation services; (ix) investment products and
services including without limitation deposit products, certificates of deposit,
annuities, and mutual funds; (x) investment and other brokerage services; (xi)
consumer loans and leases including without limitation mobile home financing,
automobile lending and leasing, equity loans and mortgages, and student loans,
provided that the Company shall not offer any closed-end installment or
revolving credit loans to Fingerhut Customers for the exclusive purchase of
Fingerhut merchandise; and (xii) mail-grams, travelers checks, money orders, and
travel services.

In addition to the above specified activities, the Certificate of
Incorporation permits the Company to engage in any other business or activity
with the consent of FCI or majority vote of the shareholders. The Certificate of
Incorporation further provides that no person shall be liable for breach of any
fiduciary duty, as a stockholder of the Company or controlling person of a
stockholder or otherwise, by reason of such person authorizing, or not
authorizing, the Company to engage in any business or activity.

CORPORATE OPPORTUNITIES

The Company's Certificate provides that no opportunity, transaction,
agreement or other arrangement to which FCI, or an entity in which FCI has an
interest, is a party, shall be a corporate opportunity of the Company unless
such opportunity, transaction, agreement or other arrangement shall have been
initially offered to the Company before it is offered to FCI or such other
entity, and either (i) the Company has an enforceable contractual interest in
such opportunity, transaction, agreement or other arrangement or (ii) the
subject matter of such opportunity, transaction, agreement or other arrangement
is a constituent element of an activity in which the Company is then actively
engaged. Even if the foregoing conditions were met, such fact alone would not
conclusively render such opportunity the property of the Company.

FCI may in the future receive business opportunities which would be
suitable for either the Company or FCI (or an affiliate of FCI other than the
Company). There can be no assurance that such business opportunities will be
undertaken through the Company.

79
<PAGE> 80

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 18,800,000 shares of
Common Stock issued and outstanding. All of the shares of Common Stock to be
sold in the Offering will be freely tradeable without restrictions or further
registration under the Securities Act. Immediately prior to the Closing Date,
all of the outstanding shares of Common Stock will be beneficially owned by FCI
and will not have been registered under the Securities Act and may not be sold
in the absence of an effective registration statement under the Securities Act
other than in accordance with Rule 144 or another exemption from registration.
FCI has certain rights to require the Company to effect registration of shares
of Common Stock owned by FCI, which rights may be assigned. See "Transactions
Between FCI and the Company -- Registration Rights Agreement".

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Common Stock for at least two years, including a person who may be deemed an
"affiliate", is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of one percent of the total number of
shares of the class of stock being sold or the average weekly reported trading
volume of the class of stock being sold during the four calendar weeks preceding
such sale. A person who is not deemed an "affiliate" of the Company at any time
during the three months preceding a sale and who has beneficially owned shares
for at least three years is entitled to sell such shares under Rule 144 without
regard to the volume limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly through the use
of one or more intermediaries controls, is controlled by, or is under common
control with, such issuer. The foregoing summary of Rule 144 is not intended to
be a complete description thereof.

Prior to the Offering, there has been no market for the Common Stock, and
no prediction can be made as to the effect, if any, that market sales of
outstanding shares of Common Stock, or the availability of such shares for sale,
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of the shares of Common Stock
beneficially owned by FCI in the public market, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock offered in the Offering.

FCI, the Company and each of the Company's officers and directors have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of Smith Barney, offer, sell,
contract to sell, solicit an offer to buy, grant any option to purchase or
otherwise transfer or dispose of, any shares of Common Stock (or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock).
See "Underwriting".

80
<PAGE> 81
UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date of this Prospectus, each of the underwriters named
below (the "Underwriters"), for whom Smith Barney Inc. ("Smith Barney"), Bear,
Stearns & Co. Inc. and William Blair & Company, L.L.C., are acting as the
representatives (the "Representatives"), has severally agreed to purchase, and
the Company has agreed to sell to such underwriter, the number of shares of
Common Stock set forth opposite the name of such Underwriter below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------- ---------
<S> <C>
Smith Barney Inc. ......................... 647,779
Bear, Stearns & Co. Inc. .................. 647,777
William Blair & Company, L.L.C. ........... 647,777
Sanford C. Bernstein & Co., Inc. .......... 50,000
Brean Murray, Foster Securities, Inc. ..... 50,000
The Chicago Corporation.................... 50,000
Dain Bosworth Incorporated................. 50,000
First of Michigan Corporation.............. 50,000
Furman Selz, L.L.C. ....................... 50,000
GS2 Securities, Inc. ...................... 50,000
Jefferies & Company, Inc. ................. 50,000

NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------- ---------
<S> <C>
C.L. King & Associates, Inc. .............. 50,000
Legg Mason Wood Walker, Incorporated....... 50,000
McDonald & Company Securities, Inc. ....... 50,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................... 80,000
PaineWebber Incorporated................... 80,000
Salomon Brothers Inc ...................... 80,000
Sutro & Co. Incorporated................... 50,000
Wheat, First Securities, Inc. ............. 50,000
---------
Total.................................. 2,833,333
=========
</TABLE>

The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and part of the shares of Common Stock to certain
dealers at a price that represents a concession not in excess of $0.66 per share
below the public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $0.10 per share to certain other
dealers. After the initial public offering, the public offering price and such
concessions may be changed by the Underwriters. The Representatives have advised
the Company that the Underwriters do not intend to confirm sales to accounts
over which they exercise discretionary authority.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 425,000
additional shares of Common Stock at the public offering price set forth on the
cover page of this Prospectus less underwriting discounts and commissions. The
Underwriters may exercise such option to purchase additional shares solely for
the purpose of covering over-allotments, if any, incurred in connection with the
sale of the shares offered hereby. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite such Underwriter's name in the preceding table bears
to the total number of shares in such table.

The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act and
other applicable securities laws, or to contribute to payments required to be
made in respect thereof.

FCI, the Company and each of the Company's officers and directors have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of Smith Barney, sell, offer to
sell, contract to sell, solicit an offer to buy, grant any option to purchase or
otherwise transfer or dispose of, any shares of Common Stock (or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock).

Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the shares of Common
Stock offered hereby was determined by negotiations among the Company and the
Representatives. Among the factors considered in determining the initial public
offering price were the history of, and the prospects for, the Company's
business and the industry in which it competes, an assessment of the Company's
management, its past and present operations, its past and present revenues
81
<PAGE> 82

and earnings and the trend of such revenues and earnings, the prospects for
growth of the Company's revenues and earnings, the present state of the
Company's development, the general condition of the securities market at the
time of the Offering and the market prices and earnings of similar securities of
comparable companies at the time of the Offering, the current state of the
economy and the current level of economic activity in the industry in which the
Company competes.

The Common Stock has been approved for listing on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "MTRS".

LEGAL MATTERS

Certain legal matters with respect to the authorization and issuance of
Common Stock offered hereby will be passed upon for the Company by Cravath,
Swaine & Moore, New York, New York and for the Underwriters by Cahill Gordon &
Reindel (a partnership including a professional corporation), New York, New
York.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1994,
and for each of the years in the three-year period ended December 31, 1995, have
been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

82
<PAGE> 83

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets as of June 30, 1996, and December 31, 1995 and 1994.................... F-3
Statements of Income for the Six Months Ended June 30, 1996 and 1995, and the Years
Ended December 31, 1995, 1994, and 1993............................................. F-4
Statements of Changes in Division Equity for the Years Ended December 31, 1995,
1994, and 1993...................................................................... F-5
Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995, and the
Years Ended December 31, 1995, 1994, and 1993....................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 84

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Fingerhut Companies, Inc.:

We have audited the accompanying balance sheets of Metris Companies Inc. (a
division of Fingerhut Companies, Inc.) as of December 31, 1995 and 1994, and the
related statements of income, changes in division equity and cash flows, for
each of the years in the three-year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metris Companies Inc. (a
division of Fingerhut Companies, Inc.) as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Minneapolis, Minnesota
August 16, 1996

F-2
<PAGE> 85

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

BALANCE SHEETS

DECEMBER 31,
JUNE 30, ------------------
1996 1995 1994
----------- -------- ------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and due from banks........................................ $ 3,755 $ 4,185 $ 23
Federal funds sold............................................. 14,361 29,144 --
Short-term investments......................................... 4,114 1,414 --
-------- -------- ------
Cash and cash equivalents.................................... 22,230 34,743 23
-------- -------- ------
Credit card loans:
Loans held for securitization................................ 19,714 15,337 --
Retained interests in loans securitized...................... 112,249 79,727 --
Less: Allowance for loan losses........................... 5,303 3,679 --
-------- -------- ------
Net credit card loans........................................ 126,660 91,385 --
-------- -------- ------
Loans to Fingerhut Companies, Inc. (FCI)....................... -- -- 9,375
Premises and equipment, net.................................... 3,012 1,476 255
Accrued interest and fees receivable........................... 2,115 2,223 --
Other receivables due from credit card securitizations, net.... 5,714 31,597 --
Prepaid expenses and deferred charges.......................... 4,063 4,517 --
Deferred income taxes.......................................... 16,255 4,306 198
Other assets................................................... 5,735 4,181 5
-------- -------- ------
TOTAL ASSETS................................................. $ 185,784 $174,428 $9,856
======== ======== ======
LIABILITIES
Interest-bearing deposit from affiliate........................ $ 1,000 $ 1,000 $ --
Short-term borrowings from FCI................................. 54,318 63,482 --
Accounts payable............................................... 15,977 21,334 2,444
Current income taxes payable to FCI............................ 8,549 5,178 127
Deferred income................................................ 21,169 10,087 3
Accrued expenses and other liabilities......................... 4,559 2,029 545
-------- -------- ------
TOTAL LIABILITIES............................................ $ 105,572 $103,110 $3,119
-------- -------- ------
DIVISION EQUITY
Contributed capital............................................ 60,028 60,028 28
Retained earnings.............................................. 20,184 11,290 6,709
-------- -------- ------
TOTAL DIVISION EQUITY........................................ 80,212 71,318 6,737
-------- -------- ------
TOTAL LIABILITIES AND DIVISION EQUITY........................ $ 185,784 $174,428 $9,856
======== ======== ======
</TABLE>

See accompanying Notes to Financial Statements.

F-3
<PAGE> 86

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Credit card loans.............................. $12,119 $ 1,371 $ 7,054 $ -- $ --
Federal funds sold............................. 436 43 487 -- --
Other.......................................... 64 46 75 487 279
------- ------- ------- ------- -------
Total interest income..................... 12,619 1,460 7,616 487 279
------- ------- ------- ------- -------
INTEREST EXPENSE
Deposit........................................ 24 11 36 -- --
Short-term borrowings from FCI................. 1,834 269 1,181 -- --
------- ------- ------- ------- -------
Total interest expense.................... 1,858 280 1,217 -- --
------- ------- ------- ------- -------
NET INTEREST INCOME............................ 10,761 1,180 6,399 487 279
Provisions for loan losses..................... 5,173 534 4,393 -- --
------- ------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES....................................... 5,588 646 2,006 487 279
------- ------- ------- ------- -------
OTHER OPERATING INCOME:
Net extended warranty revenues................. 8,615 6,687 17,779 12,244 7,935
Net securitization and credit card servicing
income....................................... 20,536 3,154 16,003 -- --
Credit card fees, interchange and other credit
card income.................................. 12,078 4,704 10,639 -- --
Fee-based product revenues..................... 12,067 1,549 6,662 1,994 2,118
------- ------- ------- ------- -------
53,296 16,094 51,083 14,238 10,053
------- ------- ------- ------- -------
OTHER OPERATING EXPENSE:
Credit card account and other product
solicitation and marketing expenses.......... 16,461 9,338 23,089 3,739 4,092
Employee compensation.......................... 7,723 764 2,466 442 300
Data processing services and communications.... 5,196 880 3,090 109 11
Third party servicing expenses................. 4,613 1,178 5,300 473 356
Warranty and debt waiver underwriting and
claims servicing expenses.................... 4,061 2,423 6,552 4,109 3,033
Credit card fraud losses....................... 1,066 281 775 -- --
Other.......................................... 5,302 1,738 4,368 2,350 541
------- ------- ------- ------- -------
44,422 16,602 45,640 11,222 8,333
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES..................... $14,462 $ 138 $ 7,449 $ 3,503 $ 1,999
Income taxes................................... 5,568 53 2,868 1,305 737
------- ------- ------- ------- -------
NET INCOME..................................... $ 8,894 $ 85 $ 4,581 $ 2,198 $ 1,262
======= ======= ======= ======= =======
</TABLE>

See accompanying Notes to Financial Statements.

F-4
<PAGE> 87

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

STATEMENTS OF CHANGES IN DIVISION EQUITY

<TABLE>
<CAPTION>
CONTRIBUTED TOTAL DIVISION
CAPITAL RETAINED EARNINGS EQUITY
----------- ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992.......................... $ 28 $ 3,249 $ 3,277
Net income.......................................... -- 1,262 1,262
------- ------- -------
BALANCE AT DECEMBER 31, 1993.......................... $ 28 $ 4,511 $ 4,539
Net income.......................................... -- 2,198 2,198
------- ------- -------
BALANCE AT DECEMBER 31, 1994.......................... $ 28 $ 6,709 $ 6,737
Net income.......................................... -- 4,581 4,581
Contributions from FCI.............................. 60,000 -- 60,000
------- ------- -------
BALANCE AT DECEMBER 31, 1995.......................... $60,028 $11,290 $ 71,318
Net income (unaudited).............................. -- 8,894 8,894
------- ------- -------
BALANCE AT JUNE 30, 1996 (unaudited).................. $60,028 $20,184 $ 80,212
======= ======= =======
</TABLE>

See accompanying Notes to Financial Statements.

F-5
<PAGE> 88

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................... $ 8,894 $ 85 $ 4,581 $ 2,198 $ 1,262
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for loan losses.............. 5,173 534 4,393 -- --
Depreciation and amortization.......... 3,277 573 2,808 26 8
(Gain)/Net amortization of gain on
securitization of credit card
loans............................... 2,728 (2,455) (7,267) -- --
Deferred income tax provision.......... (12,062) (1,318) (4,291) (95) 61
Changes in operating assets and
liabilities:
Accrued interest and fees
receivable........................ 108 (2,088) (2,223) -- --
Other receivables due from credit
card securitizations, net......... 22,953 (16,576) (24,572) -- --
Prepaid expenses and deferred
charges............................. (2,148) (2,411) (6,696) 176 (176)
Accounts payable and accrued
expenses............................ (2,827) 7,937 20,374 1,198 477
Current income taxes payable to FCI.... 3,371 834 5,051 (86) (256)
Deferred income........................ 11,082 10,119 10,084 (69) 72
Other.................................. (1,754) (1,303) (4,248) 64 (68)
--------- --------- --------- ------- -------
Net cash provided by (used in) operating
activities............................. $ 38,795 $ (6,069) $ (2,006) $ 3,412 $ 1,380
--------- --------- --------- ------- -------
INVESTING ACTIVITIES
Proceeds from sales of loans............. 487,500 145,256 448,555 -- --
Net loans originated or collected........ (527,948) (189,770) (528,864) -- --
Credit card portfolio acquisition........ -- -- (15,469) -- --
Net (increase) decrease in loans to
FCI.................................... -- 9,375 9,375 (3,215) (1,356)
Additions to premises and equipment...... (1,696) (210) (1,353) (239) (28)
--------- --------- --------- ------- -------
Net cash used in investing activities.... $ (42,144) $ (35,349) $ (87,756) $(3,454) $(1,384)
--------- --------- --------- ------- -------
FINANCING ACTIVITIES
Increase in interest-bearing deposit..... -- 1,000 1,000 -- --
Net (decrease) increase in short-term
borrowings from FCI.................... (9,164) 28,204 63,482 -- --
Capital contributions from FCI........... -- 20,000 60,000 -- --
--------- --------- --------- ------- -------
Net cash (used in) provided by financing
activities............................. $ (9,164) $ 49,204 $ 124,482 $ -- $ --
--------- --------- --------- ------- -------
Net (decrease) increase in cash and cash
equivalents............................ (12,513) 7,786 34,720 (42) (4)
Cash and cash equivalents at beginning of
period................................. 34,743 23 23 65 69
--------- --------- --------- ------- -------
Cash and cash equivalents at end of
period................................. $ 22,230 $ 7,809 $ 34,743 $ 23 $ 65
========= ========= ========= ======= =======
</TABLE>

See accompanying Notes to Financial Statements.

F-6
<PAGE> 89

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION

The financial statements include the assets, liabilities, equity, and
revenues and expenses of Fingerhut Companies, Inc.'s ("FCI") businesses engaged
in offering certain consumer credit products, extended service plans, and other
fee-based products and services to moderate income consumers ("Metris Companies
Inc." or the "Company"). This business is conducted through Metris Direct, Inc.,
Direct Merchants Credit Card Bank, National Association ("Direct Merchants
Bank") and Metris Receivables, Inc. ("MRI"), each a direct or indirect
wholly-owned subsidiary of FCI, and certain portions of the retail extended
service plan business ("Extended Service Plan Business") of Fingerhut
Corporation ("Fingerhut"), a wholly-owned subsidiary of FCI. In connection with
the planned initial public offering of the Company, FCI intends to contribute
the assets, liabilities and equity of the Extended Service Plan Business and all
of the outstanding stock of Metris Direct, Inc., Direct Merchants Bank and MRI
to Metris Companies Inc.

The financial statements include an allocation of FCI interest expense for
the net borrowings of the Company from FCI, or a net interest credit for the net
cash flows of the Company loaned to FCI in certain periods. Prior to 1995, the
Company maintained a net loan position to FCI since its extended service plan
and other fee-based products and services businesses generated positive cash
flows above its business needs. Therefore, for periods prior to 1995, the
Company's small cash position was due to this practice of loaning all available
funds to FCI on a daily basis. However, with the establishment of the Company's
consumer credit products business in early 1995, the Company's need for cash to
fund credit card loans and for other general business purposes increased above
the cash generated by its other businesses. Therefore, since early 1995, the
Company has borrowed funds or obtained capital from FCI to fund its ongoing
operations. Correspondingly, the financial statements reflect a $60 million
allocation of capital from FCI to the Company during 1995. This capital
contribution was made in installments at the beginning of each month throughout
1995, in order to maintain the Company's equity at a level sufficient to support
the growth in managed assets experienced by the Company during 1995 (generally
at a level approximating 10% of total managed assets at the end of each month).

The financial statements also include an allocation of expenses for data
processing and information systems, audit, certain accounting and similar
administrative functions, treasury, legal, human resources, customer service and
other administrative support historically provided by FCI and its subsidiaries
to the Company. Such expenses were based on the actual use of such services or
were based on other allocation methods which, in the opinion of management, are
reasonable. During 1996, FCI and the Company entered into an administrative
services agreement which covers such expense allocations and the provision of
future services using similar rates and allocation methods for various terms,
the latest of which expires at the end of 1998. The financial statements also
reflect the retroactive effects of intercompany agreements entered into during
1996 including co-brand credit card, database access, and data sharing
agreements with Fingerhut, and extended service plan and tax sharing agreements
with FCI. These agreements have terms ranging up to seven years (see Notes 2 and
10).

All significant intradivisional balances and transactions have been
eliminated in preparation of these financial statements.

INTERIM FINANCIAL STATEMENTS

The unaudited interim financial statements and the related unaudited
interim financial information in the footnotes have been prepared in accordance
with generally accepted accounting principles and the rules and regulations of
the Securities and Exchange Commission for interim financial statements. Such
interim financial statements reflect all adjustments, consisting of normal
recurring accruals, which in the opinion of management, are necessary to present
fairly the financial position of the Company at June 30, 1996, and the results
of its operations and cash flows for the six-month periods ended June 30, 1996
and 1995. The nature of

F-7
<PAGE> 90

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

the Company's business is such that the results of any interim period may not be
indicative of the results to be expected for the entire year.

COMPARABILITY OF FINANCIAL STATEMENTS

The Company's consumer credit products business and a substantial portion
of its fee-based products and services business began operations in February of
1995, with the opening of Direct Merchants Bank. Therefore, the financial
statements prior to 1995 are not necessarily comparable to the financial
statements for periods ending in 1995 and thereafter.

PERVASIVENESS OF ESTIMATES

The financial statements have been prepared in accordance with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amount of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the significant accounting and reporting
policies used in preparing the financial statements.

FEDERAL FUNDS SOLD

Federal funds sold are short-term loans made to banks through the Federal
Reserve System. It is the Company's policy to make such loans only to banks
which are considered to be in compliance with their regulatory capital
requirements.

CREDIT CARD LOANS HELD FOR SECURITIZATION

Credit card loans held for securitization are loans the Company intends to
securitize, generally no later than three months from origination and are
recorded at the lower of aggregate cost or market value.

SECURITIZATIONS, RETAINED INTERESTS IN LOANS SECURITIZED AND SECURITIZATION
INCOME

Substantially all credit card loans have been securitized and sold to
investors through a master trust (see Note 3). The Company retains an interest
in the trust in an amount equal to the amount of the retained subordinated
certificates of each series held by MRI, plus the amount equal to the loans in
excess of the principal balance of the certificates. The sales of these loans
have been recorded in accordance with Statement of Financial Accounting
Standards No. 77, "Reporting by Transferors for Transfers of Receivables with
Recourse". Upon sale, the loans are removed from the balance sheet, and a gain
on sale is recognized for the difference between the carrying value of the loans
and the adjusted sales proceeds. The adjusted sales proceeds are based on a
present value estimate of future cash flows to be received over the life of the
loans, net of certain funding and servicing costs. The resulting gain is further
reduced for estimated loan losses over the life of the related loans under the
limited recourse provisions. Because these estimates are influenced by factors
outside of the Company's control, the uncertainty inherent in these estimates
makes it reasonably possible that these estimates could change in the near term.

F-8
<PAGE> 91

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

interest income, interest expense, fee income and provision for loan losses are
instead reported in the statements of income as "Net securitization and credit
card servicing income".

ALLOWANCE FOR LOAN LOSSES

Provisions for loan losses are made in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb future losses of
principal and interest, net of recoveries (including recovery of collateral, if
applicable), inherent in the existing on-balance sheet loan portfolio. In
evaluating the adequacy of the allowance for loan losses, management considers
several factors including: historical charge-off and recovery activity by age
(vintage) of each loan portfolio (noting any particular trends over recent
periods); recent delinquency and collection trends by vintage; current economic
conditions and the impact such conditions might have on borrowers' ability to
repay; the risk characteristics of the portfolios; and other factors.
Significant changes in these factors could impact the adequacy of the allowance
for loan losses in the near term.

Credit card accounts are generally charged-off at the end of the month
during which the loan becomes contractually 180 days past due, with the
exception of bankrupt accounts, which are charged-off immediately upon formal
notification of bankruptcy, and accounts of deceased cardholders without a
surviving, contractually liable individual, or an estate large enough to pay the
debt in full, which are also charged-off immediately upon notification.

DEBT WAIVER PRODUCTS

Since 1995, Direct Merchants Bank has offered various debt-waiver products
to its credit card customers for which it retains the claims risk. Revenue for
such products is recognized ratably over the coverage period, generally one
month, and additional reserves are provided for pending claims based on Direct
Merchants Bank's historical experience with settlement of such claims. Revenues
recorded for debt waiver products are included in the statements of income under
"Fee-based product revenues" and were $9,463 and $568, and $4,845 for the six
months ended June 30, 1996 and 1995, and the year ended December 31, 1995,
respectively. Unearned revenues and reserves for pending claims are recorded in
the balance sheets in "Accrued Expenses and Other Liabilities" and amounted to
$1,580 and $698 as of June 30, 1996, and December 31, 1995, respectively.

PREMISES AND EQUIPMENT

Premises, furniture and equipment, and computer hardware and software, are
stated at cost and depreciated on a straight-line basis over their estimated
economic useful lives (three to ten years for furniture and equipment, three to
five years for computer hardware, five years for software; and over the shorter
of the estimated useful life or the term of the lease for leasehold
improvements). The Company capitalizes software developed for internal use that
represents major enhancements or replacements of operating and management
information systems. Amortization of such capitalized software begins when the
systems are fully developed and ready for implementation. Repairs and
maintenance are charged to expense as incurred.

INTEREST INCOME ON CREDIT CARD LOANS

Interest income on credit card loans is accrued and earned based on the
principal amount of the loans outstanding using the effective yield method.
Accrued interest which has been billed to the customer but not yet received is
classified on the balance sheet with the related credit card loans. Accrued
interest which has not yet been billed to the customer is estimated and
classified on the balance sheet separate from the loan balance. Interest income
is generally recognized until a loan is charged off. At that time, the accrued
interest portion of the charged-off balance is deducted from current period
interest income.

F-9
<PAGE> 92

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

EXTENDED SERVICE PLANS

The Company coordinates all of the marketing activities for Fingerhut's
sales of extended warranties or service plans. Revenues for extended warranties
sold, and related provisions for service contract returns are recorded at the
time of Fingerhut's shipment to the customer of the related extended service
plan merchandise. The provision for service contract returns charged against
revenues for the six months ended June 30, 1996, and 1995, and for the years
ended December 31, 1995, 1994, and 1993, amounted to $1,747 and $1,379, and
$3,626, $2,558, and $1,905, respectively. Additionally, the Company reimburses
Fingerhut for the cost of its marketing media and other services utilized in the
sales of service plans, based on contracts sold and on media utilization costs
as agreed to by the Company and the retailer. These media cost reimbursements
were $2,458 and $1,676 for the six months ended June 30, 1996, and 1995,
respectively, and $4,166, $2,780, and $1,785 for the years ended December 31,
1995, 1994, and 1993, respectively.

The Company has contracted with a third-party underwriter and claims
administrator to service and absorb the risk of loss from most claims. These
claims servicing contract costs are expensed as the service contracts are sold,
net of the related cost of anticipated service contract returns.

CREDIT CARD FEES AND ORIGINATION COSTS

Credit card fees include annual, late payment, over-credit limit, returned
check, and cash advance transaction fees. These fees are assessed according to
the terms of the related cardholder agreements.

The Company defers direct credit card origination costs associated with
successful credit card solicitations that it incurs in transactions with
independent third parties, and certain other costs that it incurs in connection
with loan underwriting and the preparation and processing of loan documents.
These deferred credit card origination costs are netted against the related
credit card annual fee, if any, and amortized on a straight-line basis over the
cardholder's privilege period, generally 12 months. Net deferred annual fees
were $13,491 and $6,036 as of June 30, 1996, and December 31, 1995,
respectively.

SOLICITATION EXPENSES

Credit card account and other product solicitation costs, including
printing, credit bureaus, list processing costs, telemarketing and postage, are
generally expensed as incurred over the two to three month period during which
the related responses to such solicitations are received.

CREDIT CARD FRAUD LOSSES

The Company experiences credit card fraud losses from the unauthorized use
of credit cards. These fraudulent transactions are expensed when identified,
through the establishment of a reserve for the full amount of the transactions.
These amounts are charged off after 90 days, after all attempts to recover the
amounts from such transactions, including chargebacks to merchants and claims
against cardholders, are exhausted.

INTEREST RATE CONTRACTS

The nature and composition of the Company's assets and liabilities and
off-balance sheet items expose the Company to interest rate risk. The Company
enters into a variety of interest rate contracts such as interest rate swap and
cap agreements in the management of its interest rate exposures. These interest
rate contracts are designated, and effective, as synthetic alterations of
specific assets or liabilities (or groups of assets or liabilities) and
off-balance sheet items. The monthly interest rate differential to be paid or
received on these contracts is accrued and included in "Net securitization and
credit card servicing income" in the statements of income. Premiums paid for
such contracts and the related interest payable or receivable under such
contracts are classified under "Other receivables due from credit card
securitizations, net," in the balance sheets.

F-10
<PAGE> 93

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

Premiums paid for interest rate contracts are recorded at cost and amortized on
a straight-line basis over the life of the contract.

INCOME TAXES

The Company is included in the Federal income tax return and certain state
income tax returns of FCI. Based on a tax sharing agreement between the Company
and FCI, the provisions for Federal and state income taxes are computed on a
separate-return basis. Deferred tax assets and liabilities are determined based
on the temporary differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.

STATEMENTS OF CASH FLOWS

The Company prepares its statements of cash flows using the indirect
method, which requires a reconciliation of net income to net cash from operating
activities. In addition, the Company nets certain cash receipts and cash
payments from credit card loans made to customers, including principal
collections on those loans. For purposes of the statements of cash flows, cash
and cash equivalents include cash and due from banks, federal funds sold,
short-term investments, (mainly money market mutual funds) and all other highly
liquid investments with original maturities of three months or less.

Cash paid for interest during the six months ended June 30, 1996 and 1995,
and the years ended December 31, 1995, 1994, and 1993, was $1,858 and $280 and
$1,217, $0, and $0, respectively. Cash paid for income taxes for the same
periods was $14,259 and $434, and $2,004, $1,589, and $932, respectively.

NOTE 3 -- CREDIT CARD SECURITIZATIONS

The Company securitizes and sells its credit card loans to both public and
private investors. In May of 1995, the Fingerhut Financial Services Master Trust
("the Trust") was established to allow the Company to sell, on a continuous
basis, an undivided interest in a pool of credit card loans generated or
acquired by Direct Merchants Bank. Concurrently, the Trust issued the Series
1995-1 variable funding certificates with maximum proceeds of $512.6 million,
$400 million of which represents the periodic proceeds from the issuance of
short-term asset-backed commercial paper under a liquidity facility. The Series
1995-1 certificates will enter into their amortization period beginning in May
of 1999. In April of 1996, the Trust issued the Series 1996-1 certificates with
a principal amount of $655.5 million, generating proceeds of $653.9 million,
$400 million of which was used to pay down the short-term asset-backed
commercial paper issued under Series 1995-1. Remaining proceeds were utilized to
reduce short-term borrowings from FCI. The series 1996-1 certificates will enter
into their amortization period beginning in August of 1998.

Credit card loans are transferred to the Trust, which issues certificates
representing undivided ownership interests in the Trust, primarily to
institutional investors. The Company also retains participation interests in the
Trust (under "Retained interests in loans securitized" on the balance sheets),
in an amount equal to the amount of the retained subordinated certificates of
each series held by MRI plus the amount equal to the loans in excess of the
principal balance of the certificates. Although the Company continues to service
the underlying credit card accounts and maintains the customer relationships,
these transactions are treated as sales for financial reporting purposes to the
extent of the investors interests in the Trust. Accordingly, the associated
loans are not reflected on the balance sheets.

As reflected in the balance sheets, the Company also has other receivables
from the Trust as a result of the credit card securitization transactions. These
include interest-bearing deposits, which constitute amounts subject to liens by
the certificateholders of the individual securitizations, amounts deposited in
an investor reserve account held by the trustee for the benefit of the Trust's
certificateholders, and amounts to be

F-11
<PAGE> 94

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

distributed to investors for interest payments on the certificates. As discussed
in Note 2, these amounts also include the excess servicing asset, which
represents the net gain recorded at any point in time for loans sold under asset
securitizations, net of recourse reserves for the securitized loans. As the
balance of the excess servicing asset, net of recourse reserves, is influenced
by factors outside of the Company's control, there is uncertainty inherent in
these estimates, making it possible that they could change in the near term.

NOTE 4 -- ALLOWANCE FOR LOAN LOSSES

The activity in the allowance for loan losses is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- --------------------------
1996 1995 1995 1994 1993
------ ---- ------ ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $3,679 $ -- $ -- $-- $--
Provision for loan losses........................ 5,173 534 4,393 -- --
------ ---- ------ --- ---
Loans charged-off................................ 3,629 -- 720 -- --
Recoveries....................................... 80 -- 6 -- --
------ ---- ------ --- ---
Net loan charge-offs............................. 3,549 -- 714 -- --
------ ---- ------ --- ---
Balance at end of period......................... $5,303 $534 $3,679 $-- $--
====== ==== ====== === ===
</TABLE>

NOTE 5 -- PREMISES AND EQUIPMENT

The carrying value of premises and equipment is as follows:

DECEMBER 31,
JUNE 30, ----------------
1996 1995 1994
----------- ------ ----
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment....................................... $ 638 $ 300 $166
Computer equipment............................................ 1,110 1,110 128
Computer software in development.............................. 629 110 --
Construction in progress...................................... 890 48 --
Leasehold improvements........................................ 74 74 --
------ ------ ----
Total.................................................... $ 3,341 $1,642 $294
Less: Accumulated depreciation and amortization............... 329 166 39
------ ------ ----
Balance at end of period...................................... $ 3,012 $1,476 $255
====== ====== ====
</TABLE>

Depreciation and amortization expense for the six months ended June 30,
1996 and 1995, and for the years ended December 31, 1995, 1994, and 1993 was
$163 and $44, and $127, $26, and $8, respectively.

NOTE 6 -- SHORT TERM BORROWINGS

The Company currently borrows from FCI to fund on-balance sheet loans and
for other general business purposes. Such borrowings from FCI are made from
FCI's cash balances and borrowings under its revolving credit facility which
provides for aggregate commitments of up to $400 million. At June 30, 1996, and
December 31, 1995, and 1994, FCI had outstanding revolving credit balances of
$201 million, $115 million and $0, respectively, of which the Company had
borrowed $54.3 million, $63.5 million, and $0, respectively, from FCI. The
interest rate on the borrowings was 6.0%, 7.1%, and 8.5% at June 30, 1996, and
December 31, 1995 and 1994, respectively.

F-12
<PAGE> 95

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

On July 1, 1996, FCI executed a commitment letter with a securities
underwriter and bank (the "Underwriter" and "Bank") in which the Underwriter
will act as the exclusive advisor and arranger of the following credit
facilities: (1) a $300 million, five-year revolving credit facility for the
Company (the "Revolving Credit Facility"), guaranteed by FCI; (2) a $400 million
increase of the current $800 million commercial paper liquidity facility (the
"Liquidity Facility") which matures in May 1999, and supports the Fingerhut
Owner Trust Commercial Paper program in which the Company participates; and (3)
up to $112.6 million of additional asset-backed certificates (the
"Certificates") to support the aforementioned increase in the Fingerhut Owner
Trust asset-backed commercial paper program.

The Bank and the Underwriter have agreed to provide the entire amount of
the Revolving Credit Facility and the entire amount of the increase in the
Liquidity Facility. In addition, the Underwriter has agreed to underwrite the
entire amount of the Certificates, in each case subject to the conditions set
forth or referred to in the Commitment Letter. However, these funding
commitments may be arranged and placed with such other parties as the Bank and
Underwriter deem necessary to distribute the concentration of the funding
commitments among various parties.

The Revolving Credit Facility will be guaranteed by FCI and will be further
supported by the pledge of the stock of certain subsidiaries of the Company and
certain accounts receivable and interests held therein by the Company. The
Company must pay a facility fee on the entire amount of the Revolving Credit
Facility, the level of which is determined by the non-credit enhanced senior
debt rating of FCI. The range of the facility fee is from 8 basis points to 25
basis points. The Revolving Credit Facility has Alternate Base Rate ("ABR") and
LIBOR borrowing options. The ABR rate is a per annum rate equal to the highest
of either (i) the rate of interest publicly announced by the Bank as its prime
rate in effect at its principal office in New York City, (ii) the secondary
market rate for three-month certificates of deposit plus 1%, or (iii) the
federal funds rate effective from time to time plus 0.5%. The borrowing spread
on the LIBOR borrowing option is determined by the same FCI credit rating as the
facility fee. The LIBOR borrowing spread range is from 17 basis points to 50
basis points. The Revolving Credit Facility will also contain certain financial
covenants standard for revolving credit facilities of this type including
minimum net worth, minimum equity to managed assets ratio, maximum leverage and
a limitation on indebtedness. In addition, the FCI guarantee will include
certain covenants including interest coverage, leverage and minimum net worth
for FCI.

The terms of the Revolving Credit Facility and the Liquidity Facility
include aggregate up-front fees of $2,970, which are non-refundable when paid.
In addition, the Company is obligated to pay certain ongoing administrative fees
to the administrative agent for the facilities.

NOTE 7 -- EMPLOYEE BENEFIT PLANS

Employees of the Company are participants in two non-contributory, defined
benefit plans of FCI which cover substantially all full-time non-union
employees. These plans have vesting periods of five years and provide monthly
retirement benefits based on years of service and level of compensation. FCI's
funding policy is to make annual contributions equal to, or exceeding, the
minimum required by the Employee Retirement Income Security Act of 1974, and
plan assets were primarily invested in an equity fund at December 31, 1995 and
1994. Due to the small number of the Company's employees with a significant
number of years of service, the amounts of the actuarial present value of
benefit obligations and the plan assets to be allocated to the Company were
immaterial at December 31, 1995 and 1994. Pension expense allocated to the
Company for the six months ended June 30, 1996 and 1995, and for the years ended
December 31, 1995, 1994, and 1993, was $30 and $11, and $28, $7, and $4,
respectively.

Employees of the Company are also participants in certain defined
contribution plans of FCI, (some of which have, or are limited to, 401(k)
provisions) which cover substantially all non-union employees. Employer
contributions to the plans are discretionary and are generally determined by the
Board of Directors

F-13
<PAGE> 96

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

of each of the individual companies which participate in such plans, but are not
to exceed 15 percent of each individual's compensation. The cost allocated to
the Company for these plans for the six months ended June 30, 1996 and 1995, and
for the years ended December 31, 1995, 1994, and 1993, was $465 and $75, and
$184, $34, and $28, respectively.

NOTE 8 -- STOCK OPTIONS

Effective March of 1994, FCI granted the Company's Chief Executive Officer
("CEO") a tandem option, which vests evenly over four years from the effective
date, for either (a) 55,000 shares of FCI's common stock at an exercise price of
$15.00 per share or (b) a 3.3% equity interest in the adjusted fair value of the
Company, as defined, that exceeds two times the estimated fair value of the
Company in March of 1994 (the "Initial Value"). The exercise of either option
terminates the other and if the CEO terminates his employment prior to the
completion of the Company's public offering of its stock, the entire vested
obligation is to be settled in cash. Accordingly, since March of 1994, the
Company has recorded compensation expense for this cash settlement obligation
only if the current estimated fair value of the Company, as adjusted, exceeds
the Initial Value. Compensation expense of $1.8 million was recorded based on
this calculation for the six months ended June 30, 1996, and has been recorded
on the balance sheet as "Accrued expenses and other liabilities". Additionally,
upon the initial public offering of the Company's stock, the 3.3% equity
interest option in the fair value of the Company will be converted into an
equivalent option for shares of the Company.

NOTE 9 -- INCOME TAXES

The components of the provision for income taxes consisted of the
following:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- -----------------------------
1996 1995 1995 1994 1993
-------- ------- ------- ------ ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................... $ 15,665 $ 1,195 $ 6,238 $1,274 $620
State................................. 1,965 176 921 126 56
Deferred................................ (12,062) (1,318) (4,291) (95) 61
-------- ------- ------- ------ ----
$ 5,568 $ 53 $ 2,868 $1,305 $737
======== ======= ======= ====== ====
</TABLE>

A reconciliation of the Company's effective income tax rate compared to the
statutory federal income tax rate is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ---------------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory federal income tax rate............... 35.00% 35.00% 35.00% 35.00% 35.00%
State income taxes, net of federal benefit...... 2.79 3.22 3.22 2.19 2.00
Effect of change in federal tax rate on net
deferred tax asset............................ -- -- -- -- (.23)
Other, net...................................... .71 .28 .28 .07 .11
----- ----- ----- ----- -----
Effective income tax rate....................... 38.50% 38.50% 38.50% 37.26% 36.88%
===== ===== ===== ===== =====
</TABLE>

F-14
<PAGE> 97

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

Significant components of the Company's deferred tax assets and liabilities
were as follows:

DECEMBER 31,
JUNE 30, --------------
1996 1995 1994
----------- ------ ----
(UNAUDITED)
<S> <C> <C> <C>
Deferred income tax assets resulting from future deductible
temporary differences are:
Allowance for loan losses and recourse reserves.................. $16,991 $8,455 $ --
Deferred annual credit card fees................................. 2,634 243 --
Other deferred revenue........................................... 1,304 -- --
Other product reserves........................................... 828 518 175
Other............................................................ 505 470 34
------- ------ ----
$22,262 $9,686 $209
======= ====== ====
Deferred income tax liabilities resulting from future taxable
temporary differences are:
Net gain on securitization of credit card loans.................. $ 1,713 $2,694 $ --
Deferred origination costs....................................... 1,471 1,594 --
Accrued interest on credit card loans............................ 2,797 1,061 --
Other............................................................ 26 31 11
------- ------ ----
$ 6,007 $5,380 $ 11
======= ====== ====
</TABLE>

Management believes, based on the Company's history of prior operating
earnings, expectations for operating earnings in the future and the expected
reversals of taxable temporary differences, that it is more likely than not that
all of the deferred tax assets will be realized.

NOTE 10 -- RELATED PARTY TRANSACTIONS

FCI and its various subsidiaries have historically provided significant
financial and operational support to the Company. Direct expenses incurred by
FCI and/or its subsidiaries for the Company, and other expenses, have been
allocated to the Company using various methods (headcount, actual or estimated
usage, etc.). Since the Company has not historically operated as a separate
stand-alone entity for all periods presented, these allocations do not
necessarily represent the expenses and costs that would have been incurred
directly by the Company had it operated on a stand-alone basis. However,
management believes such allocations reasonably approximate market rates for the
services performed. The direct and allocated expenses represent charges for
services such as data processing and information systems, audit, certain
accounting and other similar functions, treasury, legal, human resources,
certain customer service and marketing analysis functions, and certain executive
time, and space and property usage allocations. In addition, the Company has
historically managed the sales of credit insurance products for Fingerhut. In
accordance therewith, the Company has allocated back to Fingerhut, certain
direct and other expenses using methods similar to those mentioned above. The
historical expenses and cost allocations have been agreed to by the management
of both FCI and the Company, the terms of which are summarized in an ongoing
Administrative Services Agreement between FCI and the Company. This agreement
provides for similar future services using similar rates and cost allocation
methods for various terms, the latest of which expires on December 31, 1998.

The financial statements also include an allocation of FCI interest expense
for the net borrowings of the Company from FCI, or a net interest credit for the
net cash flows of the Company loaned to FCI in certain periods. These
allocations of interest expense or granting of a net interest credit for each of
the periods presented were based on the net loans made or borrowings received
between the Company and FCI, plus or minus the effects of intercompany balances
outstanding during such periods. The interest rate used to

F-15
<PAGE> 98

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

calculate such interest expense or credit during such periods was based on the
average short-term borrowing rates of FCI during the periods presented.

The Company and Fingerhut have also entered into several other agreements
which detail further business arrangements between the companies. The
retroactive effects of these additional intercompany agreements and business
arrangements have been reflected in the financial statements of the Company. The
agreements entered into include a Co-Brand Credit Card Agreement and a Data
Sharing Agreement which provide for a payment to Fingerhut for every credit card
account booked, as defined, and a payment based on card usage from such
accounts. The parties have also entered into a Database Access Agreement which
provides the Company with the exclusive right to access and market financial
services products, as defined, to the Fingerhut database of customers, in
exchange for an escalating non-refundable license fee, payable annually, ranging
from $0.5 million to $2.0 million, based on the year within the term of the
agreement ($1.0 million is payable in January of 1997). The agreement also calls
for a solicitation fee per consumer name mailed a product offer from such
database, and a suppress file fee for each consumer name obtained from a third
party and matched to the Fingerhut suppress file before its solicitation.

The following table summarizes the amounts of these direct expense charges
and cost allocations (including net interest income or expense), and the costs
to the Company of the intercompany agreements mentioned above, for each of the
periods reflected in the financial statements of the Company:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income................................ $ -- $ -- $ -- $ 487 $279
Expenses:
Interest expense............................... 1,834 269 1,181 -- --
Credit card account and other product
solicitation and marketing expenses......... 2,481 1,669 4,038 696 701
Data processing services and communications.... 639 28 320 7 11
Third party customer service and collections
expenses.................................... -- 326 500 473 356
Other affiliate cost allocations............... 182 856 1,680 1,688 450
</TABLE>

The Company and Fingerhut have also entered into an Extended Service Plan
Agreement which provides the Company with the exclusive right to provide and
coordinate the marketing of extended service plans to the customers of
Fingerhut. Revenues are received from Fingerhut from such sales and the Company
reimburses Fingerhut and/or its subsidiaries for certain costs which Fingerhut
or its subsidiaries incur in assisting the Company in marketing this product.
Additionally, the Company and FCI have entered into a tax sharing agreement (See
Note 2).

At or prior to the time the Company becomes a public entity, it will enter
into a Transfer Agreement with FCI and its subsidiaries detailing, in part, the
determination of vested benefits of the Company's employees in the FCI employee
benefit plans, and other terms necessary for the eventual transfer of the
Company's employees and their related benefits to its own plans.

Finally, the Company and FCI will enter into a registration rights
agreement under which FCI has the right to require the Company to register under
the Securities Act or to qualify for sale, any securities of the Company that
FCI owns, and the Company will be required to use reasonable efforts to cause
such registration to occur, subject to certain limitations and conditions. The
Company will bear the entire cost of the first three demand registrations
attributable to FCI, and FCI will bear one-half of the costs of any

F-16
<PAGE> 99

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

subsequent demand registrations. These costs include legal fees and expenses of
counsel for the Company, registration fees, printing expenses and other related
costs. FCI, however, will be required to pay any underwriting discounts and
commissions associated with the sale of its securities and the fees and expenses
of its own counsel.

In the ordinary course of business, executive officers of the Company or
FCI may have credit card loans issued by the Company. Pursuant to the Company's
policy, such loans are issued on the same terms as those prevailing at the time
for comparable loans with unrelated persons and do not involve more than the
normal risk of collectibility.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

Commitments to extend credit to consumers represent the unused credit
limits on open credit card accounts. These commitments amounted to $1.07 billion
and $709.5 million as of June 30, 1996, and December 31, 1995, respectively.
While these amounts represent the total lines of credit available to the
Company's customers, the Company has not experienced and does not anticipate
that all of its customers will exercise their entire available line at any given
point in time. The Company also has the right to increase, reduce, cancel, alter
or amend the terms of these available lines of credit at any time.

The Company leases certain office facilities and equipment under various
cancelable and non-cancelable operating lease agreements that provide for the
payment of a proportionate share of property taxes, insurance and other
maintenance expenses. These leases also may include scheduled rent increases and
renewal options. In addition, certain of these lease obligations have been
guaranteed by FCI. Rental expense for such operating leases was $587 and $72,
and $150, $79 and $0 for the six months ended June 30, 1996 and 1995, and for
the years ended December 31, 1995, 1994, and 1993, respectively.

Future minimum lease commitments at December 31, 1995, under non-cancelable
operating leases are as follows:

<TABLE>
<S> <C>
1996................................................................. $1,602
1997................................................................. 1,762
1998................................................................. 1,652
1999................................................................. 762
2000................................................................. 657
------
Total minimum lease payments.................................... $6,435
======
</TABLE>

NOTE 12 -- CAPITAL REQUIREMENTS AND DIVIDEND AND LOAN RESTRICTIONS

In the normal course of business, the Company enters into agreements, or is
subject to regulatory requirements, that result in cash, debt and dividend or
other capital restrictions.

The Federal Reserve Act imposes various legal limitations on the extent to
which banks that are members of the Federal Reserve System can finance or
otherwise supply funds to certain of their affiliates. In particular, Direct
Merchants Bank is subject to certain restrictions on any extensions of credit
to, or other covered transactions, such as certain purchases of assets, with the
Company or its affiliates. Such restrictions prevent Direct Merchants Bank from
lending to the Company and its affiliates with certain limited exceptions.
Additionally, Direct Merchants Bank is limited in its ability to declare
dividends to the Company. Such restrictions were not material to the operations
of the Company or to the Company's ability to declare and pay dividends at June
30, 1996, and December 31, 1995.

F-17
<PAGE> 100

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the Office of the Comptroller of the Currency and the Federal Reserve
Board, and monitored by the Federal Deposit Insurance Corporation and the Office
of the Comptroller of the Currency. These regulators consider a range of factors
when determining capital adequacy, such as the organization's size, quality and
stability of earnings, interest rate risk exposure, risk diversification,
management expertise, asset quality, liquidity and internal controls. At June
30, 1996, and December 31, 1995, Direct Merchants Bank's Tier 1 risk-based
capital ratio, risk-based total capital ratio and Tier 1 leverage ratio exceeded
the minimum required capital levels, and Direct Merchants Bank was considered a
"well capitalized" depository institution under regulations of the Office of the
Comptroller of the Currency.

NOTE 13 -- CONCENTRATIONS OF CREDIT RISK

A concentration of credit risk is defined as a significant credit exposure
with an individual or group engaged in similar activities or affected similarly
by economic conditions. The Company is active in originating credit card loans
throughout the United States and no individual or group had a significant
concentration of credit risk at June 30, 1996, or December 31, 1995. The
following table details the geographic distribution of the Company's retained,
sold and managed credit card loans:

<TABLE>
<CAPTION>
RETAINED SOLD MANAGED
-------- -------- ----------
<S> <C> <C> <C>
JUNE 30, 1996 (UNAUDITED)
California.................................................. $ 21,943 $107,980 $ 129,923
New York.................................................... 14,241 70,079 84,320
Texas....................................................... 13,639 67,119 80,758
Florida..................................................... 13,246 65,182 78,428
Ohio........................................................ 7,975 39,242 47,217
Pennsylvania................................................ 7,630 37,546 45,176
Illinois.................................................... 7,132 35,099 42,231
All others.................................................. 94,573 465,392 559,965
-------- -------- ----------
Total.................................................. $180,379 $887,639 $1,068,018
======== ======== ==========
DECEMBER 31, 1995
California.................................................. $ 9,765 $ 46,076 $ 55,841
New York.................................................... 7,480 35,295 42,775
Texas....................................................... 7,184 33,897 41,081
Florida..................................................... 6,091 28,740 34,831
Pennsylvania................................................ 4,465 21,069 25,534
Ohio........................................................ 4,157 19,617 23,774
Illinois.................................................... 4,052 19,120 23,172
All others.................................................. 51,870 244,741 296,611
-------- -------- ----------
Total.................................................. $ 95,064 $448,555 $ 543,619
======== ======== ==========
</TABLE>

Also at June 30, 1996, and December 31, 1995, all federal funds sold were
made to one bank, which represents a concentration of credit risk to the
Company. The Company is able to monitor and mitigate this risk since federal
funds are sold on a daily origination and repayment basis and therefore may be
recalled quickly should the credit risk of the counterparty bank increase above
certain limits set by the Company.

F-18
<PAGE> 101

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

NOTE 14 -- FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has estimated the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107").
Financial instruments include both assets and liabilities, whether or not
recognized in the Company's balance sheets, for which it is practicable to
estimate fair value. Additionally, certain intangible assets recorded on the
balance sheets, such as purchased credit card relationships, and other
intangible assets not recorded on the balance sheets (such as the value of
credit card account relationships for originated loans and the franchise values
of the Company's various lines of business) are not considered financial
instruments and, accordingly, are not valued for purposes of this disclosure.
The Company believes that there is substantial value associated with these
assets based on current market conditions, including the purchase and sale of
such assets. Accordingly, the aggregate estimated fair value amounts presented
do not represent the entire underlying value of the Company.

Quoted market prices generally are not available for all of the Company's
financial instruments. Accordingly, in cases where quoted market prices are not
available, fair values were estimated using present value and other valuation
techniques which are significantly affected by the assumptions used, including
the discount rate and estimated future cash flows. Such assumptions are based on
historical experience and assessments regarding the ultimate collectibility of
assets and related interest, and estimates of product lives and repricing
characteristics used in the Company's asset/liability management process. These
assumptions involve uncertainties and matters of judgment, and therefore, cannot
be determined with precision. Thus, changes in these assumptions could
significantly affect the fair value estimates.

A description of the methods and assumptions used to estimate the fair
value of each class of the Company's financial instruments is as follows:

CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST AND FEES RECEIVABLE

The carrying amounts approximate fair value due to the short term nature of
these instruments.

CREDIT CARD LOANS, NET OF ALLOWANCE FOR LOAN LOSSES

Currently, credit card loans are originated with variable rates of interest
that adjust with changing market interest rates. Thus, carrying value
approximates fair value. However, this valuation does not include the value that
relates to estimated cash flows generated from new loans from existing customers
over the life of the cardholder relationship. Accordingly, the aggregate fair
value of the credit card loans does not represent the underlying value of the
established cardholder relationships.

OTHER RECEIVABLES DUE FROM CREDIT CARD SECURITIZATIONS, NET

The fair value of the excess servicing rights component of other
receivables due from credit card securitizations, net, is estimated by
discounting the future cash flows at rates which management believes to be
consistent with those that would be used by an independent third party. However,
because there is no active market for these financial instruments, the fair
values presented may not be indicative of the value negotiated in an actual
sale. The future cash flows used to estimate the fair values of these financial
instruments are adjusted periodically for prepayments on loans sold, net of
anticipated charge-offs over the life of the loans under the recourse
provisions, and allow for the value of normal servicing fees. For the other
components of other receivables due from credit card securitizations, net, the
carrying amount is a reasonable estimate of the fair value.

F-19
<PAGE> 102

METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)

SHORT-TERM LOANS TO AND BORROWINGS FROM FINGERHUT COMPANIES, INC.

Short-term loans to and borrowings from Fingerhut Companies, Inc. are made
with variable rates of interest that adjust with changing market interest rates.
Thus, carrying value approximates fair value.

INTEREST RATE CAP AND SWAP AGREEMENTS

The fair values of interest rate cap and swap agreements were obtained from
dealer quoted prices. These values generally represent the estimated amounts
that the Company would receive or pay (denoted by bracketed numbers) to
terminate the agreements at the reporting dates, taking into consideration
current interest rates and the current creditworthiness of the counterparties.

The estimated fair values of the Company's financial instruments are
summarized as follows:

<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 22,230 $ 22,230 $ 34,743 $ 34,743 $ 23 $ 23
Credit card loans, net............. 126,660 126,660 91,385 91,385 -- --
Other receivables due from credit
card securitizations, net........ 5,714 5,714 31,597 31,597 -- --
Short-term borrowings from FCI..... 54,318 54,318 63,482 63,482 -- --
Interest rate swap agreements in a
net receivable position.......... -- (2,219) -- -- -- --
Interest rate cap agreements....... 2,806 1,584 3,008 1,488 -- --
</TABLE>

DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING

The Company has entered into interest rate cap and swap agreements to hedge
its economic exposure to fluctuating interest rates associated with the floating
and fixed rate certificates issued by the FFS Master Trust. Particularly, in
connection with the issuance of the $512.6 million FFS Master Trust Series
1995-1 certificates in May 1995, the Company entered into an eight-year
agreement capping the certificate interest rate at 11.2%. Additionally, the
Company entered into two interest rate swap agreements in April 1996, to
synthetically alter the fixed rate of the FFS Master Trust Series 1996-1
certificates to a floating rate to manage interest rate sensitivity and better
match this rate to the variable interest rate of the Company's loans that are
sold and serviced with limited recourse. Total notional amounts of these swap
transactions amounted to $605.5 million, and exchanged an obligation to pay a
fixed rate of 6.26% for a one-month floating rate based on the prevailing
monthly investment grade LIBOR rate. This floating rate was 5.45% at June 30,
1996. The obligations of the Company and the counterparties under these swap
agreements are settled on a monthly basis.

Interest rate contracts are generally expressed in notional principal or
contract amounts which are much larger than the amounts potentially at risk for
nonpayment by counterparties. Therefore, in the event of nonperformance by the
counterparties, the Company's credit exposure is limited to the uncollected
interest and contract market value related to the contracts that have become
favorable to the Company. Although the Company does not require collateral from
counterparties on its existing agreements, the Company does control the credit
risk of such contracts through established credit approvals, risk control
limits, and the ongoing monitoring of the credit ratings of counterparties. The
Company currently has no reason to anticipate nonperformance by the
counterparties.

F-20
<PAGE> 103

- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN
THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THE PROSPECTUS.

------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 2
Prospectus Summary...................... 3
Risk Factors............................ 9
Use of Proceeds......................... 17
Dividend Policy......................... 17
Dilution................................ 18
Capitalization.......................... 19
Selected Historical Financial and
Operating Data........................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
Business................................ 41
Management.............................. 63
Transactions Between FCI and the
Company............................... 71
Principal Stockholder................... 76
Description of Capital Stock............ 77
Shares Eligible for Future Sale......... 80
Underwriting............................ 81
Legal Matters........................... 82
Experts................................. 82
Index to Financial Statements........... F-1
</TABLE>

------------------

UNTIL NOVEMBER 19, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,833,333 SHARES
[METRIS LOGO]
COMMON STOCK

------------
PROSPECTUS

OCTOBER 25, 1996

------------
SMITH BARNEY INC.
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY

- ------------------------------------------------------
- ------------------------------------------------------