As filed with the Securities and Exchange Commission on August 26, 1996
Registration No. 333-
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
Metris Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 6141 Applied For
(State or other (Primary Standard (I.R.S. employer
jurisdiction of Industrial Classifcation identification no.)
incorporation or Code Number)
organization)
----------------
600 South Highway 169, Suite 1800
St. Louis Park, Minnesota 55426
(612) 525-5020
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
----------------
Ronald N. Zebeck
Metris Companies Inc.
600 South Highway 169, Suite 1800
St. Louis Park, Minnesota 55426
(612) 525-5020
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
COPIES TO:
Michael P. Sherman, Esq. Gregory M. Shaw, Esq. William M. Hartnett, Esq.
Fingerhut Companies, Inc. Cravath, Swaine & Moore Cahill Gordon & Reindel
4400 Baker Road 825 Eighth Avenue 80 Pine Street
Minnetonka, Minnesota New York, New York New York, New York 10005
55343 10019
(612) 932-3100 (212) 474-1000 (212) 701-3000
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
----------------
CALCULATION OF REGISTRATION FEE
===========================================================================
Proposed Proposed
maximum maximum
Title of each offering aggregate Amount of
class of securities Amount to be price per offering Registration
to be registered registered (1) share (2) price(2) fee
- ---------------------------------------------------------------------------
Common Stock, par
value $.01 per
share ............. 3,258,333 $16.00 $52,133,328 $17,977
===========================================================================
(1) Includes 425,000 shares of Common Stock subject to an option
granted to the underwriters solely to cover over-allotments,
if any.
(2) Estimated solely for the purpose of calculating the registration
fee.
----------------
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933, or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
===========================================================================
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION, DATED AUGUST 26, 1996
PROSPECTUS
2,833,333 Shares
Metris Companies Inc.
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. It is currently estimated that the initial public
offering price will be between $14.00 and $16.00 per share. See
"Underwriting" for information relating to the factors considered in
determining the initial public offering price. Application has been
made to list the Common Stock on the Nasdaq National Market 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.
------------------
======================================================================
Underwriting
Price Discounts and Proceeds to
to Public Commissions(1) Company (2)
- ----------------------------------------------------------------------
Per Share.........
Total(3)..........
======================================================================
(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 $ , 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 $ , $ and $ ,
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 , 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
, 1996
<PAGE>
[Metris Companies Inc. Logo]
"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.
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.
<PAGE>
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. 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,
<PAGE>
identifying new Warrantable Product categories for Fingerhut
products, and marketing extended service plans in conjunction with
retailers other than Fingerhut.
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 based on number of cards issued, with over 700,000 total
credit card accounts and $543.6 million total managed loans
outstanding. As of June 30, 1996, the Company had approximately 1.1
million total credit card accounts and $1.068 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.
<PAGE>
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:
o Increase the number of Fingerhut Customers utilizing the
Company's consumer credit products, extended service plans and
fee-based products and services.
o Identify and solicit additional External Prospects for credit
cards using the Company's proprietary risk, response and
profitability models.
o Maximize the profitability of each customer relationship by
cross-selling multiple products and services and using
individualized risk-based pricing.
o 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.
o 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.
o 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".
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. See "Transactions Between FCI and the Company".
<PAGE>
The Offering
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".
Proposed 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.
____________
(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 [ ] shares of Common Stock issuable upon
exercise of outstanding stock options granted or expected to be
granted to certain employees and directors of the Company. The
Company has reserved a total of 1,880,000 shares of Common Stock
for issuance in connection with options issuable under the
Company's stock option plan. 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" within
the meaning of Section 27A of the Securities Act, and Section 21E of
the Exchange Act, and is subject to the safe-harbor created by such
sections. The Company's actual results may differ significantly from
the results discussed in such forward-looking statements. Certain
factors that might cause such differences include, but are not
limited to, the "Risk Factors" described herein.
<PAGE>
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 is unaudited, but reflects, 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 Income Statement Data
and Balance Sheet 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.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30 Year Ended December 31
-------------------------- ----------------------
1996 1995 1995 1994 1993
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands,
except per share
data)
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: <F1>
Adjusted Pro-forma net
income per share $0.51 $ 0.33
Balance Sheet Data:
Credit card/other loans <F2> $ 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 %<F3> 13.85% 13.34% 13.14% 7.37% 6.14%
Managed net charge-off
ratio <F4> 5.53% -- 2.19% -- --
Managed delinquency ratio <F5> 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
revenue $ 8,615 $ 6,687 $ 17,779 $12,244 $ 7,935
Warrantable Product sales
penetration rates <F6> 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
<FN>
- -------------
<F1> 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 application of the estimated net
proceeds from the Offering as if the Offering had occurred at
the beginning of the respective periods shown.
<F2> 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.
<F3> 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.
<F4> Net charge-offs reflect actual principal amounts charged-off,
less recoveries, as a percentage of average managed principal
credit card loans on an annualized basis.
<F5> Delinquencies represent credit card loans that were at least 30
days past due at period end.
<F6> 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.
</FN>
</TABLE>
<PAGE>
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.
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 and the Company will have one new member of
the Board of Directors who will be appointed at the time of or following
the Offering. A number of significant changes will occur in the funding
and operations of the Company following the consummation of the
Offering. 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. 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. 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 expectations would have a
material adverse impact on the Company's results of operations and
financial condition.
<PAGE>
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
(i) on 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. Many
lenders, including the Company, recently have reported increased
levels of account delinquencies and losses, and this trend may
continue. 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 the Company's
securitizations and other funding and the indices used to determine
the finance charges on account balances.
<PAGE>
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.
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 Office of the Comptroller of the Currency (the
"OCC"). Such regulations include limitations on the nature of the
businesses Direct Merchants Bank may conduct. See
"Business--Regulation".
<PAGE>
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. 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 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.
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.
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.
See "Business--Competition".
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. The loss of the ability to use
information from the Fingerhut Database or to
<PAGE>
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.
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.
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. To address the
potential for conflicts between the Company and FCI, the Company's
Amended and Restated Certificate of Incorporation (the "Certificate")
contains detailed provisions concerning the business activities in
which the Company is permitted to engage for so long as FCI continues
to control the Company.
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
"Certain Provisions of the Company's Certificate of Incorporation and
By- laws--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. The Company may engage in any other business with the
consent of FCI. 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
<PAGE>
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 arms-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 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. 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".
<PAGE>
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 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.
Application has been made to list the Common Stock on the Nasdaq
National Market under the symbol "MTRS". The price of the Common
Stock offered hereby will be 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".
<PAGE>
Dilution
Based upon an assumed initial public offering price of $15.00
per share (and assuming that the Underwriters do not exercise their
over-allotment option), 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 would be $6.27. Accordingly, purchasers of
the Common Stock offered hereby would suffer immediate dilution in
net tangible book value per share of $8.73. See "Dilution".
USE OF PROCEEDS
Assuming an initial public offering price of $15.00 per share,
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 $38.7 million
(approximately $44.7 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 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 August 2001. The indebtedness to FCI bears interest at
a variable rate, which was 6.0% at June 30, 1996.
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".
<PAGE>
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 $117.9 million, or $6.27
per share of Common Stock. This represents an immediate increase in
net tangible book value of 1.31 per share to existing stockholders.
Assuming an initial public offering price of $15.00 per share of
Common Stock, there would be an immediate dilution of $8.73 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:
Initial public offering price per share...... $15.00
------
Net tangible book value per share
before the Offering(1)..................... $4.96
-----
Increase in net tangible book value
per share attributable to the Offering..... 1.31
----
Net tangible book value per share
after the Offering......................... 6.27
----
Dilution per share to New Investors.......... $8.73
=====
- ----------------
(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.
Shares Purchased Total Consideration
Average Price
Number Percent Amount Percent Paid per Share
Existing
stockholders(1).... 15,966,667 84.9% $ 80,212,000 65.4% $5.02
New Investors........ 2,833,333 15.1% 42,500,000 34.6% $15.00
---------- ----- ------------ -----
Total................ 18,800,000 100% $122,712,000 100%
=========== ====== ============ ====
- ----------------------
(1) Excludes [ ] shares of Common Stock issuable upon
exercise of outstanding stock options granted or expected to be
granted to certain employees and directors of the Company. The
Company has reserved a total of 1,880,000 shares of Common Stock
for issuance in connection with options issuable under the
Company's stock option plan. See "Management--Compensation
Programs".
<PAGE>
CAPITALIZATION
The following table sets forth the debt and capitalization of
Metris as of June 30, 1996, as adjusted to give effect to the planned
borrowing under the Company's bank revolving credit facility to repay
borrowings from FCI in full, and to the effect of the Offering and the
application of the net proceeds therefrom (assuming an offering price
of $15.00 per share and that 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.
As of June 30, 1996
Dollars in thousands Actual As Adjusted
Debt:
Short-term borrowings from FCI(1) $ 54,318 $ -
Revolving credit facility(1) - 15,618
Other 1,000 1,000
-------- --------
Total debt 55,318 16,618
======== =========
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 - 98,540
Retained earnings - 20,184
------- ---------
Total stockholders' equity - 118,912
======= =========
Total capitalization $ 135,530 $ 135,530
======= =========
- -------------------
(1) Prior to the Offering, the Company expects to borrow under its
bank revolving credit facility in order to repay borrowings from
FCI in full.
(2) Excludes [ ] shares of Common Stock issuable upon
exercise of outstanding stock options granted or expected to be
granted to certain employees and directors of the Company. The
Company has reserved a total of 1,880,000 shares of Common Stock
for issuance in connection with options issuable under the
Company's stock option plan. See "Management--Compensation
Programs".
<PAGE>
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 is
unaudited but reflects, 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.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
----------------------------------- ----------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands, except
percents and per share data
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:<F1>
Adjusted Pro-forma net income
per share $ 0.51 $ 0.33
Balance Sheet Data:
Credit card/other loans<F2> $ 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 %<F3> 13.85% 13.34% 13.14% 7.37% 6.14% 5.97% 7.07%
Managed net charge-off ratio<F4> 5.53% -- 2.19% -- -- -- --
Managed delinquency ratio <F5> 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<F6>) 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
<FN>
<F1> 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 application of the estimated net proceeds from the
Offering as if it had occurred at the beginning of the respective
periods shown.
<F2> 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.
<F3> 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.
<F4> Net charge-offs reflect actual principal amounts charged-off,
less recoveries, as a percentage of average managed principal
credit card loans on an annualized basis.
<F5> Delinquencies represent credit card loans that were at least 30
days past due at period end.
<F6> 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. 1991 information
was not available and therefore is labeled as N/A.
</FN>
</TABLE>
<PAGE>
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.
Selected Financial Information
For the Quarters Ended
June 30, Mar. 31, Dec. 31, Sept. 30, June 30,
Dollars in thousands 1996 1996 1995 1995 1995
-------- ------- -------- --------- --------
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%
<PAGE>
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. These marketing and
other account acquisition 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.
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.
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.
Other operating income increased $37.2 million to $53.3 million,
primarily due to the increase in average managed loans 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
<PAGE>
attributable to the 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 campaign, 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 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 operation.
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
<PAGE>
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.
For the Quarters Ended
June 30, June 30, Dec. 31, Dec. 31, Dec. 31,
Dollars in thousands 1996 1995 1995 1994 1993
-------- -------- -------- ------- ------
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
loan 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
loan 615,999 20,691 143,442 -- --
---------- ---------- ---------- ----- ----
Total average managed
loan portfolio $ 741,177 $ 42,576 $ 183,274 $ -- $ --
========== ========== ========== ===== ====
<PAGE>
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>
For the Quarters Ended
June 30, June 30, Dec. 31, Dec. 31, Dec. 31,
Dollars in thousands 1996 1995 1995 1994 1993
----------------------------------------------------
<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 <F1> 15.02% 9.54% 12.89% 7.37% 6.14%
Managed Basis:
Average managed interest
earning assets $760,108 $45,648 $193,086 $ 6,615 $ 4,531
Return on managed assets 2.23% 0.32% 2.14% 31.06% 24.31%
Net interest margin <F1> 13.85% 13.34% 13.14% 7.37% 6.14%
<FN>
<F1> 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.
</FN>
</TABLE>
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 months of 1996. See "--Interest Rate
Sensitivity" for further discussion of the Company's interest rate
risk management strategy.
<PAGE>
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, 1994, and 1993:
<PAGE>
Analysis of Average Balances, Interest and Average Yields
and Rates on an Owned Basis
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------------------------------
1996 1995
------------------------------ -----------------------------
Dollars in Average Yield/ Average Yield/
thousands Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets: <F1>
Federal funds sold $ 16,410 $ 436 5.3% $ 1,462 $ 43 5.9%
Short-term investments 2,521 64 5.1% 1,610 46 5.8%
Credit card loans 125,178 12,119 19.5% 21,885 1,371 12.6%
Loans to FCI -- -- -- -- -- --
--------- -------- ----- -------- ------ -----
Total interest-earning
assets $ 144,109 $ 12,619 17.6% $ 24,957 $1,460 11.8%
--------- -------- ----- ------- ------ -----
Cash and due from banks 3,197 509
Accrued interest and fees 2,475 1,848
Other amounts due from
securitizations 16,490 3,033
Other assets 25,011 3,079
Allowance for loan losses (5,078) (233)
--------- ---------
Total assets $ 186,204 $ 33,193
========= =========
Liabilities and Equity:
Interest-bearing liabilities:
Interest bearing deposit $ 1,000 $ 24 4.8% $ 394 $ 11 5.5%
Due to FCI 63,351 1,834 5.8% 9,588 269 5.6%
--------- -------- ---- ------- ------ ----
Total 64,351 $ 1,858 5.8% 9,982 $ 280 5.7%
Other liabilities 46,598 10,109
--------- -------
Total liabilities 110,949 20,091
Division Equity 75,255 13,102
--------- -------
Total Liabilities and
Equity $ 186,204 $ 33,193
========= ========
Net interest income and
interest margin <F2> $ 10,761 15.0% $1,180 9.5%
Net interest rate spread <F3> 11.8% 6.1%
Year Ended December 31
-------------------------------------------------------------
1995 1994
------------------------------- ---------------------------
Dollars in Average Yield/ Average Yield/
thousands Balance Interest Rate Balance Interst Rate
------- -------- ------- ------- ------- ----
Assets:
Interest-earning assets:<F1>
Federal funds sold $ 8,501 $ 487 5.7% $ -- -- --
Short-term investments 1,311 75 5.7% -- -- --
Credit card loans 39,832 7,054 17.7% -- -- --
Loans to FCI -- -- -- $ 6,615 487 7.4%
--------- --------- ------ -------- ------ ----
Total interest-earning
assets $ 49,644 $ 7,616 15.3% $ 6,615 $ 487 7.4%
--------- ---------- ------ -------- ------ -----
Cash and due from banks 1,572 33
Accrued interest and fees 1,497 --
Other amounts due from
securitizations 12,235 --
Other assets 7,122 428
Allowance for loan losses (1,149) --
--------- --------
Total assets $ 70,921 $ 7,076
========= ========
Liabilities and Equity:
Interest-bearing liabilities:
Interest bearing deposit $ 700 $ 36 5.2% -- -- --
Due to FCI 20,822 1,181 5.7% -- -- --
--------- --------- ------ -------- ----- ----
Total 21,522 $ 1,217 5.7% --
Other liabilities 19,316 1,711
--------- --------
Total liabilities 40,838 1,711
Division Equity 30,083 5,365
--------- --------
Total Liabilities and
Equity $70,921 $7,076
========= ========
Net interest income and
interest margin <F2> $ 6,399 12.9% $ 487 7.4%
Net interest rate spread <F3> 9.6% 7.4%
<FN>
<F1> There were no taxable equivalent adjustments necessary for the periods presented.
<F2> Net interest margin is computed by dividing annualized net interest income by average
total interest-earning assets.
<F3> The interest rate spread is the annualized yield on annualized average interest earning
assets minus the funding rate on average interest-bearing liabilities.
</FN>
</TABLE>
<PAGE>
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*
Dollars in thousands Increase Volume Rate Increase Volume Rate
-------- ------ ---- -------- -------- ----
<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 December 31
June 30
------------------- ------------------------------
Dollars in thousands 1996 1995 1995 1994 1993
------- ------- ------- ------- -------
<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 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>
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, and deferred warranty
revenues.
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.
<PAGE>
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.
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.
<PAGE>
Other Operating Expense
Six Months Ended
June 30, Year Ended December 31,
----------------- --------------------------
Dollars in thousands 1996 1995 1995 1994 1993
------- ------- ------- ------- -------
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
======= ======= ======= ======= ======
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 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.
<PAGE>
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 increase in the
effective tax rate for 1995 over 1994 is 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. The increase in the effective income
tax rate for 1994 over 1993 was caused primarily by a change in the
federal statutory income tax rates. 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.
<PAGE>
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:
<TABLE>
<CAPTION>
Managed loan delinquency
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
---------- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands
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
<PAGE>
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 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% -- --
---------- ---------- --------- --------- ------- ----
(1) Annualized
</TABLE>
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
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 delinquency and collection trends by loan
portfolio, (iii) current economic 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's primary tool used to calculate the necessary allowance at
any point in time is a statistical model which uses delinquency
levels, loan seasoning and other measures of asset quality to
estimate net charge-offs. However, other more subjective factors such
as economic and industry trends are also reviewed to determine the
appropriate level of the allowance and the required provision to
establish the allowance at such an amount.
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.
<PAGE>
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:
<TABLE>
Analysis of allowance for loan losses
<CAPTION>
For the Quarters Ended
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
(Owned Basis) 1996 1996 1995 1995 1995 1005
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dollars in thousands
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 % 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,
(Managed Basis) 1996 1996 1995 1995 1995 1995
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dollars in thousands
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 % of managed loans 4.15% 4.20% 4.09% 3.40% 1.49% --%
======== ======== ======== ======= ======== =========
</TABLE>
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. 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).
<PAGE>
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. Variable rate funding is also used
for on-balance sheet loans and other assets to match the variable rate
pricing structure of these assets. At June 30, 1996, all of the
Company's credit card accounts 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.
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 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
and the counterparties under the Company's swap arrangements are AAA-
rated. The obligations of the Company and the counterparties under
these swap agreements are settled on a monthly basis.
<PAGE>
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.
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.
The Company's liquidity needs and funding sources may change over
time. On July 1, 1996, FCI executed a commitment letter 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) up to $112.6 million of
additional asset- backed certificates to support the aforementioned
increase in the Fingerhut Owner Trust asset-backed commercial paper
program.
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 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 will
also contain certain financial covenants standard for revolving credit
facilities of this type including minimum net worth, minimum equity
<PAGE>
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 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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards ("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
<PAGE>
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.
<PAGE>
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. 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 and the Direct Merchants Bank MasterCard. The Company's
customers and prospects include both Fingerhut Customers and External
Prospects for whom credit bureau information is available. 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 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.
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.
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.
<PAGE>
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 by, a particular merchant, such as
gasoline or department store credit cards. 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. Industry sources estimate
that the potential secured card market includes approximately 17
million U.S. households and that the number of secured card accounts
has grown from approximately 0.7 million in 1993 to approximately 2.5
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.
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
<PAGE>
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. Based
on a survey by Payment Systems Inc. ("PSI"), an independent research
firm, management believes 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<F1>
$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>
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%
<FN>
<F1> 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.
</FN>
</TABLE>
<PAGE>
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:
<TABLE>
Credit Card Penetration by Income Segment
Annual Household Income
<CAPTION>
$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>
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 # of Credit Cards
Per Household* 1.25 2.50 3.41 4.12 5.46 6.81 3.72
* Includes MasterCard, Visa, Diners Club, American Express, and
Discover cards. Source: 1996 Survey of the American Household,
Simmons Market Research Bureau, Inc.
</TABLE>
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.
[GRAPHIC OMITTED]
[GRAPH: Industry-Wide Response Rates by Household Income]
Under $20,000- $35,000- $50,000- $75,000+
$20,000 34,999 49,999 74,999
2.0% 1.9% 1.4% 1.1% 1.0%
Source: Mail Monitor, Behavioral Analysis, Inc., 12 Months Ending
First Quarter 1996. Includes MasterCard, Visa, Discover and American
Express.
<PAGE>
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 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. Having been in the direct
marketing business for over 45 years, Fingerhut has a large base of
loyal, repeat customers.
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. 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.
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 1400 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. The Fingerhut Database also 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. 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 financial service products. 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 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.
<PAGE>
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 based on the
number of cards issued, according to the Nilson Report. As of June 30,
1996, the Company had 1.1 million credit card accounts and $1.068
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 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.
<PAGE>
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 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 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 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).
<PAGE>
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.
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 marketed directly to moderate income consumers.
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 contracts. For each
customer in the Fingerhut Database, a Fingerhut Score has been
developed utilizing sophisticated statistical modeling techniques. 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
<PAGE>
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.
[GRAPHIC OMITTED]
[GRAPH: Credit Scoring Evaluation-Fingerhut Customers]
1-10 11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100
46 62 77 86 96 109 124 127 169 170
Lower Risk Score-----------------------------Higher Risk Score
Fingerhut Score
Note: 100=average delinquency of Fingerhut Customers who were solicted
during the Spring of 1995 and had FICO scores within one 20-point
subsegment.
<PAGE>
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.
[GRAPHIC OMITTED]
[GRAPH: Credit Scoring Evaluation-External Prospects]
1 2 3 4 5 6 7 8 9 10 11 12 13
45 46 51 62 81 88 88 89 95 96 118 155 208
Lower Risk Score-----------------------Higher Risk Score
Proprietary Score
Note: 100=average delinquency of the External Prospects who were solicited
during the Spring of 1995 and had FICO scores within one twenty-point
subsegment.
<PAGE>
Similar analyses were performed on External Prospectus 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 pre-screened 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 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.
<PAGE>
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
Dollars in thousands of Accounts of Accounts Outstanding Outstanding
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Age Since Origination
- ---------------------
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.
Percentage of
Number Percentage Loans Loans
Dollars in thousands of Accounts of Accounts Outstanding Outstanding
----------- ----------- ----------- -----------
State
- -----
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%
========= ====== ========== ======
(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 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
<PAGE>
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
Dollars in thousands (except Number Percentage Loans Loans
for Account Balance Range) of Accounts of Accounts Outstanding Outstanding
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Account Balance Range
- ---------------------
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%
========= ======== ========== =======
Percentage of
Dollars in thousands (except Number Percentage Loans Loans
for Credit Limit Range) of Accounts of Accounts Outstanding Outstanding
----------- ----------- ----------- -----------
Credit Limit Range
- ------------------
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 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
<PAGE>
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 1400 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 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
<PAGE>
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.
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
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.
<PAGE>
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.
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 Note 6 of "Selected Historical Financial
and Operating Data".
Most of the Company's extended service plans begin at the point
in time when the manufacturer's warranty ends and 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 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. 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.
<PAGE>
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. The Company has achieved a
penetration rate of approximately 53% for fee-based products, which
management believes significantly exceeds industry norms.
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 net 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.
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
<PAGE>
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 $512.6 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 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.
<PAGE>
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. 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 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".
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 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.
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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 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".
<PAGE>
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.
<PAGE>
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.
Name Age Position
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
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
<PAGE>
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.
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 a 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.
<PAGE>
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.
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 $2,000 each for service as chairpersons of
such committees. Non- employee directors will receive an initial grant
of 5,000 stock options with an exercise price per share equal to the
price to the public in connection with the Offering and will receive
annual grants of 1,000 stock options with exercise prices equal to the
fair market value of the Common Stock on the respective grant date for
each subsequent year they serve as directors of the Company. Directors
employed by the Company or FCI will receive no directors' fees or
directors' stock options. In addition, the Company will reimburse
reasonable travel, lodging and other incidental expenses incurred by
directors in attending meetings of the Board of Directors and
committees. The Chairman of the Board was granted options to purchase
[ ] shares of Common Stock at the public offering price.
<PAGE>
Compensation of Executive Officers
The following table sets forth cash and noncash compensation paid
for each of the last three fiscal years to the Chief Executive Officer
and each of the four other most highly compensated executive officers
who were serving as executive officers at December 31, 1995. Prior to
the Offering, executive compensation was established by the FCI
Compensation Committee. It is anticipated that, following the
Offering, the Compensation Committee of the Board of Directors of the
Company will review the compensation established for the executive
officers and may revise such compensation based upon such standards
and peer company comparisons as the Committee deems appropriate at
such time.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-term
Annual Compensation Compensation
--------------------------------------- ------------
Awards
Securities
Other Annual Underlying All Other
Name and Compensation Options Compensation
Principal Position <F1> Year Salary($) Bonus($) ($)<F2> (#)<F3> ($)<F4>
--------------------------- ---- --------- -------- ------------ ------------ ------------
<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 Financial Officer 1994 $111,731 $ 65,766 $10,651 8,500 $ 10,620
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 -- -- -- -- --
<FN>
<F1> 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.
<F2> 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. The auto allowance payments were: Mr. Zebeck, $16,524 for 1995 and
$12,737 for 1994; and Mr. Michielutti, $11,940 for 1995.
<F3> All amounts represent option grants under option plans of FCI. These options
will terminate if the Company ceases to be a subsidiary of FCI.
<F4> 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.
</FN>
</TABLE>
<PAGE>
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.
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, all of the Company's executive officers were eligible to
participate in the Profit Sharing Plan, subject to completing one year
of service. It is contemplated that the Company will become a
participating employer, and make contributions to, the Profit Sharing
Plan for at least the 1996 fiscal year.
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. All of the Company's executive officers are
participants in the Pension Plan. It is contemplated that the Company
will become a participating employer and make contributions to the
Pension Plan for at least the 1996 fiscal year. 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, on [ ],
1996, the Company adopted the Metris Companies Inc. Long-Term
Incentive and Stock Option Plan (the "Stock Option Plan"), which
permits a variety of stock-based grants
<PAGE>
and awards and give the Company flexibility in tailoring its long-term
compensation programs. It provides 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. As
of the date hereof, the Company has granted options to purchase an
aggregate of [ ] shares of Common Stock to [ ] officers and
employees of the Company and the Chairman of the Board.
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 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
<PAGE>
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 (the "Tandem Plan")
exercisable for either (i) 55,000 shares of FCI common stock at an
exercise price of $15.00 per share or (ii) an interest in the
Company. Exercise of either option terminates the other. Prior to
the Offering, the interest in the Company is for the value of 3.3%
of the Company in excess of two times the estimated fair value of
the Company in March 1994 plus an adjustment for capital
contributions, to be settled in cash upon termination of employment
or termination of the Tandem Plan. Concurrently with the Offering,
the interest in the Company will be converted to options to purchase
____ shares of Common Stock with the exercise price to be two times
the per share estimated value in March 1994 plus an adjustment for
capital contributions. The Tandem Plan vests 25% annually from the
effective date and terminates in March 2001.
The following table shows information concerning options to
purchase FCI common stock granted to the named executives under
FCI's stock option plans during the fiscal year ended December 31,
1995.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
% of Total Potential Realizable
Number of Options Value at Assumed
Securities Granted to Exercise Annual Rates of Stock
Underlying Options Employees in Price Expiration Price Appreciation for
Name Granted 1995<F1> ($/Sh.) Date Option Term<F2>
- ---- ------------------ ------------ -------- ---------- -----------------------
5% 10%
--- ----
<S> <C> <C> <C> <C> <C> <C>
Ronald N. Zebeck 50,000<F3> 3.4% $15.00 6/16/05 $471,500 $1,195,500
55,000<F3> 3.7% $15.00 3/21/01 $518,650 $1,315,050
Peter G. Michielutti 30,000<F3> 2.0% $15.00 6/16/05 $282,900 $717,300
Douglas B. McCoy 10,000<F4> <F5> $19.03 1/31/02 $91,200 $231,100
3,500<F3> <F5> $15.00 6/16/05 $33,005 $83,685
Robert W. Oberrender 20,000<F3> 1.4% $15.00 6/16/05 $188,600 $478,200
Douglas L. Scaliti 3,500<F3> <F5> $15.00 6/16/05 $33,005 $83,685
<FN>
<F1> The percentages reflect the percent of total options granted under FCI option
plans in 1995.
<F2> 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.
<F3> 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.
<F4> 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.
<F5> Less than 1%.
</FN>
</TABLE>
<PAGE>
The following table shows information concerning options to
purchase FCI common stock granted to the names 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>
FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held at In-the-Money Options at
Name Fiscal Year-End Fiscal Year-End<F1>
- ---- ---------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <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 $ -- $ --
<FN>
- ----------------
<F1> 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.
</FN>
</TABLE>
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.<F1> 15,966,667 84.9%
Theodore Deikel -- -- 5,669,651<F2> 11.2%
Ronald N. Zebeck [ ]<F3> [ %] 39,763<F4> *
Dudley C. Mecum -- -- 6,000<F5> *
Michael P. Sherman -- -- -- --
Frank D. Trestman -- -- -- --
Peter G. Michielutti -- -- 25,091<F5> *
Douglas B. McCoy -- -- 5,385<F5> *
Robert W. Oberrender -- -- 11,364<F5> *
Douglas L. Scaliti -- -- 5,848<F7> *
All directors and executive officer [ ]<F6> [ %] 5,763,102 11.4%
as a group (10 persons)
* Less than 1%.
<FN>
<F1> FCI owns 10% of the outstanding common stock of Fingerhut, whose wholly owned
subsidiary is the holder of record of the shares.
<F2> Includes 4,227,535 shares of FCI common stock that Mr. Deikel has the right to
acquire within 60 days of August 26, 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.
<F3> Includes shares of Common Stock that Mr. Zebeck has the right to acquire within
60 days of August 26, 1996 through the exercise of stock options.
<F4> Includes 16,666 shares of FCI common stock that Mr. Zebeck has the right to
acquire within 60 days of August 26, 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.
<F5> 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 August 26, 1996 through the exercise of stock options.
<F6> Includes shares of Company Common Stock that the officers and directors have the
right tot acquire within 60 days of August 26, 1996 through the exercise of
stock options.
<F7> Includes 4,269,899 shares of FCI common stock that the directors and executive
officers have the right to acquire within 60 days of August 26, 1996 through the
exercise of stock options.
</TABLE>
<PAGE>
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. 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 the Pension Plan, the Profit Sharing Plan, and
Fingerhut's medical, dental, and life insurance 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 forseeable 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.
<PAGE>
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 re-issue 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.
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.
<PAGE>
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 the 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 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), other than credit
cards, and for use in developing marketing lists for third parties
offering such products.
<PAGE>
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 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.
<PAGE>
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, 1996, pursuant to 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 the
inclusion of their securities in such registration statement, subject
to certain limitations and conditions, among them the right of the
underwriters of such
<PAGE>
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.
<PAGE>
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 Certificate, adopted in [ ] 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.
<PAGE>
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is [ ].
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
<PAGE>
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. 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 662/3% of the outstanding voting
stock not owned by the interested stockholder.
Limitations on the Company's Business Activities
The Company's Certificate provides that, for so long as FCI
continues to control the Company, 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; 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. 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
<PAGE>
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.
<PAGE>
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".
<PAGE>
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:
Underwriters Number of
Shares
Smith Barney Inc...............................
Bear, Stearns & Co. Inc........................
William Blair & Company, L.L.C................. _____________
Total..................................... _____________
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 $ per share below the public offering
price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ 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 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.
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 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
<PAGE>
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.
Application has been made to list the Common Stock on the
Nasdaq National Market 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.
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
INDEX TO FINANCIAL STATEMENTS
Page
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-8
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
Metris Companies Inc. (a division of Fingerhut Companies, Inc.)
Balance Sheets
June 30,
1996 December 31,
(Dollars in thousands) (unaudited) 1995 1994
----------- --------- ------
<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.
<PAGE>
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
------- ----------- ----------- ------------ -------
(Dollars in thousands) (unaudited)
<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.
<PAGE>
Metris Companies Inc. (a division of Fingerhut Companies, Inc.)
Statements of Changes in Division Equity
Contributed Retained Total Division
Capital Earnings Equity
(Dollars in thousands)
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
========= ======== ========
See accompanying Notes to Financial Statements.
<PAGE>
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)
<S> <C> <C> <C> <C> <C>
Dollars in Thousands
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)
--------- --------- ---------- --------- ----------
</TABLE>
<PAGE>
<TABLE>
Metris Companies Inc. (a division of Fingerhut Companies, Inc.)
Statement of Cash Flows (continued)
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1996 1995 1995 1994 1993
------- ------- ------ ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Dollars in thousands
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
========= ======== ======== ------- =======
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
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 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.
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
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.
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 the statements of income as "Net securitization
and credit card servicing income".
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
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 Claims Reserves
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 and additional reserves are
provided for pending claims based on Direct Merchants Bank's
historical experience with settlement of such claims. These reserves
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.
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 the 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
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
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.
Solicitation Expenses
Credit card account and other product solicitation costs are
generally expensed as incurred over the period during which the
related responses to such solicitations are expected.
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
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
card securitizations, net," in the balance sheets. 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
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
by the trustee for the benefit of the Trust's certificateholders,
and amounts to be 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
<TABLE>
The carrying value of premises and equipment is as follows:
<CAPTION>
June 30, December 31,
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
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
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.
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.
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
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
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.
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
NOTE 9--INCOME TAXES
The components of the provision for income taxes consisted of the
following:
Six Months Ended Year Ended December 31,
June 30,
1996 1995 1995 1994 1993
-------- -------- -------- -------- -------
(unaudited)
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
======== ======= ======= ======== ======
A reconciliation of the Company's effective income tax rate
compared to the statutory federal income tax rate is as follows:
Six Months Ended
June 30, Year Ended December 31,
---------------------------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- ------
(unaudited)
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%
====== ====== ====== ====== ======
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
Significant components of the Company's deferred tax assets and
liabilities were as follows:
June 30, December 31,
1996 1995 1994
---------- -------- -----------
(unaudited)
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
========= ======== ========
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 calculate
such interest expense or credit during such periods was based on the
average short-term borrowing rates of FCI during the periods
presented.
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
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:
Six Months Ended
June 30, Year Ended December 31,
---------------- --------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
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
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
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
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, 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:
1996 $1,602
1997 1,762
1998 1,652
1999 762
2000 657
------
Total minimum lease payments $6,435
======
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.
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (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:
Retained Sold Managed
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
======= ======== ========
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.
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (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.
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (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
<PAGE>
METRIS COMPANIES INC. (A DIVISION OF FINGERHUT COMPANIES, INC.)
Notes to Financial Statements (dollars in thousands)
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.
<PAGE>
============================== =================================
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 2,833,333 Shares
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 METRIS COMPANIES INC.
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
Page
Available Information...... 2
Prospectus Summary......... 3
Risk Factors............... 9
Use of Proceeds............ 16
Dividend Policy............ 16
Dilution................... 17 COMMON STOCK
Capitalization............. 18
Selected Historical
Financial and Operating
Data..................... 19
Management's Discussion
and Analysis of Financial ---------
Condition and Results of
Operations............... 21
Business................... 39
Management................. 64
Transactions Between FCI Prospectus
and the Company.......... 72
Principal Stockholder...... 77
Description of Capital
Stock.................... 78 , 1996
Shares Eligible for Future
Sale..................... 82
Underwriting............... 83 ----------
Legal Matters.............. 84
Experts.................... 84
Index to Financial
Statements...............F-1
Until [ ], 1996 (25 days
after the date of this Smith Barney Inc.
Prospectus), all dealers
effecting transactions in the
Common Stock, whether or not Bear, Stearns & Co. Inc.
participating in this
distribution, may be required William Blair & Company
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.
============================== =================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses incurred in
connection with the sale and distribution of the securities being
registered which will be paid solely by the Company. All the amounts
shown are estimates, except the Commission registration fee, the
listing fee and the NASD filing fee.
Commission registration fee..........................$ 17,977
NASD filing fee...................................... 5,713
NASDAQ listing fee................................... 6,417
Blue sky fees and expenses........................... *
Transfer agent and registrar fees and expenses....... *
Accounting fees and expenses......................... *
Legal fees and expenses.............................. *
Printing and engraving expenses...................... *
Miscellaneous expenses............................... *
--------
Total.......................................$ *
========
- -----------------
*To be completed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of
Delaware provides that under certain circumstances a corporation may
indemnify any person who or is a party or is threatened to be made a
party any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of
the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at its request in such capacity
in another corporation or business association, against expenses
(including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was
unlawful.
The Certificate and By Laws of the registrant provide that
(a) the registrant shall indemnify to the full extent permitted by law
any person made, or threatened to be made, a party to any action, suit
or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he is or was a director,
officer or employee of the registrant serving at its request as a
director, officer, employee, trustee or agent of another enterprise
and (b) the registrant shall pay the expenses, including attorney's
fees, incurred by a director or officer in defending or investigating
a threatened or pending action, suit or proceeding, in advance of the
final disposition of such action, suit or proceeding upon receipt of
an undertaking by or on behalf of such director or officer to repay
such amount by the registrant. The Certificate of Incorporation also
provides that, to the extent permitted by law, the directors of the
registrant shall have no liability to the registrant or its
stockholders for monetary damages for breach of fiduciary duty as a
director.
<PAGE>
The Company intends to purchase policies of insurance under
which the registrant's directors and officers are insured, within the
limits and subject to the limitations of the policies, against certain
expenses in connection with the defense of actions, suits or
proceedings, and certain liabilities which might be imposed as a
result of such actions, suits or proceedings, to which they are
parties by reason of being or having been such directors or officers.
Item 15. Recent Sales of Unregistered Securities
None.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit Number Description of Exhibit
1 Form of Underwriting Agreement**
Articles of Incorporation and Bylaws
3.a Amended and Restated Certificate of Incorporation of the
Registrant**
3.b Bylaws of the Registrant**
5 Opinion of Michael P. Sherman, Esq.**
Material Contracts
10.a Pooling and Servicing Agreement dated as of May
26, 1995 among Fingerhut Financial Services
Receivables, Inc., as Transferor, Direct Merchants
Credit Card Bank, National Association, as
Servicer, and The Bank of New York (Delaware), as
Trustee (Incorporated by reference to Exhibit 10.u
to Fingerhut Companies, Inc.'s Quarterly Report on
Form 10-Q (File No. 1-8668) for the fiscal quarter
ended June 30, 1995).
(i) Series 1995-1 Supplement dated as of May 26, 1995
(Incorporated by reference to Exhibit 10.u(i) to
Fingerhut Companies, Inc.'s Quarterly Report on
Form 10-Q (File No. 1-8668) for the fiscal quarter
ended June 30, 1995).
(ii) Series 1996-1 Supplement dated as of April 23,
1996 (Incorporated by reference to Exhibit
10.c(ii) to Fingerhut Companies, Inc.'s Quarterly
Report on Form 10-Q (File No. 1-8668) for the
fiscal quarter ended March 29, 1996).
(iii) Amendment No. 1 to the Pooling and Servicing
Agreement dated as of June 10, 1996.
<PAGE>
(iv) Amendment No. 2 to the Pooling and Servicing
Agreement dated as of ____________, 1996.**
10.b Amended and Restated Bank Receivables Purchase
Agreement dated as of May 26, 1995 between
Fingerhut Companies, Inc., as Buyer, and Direct
Merchants Credit Card Bank, National Association,
as Seller**
(i) Assignment and Assumption Agreement dated as of
____________, 1996 among Fingerhut Companies,
Inc., as assignor, Metris Companies, Inc., as
assignee, and Direct Merchants Credit Card Bank,
National Association**
10.c Purchase Agreement dated as of May 26, 1995
between Fingerhut Financial Services Receivables,
Inc., as Buyer, and Fingerhut Companies, Inc., as
Seller**
(i) Assignment and Assumption Agreement dated as of
____________, 1996 among Fingerhut Companies,
Inc., as assignor, Metris Companies, Inc., as
assignee, and Metris Receivables, Inc.**
10.d* Stock Option and Valuation Rights Agreement dated
as of March 21, 1994, between Fingerhut Companies,
Inc. and Ronald N. Zebeck (Incorporated by
reference to Exhibit 10.1 to Fingerhut Companies,
Inc.'s Annual report on Form 10-K for the fiscal
year ended December 29, 1995).
10.e* Fingerhut Corporation Profit Sharing Plan 1989
Revision (Incorporated by reference to Exhibit
10(d) to Fingerhut Companies, Inc.'s Registration
Statement on Form S-1 (No. 33-33923)).
10.f* Fingerhut Companies, Inc. and Subsidiaries 1995
Key Management Incentive Bonus Plan for Designated
Corporate Officers (Incorporated by reference to
Exhibit 10.e to Fingerhut Companies, Inc.'s Annual
Report on Form 10-K for the fiscal year ended
December 29, 1995).
10.g* Fingerhut Corporation Pension Plan 1990 Revision
(Incorporated by reference to Exhibit 10(f) to
Fingerhut Companies, Inc.'s Registration Statement
on Form S-1 (No. 33-33923)).
10.h* Fingerhut Companies, Inc. Stock Option Plan
(Incorporated by reference to Exhibit 10(h) to
Fingerhut Companies, Inc.'s Registration Statement
on Form S-1 (No. 33-33923)).
10.i* Fingerhut Companies, Inc. 1995 Long-Term Incentive
and Stock Option Plan (Incorporated by reference
to Exhibit 10.i to Fingerhut Companies, Inc.'s
Annual Report on Form 10-K for the fiscal year
ended December 29, 1995).
<PAGE>
(i) Form of option agreement (Incorporated by
reference to Exhibit 10.i(i) to Fingerhut
Companies, Inc.'s Annual report on Form 10-K for
the fiscal year ended December 29, 1995).
10.j Transfer Agreement dated as of , 1996
between the Registrant and Fingerhut Companies,
Inc.**
10.k Co-Brand Credit Card Agreement dated as of
, 1996 between the Registrant and
Fingerhut Corporation.**
10.l Extended Service Plan Agreement dated as of
, 1996 between the Registrant and
Fingerhut Corporation.**
10.m Database Access Agreement dated as of ,
1996 between the Registrant and Fingerhut
Corporation.**
10.n Administrative Services Agreement dated as of
, 1996 between the Registrant and
Fingerhut Companies, Inc.**
10.o Tax Sharing Agreement dated as of , 1996
between the Registrant and Fingerhut Companies,
Inc.**
10.p Registration Rights Agreement dated as of
, 1996 between the Registrant and
Fingerhut Companies, Inc.**
Other Exhibits
22 Subsidiaries of the Registrant**
23 Consent of KPMG Peat Marwick LLP
25 Powers of Attorney (included on Page II-6).
27 Financial Data Schedule
- ---------------
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** To be filed by amendment.
Item 17. Undertakings
(1) The undersigned Registrant hereby undertakes to provide
to the Underwriters at the closing specified in the Underwriting
Agreement, certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to
each purchaser.
<PAGE>
(2) Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and
will be governed by a final adjudication of such issue.
(3) The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the
time it was declared effective.
(b) For the purpose of determining liability under the
Securities Act, each post- effective amendment that contains
a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Minnetonka, Minnesota, on August 26, 1996.
METRIS COMPANIES INC.
By: /s/ Ronald N. Zebeck
----------------------------------
Ronald N. Zebeck
President, Chief Executive Officer
and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints each of Ronald N.
Zebeck, Robert W. Oberrender and David P. Turk, or any of them, each
acting alone, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for such person and in
his name, place and stead, in any and all capacities, in connection
with Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, including to sign the Registration Statement
in the name and on behalf of the Registrant or on behalf of the
undersigned as a director or officer of the Registrant, and any and
all amendments or supplements to the Registration Statement, including
any and all stickers and post-effective amendments to the Registration
Statement and to sign any and all additional registration statements
relating to the same offering of securities as those that are covered
by the Registration Statement that are filed pursuant to Rule 462(b)
under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission and any applicable securities
exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents,
or their substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Signatures Titles Dates
/s/ Theodore Deikel Chairman of the Board August 26, 1996
- ------------------------------- of Directors
Theodore Deikel
/s/ Ronald N. Zebeck President, Chief Executive August 26, 1996
- ------------------------------- Officer and Director
Ronald N. Zebeck (Principal Executive
Officer)
/s/ Robert W. Oberrender Chief Financial Officer August 26, 1996
- ------------------------------- (Principal Financial
Robert W. Oberrender Officer)
/s/ David P. Turk Director of Finance August 26, 1996
- ------------------------------- (Principal Accounting
David P. Turk Officer)
Dudley C. Mecum Director August , 1996
- -------------------------------
<PAGE>
/s/ Michael P. Sherman Director August 26, 1996
- -------------------------------
Michael P. Sherman
Frank D. Trestman Director August , 1996
- -------------------------------
EXHIBIT 10.a
AMENDMENT NO. 1, dated as of June 10, 1996 (this "Agreement"),
by and among FINGERHUT FINANCIAL SERVICES RECEIVABLES, INC., a
corporation organized and existing under the laws of the State of
Delaware, as Transferor, DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL
ASSOCIATION, a national banking organization organized and existing
under the laws of the United States of America, as Servicer, and THE
BANK OF NEW YORK (DELAWARE), a Delaware banking corporation
organized and existing under the laws of the State of Delaware, as
Trustee, to the POOLING AND SERVICING AGREEMENT, dated as of May 26,
1995 (the "Pooling and Servicing Agreement"), by and among the
Transferor, the Servicer and the Trustee.
W I T N E S S E T H:
WHEREAS, the Transferor, the Servicer and the Trustee desire to
amend the Pooling and Servicing Agreement pursuant to Section
13.1(a) therein in order to provide for the terms contained herein.
WHEREAS, the Transferor suspended the automatic inclusion in
Accounts of Additional Accounts at the close of business on May 31,
1996 and the Transferor desires to reinstate such automatic
inclusion in Accounts of Additional Accounts upon the effectiveness
of this Agreement.
Therefore, in consideration of the mutual agreements herein
contained, each party agrees as follows for the benefit of the other
parties and the Certificateholders:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. Except as provided herein, all
capitalized terms used in this Agreement but not defined herein
shall have their respective meanings in the Pooling and Servicing
Agreement.
Section 1.2 Additional Accounts. The definition of Additional
Account in the Pooling and Servicing Agreement is hereby replaced in
its entirety by the following:
<PAGE>
"Additional Account" shall mean each revolving credit consumer
credit card account owned by a Credit Card Originator coming into
existence after the Initial Closing Date which is an Approved
Account that the Transferor has not elected to exclude from the
Trust after June 7, 1996. Any election to exclude certain Approved
Accounts shall be made by the Transferor or the Servicer providing
to the Trustee a written notice thereof clearly identifying such
excluded accounts.
"New Accounts" shall have the meaning specified in Section 2.5
of this Agreement.
ARTICLE II
Section 2.1 Receivables in Defaulted Accounts. The following
Section 2.10 shall be read in conjunction with Article II of the
Pooling and Servicing Agreement:
"Section 2.10. Receivables in Defaulted Accounts. On the date
on which an Account becomes a Defaulted Account, the Trust shall
automatically and without further action or consideration be deemed
to transfer, set over, and otherwise convey to the Transferor,
without recourse, representation or warranty, all the right, title
and interest of the Trust in and to the Receivables in such
Defaulted Account, all monies due or to become due with respect
thereto, all proceeds of such Receivables allocable to the Trust
with respect to such Receivable, excluding Recoveries relating
thereto, which shall remain a part of the Trust Property. On each
Determination Date, the Servicer shall calculate the aggregate
Investor Default Amount for the preceding Monthly Period with
respect to each Series."
Section 2.2 Amendment of Section 2.6(a). The first sentence of
Section 2.6(a) of the Pooling and Servicing Agreement is hereby
replaced in its entirety by the following:
"Unless otherwise specified in any Supplement, and subject to
the conditions of subsection 2.6(f) herein, all accounts which meet
the definition of Additional Accounts shall be included as Accounts
from and after the date upon which such Additional Accounts are
<PAGE>
created and all Receivables in such Additional Accounts, whether such
Receivables are then existing or thereafter created, shall be
transferred automatically to the Trust upon purchase by the
Transferor."
Section 2.3 Amendment of Section 2.6(c). Section 2.6(c) of the
Pooling and Servicing Agreement is hereby replaced in its entirety
by the following:
"In addition to its obligation under subsection 2.6(b), the
Transferor may, by giving ten Business Days notice to the Trustee
and each Rating Agency, but shall not be obligated to, designate
from time to time Supplemental Accounts of the Transferor to be
included as Accounts."
Section 2.4 Amendment of Section 2.6(f). Section 2.6(f) of the
Pooling and Servicing Agreement is hereby replaced in its entirety
by the following:
"Additional Accounts shall be deemed to be Accounts the
Receivables of which shall be designated for inclusion in the Trust
if, unless each Rating Agency otherwise consents, on and after the
beginning of the June 1996 Monthly Period, the following conditions
are met: the number of Accounts the Receivables of which are
designated to be included in the Trust pursuant to subsection 2.6(a)
since (i) the first day of the eleventh preceding Monthly Period
(or, in the case of any date on which Additional Accounts are to be
added to the Trust which occurs on or before the last day of the May
1997 Monthly Period, June 1, 1996) minus the number of Accounts of
the type described in clause (ii) of the definition of "Approved
Account" which have been added on the initial day of the addition of
such type of Account pursuant to such clause (ii) since the first
day of such eleventh preceding Monthly Period (or June 1, 1996, as
the case may be) minus any Removed Accounts removed since the first
day of such eleventh preceding Monthly Period (or June 1, 1996, as
the case may be) shall not exceed 20% of number of Accounts on the
first day of such eleventh preceding Monthly Period (or June 1,
1996, as the case may be), and (ii) the first day of the second
preceding Monthly Period (or, in the case of any date on which
Additional Accounts are to be added to the Trust which occurs on or
before the last day of the August 1996 Monthly Period, June 1, 1996)
minus the number of Accounts of the type described in clause (ii) of
the definition of "Approved Accounts" have been added on the initial
day of the addition of such type of Account pursuant to such clause
(ii) since the first day of such second preceding Monthly Period (or
<PAGE>
June 1, 1996, as the case may be) minus any Removed Accounts removed
since the first day of such second preceding Monthly Period (or June
1, 1996, as the case may be) shall not exceed 15% of the number of
Accounts on the first day of such second preceding Monthly Period
(or June 1, 1996, as the case may be).
Section 2.5 Automatic Additions. Upon the effectiveness of this
Agreement, Additional Accounts shall be automatically designated for
inclusion in the Trust to the extent provided in Section 2.6 of the
Pooling and Servicing Agreement as amended hereby and all
revolving credit consumer credit card accounts which are Approved
Accounts originated after the close of business on May 31, 1996
until the date the Transferor elects to exclude any accounts from
the Trust (such accounts, "New Accounts") shall be Accounts for all
purposes under the Pooling and Servicing Agreement and the
Transferor hereby conveys the Receivables in the New Accounts to the
Trust pursuant to Section 2.1 of the Pooling and Servicing
Agreement.
Section 2.6 Conditions to Effectiveness. This Agreement shall
become effective upon the satisfaction of the following conditions:
(i) the Servicer shall have provided an Officer's
Certificate to the Trustee to the effect that such
amendment will not materially and adversely affect the
interests of the Certificateholders,
(ii) receipt by the Trustee of an Opinion of Counsel
pursuant to Section 13.1(a)(ii) of the Pooling and
Servicing Agreement;
(iii) receipt by the Trustee of an Opinion of Counsel
pursuant to Section 13.1(g) of the Pooling and Servicing
Agreement;
(iv) the Servicer shall have provided at least ten
Business Days prior written notice to each Rating
Agency of this Agreement and shall have received written
confirmation from each Rating Agency to the effect that
<PAGE>
the rating of any Series or any class of any
Series will not be reduced or withdrawn as a result of such
amendment; and
(v) execution of this Agreement by each of the parties
hereto.
Section 2.7 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE
TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND
REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE
WITH SUCH LAWS.
Section 2.8 Counterparts. This Agreement may be executed in two
or more counterparts (and by different parties on separate
counterparts), each of which shall be an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Transferor, the Servicer and the
Trustee have caused this Agreement to be duly exe- cuted by their
respective officers as of the day and year first above written.
FINGERHUT FINANCIAL SERVICES
RECEIVABLES, INC.,
as Transferor
By:--------------------------
Name:
Title:
DIRECT MERCHANTS CREDIT CARD
BANK, NATIONAL ASSOCIATION,
as Servicer
By:--------------------------
Name:
Title:
THE BANK OF NEW YORK (DELAWARE),
as Trustee
By:--------------------------
Name:
Title:
Exhibit 23
Independent Auditors' Consent
The Board of Directors
Fingerhut Companies, Inc.:
We consent to the use of our report dated August 16, 1996
included herein and to the reference to our firm under the heading
"Experts" in the registration statement.
/s/ KPMG Peat Marwick LLP
August 26, 1996
Minneapolis, Minnesota
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF METRIS COMPANIES
INC. (A DIVISION OF FINGERHUT COMPANIES, INC.) AS OF AND FOR
THE SIX MONTHS ENDED JUNE 30, 1996 AND AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
Multiplier 1,000 1,000
Fiscal year end Dec 31, 1996 Dec 31, 1995
Period End June 30, 1996 Dec 31, 1995
Period Type 6 months 12 months
Cash and due from banks 3,755 4,185
Interest-bearing deposits 0 0
Federal funds sold 14,361 29,144
Trading account assets 0 0
Investment and MBS held to
maturity - carrying value 0 0
Investment and MBS held to
maturity - market value 0 0
Investment and MBS held for sale 0 0
Loans 131,963 95,064
Allowances for losses 5,303 3,679
Total assets 185,784 174,428
Deposits 1,000 1,000
Short-term borrowings 54,318 63,482
Other liabilities 50,254 38,628
Log-term debt 0 0
Preferred - mandatory redemption 0 0
Preferred - no mandatory
redemption 0 0
Common stock 0 0
Other stockholders' equity 80,212 71,318
Total liabilities and equity 185,784 174,428
Interest and fees on loans 12,119 7,054
Interest and dividends on
investments 436 487
Other interest income 64 75
Total interest income 12,619 7,616
Interest on deposit 24 36
Total interest expense 1,858 1,217
Net interest income 10,761 6,399
Provision for loan losses 5,173 4,393
Investment securities
gains/losses 0 0
Other expenses 44,422 45,640
Income/loss before income tax 14,462 7,449
Income/loss before extraordinary
items 8,894 4,581
Extraordinary items, less tax 0 0
Cumulative change in accounting
principles 0 0
Net income or loss 8,894 4,581
Earnings per share - primary .0 .0
Earnings per share - fully
diluted .0 .0
Net yield - interest earning
assets - actual 17.6% 15.3%
<PAGE>
Loans on nonaccrual 0 0
Accruing loans past due 90 days
or more 1,700 1,573
Troubled debt restructuring 0 0
Potential problem loans 0 0
Allowance for loan loss -
beginning of period 3,679 0
Total chargeoffs 3,629 720
Total recoveries 80 6
Allowance for loan loss - end of
period 5,303 3,679
Loan loss allowance allocated to
domestic loans 5,303 3,679
Loan loss allowance allocated to
foreign loans 0 0
Loan loss allowance - unallocated 0 0
</TABLE>
