SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 001-12351
December 31, 1996 Commission file number
____________________
METRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1849591
(State of Incorporation) (I.R.S. Employer Identification
No.)
600 South Highway 169, Suite 1800, St. Louis Park, Minnesota
55426
(Address of principal executive offices)
(612) 525-5020
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 20, 1997, 19,225,000 shares of the Registrant's
Common Stock were outstanding and the aggregate market value of
Common Stock held by non-affiliates of the Registrant on that
date was approximately $81,703,262 based upon the closing price
on the Nasdaq National Market on March 20, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Annual Report to Shareholders for the
year ended December 31, 1996, are incorporated by reference in
Parts II and IV.
Certain portions of the Proxy Statement for the Annual Meeting of
Shareholders of Metris Companies Inc. to be held on May 19, 1997,
which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 1996, are incorporated by
reference in Part III.
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 18
Signatures 19
Exhibit Index 21
PART I
Item 1. Business
BUSINESS
Metris Companies Inc. ("MCI" and collectively with its
subsidiaries, the "Company") is an information-based direct
marketer of consumer credit products, extended service plans, and
fee-based products and services to moderate income consumers. The
Company's consumer credit products currently are unsecured and
secured credit cards issued by its subsidiary, Direct Merchants
Credit Card Bank, National Association ("Direct Merchants Bank").
The Company's customers and prospects include existing customers
of an affiliate, Fingerhut Corporation ("Fingerhut Customers"),
and individuals who are not Fingerhut Customers but for whom
credit bureau information is available ("External Prospects").
Metris Direct, Inc., a subsidiary, also provides extended service
plans on certain categories of products sold by Fingerhut
Corporation ("Fingerhut") that extend service coverage beyond the
manufacturer's warranty. The Company markets its fee-based
products and services, including debt waiver programs, card
registration, third party insurance, and membership clubs to its
credit card customers, Fingerhut Customers and customers of a
third party credit card issuer.
MCI is a Delaware corporation incorporated on August 20, 1996,
and is an 83% owned indirect subsidiary of Fingerhut Companies,
Inc. ("FCI"). The Company became a publicly held company in
October 1996 after completing an initial public offering. The
Company's principal subsidiaries are Direct Merchants Bank,
Metris Direct, Inc. and Metris Receivables, Inc.
History of the Company
MCI is an indirect subsidiary of FCI, a database marketing
company that sells a broad range of products and services via
catalogs, telemarketing, television and other media. Fingerhut, a
wholly owned subsidiary of FCI, has been in the direct marketing
business for over 45 years and is one of the largest catalog
marketers in the United States. Fingerhut sells a broad range of
general merchandise products and services to moderate income
consumers.
Fingerhut makes substantially all of its sales using
proprietary 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 (the "Fingerhut Database"). Fingerhut uses this
database, along with sophisticated and highly automated
proprietary modeling techniques, to evaluate each customer's
creditworthiness.
The Fingerhut Database
The Fingerhut Database contains information on more than 30
million individuals, including approximately 9 million customers
who have made a purchase from Fingerhut within the past 24
months. This database contains up to 1,400 potential data items
in a customer record, including names, addresses, behavioral
characteristics, 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 Fingerhut Customers. The Fingerhut
Database also includes Fingerhut's "suppress" file (the "Suppress
File"), which contains information on approximately 8 million
individuals about whom it has information relating to fraud and
similar indicators of unacceptably high risk. Fingerhut
periodically updates the information in the Fingerhut Database.
Fingerhut does not report its credit information to the credit
bureaus, which means this information is not publicly available.
The Company has a seven year license with Fingerhut to use the
information in the Fingerhut Database for marketing its financial
services products, including general purpose credit cards.
Strategy
The Company targets 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 United States households with annual incomes 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 principal components of the Company's strategy are the
following:
Increase the number of Fingerhut Customers using the
Company's products and services. The Company's strategy is to
continue to use its proprietary 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.
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"). By incorporating individual
credit information from the major credit bureaus into this
Proprietary Modeling System and eliminating those individuals
contained in the Suppress File, the Company expects to generate
additional 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. Currently the Company focuses its cross-selling
efforts on selling fee-based products to its credit card
customers and credit card customers of a third party.
Use 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 the use of risk-based pricing allows it to
maximize the profitability of each customer relationship.
Business Lines
The Company currently operates three business lines:
(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
MasterCardr and the Direct Merchants Bank MasterCard. 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. At December 31, 1996, the
Company had over 1.4 million credit card accounts with over
$1.6 billion in managed credit card loans. Fingerhut Customers
represented approximately 50% of the accounts and approximately
51% of the managed loans. According to the Nilson Report, at
December 31, 1996, the Company was the 19th largest MasterCard
issuer in the United States based on the number of cards issued,
and the 32nd largest credit card issuer in the United States
based on managed credit card loan balances.
Credit Scoring. The Company requests a Fingerhut Score for
prospective customers in the Fingerhut Database. The Company also
requests credit bureau information, including risk scores
provided by Fair, Isaac & Company ("FICO scores"), for all
Fingerhut Customers. For those Fingerhut Customers who have FICO
scores, the Company uses the Fingerhut Score to further segment
Fingerhut Customers into narrower ranges within each FICO score
subsegment, allowing the Company to better evaluate individual
credit risk and to tailor its risk-based pricing accordingly.
Additionally, the Fingerhut Score is used to target individuals
who have no credit bureau information, and consequently no FICO
scores, allowing the Company to target Fingerhut Customers who
would not typically be solicited by other credit card issuers.
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. 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 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 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 generated from the
Proprietary Modeling System are then checked against the Suppress
File and any matching names are excluded. The Company currently
does not solicit External Prospects who do not have FICO scores.
The Company believes 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.
Solicitation. Prospects for solicitation include both
Fingerhut Customers and External Prospects. They 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 credit analysts 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. The Company currently offers 43 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 16.65%. After
credit card accounts are opened, the Company actively monitors
customers' internal and external credit performance and
periodically recalculates behavior and risk scores. As customers
evolve through the credit lifecycle and are regularly rescored,
the lending relationship can evolve to include more competitive
(or more restrictive) pricing and product configurations.
Age of Portfolio. The following table sets forth, as of
December 31, 1996, the number of total accounts and amount of
outstanding loans based upon the age of the managed accounts.
<TABLE>
Age Since Number Percentage Loans Percentage of
Origination of Accounts of Accounts Outstanding Loans Outstanding
(Dollars in thousands)
<C> <S> <C> <C> <C> <C>
0-6 Months 445,542 31.4% $ 271,610 16.8%
7-12 Months 477,205 33.7% 569,667 35.3%
13-18 Months 252,470 17.8% 362,927 22.4%
19-24 Months 232,271 16.4% 395,385 24.5%
25-36 Months 10,574 0.7% 16, 351 1.0%
Total 1,418,002 100.0% $1,615,940 100.0%
</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 December 31, 1996.
Percentage
Number Percentage Loans of Loans
of Accounts of Accounts Outstanding Outstanding
State
(Dollars in thousands)
California 168,337 11.9% $ 202,945 12.6%
Florida 113,329 8.0% 131,324 8.1%
New York 108,615 7.7% 127,788 7.9%
Texas 108,332 7.6% 123,631 7.7%
Ohio 61,267 4.3% 70,588 4.4%
Pennsylvania 58,631 4.1% 64,921 4.0%
Illinois 51,769 3.7% 59,929 3.7%
Michigan 43,144 3.0% 49,842 3.1%
Indiana 36,953 2.6% 42,674 2.6%
North 40,602 2.9% 41,135 2.5%
Carolina
Georgia 38,426 2.7% 40,781 2.5%
All Others(1) 588,657 41.5% 660,382 40.9%
Total 1,418,062 100.0% $1,615,940 100.0%
(1) No other state accounts for more than 2.5% of loans
outstanding.
The Adaptive Control System. The Company uses 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
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).
Credit Lines. Once an account is approved, an initial credit
line is established based on the individual's risk profile using
automated screening and credit scoring techniques. This process
results in a portfolio with average credit lines that are below
the industry average due to the higher average risk elements
inherent in the Company's target market. The Company may elect,
at any time and without prior notice to the cardholder, to
preclude or restrict further credit card use by the cardholder,
usually as a result of poor payment performance or the Company's
concern over the creditworthiness of the cardholder. Credit lines
are managed based on the results of the behavioral scoring
analysis in accordance with criteria established by the Company.
The following table sets forth information with respect to
account balance and credit limit ranges of the Company's managed
portfolio as of December 31, 1996:
Account Balance Percentage
Range Number Percentage Loans of Loans
of of Outstanding Outstanding
Accounts Accounts
(Dollars in thousands)
Credit Balance 11,504 0.8% $ (661) _
No Balance 170,340 12.0% _ _
$1,000 or Less 590,254 41.6% 278,725 17.2%
$1,001-$2,000 377,279 26.6% 559,438 34.6%
$2,001-$3,500 216,444 15.3% 558,895 34.6%
Over $3,500 52,241 3.7% 219,543 13.6%
Total 1,418,062 100.0% $1,615,940 100.0%
Percentage
Number of Percentage of Loans of Loans
Credit Limit Range Accounts Accounts Outstanding Outstanding
(Dollars in thousands)
$1,000 or Less 418,757 29.5% $ 193,213 12.0%
$1,001-$2,000 470,300 33.2% 518,913 32.1%
$2,001-$3,500 338,763 23.9% 546,460 33.8%
$3,501-$5,000 187,099 13.2% 349,302 21.6%
Over $5,000 3,143 0.2% 8,052 0.5%
Total 1,418,062 100.0% $ 1,615,940 100.0%
Delinquency, Collections and Charge-offs. The Company
considers an account delinquent if a payment due is not received
by the Company within 25 days from the closing date of the
statement. Collection activities are determined by the Adaptive
Control System, which continually monitors all delinquent
accounts. The collections function is handled internally.
Accounts that become 90 days delinquent are closed but not
necessarily charged off. Accounts are charged off and taken as a
loss either after formal notification of bankruptcy or at the end
of the month during which they become contractually 180 days past
due. Accounts identified as fraud losses are immediately reserved
for and charged off no later than 90 days after the last
activity. 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.
Servicing, Billing and Payment. The Company has established a
relationship with FDR for cardholder processing services. FDR is
a subsidiary of First Data Corporation, a provider of information
processing and related services including cardholder processing
(services for financial institutions which issue credit cards to
cardholders), and merchant processing (services for financial
institutions which make arrangements with merchants for the
acceptance of credit cards as methods of payment). FDR provides
data processing, credit card reissuance, statementing, inbound
customer service telephone calls and interbank settlement for
the Company. Applications processing and back office support for
mail inquiries and fraud management are handled internally by the
Company.
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. The Company may
waive the annual membership fees, or a portion thereof, in
connection with the solicitation of new accounts depending on the
credit terms offered, which are determined by the prospect's risk
profile prior to solicitation or when the Company determines a
waiver to be necessary in order to be competitive. In addition to
the annual fee, the Company may charge accounts certain other
fees including: (i) a late fee with respect to any unpaid monthly
payment if the Company does not receive the required minimum
monthly payment by the Payment Date, (ii) a cash advance fee for
each cash advance, (iii) a fee with respect to each check
submitted by a cardholder in payment of an account which is not
honored by the cardholder's bank, and (iv) an overlimit charge
if, at any time during the billing cycle, the total amount owed
exceeds the cardholder's credit line by at least $30 due to
transaction activity.
Each cardholder is subject to an agreement governing the
terms and conditions of the accounts. Pursuant to such
agreements, the Company reserves the right to change or terminate
certain terms, conditions, services and features of the account
(including periodic finance charges, late fees, returned check
charges and any other charges or the minimum payment), subject to
the conditions set forth in the account agreement.
Monthly billing statements are sent to cardholders by FDR on
behalf of the Company. When an account is established, it is
assigned a billing cycle. Currently, there are 21 billing cycles
and each such cycle has a separate monthly billing date based on
the respective business day the cycle represents in each calendar
month. On a set billing date each month, a statement is sent to
all accounts with an outstanding balance greater than $1.00.
Cardholders must make a minimum monthly payment of the greater of
$10.00 or 2.0% of the outstanding balance, or the balance of the
account if the balance is less than $10. Payment is due upon
receipt of the statement. If the minimum payment is not collected
within 25 days after the statement cycle date, the account is
considered delinquent.
Most merchant transactions by cardholders are authorized
online. The remaining transactions generally are low dollar
amounts, typically below $50.00. All authorizations are handled
through the Adaptive Control System.
Extended Service Plans
Extended service plans provide warranty service coverage
beyond the manufacturer's warranty. In general, the Company's
extended service plans provide customers with the right to have
their covered 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. The Company currently provides
extended service plans for consumer electronics, furniture, and
jewelry ("Warrantable Products") purchased from Fingerhut.
For consumer electronics, Fingerhut Customers may purchase
extended service plans that give them the right to have their
purchases repaired or replaced in the event of electrical or
mechanical failure or defects in materials and workmanship.
Quality Jewelry Carer is the Company's extended service plan
for jewelry. The services provided to Quality Jewelry Care
customers include repair, soldering, ring sizing, and cleaning,
for which the Company contracts with Fingerhut to perform such
services. To submit a claim, the customer must mail the item to
Fingerhut, who returns the item to the customer after it has been
repaired or cleaned, typically within 4 to 6 weeks.
The Company's extended service plan program for furniture is
called Quality Furniture CareSM. 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 must first obtain an estimated cost for the
service from a repair or service provider. If the estimated cost
does not exceed $100, the customer may pay for the service and
submit the bill to the Company for reimbursement or the Company
will pay the servicer directly if the customer so desires. 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 may pay for the service and submit the bill to the
Company for reimbursement or the Company will pay the servicer
directly if the customer so desires.
Most of the Company's extended service plans continue for two
years from the date of the product purchase (three to five years
in limited cases). The customer pays Fingerhut a one-time fee for
this coverage based on the price of the product and the expected
claims. The Company also offers customers the opportunity to
renew their coverage in one-year extensions, up to five years
from the date of purchase, upon payment of an additional fee for
each renewal.
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 these programs, the Company has
developed proprietary targeting models to predict which customers
will be most responsive to its extended service plan direct
marketing efforts.
Operations. Through the end of 1996, claims risk and claims
processing for consumer electronics items were the responsibility
of a third party. The Company is responsible for claims risk and
claims processing for furniture and jewelry. At the beginning of
1997, the Company internalized operations related to extended
service plans for consumer electronics, and will incur the
resulting claims risk for extended service plans sold on or after
January 1, 1997.
Fee-based Products and Services
The Company currently sells a variety of fee-based products
and services to its credit card customers, Fingerhut Customers
and credit card customers of a third party, including (i) debt
waiver protection for unemployment, disability, and death,
(ii) programs such as card registration, shopping and dining club
memberships, and (iii) third-party insurance. In addition, the
Company develops customized targeted mailing lists, using both
the Company's and Fingerhut's databases, for external companies
to use in their own financial services product solicitation
efforts that do not directly compete with those of the Company.
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 Benefit Plan. This debt waiver program 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. Card registration protects members from
fraudulent charges if their credit cards are lost or stolen,
provides emergency cash, airline tickets, change of address
notification, valuable property and document registration,
messaging service, and car rental discounts. The Company
currently offers card registration services to its credit card
customers and credit card customers of a third party. The Company
internalized this program in September 1996 and is responsible
for all of its associated costs and revenues. Prior to September
1996, the Company had an agreement with a third party vendor to
offer card registration services to its credit card customers.
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.
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 reduced cost.
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.
Funding and Liquidity
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 uses a variety of funding sources to
establish a maturity pattern with 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 the Company
or by FCI.
The Company finances the growth in its credit card loans
through a commonly used form of asset-backed securitization known
as a master trust. A securitization involves the transfer by the
Company of loans generated by a pool of credit card accounts to
the master trust. Direct Merchants Bank sells its loans to the
Company, which then sells them to a bankruptcy-remote special
purpose subsidiary (the "Transferor"), which in turn transfers
the loans to the master trust. The trust is authorized to sell
multiple series and classes of certificates of beneficial
ownership interests in the loans and other assets that are part
of the trust. Both the loans and the certificates held by third
parties are removed from the Company's balance sheet for
financial and regulatory accounting purposes. For tax purposes,
the certificates are treated as secured debt of the special
purpose subsidiary.
The Company's liquidity needs and funding sources may change
over time. In September 1996, the Company executed a revolving
credit facility agreement to fund on-balance sheet loans and for
other general business purposes. Prior to September 1996, the
Company borrowed from FCI.
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. 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.
During the term of an agreement between Fingerhut and the
Company, Fingerhut will only offer its customers extended service
plans provided by the Company. 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 and
services 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 an agreement
with Fingerhut, the Company 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 and services
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
Office of the Comptroller of the Currency (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 limit
the Company's ability to pursue future opportunities.
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 law 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 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.
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
presently rely on brokered deposits to fund its operations.
Lending Activities
Direct Merchants Bank's activities as a credit card lender
are also subject to regulation under various federal laws
including the Truth-in-Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, the Community Reinvestment
Act (the "CRA") and the Soldiers' and Sailors' Civil Relief Act.
Regulators are authorized to impose penalties for violations of
these statutes and, in certain cases, to order Direct Merchants
Bank to pay restitution to injured cardmembers. Cardholders may
also bring actions for certain alleged violations of such
regulations. Federal and state bankruptcy and debtor relief laws
also affect Direct Merchants Bank's ability to collect
outstanding balances owed by cardholders who seek relief under
these statutes.
The OCC and other federal banking agencies have recently
revised their regulations under the CRA that 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.
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.
Employees
As of December 31, 1996, the Company had approximately 650
employees located in Minnesota, Maryland, Oklahoma and Utah. None
of the Company's employees are represented by a collective
bargaining agreement. The Company considers its relations with
its employees to be good.
Trademarks and Tradenames
MCI and its subsidiaries have registered and continue to
register, when appropriate, various trademarks, tradenames and
service marks used in connection with its business and for
private label marketing of certain of its products. The Company
considers these trademarks and service marks to be readily
identifiable with, and valuable to its business.
Executive Officers of the Registrant
The following table sets forth certain information concerning
the persons who currently serve as executive officers of MCI.
Each executive officer serves at the discretion of the Board of
Directors of MCI. One of MCI's executive officers currently is an
executive officer of FCI.
Name Age Position
Ronald N. Zebeck 42 President, Chief Executive
Officer and Director
Douglas B. McCoy 50 Senior Vice President,
Operations
Peter G. Michielutti 40 Senior Vice President, Business
Development
Robert W. Oberrender 37 Senior Vice President, Chief
Financial Officer
Douglas L. Scaliti 39 Senior Vice President, Marketing
David R. Reak 38 Vice President, Credit Risk
Jean C. Benson 29 Controller
Ronald N. Zebeck is President and Chief Executive Officer and
a director of MCI. He has been President of Metris Direct, Inc.
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.
Douglas B. McCoy has been Senior Vice President, Operations
since December 1996 and was Vice President, Operations of Metris
Direct, Inc. from January 1995 to November 1996. In addition, he
has been President of Direct Merchants Bank since July, 1995.
Prior to joining the Company, he was Vice President, Credit
Administration of USAA Federal Savings Bank from September 1984
to January 1995, Assistant Vice President, Credit Administration,
of Bank of Oklahoma from July 1984 to September 1984, 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.
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.
Robert W. Oberrender has been Senior Vice President, Chief
Financial Officer of MCI since December 1996. He held the
position of Vice President, Chief Financial Officer of the
Company from August 1996 to December 1996. He was Vice President,
Treasurer of FCI from July 1994, and was Assistant Treasurer of
FCI from February 1993 until July 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 has been Senior Vice President, Marketing
since December 1996. He was Vice President, Marketing of MCI from
August 1996 to November 1996 and held that position at Metris
Direct, Inc. 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 Market Area Advisory
Group.
David R. Reak is Vice President, Credit Risk of MCI and has
held that position since October 1996. From December 1995 to
October 1996, he was Senior Director, Credit Risk of Metris
Direct, Inc. 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.
Jean C. Benson is Controller of the Company. She has held
various finance positions at the Company and FCI since October
1994. Prior to that she held various positions at Deloitte &
Touche LLP (public accounting), specializing in the financial
services industry.
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.
Item 2. Properties
The Company leases its principal executive office space in St.
Louis Park, Minnesota, consisting of approximately 54,000 square
feet. This office space is subject to a lease which expires on
November 30, 2000. Direct Merchants Bank leases office space in
Salt Lake City, Utah, consisting of approximately 11,700 square
feet. This lease expires on April 30, 1999. In addition, the
Company leases facilities in Tulsa, Oklahoma and a temporary
facility in Hunt Valley, Maryland consisting of 52,400 and
16,000, respectively. These leases expire on December 31, 1998
and December 31, 1997, respectively. In March 1997, the Company
signed a lease for a permanent facility in White Marsh, Maryland
consisting of 50,000 square feet, expiring on September 30, 2007.
The leased properties in Oklahoma and Maryland support the
Company's collections, customer service and back office
operations. The Company believes its facilities are suitable to
its businesses and that it will be able to lease or purchase
additional facilities as its needs require.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during
the fourth quarter of the Company's fiscal year ended December
31, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The information required by this item is set forth in the
"Summary of Consolidated Quarterly Financial Information and
Stock Data" on page 44 of the Company's Annual Report to
Shareholders for the year ended December 31, 1996 (the "1996
Annual Report") and is incorporated herein by reference.
Item 6. Selected Financial Data
The information required by this item is set forth under the
caption "Selected Financial Data" on page 12 of the 1996 Annual
Report and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information required by this item is set forth under the
captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Forward Looking
Statements" on pages 13 to 24 of the 1996 Annual Report and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The audited Consolidated Financial Statements of the
Registrant, including the notes thereto, and independent
auditors' report thereon and the unaudited "Summary of
Consolidated Quarterly Financial Information and Stock Data" set
forth on pages 26 to 44 of the 1996 Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to
directors is set forth under "Proposal 1: Election of Directors"
in the Company's proxy statement for the annual meeting of
shareholders to be held on May 19, 1997, which will be filed
within 120 days of December 31, 1996 (the "Proxy Statement") and
is incorporated herein by reference. The information required by
this item with respect to executive officers is, pursuant to
instruction 3 of Item 401(b) of Regulation S-K, set forth in Part
I of this Form 10-K under "Business--Executive Officers of the
Registrant." The information required by this item with respect
to reports required to be filed under Section 16(a) of the
Securities Exchange Act of 1934 is set forth under "Security
Ownership of Certain Beneficial Owners and Management_Compliance
with Section 16" in the Proxy Statement and is incorporated by
reference.
Item 11. Executive Compensation
The information required by this item is set forth under
"Executive Compensation" in the Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this item is set forth under
"Security Ownership of Certain Beneficial Owners and Management"
in the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under
"Arrangements and Transactions with Related Parties" in the Proxy
Statement and is incorporated herein by reference.
With the exception of the information incorporated by
reference in Items 10-13 above, the Proxy Statement is not to be
deemed filed as part of this Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) The following documents are made part of this report:
1. Consolidated Financial Statements.
The following consolidated financial
statements, the related notes and the report of the
Company's independent auditors are incorporated
herein by reference from the 1996 Annual Report as
part of this report at Item 8 hereof:
Independent Auditors' Report dated January 23, 1997.
Consolidated Balance Sheets at December 31, 1996
and December 31, 1995.
Consolidated Statements of Income for each of the
years in the three-year period ended December 31, 1996.
Consolidated Statements of Changes
in Stockholders'/Division Equity for each of the
years in the three-year period ended December
31, 1996.
Consolidated Statements of Cash
Flows for each of the years in the three-year
period ended December 31, 1996.
Notes to Consolidated Financial Statements.
With the exception of the foregoing
information and the information incorporated by
reference in Items 5-8 of this Part II, the 1996
Annual Report is not to be deemed filed as part of
this Form 10-K.
2. Financial Statement Schedules
No Financial Statement Schedules are required to be
filed.
(b) Reports on Form 8-K: None
(c) Exhibits: See Exhibit Index on page 21 of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized on the 27th day of March, 1997.
METRIS COMPANIES INC.
(Registrant)
By /s/Ronald N. Zebeck
Ronald N. Zebeck
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of Metris Companies Inc., the Registrant, and in the
capacities and on the dates indicated.
Signature Title Date
Principal executive President, March 27, 1997
officer and director: Chief Executive Officer
and Director
/s/Ronald N. Zebeck
Ronald N. Zebeck
Principal financial officer: Senior Vice President, March 27, 1997
Chief Financial Officer
/s/Robert W. Oberrender
Robert W. Oberrender
Principal accounting officer: Controller March 27, 1997
/s/Jean C. Benson
Jean C. Benson
Directors:
/s/Theodore Deikel Director March 27, 1997
Theodore Deikel
/s/Michael P. Sherman Director March 27, 1997
Michael P. Sherman
/s/Dudley C. Mecum Director March 27, 1997
Dudley C. Mecum
/s/Frank D. Trestman Director March 27, 1997
Frank D. Trestman
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
Articles of Incorporation and Bylaws
3.a Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated by reference to Exhibit 3.a to the
Registrant's Registration Statement on Form S-1 (No. 333-
10831).
3.b Bylaws of the Registrant (Incorporated by reference to
Exhibit 3.b to the Registrant's Registration Statement on
Form S-1 (No. 333-10831).
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) Amended and Restated Series 1995-1 Supplement dated as
of September 16, 1996 (Incorporated by reference to
Exhibit 10.a(i) to Registrant's Registration Statement
on Form S-1 (No. 333-10831)).
(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 (Incorporated by
reference to Exhibit 10.a(iii) to Registrant's
Registration Statement on Form S-1 (No. 333-10831)).
(iv) Amendment No. 2 to the Pooling and Servicing Agreement
dated as of September 16, 1996 (Incorporated by
reference to Exhibit 10.a(iv) to Registrant's
Registration Statement on Form S-1 (No. 333-10831)).
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 (Incorporated by reference to
Exhibit 10.b to Registrant's Registration Statement on Form
S-1 (No. 333-10831)).
10.c Purchase Agreement dated as of May 26, 1995 between
Fingerhut Financial Services Receivables, Inc., as Buyer,
and Fingerhut Companies, Inc., as Seller (Incorporated by
reference to Exhibit 10.c to Registrant's Registration
Statement on Form S-1 (No. 333-10831)).
(i) Assignment and Assumption Agreement dated as of
September 16, 1996 among Fingerhut Companies, Inc., as
assignor, Metris Companies Inc., as assignee, and
Metris Receivables, Inc. (Incorporated by reference to
Exhibit 10.c(i) to Registrant's Registration Statement
on Form S-1 (No. 333-10831)).
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
(File No. 1-8668) for the fiscal year ended December 29,
1995.
(i) Amendment dated October 25, 1996.
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* Intentionally left blank.
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* Metris Companies Inc. Long -Term Incentive and Stock
Option Plan.
(i)* Form of option agreement.
10.i* Metris Companies Inc. Nonemployee Director Stock
Option Plan.
10.j* Metris Companies Inc. Annual Incentive Plan for
Designated Corporate Officers.
10.k Co-Brand Credit Card Agreement dated as of October 31, 1996
between the Registrant and Fingerhut Corporation.
10.l Extended Service Plan Agreement dated as of October 31, 1996
between the Registrant and Fingerhut Corporation.
10.m Database Access Agreement dated as of October 31, 1996
between the Registrant and Fingerhut Corporation.
10.n Administrative Services Agreement dated as of October 31,
1996 between the Registrant and Fingerhut Companies, Inc.
10.o Tax Sharing Agreement dated as of October 31, 1996 between
the Registrant and Fingerhut Companies, Inc.
10.p Registration Rights Agreement dated as of October 31, 1996
between the Registrant and Fingerhut Companies, Inc.
10.q Data Sharing Agreement dated as of October 31, 1996 between
Fingerhut Corporation and Direct Merchants Credit Card Bank,
National Association.
10.r Revolving Credit and Letter of Credit Facility Agreement
dated as of September 16, 1996 (Incorporated by reference to
Exhibit 10.s to Registrant's Registration Statement on Form
S-1 (No. 333-10831)).
Other Exhibits
11 Computation of Earnings Per Share.
13 Pages 12 to 44 of the 1996 Annual Report to Shareholders.
The 1996 Annual Report shall not be deemed to be filed with
the Commission except to the extent that information is
specifically incorporated herein by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99 Cautionary Statement Regarding Forward Looking Statements.
*Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
AMENDMENT dated as of
October 25, 1996 (this "Amendment"), to
the Stock Option and Value Appreciation
Rights Agreement dated as of March 21, 1994
(the "Option Agreement"), between FINGERHUT
COMPANIES, INC., a Minnesota corporation (the
"Company"), and RONALD N. ZEBECK, an
individual resident of Minnesota
("Employee").
WHEREAS, there is a good-faith dispute between the
Company and Employee regarding the number of options granted
to Employee pursuant to the Option Agreement; and
WHEREAS, the parties desire to enter into this
Amendment to resolve such dispute.
NOW, THEREFORE, in consideration of the mutual
covenants contained herein and other good and valuable
consideration, the parties hereto agree as follows:
SECTION 1. Certain Amendments to the Option
Agreement. (a) The definition of the term "Vested
Percentage" in Article I of the Option Agreement is hereby
amended by replacing the table contained in such definition
with the following:
Time Vested Percentage
One year or more 25%
Two years or more 50%
Three years or more 73.74%
Four years or more 97.49%
Five years or more 100.00%
(b) Section 3.01 of the Option Agreement is hereby
amended by replacing the phrase "issued and outstanding
immediately before the Public Event" in the first sentence
of such Section 3.01 with the phrase "issued and outstanding
immediately after the Public Event".
(c) Section 3.02 of the Option Agreement is hereby
amended by deleting subsection (b) thereof in its entirety.
Section 3.02(a) shall remain in full force and effect.
SECTION 2. Effective Date. This Amendment shall
become effective on the date (the "Effective Date") on which
the Public Event occurs.
SECTION 3. Option Agreement; Terms. Except for
the amendments expressly entered into pursuant to this
Amendment, the Option Agreement shall continue in full force
and effect in accordance with the provisions thereof on the
date hereof. This Amendment shall apply and be effective
only with respect to the provisions of the Option Agreement
specifically amended or modified hereby. As used in the
Option Agreement, the terms "Agreement", "this Agreement",
"herein", "hereinafter", "hereunder", "hereto" and words of
similar import shall mean from and after the Effective Date,
unless the context otherwise specifically requires, the
Option Agreement as amended or modified by this Amendment.
SECTION 4. Termination of Side Letter. Effective
immediately upon the effectiveness of this Amendment, that
certain side letter dated March 8, 1996 from John Ellingboe
to Ronald Zebeck shall be terminated and have no further
force or effect.
SECTION 5. Applicable Law. This Amendment shall
be governed by and construed in accordance with the laws of
the State of Minnesota.
SECTION 6. Counterparts. This Amendment may be
executed in two counterparts, each of which shall constitute
an original, but all of which when taken together shall
constitute but one instrument.
SECTION 7. Headings. The headings of this
Amendment are for the purposes of reference only and shall
not limit or otherwise affect the meaning hereof.
IN WITNESS WHEREOF, the Company and Employee
executed this Amendment as of the date first above written.
FINGERHUT COMPANIES, INC.
by
_______________________
Name:
Title:
_______________________
Ronald N. Zebeck
Exhibit 10.h
METRIS COMPANIES INC.
LONG-TERM INCENTIVE AND STOCK OPTION PLAN
1. Purpose of Plan.
This Plan shall be known as the "METRIS COMPANIES INC. LONG-
TERM INCENTIVE AND STOCK OPTION PLAN" and is hereinafter referred
to as the "Plan." The purpose of the Plan is to aid in
maintaining and developing personnel capable of ensuring the
future success of Metris Companies Inc., a Delaware corporation
(the "Company"), to offer such personnel additional incentives to
put forth maximum efforts for the success of the business, and to
afford them an opportunity to acquire a proprietary interest in
the Company through stock options and other long-term incentive
awards as provided herein. Options granted under this Plan may
be either incentive stock options ("Incentive Stock Options"')
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"'), or stock options which do not
qualify as Incentive Stock Options ("Nonqualified Stock
Options"). Awards granted under this Plan may be stock
appreciation rights, restricted stock or performance awards as
hereinafter described.
2. Stock Subject to Plan.
Subject to the provisions of Section 15 hereof, the stock to
be subject to options or other awards under the Plan shall be the
Company's common stock, $.01 par value (the "Common Stock").
Subject to adjustment as provided in Section 15 hereof, the
maximum number of shares on which options may be exercised or
other awards issued under this Plan shall be 1,860,000 shares.
If an option or award under the Plan expires, or for any reason
is terminated or unexercised with respect to any shares, such
shares shall again be available for options or awards thereafter
granted during the term of the Plan.
3. Administration of Plan.
(a) The Plan shall be administered by the Compensation
Committee of the Board of Directors (the "Committee") which shall
be a committee comprised of not less than two directors appointed
from time to time by the Board of Directors. Each member of the
Committee shall be a "Non-Employee Director" within the meaning
of Rule 16b-3 promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended,
or any successor rule or regulation ("Rule 16b-3") and an
"outside director" within the meaning of Section 162(m) of the
Code.
(b) The Committee shall have plenary authority in its
discretion, but subject to the express provisions of the Plan:
(i) to determine the purchase price of the Common Stock covered
by each option or award, (ii) to determine the individuals to
whom and the time or times at which such options and awards shall
be granted and the number of shares to be subject to each, (iii)
to determine the form of payment to be made upon the exercise of
an SAR or in connection with performance awards, either cash,
Common Stock or a combination thereof, (iv) to determine the
terms of exercise of each option and award, (v) to accelerate the
time at which all or any part of an option or award may be
exercised, (vi) to amend or modify the terms of any option or
award with the consent of the optionee, (vii) to interpret the
Plan, (viii) to prescribe, amend and rescind rules and
regulations relating to the Plan, (ix) to determine the terms and
provisions of each option and award agreement under the Plan
(which agreements need not be identical), including the
designation of those options intended to be Incentive Stock
Options, and (x) to make all other determinations necessary or
advisable for the administration of the Plan, subject to the
exclusive authority of the Board of Directors under Section 16
hereof to amend or terminate the Plan. The Committee's
determinations on the foregoing matters, unless otherwise
disapproved by the Board of Directors of the Company, shall be
final and conclusive.
4. Eligibility.
Incentive Stock Options may only be granted under this Plan
to any full or part-time employee (which term as used herein
includes, but is not limited to, officers and directors who are
also employees) of the Company and of its present and future
subsidiary corporations within the meaning of Section 424(f) of
the Code (herein called "subsidiaries"). Full or part-time
employees, consultants or independent contractors to the Company
or one of its subsidiaries and full and part-time employees of
any subsidiary of Fingerhut Companies, Inc. shall be eligible to
receive Nonqualified Stock Options and awards. In determining
the persons to whom options and awards shall be granted and the
number of shares subject to each, the Committee may take into
account the nature of services rendered by the respective
employees or consultants, their present and potential
contributions to the success of the Company and such other
factors as the Committee in its discretion shall deem relevant.
A person who has been granted an option or award under this Plan
may be granted additional options or awards under the Plan if the
Committee shall so determine; provided, however, that for
Incentive Stock Options granted after December 31, 1986, to the
extent the aggregate fair market value (determined at the time
the Incentive Stock Option is granted) of the Common Stock with
respect to which all Incentive Stock Options are exercisable for
the first time by an employee during any calendar year (under all
plans described in subsection (d) of Section 422 of the Code of
his employer corporation and its parent and subsidiary
corporations) exceeds $100,000, such options shall be treated as
Nonqualified Stock Options. Nothing in the Plan or in any
agreement thereunder shall confer on any employee any right to
continue in the employ of the Company or any of its subsidiaries
or affect, in any way, the right of the Company or any of its
subsidiaries or Fingerhut Companies, Inc. or any of its
subsidiaries to terminate his or her employment at any time.
5. Price.
The option price for all Incentive Stock Options granted
under the Plan shall be determined by the Committee but shall not
be less than 100% of the fair market value per share of Common
Stock at the date of grant of such option. The option price for
Nonqualified Stock Options granted under the Plan and, if
applicable, the price for all awards shall also be determined by
the Committee. For purposes of the preceding sentence and for
all other valuation purposes under the Plan, the fair market
value of the Common Stock shall be as reasonably determined by
the Committee. If on the date of grant of any option or award
hereunder the Common Stock is not traded on an established
securities market, the Committee shall make a good faith attempt
to satisfy the requirements of this Section 5 and in connection
therewith shall take such action as it deems necessary or
advisable.
6. Term.
Each option and award and all rights and obligations
thereunder shall expire on the date determined by the Committee
and specified in the option or award agreement. The Committee
shall be under no duty to provide terms of like duration for
options or awards granted under the Plan, but the term of an
Incentive Stock Option may not extend more than ten (10) years
from the date of grant of such option and the term of options
granted under the Plan which do not qualify as Incentive Stock
Options may not extend more than fifteen (15) years from the date
of granting of such option.
7. Exercise of Option or Award.
(a) The Committee shall have full and complete authority to
determine whether an option or award will be exercisable in full
at any time or from time to time during the term thereof, or to
provide for the exercise thereof in such installments, upon the
occurrence of such events (such as termination of employment for
any reason) and at such times during the term of the option as
the Committee may determine and specify in the option or award
agreement.
(b) The exercise of any option or award granted hereunder
shall only be effective at such time that the sale of Common
Stock pursuant to such exercise will not violate any state or
federal securities or other laws.
(c) An optionee or grantee electing to exercise an option
or award shall give written notice to the Company of such
election and of the number of shares subject to such exercise.
The full purchase price of such shares shall be tendered with
such notice of exercise. Payment shall be made to the Company in
cash (including bank check, certified check, personal check, or
money order), or, at the discretion of the Committee and as
specified by the Committee, (i) by delivering certificates for
Common Stock already owned by the optionee or grantee having a
fair market value as of the date of grant equal to the full
purchase price of the shares, or (ii) by delivering the
optionee's or grantee's promissory note, which 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, or (iii) a
combination of cash, the optionee's or grantee's promissory note
and such shares. The fair market value of such tendered shares
shall be determined as provided in Section 5 hereof. The
optionee's or grantee's promissory note shall be a full recourse
liability of the optionee and may, at the discretion of the
Committee, be secured by a pledge of the shares being purchased.
Until such person has been issued the shares subject to such
exercise, he or she shall possess no rights as a shareholder with
respect to such shares.
(d) The Committee may grant "restoration" options,
separately or together with another option, pursuant to which,
subject to the terms and conditions established by the Committee
and any applicable requirements of Rule 16b-3 promulgated under
the Securities and Exchange Act of 1934 or any other applicable
law, the optionee would be granted a new option when the payment
of the exercise price of the option to which such "restoration"
option relates is made by the delivery of shares of Common Stock
owned by the optionee, as described in subsection (c) above,
which new option would be an option to purchase the number of
shares not exceeding the sum of (a) the number of shares of
Common Stock tendered as payment upon the exercise of the option
to which such "restoration" option relates and (b) the number of
shares of Common Stock, if any, tendered as payment of the amount
to be withheld under applicable income tax laws in connection
with the exercise of the option to which such "restoration"
option relates, as described in Section 11 hereof. "Restoration"
options may be granted with respect to options previously granted
under this Plan or any prior stock option plan of the Company,
and may be granted in connection with any option granted under
this Plan at the time of such grant. The purchase price of the
Common Stock under each such new option, and the other terms and
conditions of such option, shall be determined by the Committee
consistent with the provisions of the Plan.
8. Stock Appreciation Rights.
(a) Grant. At the time of grant of an option or award
under the Plan (or at any other time), the Committee, in its
discretion, may grant a stock appreciation right ("SAR")
evidenced by an agreement in such form as the Committee shall
from time to time approve. Any such SAR may be subject to
restrictions on the exercise thereof as may be set forth in the
agreement representing such SAR, which agreement shall comply
with and be subject to the following terms and conditions and any
additional terms and conditions established by the Committee that
are consistent with the terms of the Plan.
(b) Exercise. An SAR shall be exercised by the delivery to
the Company of a written notice which shall state that the holder
thereof elects to exercise his or her SAR as to the number of
shares specified in the notice and which shall further state what
portion, if any, of the SAR exercise amount (hereinafter defined)
the holder thereof requests be paid in cash and what portion, if
any, is to be paid in Common Stock of the Company. The Committee
promptly shall cause to be paid to such holder the SAR exercise
amount either in cash, in Common Stock of the Company, or any
combination of cash and shares as the Committee may by the holder
of the SAR or in the sole and absolute discretion of the
Committee. The SAR exercise amount is the excess of the fair
market value of one share of Common Stock on the date of exercise
over the per share exercise price in respect of which the SAR was
granted, multiplied by the number of shares as to which the SAR
is exercised. For the purposes hereof, the fair market value of
the Common Stock shall be determined as provided in Section 5
hereof.
9. Restricted Stock Awards.
Awards of Common Stock subject to forfeiture and transfer
restrictions may be granted by the Committee. Any restricted
stock award shall be evidenced by an agreement in such form as
the Committee shall from time to time approve, which agreement
shall comply with and be subject to the following terms and
conditions and any additional terms and conditions established by
the Committee that are consistent with the terms of the Plan:
(a) Grant of Restricted Stock Awards. Each restricted
stock award made under the Plan shall be for such number of
shares of Common Stock as shall be determined by the Committee
and set forth in the agreement containing the terms of such
restricted stock award. Such agreement shall set forth a period
of time during which the grantee must remain in the continuous
employment of the Company in order for the forfeiture and
transfer restrictions to lapse. If the Committee so determines,
the restrictions may lapse during such restricted period in
installments with respect to specified portions of the shares
covered by the restricted stock award. The agreement may also,
in the discretion of the Committee, set forth performance or
other conditions that will subject the Common Stock to forfeiture
and transfer restrictions. The Committee may, at its discretion,
waive all or any part of the restrictions applicable to any or
all outstanding restricted stock awards.
(b) Delivery of Common Stock and Restrictions. At the time
of a restricted stock award, a certificate representing the
number of shares of Common Stock awarded thereunder shall be
registered in the name of the grantee. Such certificate shall be
held by the Company or any custodian appointed by the Company for
the account of the grantee subject to the terms and conditions of
the Plan, and shall bear such a legend setting forth the
restrictions imposed thereon as the Committee, in its discretion,
may determine. The grantee shall have all rights of a
shareholder with respect to the Common Stock, including the right
to receive dividends and the right to vote such shares, subject
to the following restrictions: (i) the grantee shall not be
entitled to delivery of the stock certificate until the
expiration of the restricted period and the fulfillment of any
other restrictive conditions set forth in the restricted stock
agreement with respect to such Common Stock; (ii) none of such
shares may be sold, assigned, transferred, pledged, hypothecated
or otherwise encumbered or disposed of during such restricted
period or until after the fulfillment of any such other
restrictive conditions; and (iii) except as otherwise determined
by the Committee, all of the Common Stock shall be forfeited and
all rights of the grantee to such Common Stock shall terminate,
without further obligation on the part of the Company, unless the
grantee remains in the continuous employment of the Company or
any subsidiary of the Company or any other subsidiary of
Fingerhut Companies, Inc. for the entire restricted period in
relation to which such Common Stock was granted and unless any
other restrictive conditions relating to the restricted stock
award are met. Any Common Stock, any other securities of the
Company and any other property (except for cash dividends)
distributed with respect to the Common Stock subject to
restricted stock awards shall be subject to the same
restrictions, terms and conditions as such restricted Common
Stock.
(c) Termination of Restrictions. At the end of the
restricted period and provided that any other restrictive
conditions of the restricted stock award are met, or at such
earlier time as otherwise determined by the Committee, all
restrictions set forth in the agreement relating to the
restricted stock award or in the Plan shall lapse as to the
restricted Common Stock subject thereto, and a stock certificate
for the appropriate number of shares of Common Stock, free of the
restrictions and the restricted stock legend, shall be delivered
to the grantee or his beneficiary or estate, as the case may be.
If the Common Stock is traded on a securities exchange, the
Company shall not be required to deliver such certificates until
such shares have been admitted for trading on such securities
exchange.
10. Performance Awards.
The Committee is further authorized to grant Performance
Awards. Subject to the terms of this Plan and any applicable
award agreement, a Performance Award granted under the Plan (i)
may be denominated or payable in cash, Common Stock (including,
without limitation, restricted stock), other securities, other
awards, or other property and (ii) shall confer on the holder
thereof rights valued as determined by the Committee, in its
discretion, and payable to, or exercisable by, the holder of the
Performance Award, in whole or in part, upon the achievement of
such performance goals during such performance periods as the
Committee, in its discretion, shall establish. Subject to the
terms of this Plan and any applicable award agreement, the
performance goals to be achieved during any performance period,
the length of any performance period, the amount of any
Performance Award granted, and the amount of any payment or
transfer to be made by the grantee and by the Company under any
Performance Award shall be determined by the Committee.
11. Income Tax Withholding.
In order to comply with all applicable federal or state
income tax laws or regulations, the Company may take such action
as it deems appropriate to ensure that all applicable federal or
state payroll, withholding, income or other taxes, which are the
sole and absolute responsibility of an optionee or grantee under
the Plan, are withheld or collected from such optionee or
grantee. In order to assist an optionee or grantee in paying all
federal and state taxes to be withheld or collected upon exercise
of an option or award which does not qualify as an Incentive
Stock Option hereunder, the Committee, in its absolute discretion
and subject to such additional terms and conditions as it may
adopt, may permit the optionee or grantee to satisfy such tax
obligation by (i) electing to have the Company withhold a portion
of the shares otherwise to be delivered upon exercise of such
option or award with a fair market value, determined in
accordance with Section 5 hereof, equal to such taxes or (ii)
delivering to the Company Common Stock other than the shares
issuable upon exercise of such option or award with a fair market
value, determined in accordance with Section 5 hereof, equal to
such taxes.
12. Additional Restrictions.
(a) The Committee shall have full and complete authority to
determine whether all or any part of the Common Stock acquired
upon exercise of any of the options or awards granted under the
Plan shall be subject to restrictions on the transferability
thereof or any other restrictions affecting in any manner the
optionee's or grantee's rights with respect thereto, but any such
restriction shall be contained in the agreement relating to such
options or awards.
(b) No person, who is an employee of the Company at the
time of grant, may be granted any award or awards, the value of
which awards are based solely on an increase in the value of the
Common Stock after the date of grant of such awards, for more
than 675,000 shares, in the aggregate, in any one calendar year
period. The foregoing annual limitation specifically includes
the grant of any awards representing "qualified performance-based
compensation" within the meaning of Section 162(m) of the Code.
13. Ten Percent Shareholder Rule.
Notwithstanding any other provision in the Plan, if at the
time an option is otherwise to be granted pursuant to the Plan
the optionee owns directly or indirectly (within the meaning of
Section 424(d) of the Code) Common Stock of the Company
possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or its parent
or subsidiary corporations, if any (within the meaning of Section
422(b)(6) of the Code), then any Incentive Stock Option to be
granted to such optionee pursuant to the Plan shall satisfy the
requirements of Section 422(c)(5) of the Code, and the option
price shall be not less than 110% of the fair market value of the
Common Stock determined as described herein, and such option by
its terms shall not be exercisable after the expiration of five
(5) years from the date such option is granted.
14. Non-Transferability.
Except as otherwise determined by the Committee or in an
option or award agreement, no option or award granted under the
Plan shall be transferable by an optionee or grantee, otherwise
than by will or the laws of descent or distribution and during
the lifetime of an optionee or grantee, the option shall be
exercisable only by such optionee or grantee. Notwithstanding
the foregoing, no Incentive Stock Option shall be transferable by
an optionee otherwise than by will or the laws of descent or
distribution.
15. Dilution or Other Adjustments.
If there shall be any change in the Common Stock through
merger, consolidation, reorganization, recapitalization, dividend
in the form of stock (of whatever amount), stock split or other
change in the corporate structure, appropriate adjustments in the
Plan and outstanding options and awards shall be made by the
Committee. In the event of any such changes, adjustments shall
include, where appropriate, changes in the aggregate number of
shares subject to the Plan, the number of shares and the price
per share subject to outstanding options and awards and the
amount payable upon exercise of outstanding awards, in order to
prevent dilution or enlargement of option or award rights.
16. Amendment or Discontinuance of Plan.
Except to the extent prohibited by applicable law and unless
otherwise expressly provided in an option or award agreement or
in the Plan:
(a) Amendments to the Plan. The Board of Directors of the
Company may amend, alter, suspend, discontinue or terminate the
Plan; provided, however, that, notwithstanding any other
provisions of the Plan or any option or award agreement, without
the approval of the shareholders of the Company, no such
amendment, alteration, suspension, discontinuation or termination
shall be made that, absent such approval:
(i) would violate the rules or regulations of the
National Association of Securities Dealers, Inc. or The
Nasdaq National Market or any other securities exchange that
are applicable to the Company; or
(ii) would cause the Company to be unable, under the
Code, to grant Incentive Stock Options under the Plan.
(b) Amendments to Awards. The Committee may waive any
conditions of or rights of the Company under any outstanding
option or award, prospectively or retroactively. The Committee
may not amend, alter, suspend, discontinue or terminate any
outstanding option or award, prospectively or retroactively,
without the consent of the Participant or holder or beneficiary
thereof, except as otherwise herein provided.
(c) Correction of Defects, Omissions and Inconsistencies.
The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any option or award in
the manner and to the extent it shall deem desirable to carry the
Plan into effect.
17. Time of Granting.
Nothing contained in the Plan or in any resolution adopted
or to be adopted by the Board of Directors or by the shareholders
of the Company, and no action taken by the Committee or the Board
of Directors (other than the execution and delivery of an option
or award agreement), shall constitute the granting of an option
or award hereunder.
18. Section 16(b) Compliance
The Plan is intended to comply in all respects with Rule 16b-
3 or any successor provision, as in effect from time to time, and
in all events the Plan shall be construed in accordance with the
requirements of Rule 16b-3. If any Plan provision does not
comply with Rule 16b-3 as hereafter amended or interpreted, the
provision shall be deemed inoperative. The Board of Directors,
in its absolute discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan
to participants who are officers or directors subject to Section
16 of the Securities and Exchange Act of 1934, as amended,
without so restricting, limiting or conditioning the Plan with
respect to other participants.
19. Effective Date and Termination of Plan.
(a) The Plan shall be submitted to the shareholders of the
Company for their approval and adoption.
(b) Unless the Plan shall have been discontinued as
provided in Section 16 hereof, the Plan shall terminate October
30, 2006. No option or award may be granted after such
termination, but termination of the Plan shall not, without the
consent of the optionee or grantee, alter or impair any rights or
obligations under any option or award theretofore granted.
Exhibit 10.h(i)
METRIS COMPANIES INC.
LONG-TERM INCENTIVE AND STOCK OPTION PLAN
Non-Qualified Stock Option Agreement
This Non-Qualified Stock Option Agreement is made and
entered into as of [date1] by and between [name] (the
"Optionee") and Metris Companies Inc., a Delaware
corporation, with its principal business office located in
St. Louis Park, Minnesota (the "Company").
WHEREAS, the Compensation Committee (the "Committee")
of the Board of Directors of the Company (the "Board")
desires to provide Optionee with an option to purchase
shares of common stock of the Company pursuant to the
provisions of the Metris Companies Inc. Long-Term Incentive
and Stock Option Plan (the "Plan") and this Non-Qualified
Stock Option Agreement (the "Agreement"), and Optionee
desires to acquire such option.
NOW, THEREFORE, for and in consideration of the mutual
covenants and promises contained herein, and for other
valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant of Option. The Company hereby grants to
Optionee effective as of [date1] (the "Date of Grant"), the
option (the "Option") to purchase an aggregate of[date1]
[no]) shares (the "Shares") of common stock of the Company
(the "Common Stock"), subject to the terms and conditions
set forth herein and in the Plan.
2. Option Price. The purchase price of the Shares
subject to the Option (the "Option Price") shall be
$[price] per share, subject to adjustment as provided
herein.
3. Term of Option; Time of Exercise.
3.1 The term of the Option shall be for a period of
ten (10) years from the Date of Grant. The Option shall be
exercisable with respect to fifty percent (50%) of the
Shares on [date2] and with respect to fifty percent (50%)
of the Shares on [date3].
3.2 This Option shall not under any circumstances be
exercisable after, and this Agreement and Option shall
terminate as to all unexercised Shares at, 5:00 p.m.
(Minnesota time) on the date that is ten (10) years from
the Date of Grant (the "Expiration Date"), unless
terminated prior thereto pursuant to the provisions of
Section 5 hereof.
3.3 Notwithstanding the vesting provisions contained
in Section 3.1 hereof, but subject to the other terms and
conditions set forth herein, the Option may be exercised in
full immediately following the date of a "Change in
Control" (as hereinafter defined). For purposes of this
Agreement, the following terms shall have the definitions
set forth below:
(a) "Change in Control" shall mean:
(i) a change in control of a nature that would be
required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not the Company is then subject to such
reporting requirement; or
(ii) the public announcement (which, for purposes of
this definition, shall include, without limitation, a
report filed pursuant to Section 13(d) of the Exchange Act)
by the Company or any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) other than
Fingerhut Companies, Inc. ("Fingerhut") or any of
Fingerhut's affiliates that such person has become the
"beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of
securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding
securities at any time when Fingerhut beneficially owns
less than 30% of the combined voting power of the Company's
then outstanding securities; provided, however, that
notwithstanding the foregoing, no Change of Control shall
be deemed to have occurred for purposes of this Agreement
by reason of ownership of 50% or more of the total voting
capital stock of the Company then issued and outstanding by
any subsidiary of the Company or any employee benefit plan
of the Company or of any subsidiary of the Company or any
entity holding shares of the Common Stock organized,
appointed or established for, or pursuant to the terms of,
any such plan (any such person or entity described in this
proviso is referred to herein as a "Company Entity"); or
(iii) the announcement of a tender offer by any
person or entity (other than a Company Entity) for 30% or
more of the Company's voting capital stock then issued and
outstanding at any time when Fingerhut beneficially owns
less than 50% of the Company's voting capital stock, which
tender offer has not been approved by the Board, a majority
of the members of which are Continuing Directors (as
hereinafter defined), and recommended to the shareholders
of the Company; or
(iv) the Continuing Directors (as hereinafter defined)
cease to constitute a majority of the Company's Board of
Directors; or
(v) the shareholders of the Company approve (x) any
consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant
to which shares of Company stock would be converted into
cash, securities or other property, other than a merger of
the Company in which shareholders immediately prior to the
merger have the same proportionate ownership of stock of
the surviving corporation immediately after the merger; (y)
any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of the Company; or (z) any
plan of liquidation or dissolution of the Company; or
(vi) a Fingerhut Change of Control at any time
Fingerhut beneficially owns 30% or more of the combined
voting power of the Company's then outstanding securities.
(b) "Continuing Director" shall mean any person who
is a member of the Board of Directors of the Company, while
such person is a member of the Board of Directors, who is
not an Acquiring Person (as defined below) or an Affiliate
or Associate (as defined below) of an Acquiring Person, or
a representative of an Acquiring Person or of any such
Affiliate or Associate, and who (x) was a member of the
Board of Directors on the date of this Agreement as first
written above or (y) subsequently becomes a member of the
Board of Directors, if such person's initial nomination for
election or initial election to the Board of Directors is
recommended or approved by a majority of the Continuing
Directors. For purposes of this subparagraph (ii),
"Acquiring Person" shall mean any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) who
or which, together with all Affiliates and Associates of
such person, is the "beneficial owner" (as defined in Rule
13d-3 promulgated under the Exchange Act), directly or
indirectly of securities of the Company representing 30% or
more of the combined voting power of the Company's then
outstanding securities, but shall not include any Company
Entity; and "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2
promulgated under the Exchange Act.
(c) "Fingerhut Change in Control" shall mean:
(i) a change in control of Fingerhut of a nature that
would be required to be reported in response to Item 6(e)
of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not Fingerhut is then subject to such
reporting requirement; or
(ii) the public announcement (which, for purposes of
this definition, shall include, without limitation, a
report filed pursuant to Section 13(d) of the Exchange Act)
by Fingerhut or any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) that such
person has become the "beneficial owner" (as defined in
Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of Fingerhut representing 30% or
more of the combined voting power of Fingerhut's then
outstanding securities; provided, however, that
notwithstanding the foregoing, no Fingerhut Change of
Control shall be deemed to have occurred for purposes of
this Agreement by reason of ownership of 30% or more of the
total voting capital stock of Fingerhut then issued and
outstanding by any subsidiary of Fingerhut or any employee
benefit plan of Fingerhut or of any subsidiary of Fingerhut
or any entity holding shares of the Common Stock organized,
appointed or established for, or pursuant to the terms of,
any such plan (any such person or entity described in this
proviso is referred to herein as a "Fingerhut Entity"); or
(iii) the announcement of a tender offer by any
person or entity (other than a Fingerhut Entity) for 30% or
more of Fingerhut's voting capital stock then issued and
outstanding, which tender offer has not been approved by
the Fingerhut Board of Directors, a majority of the members
of which are Fingerhut Continuing Directors (as hereinafter
defined), and recommended to the shareholders of Fingerhut;
or
(iv) the Fingerhut Continuing Directors (as
hereinafter defined) cease to constitute a majority of
Fingerhut's Board of Directors; or
(v) the shareholders of Fingerhut approve (x) any
consolidation or merger of Fingerhut in which Fingerhut is
not the continuing or surviving corporation or pursuant to
which shares of Fingerhut stock would be converted into
cash, securities or other property, other than a merger of
Fingerhut in which shareholders immediately prior to the
merger have the same proportionate ownership of stock of
the surviving corporation immediately after the merger; (y)
any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of Fingerhut; or (z) any
plan of liquidation or dissolution of Fingerhut.
(vi) "Fingerhut Continuing Director" shall mean any
person who is a member of the Board of Directors of
Fingerhut, while such person is a member of the Fingerhut
Board of Directors, who is not a Fingerhut Acquiring Person
(as defined below) or an Affiliate or Associate (as defined
below) of a Fingerhut Acquiring Person, or a representative
of a Fingerhut Acquiring Person or of any such Affiliate or
Associate, and who (x) was a member of the Fingerhut Board
of Directors on the date of this Agreement as first written
above or (y) subsequently becomes a member of the Fingerhut
Board of Directors, if such person's initial nomination for
election or initial election to the Fingerhut Board of
Directors is recommended or approved by a majority of the
Fingerhut Continuing Directors. For purposes of this
subparagraph (ii), "Fingerhut Acquiring Person" shall mean
any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) who or which, together with all
Affiliates and Associates of such person, is the
"beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly of
securities of Fingerhut representing 30% or more of the
combined voting power of Fingerhut's then outstanding
securities, but shall not include any Fingerhut Entity; and
"Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 promulgated
under the Exchange Act.
4. Exercise of Option.
4.1 Subject to the terms and conditions of the Plan
and this Section 4, this Option may be exercised by
Optionee in whole or in part by written notice to the
Company at its principal executive office addressed to the
attention of its General Counsel. Such notice shall
specify Optionee's election to exercise this Option and the
number of Shares in respect of which it is being exercised,
and shall be signed by Optionee. The Company shall not,
however, be required to sell or issue any Shares pursuant
to this Option if the issuance of such Shares would
constitute a violation by Optionee or the Company of any
applicable law or regulation of any governmental authority.
4.2 Notice of exercise of the Option by Optionee
shall be accompanied by payment of the full Option Price of
the Shares as to which the Option is to be exercised,
together with payment of the amount determined by the
Company to be necessary to satisfy any applicable federal,
state and local tax withholding requirements arising from
the exercise of the Option. The Company shall issue and
deliver a certificate or certificates representing such
Shares as soon as practicable after such notice and
payments are received. Payment of such Option Price shall
be made in cash or check payable to the order of the
Company or, in lieu thereof, if the Committee in its sole
discretion at the time of exercise
so permits, by tendering to the Company shares of common
stock of the Company having a fair market value equal to
the Option Price. Payment by the Optionee of any required
amount of withholding for tax purposes shall be made in
cash or check payable to the order of the Company. The
certificate or certificates for the Shares as to which the
Option shall have been so exercised shall be registered in
the name of Optionee (or Optionee's Representative (as
defined in Section 5)) or at the direction of Optionee or
such Representative and shall be delivered as aforesaid to
or upon the written order of such person or persons. In
the event that the Option shall be exercised by any person
or persons other than Optionee, such notice shall be
accompanied by appropriate proof of the authority and right
of such person or persons to exercise the Option. All
Shares purchased upon the exercise of the Option as
provided herein shall be fully paid and nonassessable.
5. Termination of Option.
(a) This Option shall terminate and may no longer be
exercised if Optionee ceases to be employed by the Company
or one of its subsidiaries (as defined in the Plan) except:
(i) if Optionee's employment shall be terminated for
any reason other than gross and willful misconduct, death,
disability or retirement, Optionee may, at any time before
(x) the expiration of ninety (90) days after such
termination or (y) the Expiration Date, whichever shall
first occur, exercise this Option (A) to the extent that
the Option was exercisable on the date of the termination
of employment in the case of voluntary termination or (B)
to the extent that the Option was or would become
exercisable on or before the expiration of such ninety (90)
day period in the case of involuntary termination;
provided, however, that if, immediately prior to such
termination of
employment, Optionee was an "officer" as defined in Rule
16a1(f) promulgated under the Exchange Act, the periods of
exercisability referred to in clauses (A) and (B) above
(but not the acceleration of vesting referred to in clause
(B)) shall be extended from ninety (90) days to seven (7)
months after the date of such termination;
(ii) if Optionee's employment shall be terminated by
reason of Optionee's gross and willful misconduct during
the course of employment (as may be determined by the
Committee in its sole and absolute discretion), including
but not limited to, wrongful appropriation of funds of the
employer or the commission of a gross misdemeanor or
felony, this Option shall be terminated as of the date of
the misconduct and Optionee shall have no further rights
hereunder.
(iii) if Optionee's employment shall be terminated
by reason of Optionee's death, this Option will become
fully exercisable and may be exercised, by the Optionee's
Representative (as defined below) at any time before (a)
the expiration of three (3) years after the date of death,
or (b) the Expiration Date, whichever shall first occur;
(iv) (A) if Optionee's employment shall be terminated
by reason of Optionee's disability (other than Total
Disability), as may be determined by the Committee in its
sole and absolute discretion, this Option may be exercised,
to the extent that the Option was exercisable on the date
of disability, by Optionee or Optionee's guardian or legal
representative, at any time before (x) the expiration of
one
(1) year after the date Optionee's employment was
terminated by reason of such disability or (y) the
Expiration Date, whichever shall first occur; or (B) if
Optionee's employment shall be terminated by reason of
Optionee's Total Disability, this Option will become fully
exercisable and may be exercised by Optionee or Optionee's
guardian or legal representative at any time before (x)
the expiration of three (3) years after the date
Optionee's employment was terminated by reason of such
disability or (y) the Expiration Date, whichever shall
first occur;
(v) if the Optionee's employment shall be terminated
by the Optionee's Retirement (as defined below), this
Option will become fully exercisable and may be exercised
by Optionee before (x) the expiration of three years after
such date, or (y) the Expiration Date, whichever shall
first occur; or
(vi) if Optionee dies or becomes disabled (as may be
determined by the Committee in its sole and absolute
discretion) during the time of exercisability after
termination of employment provided in clause (i) of this
Section 5(a), this Option may be exercised, to the extent
that the Option was exercisable on the date of death or
disability: (x) in the case of death, by the Optionee's
Representative or (y) in the case of disability, by
Optionee or Optionee's guardian or legal representative,
before (A) the expiration of one year after the date of
death or the onset of such disability, or (B) the
Expiration Date, whichever shall first occur.
(b) Notwithstanding the provisions contained in
Section 5(a) above, but subject to the other terms and
conditions set forth herein, in the event that, within one
year following a Change in Control, Optionee's employment
is terminated for any reason other than for gross and
willful misconduct (including Optionee's voluntary
termination), Optionee shall have the right to exercise
the Option in whole or in part at any time before (i) the
expiration of one year after the date of such termination
of employment, or (ii) the Expiration Date, whichever
shall first occur.
(c) For purposes of this Agreement, the following
terms shall be defined as follows:
(i) "Retirement" shall mean any termination other
than by death or gross and willful misconduct after (A)
the Optionee has attained at least age fifty-five (55) and
(B) the Optionee's age plus completed continuous years of
service equals sixty (60) or more; provided, however, that
if Optionee is less than age sixty-five (65) on the date
of termination of employment, Optionee must have completed
at least five (5) years of service.
(ii) "Representative" shall mean the person or
persons to whom Optionee's rights under this Agreement
shall pass upon death, whether by will or by the
applicable laws of descent and distribution.
(iii) "Total Disability" shall have the meaning
given to "permanent and total disability" in Section
22(e)(3) of the Code (as defined in the Plan) and shall be
determined by the Committee in its sole and absolute
discretion.
(d) Notwithstanding the foregoing provisions of
Section 5(a), the Committee shall have the authority, on a
case by case basis, in its sole and absolute discretion to
extend for up to a period of two (2) years following the
termination of employment of Optionee the period of
vesting referred to in Section 3.1 and the period of
exercisability, provided such extension does not exceed
the Expiration Date.
6. Leave of Absence; Related Employment. A leave
of absence granted in accordance with the Company's usual
procedure which does not operate to interrupt continuous
employment for other benefits granted by the Company shall
not be considered a termination of employment under this
Agreement. A period of related employment during which
Optionee is not employed by the Company nor a subsidiary
(as defined in the Plan) shall not be considered a
termination of employment under this Agreement if (i) such
employment is undertaken by Optionee at the request of the
Company or a subsidiary, (ii) immediately prior to the
undertaking of such employment Optionee was an officer or
employee of the Company or a subsidiary or was engaged in
related employment, and (iii) such employment is
recognized by the Committee, in its sole discretion, as
related employment. The death or disability of Optionee
during a period of related employment shall be treated,
for purposes of this agreement, as if such death or the
onset of such disability had occurred while Optionee was
an officer or employee of the Company.
7. Adjustments for Changes in Common Stock.
7.1 In the event that the outstanding shares of
Common Stock (other than shares held by dissenting
shareholders) shall be changed into, or exchanged for, a
different number or kind of shares of Common Stock or
other securities of the Company, or, if further changes or
exchanges of any Common Stock or other securities into
which the Common Stock shall have been changed, or for
which it shall have been exchanged, shall be made (whether
by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, reclassification, split-
up, combination of shares or otherwise), then for each
Share subject to the Option, there shall be substituted
and exchanged therefor the number and kind of shares of
Common Stock or other securities into or for which each
outstanding share of Common Stock (other than shares held
by dissenting shareholders) shall be so changed or
exchanged. If in the event of any such changes or
exchanges in order to prevent dilution or enlargement of
rights under this Agreement, it is necessary to make an
adjustment in the number, kind, or option exercise price
of the Shares then subject to the Option, such adjustment
shall be made by the Committee and shall be effective and
binding for all purposes of this Agreement.
7.2 All adjustments made pursuant to the provision
of this Section 7 shall be made by the Committee, whose
determination as to which adjustments shall be made, and
the extent thereof, shall be final, binding and
conclusive.
8. Non-transferability of Option.
(a) Except as provided in subsection 8(b) below, the
Option granted under this Agreement shall not be
transferable by Optionee, either voluntarily or
involuntarily, except by will or the laws of descent and
distribution. This Option may not be transferred,
assigned, pledged or hypothecated, whether by operation of
law or
otherwise, or be subject to attachment, execution or
similar process. Any attempt to do so shall void this
Option. During the lifetime of Optionee, this Option may
be exercised only by the Optionee (or by Optionee's
guardian or legal representative in the case of
disability) or by a permitted transferee pursuant to a
transfer as described below.
(b) To the extent such transfers are permitted under
the Plan and are not restricted by Rule 16b-3 promulgated
under the Exchange Act, the Committee, in its sole
discretion, may establish, as permitted by applicable law,
rules and conditions under which an Optionee may transfer
this Option to any member of Optionee's "immediate family"
(as such term is defined in Rule 16a-1(e) promulgated
under the Exchange Act).
9. Rights as a Shareholder. No rights of a
shareholder of the Company shall attach to Optionee with
respect to any of the Shares until this Option shall be
duly exercised as to such Shares and Optionee shall have
become the holder of record of such Shares. No
adjustments shall be made for cash dividends or other
distributions or rights as to which there is a record date
preceding the date that Optionee becomes the holder of
record of such Shares.
10. Securities Law Compliance. The exercise of all
or any portion of this Option shall only be effective at
such time that the sale of Common Stock issued pursuant to
such exercise will not violate any state or federal
securities or other laws. The Company is under no
obligation to effect any registration of the stock subject
to the Option under the Securities Act of 1933 or to
effect any state registration or qualification of such
Common Stock. The Company may, in its sole discretion,
defer the effectiveness of any full or partial exercise of
the Option in order to ensure that the issuance of stock
upon exercise will be in compliance with federal or state
securities laws and the rules of the New York Stock
Exchange or any other exchange upon which the Company's
Common Stock is traded.
11. Limitation of Liability. Nothing in this
Agreement shall be construed to:
(a) limit in any way the right of the Company or a
subsidiary to terminate the employment of Optionee; or
(b) be evidence of any agreement or understanding,
express or implied, that the Company or a subsidiary shall
employ Optionee in any particular position at any
particular rate of compensation or for any particular
period of time.
12. Severability. It is intended that each
provision of this Agreement shall be viewed as separate
and divisible. In the event that any provision hereof
shall be held to be invalid or unenforceable, the
remaining provisions of this Agreement shall continue to
be in full force and effect.
13. Governing Law. This Agreement shall be
construed in accordance with and governed by the laws of
the State of Minnesota.
14. Further Assurances. Upon the exercise of the
option by Optionee or at such subsequent date as either
the Company or Optionee may reasonably request, each party
hereto agrees to execute and deliver such further
instruments and to take such other action as shall be
reasonably required to carry out the intent and purposes
of this Agreement.
15. Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed
an original, but all of which together shall constitute
one and the same document.
16. Notices. All notices that are required or may
be given pursuant to the terms of this Agreement shall be
in writing and delivered personally or by registered or
certified mail, return receipt requested, postage prepaid,
addressed as follows and shall be deemed to have been
given upon delivery to the addressee:
To the Company:
Metris Companies Inc.
600 South Highway 169, Suite 1800
St. Louis Park, MN 55341
Attention: General Counsel
To Optionee:
At Optionee's residence address listed in
the Company's personnel records.
Notice of a change in address of one of the parties hereto
shall be given in writing to the other party as provided
above, but shall be effective only upon actual receipt.
17. Amendment. This Agreement may not be amended or
modified by the parties hereto in any manner, except by a
written instrument signed by both parties hereto.
18. Binding Effect: Assignment. This Agreement
shall be binding upon the heirs, successors and assigns of
the parties hereto, subject to shareholder approval of the
Plan. This Agreement shall not be assigned by either party
hereto without the express written consent of the other
party.
19. Entire Agreement. The Plan, the rules adopted
by the Committee from time to time and this Agreement
constitute, except as to any written agreement between the
parties hereto which specifically references this Section
19, the entire understanding between the parties hereto
with respect to the matters covered herein and supersede
all previous written, oral or implied understandings
between the parties hereto with respect to the subject
matter hereof.
IN WITNESS WHEREOF, the Company and Optionee have
executed this Agreement as of the day and year first above
written.
METRIS COMPANIES INC.
By
Ronald N. Zebeck
OPTIONEE SIGNATURE
[name]
Social Security #: [ssn]
Date:
Exhibit 10.i
METRIS COMPANIES INC.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose of Plan. This plan shall be known as the
"Metris Companies Inc. Nonemployee Director Stock Option
Plan" and is hereinafter referred to as the "Plan." The
purpose of the Plan is to promote the interests of Metris
Companies Inc., a Delaware corporation (the "Company"), by
enhancing its ability to attract and retain the services of
experienced and knowledgeable outside directors and by
providing an additional means for such directors to identify
with the interests of the Company's shareholders.
2. Administration.
(a) The Plan shall be administered by the Board of
Directors of the Company (the "Board of Directors"). All
questions of interpretation of the Plan or of any options
issued under it shall be determined by the Board of
Directors and such determination shall be final and binding
upon all persons having an interest in the Plan. Any or all
powers and discretion vested in the Board of Directors under
this Plan may be exercised by any person or committee duly
authorized by the Board of Directors except that the Board
of Directors shall approve and authorize each grant, award
or other similar acquisition from the Company pursuant to or
in connection with the Plan.
(b) The Board of Directors shall have plenary
authority in its discretion, but subject to the express
provisions of the Plan: (i) to determine the purchase price
of the Common Stock (as hereinafter defined) covered by each
option, (ii) to determine the directors to whom and the time
or times at which such options shall be granted and the
number of shares to be subject to each, (iii) to determine
the terms of exercise of each option, (iv) to amend or
modify the terms of any option with the consent of the
optionee, (v) to amend or interpret the Plan, (vi) to
prescribe, amend and rescind rules and regulations relating
to the Plan, (vii) to determine the terms and provisions of
each option agreement under the Plan (which agreements need
not be identical), and (viii) to make all other
determinations necessary or advisable for the administration
of the Plan. The Board of Directors also shall have such
additional authority and powers as set forth in Section 17
hereof, including the authority to amend and terminate the
Plan. The Board of Directors' determinations on the
foregoing matters shall be final and conclusive.
3. Participation in the Plan. Each director of the
Company shall be eligible to participate in the Plan unless
such director is an officer or employee of the Company, any
subsidiary of the Company, or any entity that owns at least
20% of the outstanding common stock of the Company. A
director who has been granted an option under this Plan may
be granted additional options under the Plan.
4. Stock Subject to the Plan. Subject to the
provisions of Section 14 hereof, the stock to be subject to
options under the Plan shall be authorized but unissued
shares of the Company's common stock, par value $.01 per
share (the "Common Stock") or treasury shares of Common
Stock. Subject to the adjustment as provided in Section 14
hereof, the maximum number of shares on which options may be
exercised under this Plan shall be 20,000 shares. If an
option under the Plan expires, or for any reason is
terminated and unexercised with respect to any shares, such
shares shall be available for options thereafter granted
during the term of the Plan.
5. Nonqualified Stock Options. All options granted
under the Plan shall be nonqualified stock options that do
not qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
6. Terms and Conditions of Options. Each option
granted under this Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from
time to time approve, which agreements shall comply with and
be subject to the terms and conditions of the Plan.
7. Term of Options. Each option and all rights and
obligations thereunder shall expire on the date determined
by the Board of Directors as specified in the option
agreement. The Board of Directors shall be under no duty to
provide terms of like duration for options granted under the
Plan, but the term of options granted under the Plan may not
extend more than fifteen (15) years from the date of
granting of such option.
8. Exercise of Options.
(a) The Board of Directors shall have full and
complete authority to determine whether an option will be
exercisable in full at any time or from time to time during
the term thereof, or to provide for the exercise thereof in
such installments, upon the occurrence of such events (such
as termination of employment for any reason) and at such
times during the term of the option as the Board of
Directors may determine and specify in the option agreement.
(b) The exercise of any option granted hereunder shall
only be effective at such time as counsel to the Company
shall have determined that the issuance and delivery of
Common Stock pursuant to such exercise will not violate any
state or federal securities or other laws. An optionee
desiring to exercise an option may be required by the
Company, as a condition of the effectiveness of any exercise
of an option granted hereunder, to agree in writing that all
Common Stock to be acquired pursuant to such exercise shall
be held for his or her own account without a view to any
further distribution thereof, that the certificates for such
shares shall bear an appropriate legend to that effect and
that such shares will not be transferred or disposed of
except in compliance with applicable federal and state
securities laws.
(c) An optionee electing to exercise an option shall
give written notice to the Company of such election and of
the number of shares subject to such exercise. The full
purchase price of such shares shall be tendered with such
notice of exercise. Payment shall be made to the Company by
delivery of (A) cash (including check, bank draft or money
order), (B) shares of Common Stock already owned by the
optionee having a fair market value as of the date of
exercise equal to the full exercise price of the shares to
be acquired, (C) written authorization for the Company to
retain from the total number of shares of Common Stock as to
which the option is exercised that number of shares having a
fair market value as of the date of exercise equal to the
aggregate exercise price of the options exercised, (D) any
combination of the foregoing methods of payment, or (E) such
other form of consideration as the Board of Directors may
deem acceptable. For purposes of the preceding sentence,
the fair market value of Common Stock tendered shall be
determined as provided in Section 11 as of the date of
exercise.
9. Effect of Termination of Directorship or Death or
Disability.
(a) In the event that an optionee shall cease to be a
director of the Company for any reason other than such
person's gross and willful misconduct or such person's death
or disability, (as may be determined in the sole discretion
of the Board of Directors) such optionee shall have the
right to exercise the option at any time within seven months
after such termination of directorship to the extent of the
full number of shares he or she was entitled to purchase
under the option on the date of termination, subject to the
condition that no option shall be exercisable after the
expiration of the term of the option.
(b) In the event that an optionee shall cease to be a
director of the Company by reason of the optionee's gross
and willful misconduct during the course of his or her
service as a director of the Company, including but not
limited to wrongful appropriation of funds of the Company,
or the commission of a gross misdemeanor or felony, the
option shall be terminated as of the date of the misconduct
and the optionee shall have no further rights thereunder.
(c) If the optionee shall die while serving as a
director of the Company or within seven months after
termination of his or her directorship for any reason other
than the optionee's gross and willful misconduct or the
optionee shall become disabled (as may be determined in the
sole discretion of the Board of Directors) while serving as
a director of the Company and such optionee shall not have
fully exercised the option, such option may be exercised at
any time within 12 months after the date of such death or
the onset of such disability by the optionee or the
optionee's legal representative, in the case of disability,
or by the personal representative(s), administrator(s), or
heir(s) of the optionee, in the case of death, to the extent
of the full number of shares the optionee was entitled to
purchase under the option on the date of death, disability,
or termination of directorship, if earlier, and subject to
the condition that no option shall be exercisable after the
expiration of the term of the option.
10. Option Exercise Price. The option price for all
Options granted under the Plan shall be determined by the
Board of Directors but shall not be less than 100% of the
fair market value per share of Common Stock as of the date
of grant of such option.
11. Fair Market Value of Common Stock. For purposes
of this Plan, the fair market value of the Common Stock as
of a given date shall be the closing price of the Common
Stock as reported on the Nasdaq National Market on the
trading date immediately preceding such date. If the Common
Stock is not publicly traded on such date, the Board of
Directors shall make a good faith attempt to determine such
fair market value and, in connection therewith, shall take
such actions and consider such factors as it deems necessary
or advisable.
12. Transfer Restrictions. No option granted under
the Plan or interest therein may be transferred, assigned,
pledged or hypothecated by the optionee during such
optionee's lifetime, whether by operation of law or
otherwise, or be made subject to execution, attachment or
similar process, except that options shall be transferable
by the optionee: (a) by will or by the laws of descent and
distribution as provided in Section 9(c) hereof; (b) to any
child, stepchild, grandchild, parent, step-parent,
grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law
of the optionee, including adoptive relationships
("immediate family members"); (c) to charitable
organizations; or (d) to trusts for the benefit of immediate
family members of the optionee or charitable organizations.
Except as provided in Section 9 hereof with respect to
disability of the optionee, and except for options that have
been transferred in accordance with the provisions of this
Section 12, during the lifetime of the optionee an option
granted under this Plan shall be exercisable only by the
optionee.
13. Limitation of Rights
(a) No Right to Continue as a Director. Neither the
Plan, nor the granting of an option nor any other action
taken pursuant to the Plan, shall constitute, or be evidence
of, any agreement or understanding, express or implied, that
the Company will retain a director for any period of time,
or at any particular rate of compensation.
(b) No Shareholder Rights for Options. An optionee
shall have no rights as a shareholder with respect to the
shares covered by options until the date of the issuance to
such optionee of a stock certificate therefor, and no
adjustment will be made for dividends or other rights for
which the record date is prior to the date such certificate
is issued.
14. Adjustments to Common Stock. If there shall be
any change in Common Stock through merger, consolidation,
reorganization, recapitalization, stock dividend (of
whatever amount), stock split or other changes in the
corporate structure, appropriate adjustments to the Plan and
outstanding options shall be made. In the event of any such
changes, adjustments shall include, where appropriate,
changes in the aggregate number of shares subject to the
Plan, the number of shares subject to outstanding options
and the option exercise prices thereof in order to prevent
dilution or enlargement of option rights.
15. Effective Date of the Plan. The Plan shall take
effect immediately upon its approval by the affirmative vote
of the majority of the directors of the Company at a duly
held meeting of the Board of Directors.
16. Time for Granting Options. Unless the Plan shall
have been terminated as provided in Section 17 hereof, the
Plan shall terminate upon the expiration of 10 years from
the date upon which it takes effect as provided in Section
15 hereof. No option may be granted after such termination,
but termination of the Plan shall not, without the consent
of the optionee, alter or impair any rights or obligations
under any option theretofore granted.
17. Amendment of the Plan. The Board of Directors may
amend the Plan in any respect whatsoever; provided however,
that the Board of Directors shall not amend the Plan in a
manner that adversely affects any rights of any holder of
any option heretofore granted under the Plan without the
consent of the holder of the option. Notwithstanding the
foregoing, only the Board of Directors has the authority to
amend the Plan to increase the number of shares subject
thereto or to terminate the Plan.
18. Governing Law. The Plan and all determinations
made and actions taken pursuant hereto shall be governed by
the law of the State of Minnesota and construed accordingly.
Exhibit 10.j
METRIS COMPANIES INC.
ANNUAL INCENTIVE BONUS PLAN
DESIGNATED CORPORATE OFFICERS
1. Definitions. When the following terms are used herein with
initial capital letters, they shall have the following meanings:
1.1. Base Pay - a specific dollar amount identified in
schedule X.
1.2. Compensation Committee - a committee comprised solely
of two or more "outside directors" of Metris Companies Inc.
which satisfies the requirements of Section 162(m) of the
Code.
1.2. Code - the Internal Revenue Code of 1986, as it may be
amended from time to time, and any proposed, temporary or
final Treasury Regulations promulgated thereunder.
1.3. Company - Metris Companies Inc., a Delaware
corporation, and any of its affiliates that adopt this Plan.
1.4. Participant - the President and Chief Executive
Officer, and any of the Executive Vice Presidents or Senior
Vice Presidents of the Company who are designated by the
Personnel and Compensation Committee at any time ending on
or before the 90th day of each Performance Period as
Participants in this Plan.
1.5. Performance Period - the twelve consecutive month
period which coincides with the Company's fiscal year.
1.6. Targeted Bonus Percentage - the percentage identified
in Schedule Y.
1.7. Company Performance Factor - percentage identified in
Schedule Z The Company Performance Factor shall be directly
and specifically tied to one or more of the following
business criteria, determined with respect to either or both
of the Company or Fingerhut Companies, Inc., a Minnesota
corporation ("Fingerhut"): consolidated pre-tax earnings,
net revenues, net earnings, operating income, earnings
before interest and taxes, cash flow, return on equity,
return on net assets employed or earnings per share for the
applicable Performance Period, all as computed in accordance
with generally accepted accounting principles as in effect
from time to time and as applied by the Company or Fingerhut
in the preparation of its financial statements and subject
to such other special rules and conditions as the
Compensation Committee may establish at any time ending on
or before the 90th day of the applicable Performance Period.
Such Performance Factors shall constitute the sole business
criteria upon which the performance goals under this Plan
shall be based.
2. Administration.
2.1. Compensation Committee. The Plan shall be administered
by the Corporation Committee.
2.2. Determinations made prior to each performance Period.
At any time ending on or before the 90th day of each
Performance Period, they shall:
(a) designate Participants for that Performance
Period;
(b) determine each Participant's Base Pay for the
Performance Period by amending (in writing)
Schedule X;
(c) establish Targeted Bonus Percentages for the
Performance Period by amending (in writing)
Schedule Y;
(d) establish Company Performance Factors for the
Performance Period by amending (in writing)
Schedule Z.
2.3. Certification. Following the close of each Performance
Period and prior to payment of any bonus under the Plan, the
Compensation Committee must certify in writing that the
Company Performance Factor and all other factors upon which a
bonus is based have been attained.
2.4. Shareholder Approval. The material terms of this Plan
shall be disclosed to and approved by shareholders of the
Company in accordance with Section (162(m) of the Code. No
bonus shall be paid under this Plan unless such shareholder
approval has been obtained.
3. Bonus Payment.
3.1. Formula. Each Participant shall receive a bonus
payment for each Performance Period in an amount not greater
than:
(a) the Participant's Base Pay for the
Performance Period, multiplied by.
(b) the Participant's Targeted Bonus Percentage
for the Performance Period multiplied by .
(c) the Participant's Company Performance Factor
for the Performance Period.
3.2. Limitations.
(a) No payment if Performance Factor not
Achieved. In no event shall any Participant
receive a bonus payment hereunder if the
Performance Factor and all other factors on which
the bonus payment is based is not achieved during
the Performance Period.
(b) No payment in excess of preestablished
amount. No Participant shall receive a payment
under this Plan for any Performance Period in
excess of $2 million.
(c) Compensation Committee may reduce bonus
payment. The Compensation Committee retains sole
discretion to reduce the amount of or eliminate
any bonus otherwise payable under this Plan.
4. Benefit Payments.
4.1. Time and Form of Payments. Subject to any deferred
compensation election pursuant to any such plans of the
Company, benefits shall be paid to the Participant in one or more
cash payments as soon as determined by the Compensation
Committee after it has certified that the Company Performance
Factor and all other factors upon which the bonus payment for the
Participant is based have been attained.
4.2. Nontransferability. Participants and beneficiaries
shall not have the right to assign, encumber or otherwise
anticipate the payments to be made under this Plan, and the
benefits provided hereunder shall not be subject to seizure for
payment of any debts or judgments against any Participant or
any beneficiary.
4.3. Tax Withholding. In order to comply with all
applicable federal or state income tax laws or regulations, the
Company may take such action as it deems appropriate to ensure
that all applicable federal or state payroll, withholding,
income or other taxes, which a re the sole and absolute
responsibility of a Participant, are withheld or collected from
such Participant.
5. Amendment and Termination. The Compensation Committee may
amend this Plan prospectively at any time and for any reason
deemed sufficient by it without notice to any person affected by
this Plan and may likewise terminate or curtail the benefits of
this Plan both with regard to persons expecting to receive
benefits hereunder in the future and persons already receiving
benefits at the time of such action.
6. Miscellaneous.
6.1. Effective Date. January 1, 1997.
6.2. Term of the Plan. Unless the Plan shall have been
discontinued or terminated, the Plan shall terminate on
December 31, 2002. No bonus shall be granted after the
termination of the Plan; provided, however, that a payment with
respect to a Performance Period which begins before such
termination may be made thereafter. In addition, the authority
of the Human Resources Committee to amend the Plan, shall
extend beyond the termination of the Plan.
6.3. Headings. Headings are given to the Sections and
subsections of the Plan solely as a convenience to facilitate
reference. Such headings shall not be deemed in any ways
material or relevant to the construction or interpretation of
the Plan or any provision thereof.
6.4. Applicability to Successors. This Plan shall be
binding upon and inure to the benefit of the Company and each
Participant, the successors and assigns of the Company, and the
beneficiaries, personal representatives and heirs of each
Participant. If the Company becomes a party to any merger,
consolidation or reorganization, this Plan shall remain in full
force and effect as an obligation of the Company or its
successors in interest.
6.5. Employment Rights and Other Benefit Programs. The
provisions of this Plan shall not give any Participant any
right to be retained in the employment of the Company. In the
absence of any specific agreement to the contrary, this Plan
shall not affect any right of the Company, or of any affiliate
of the Company, to terminate, with or without cause, the
participant's employment at any time. This Plan shall not
replace any contract of employment, whether oral or written,
between the Company and any Participant, but shall be considered
a supplement thereto. This Plan is in addition to, and not in
lieu of, any other employee benefit plan or program in which
any Participant may be or become eligible to participate by
reason of employment with the Company. Receipt of benefits
hereunder shall have such effect on contributions to and
benefits under such other plans or programs as the provisions of
each such other plan or program may specify.
6.6. No Trust Fund Created. This Plan shall not create or
be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any affiliate and a
Participant or any other person. To the extent that any person
acquires a right to receive payments from the Company or any
affiliate pursuant to this Plan, such right shall be no greater
than the right of any unsecured general creditor of the Company
or of any affiliate.
6.7. Governing Law. The validity, construction and effect
of the Plan or any bonus payable under the Plan shall be
determined in accordance with the laws of the State of Minnesota.
6.8. Severability. If any provision of the Plan is or
becomes or is deemed to be invalid, illegal or unenforceable
in any jurisdiction such provision shall be construed or deemed
amended to conform to applicable laws, or if it cannot be so
construed or deemed amended without, in the determination of the
Compensation Committee, materially altering the purpose or intent
of the Plan, such provision shall be stricken as to such
jurisdiction, and the remainder of the Plan shall remain in
full force and effect.
6.9. Qualified Performance-Based Compensation. All of the
terms and conditions of the Plan shall be interpreted in such a
fashion as to qualify all compensation paid hereunder as
qualified performance-based compensation within the meaning of
Section 162(m) of the Code.
METRIS COMPANIES INC.
SCHEDULE X
BASE PAY FOR PERFORMANCE PERIOD
BEGINNING ON JANUARY 1, __
ENDING ON DECEMBER 31,
Job Title (or name) Base Pay
President and Chief Executive Officer Actual paid salary
for calendar year that
most closely coincides with
Company fiscal
year but not in excess of
$__________
METRIS COMPANIES INC.
SCHEDULE Y
TARGETED BONUS PERCENTAGE FOR PERFORMANCE PERIOD
BEGINNING ON JANUARY 1, ____
ENDING ON DECEMBER 31,
Job Title Targeted Bonus Percentage
President and Chief Executive Officer ____% of Base Pay
METRIS COMPANIES INC.
SCHEDULE Z
COMPANY PERFORMANCE TARGETS FOR PERFORMANCE PERIOD
BEGINNING ON JANUARY 1,
ENDING ON DECEMBER 31,
CO-BRAND CREDIT CARD AGREEMENT
This Agreement is entered into as of the 31st day of October,
1996, by and among Direct Merchants Credit Card Bank, National
Association, a national banking association, with its offices at
1455 West 2200 South, Salt Lake City, Utah 84119 ("Direct
Merchants Bank"), Metris Direct, Inc., a Minnesota corporation,
with offices at 600 South Highway 169, Suite 1800, St. Louis Park,
Minnesota 55426 ("Metris") and Fingerhut Corporation, a Minnesota
corporation with offices at 4400 Baker Road, Minnetonka, MN 55343
("Fingerhut").
WITNESSETH:
WHEREAS, Direct Merchants Bank, Metris, and Fingerhut desire
to market to Fingerhut customers the Fingerhut Card, as defined
herein; and
WHEREAS, Fingerhut desires that Direct Merchants Bank be the
exclusive issuer of the Fingerhut Card and acknowledges that
Direct Merchants Bank has designated Metris as the exclusive
service provider of marketing, mail segmentation and such other
services as the parties may mutually agree for the Fingerhut Card;
NOW, THEREFORE, in consideration of the mutual promises
contained herein, the parties agree as follows:
DEFINITIONS
The following terms, as used herein shall have the following
meanings whether used in the singular or plural:
"Account" means an open-end line of credit (secured or unsecured),
owned by Direct Merchants Bank (including the receivable generated
thereunder), accessed through the use of the Fingerhut Card or
other access device and used by a Cardholder for personal, family
and household purposes. Account does not mean open or closed end
credit accessed by a credit card or other access device which is a
private label credit card, issued by or on behalf of Fingerhut or
any Affiliate of Fingerhut.
"Account Booked" means an Account that meets Direct Merchants
Bank's underwriting criteria for approval and a credit line is
opened for the Cardholder greater than Direct Merchants Bank's
minimum credit line in effect at time of approval. Account Booked
does not mean an Account which is determined to be fraudulent or
lost/stolen.
"Affiliate" means (i) with respect to Fingerhut any person or
entity directly or indirectly (including through any subsidiary)
owned or controlled by Fingerhut or under common ownership or
control with Fingerhut; (other than Metris and any person or
entity directly or indirectly owned or controlled by Metris) and
(ii) with respect to Direct Merchants Bank and Metris, any person
or entity directly or indirectly (including through any
subsidiary) owned or controlled by Direct Merchants Bank or
Metris.
"Affinity Participant" means a non-Party business that offers
special products or services directly to Cardholder in accordance
with terms agreed upon by Direct Merchants Bank and Metris.
"Agreement" means this Agreement including all Exhibits, as
amended from time to time, identified in this Agreement.
"Direct Merchants Bank" means Direct Merchants Credit Card Bank,
National Association, a national banking association and any
Affiliate of Direct Merchants Bank to which this Agreement is
assigned.
"Cardholder" means a Prospect who accepts a Fingerhut Card, and
for whom an Account is established.
"Cardholder Account Agreement" means the agreement between Direct
Merchants Bank and each Cardholder.
"Cardholder List" means a list of Cardholders.
"Card Enhancement Products" means one or more of the following
products: auto clubs, account protection and debt waiver products,
credit life insurance, credit card registration, legal services,
shopping services, dining clubs, bonus or rebate programs, retail
memberships, any other credit card value program developed by
Metris or Direct Merchants Bank, and any other products offered by
Metris or Direct Merchants Bank for which the Fingerhut Card (or
its successor product) is the primary billing or access device and
which are offered in conjunction with the Fingerhut Card.
"Direct Competitor of Fingerhut" means any unaffiliated third
party that sells merchandise through direct mail and/or
inbound/outbound telemarketing solicitations.
"Metris" means Metris and any Metris Affiliate to which this
Agreement is assigned or which otherwise become Party to this
Agreement.
"Fingerhut Card" means a general purpose credit card, plate or
other access device (including cash advance checks) issued by
Direct Merchants Bank that may be used from time to time to obtain
credit on the Account and that bears the name and logo of VISA,
MasterCard or other member association as well as the name and
logo of Fingerhut.
"Initial Term" has the meaning ascribed in Article 7.
"Net Purchases" means purchases of goods or services (including
cash advances) made by Cardholders or their authorized users
through the use of Fingerhut Cards (whether or not the purchases
are effected in person or via telephone, mail or other means),
less merchant credits, and reflecting appropriate purchase
adjustments posted to the Accounts.
"Party" or "Parties" means Direct Merchants Bank and/or Fingerhut
and/or Metris, and/or if the context so requires, any Affiliate
which is an assignee of the parties.
"Pre-Screened Prospect List" means a list of Prospects who have
been prescreened by Direct Merchants Bank for credit worthiness,
are approved by Direct Merchants Bank for solicitation, and will
be solicited by Direct Merchants Bank for the Fingerhut Card.
"Prospect" means an individual who may be solicited for or may
seek a Fingerhut Card.
"Renewal Term" has the meaning ascribed in Article 7.
"Securitization" means any transaction involving the pooling and
sale of the receivable and other assets arising under or through
the Accounts to an entity which may issue securities and fund such
purchases. The term is to be construed broadly to include sales
to a trust which issues certificates or sales to corporations or
other institutions which may issue notes or commercial paper to
fund such purchases.
"Securitized Account" means all Accounts whose receivable or
other assets have been transferred in a Securitization.
ARTICLE 1 - CARD PROGRAM
1.1 General.
(a) Direct Merchants Bank and Fingerhut will develop,
as provided in this Agreement, a credit card program whereby
Direct Merchants Bank will offer a Fingerhut Card. Direct
Merchants Bank will establish Accounts and issue Fingerhut Cards,
and Direct Merchants Bank or Metris will administer such Accounts.
Direct Merchants Bank, Metris and Fingerhut will also develop
mutually agreeable lists of Prospects for the Fingerhut Card.
Fingerhut reserves the right to develop a Cardholder "rewards" or
"incentive" program for the Fingerhut Card. At such time, the
Parties agree to negotiate in good faith to develop such a program
to enhance the value of the Fingerhut Card and the terms and
conditions to fund such program.
(b) Notwithstanding anything else in this Agreement,
Fingerhut acknowledges that Direct Merchants Bank shall be solely
responsible for credit policy, including Account origination
credit criteria, credit approval, administration, billing,
collections, credit terms (including interest rate) and any other
areas of responsibility which applicable laws, regulations or
other member association rules require to be the sole
responsibility of Direct Merchants Bank. Subject to the
conditions set forth in Section 4.3(b), Fingerhut further agrees
that Direct Merchants Bank may enter into any contract, agreement
or other arrangement with a Direct Competitor to issue, process or
manage a co-brand, affinity or other jointly branded credit card
or product.
1.2 Responsibilities
(a) List Development. The Parties shall, at Direct
Merchants Bank's expense, prepare lists of Prospects to be
solicited for the Fingerhut Card. Fingerhut will provide Direct
Merchants Bank with lists of Prospects from its lists of customers
along with certain attributes regarding those customers.
Fingerhut will not provide any customer information that in its
sole discretion would cause it to become a consumer reporting
agency.
(b) Solicitations/Applications. Subject to the review
process in Section 1.2(k), Metris and Direct Merchants Bank will
each, at their own expense, develop and distribute credit
solicitations/applications for the Fingerhut Card. Subject to
Fingerhut's prior written consent, such consent not to be
unreasonably withheld, Direct Merchants Bank may use Fingerhut's
or other advertising media (including direct mail, catalog, and
inbound/outbound telemarketing or other media) to solicit
Prospects. Any such solicitations shall be upon terms and
conditions mutually agreed to by the Parties.
(c) Marketing/Response Fulfillment. Metris and Direct
Merchants Bank agree to assume responsibility for all costs and
expenses of all marketing, advertising (including mass media), and
other marketing costs (including mailing of Fingerhut Cards, card
carriers and production of Cardholder Account Agreements) for
application fulfillment (including postage), associated with the
marketing of the Fingerhut Card.
(d) Account Origination. Direct Merchants Bank agrees
to open an Account for each Prospect meeting its credit criteria.
Direct Merchants Bank, as owner and issuer of the Account, will
have sole discretion in developing and implementing credit
criteria for establishing an Account, including but not limited to
all on-going credit decisions for credit line increases or
decreases, overlimits, point-of-sale authorizations, Account
closures, and re-issuance of Fingerhut Cards.
(e) Pre-Screening. Subject to the credit and other
criteria of Direct Merchants Bank, the Parties will develop a Pre-
Screened Prospect List from the lists of Prospects. The Parties
agree that the Prospect List provided shall be considered
Confidential Information as such term is defined in Section 4.1
(b) hereof and agree to maintain the confidentiality of such
Prospect list.
(f) Card Enhancement Products. Metris or Direct
Merchants Bank will develop, itself or through third parties, Card
Enhancement Products to offer Cardholders. Revenues from such Card
Enhancement Products will be for the sole benefit of Direct
Merchants Bank. Metris or Direct Merchants Bank will not offer a
Card Enhancement Product to Cardholders that is provided for the
benefit of or in association with a Direct Competitor of Fingerhut
without Fingerhut's prior written consent, (such consent to be
provided within ten (10) days of request). The Parties confirm
that Fingerhut may reasonably withhold such consent if an offer
may have an adverse effect on Fingerhut's business or its
competitive position relative to a Direct Competitor.
(g) Statement Messages. Fingerhut shall have the right
to use, without cost, the space allocable to marketing messages on
Direct Merchants Bank's periodic billing statements to Cardholders
for up to four of the twelve periodic billing statements sent to
Cardholders within a calendar year but not more than once per
quarter. Direct Merchants Bank shall have the right to use the
remaining space except such space will not be used to offer
products of Direct Competitors of Fingerhut. The total space
allocable to marketing messages shall exclude space reasonably
required by Direct Merchants Bank to communicate credit
information to Cardholders, including but not limited to changes
in terms, annual fees, over-the-credit-limit and late payment
information and any information required by law or regulation.
(h) Inserts. Fingerhut, at no cost, shall have the
right to place inserts in Cardholder periodic billing envelopes,
up to the standard postage weight limitations for statement
mailings with a maximum of up to six inserts per calendar year not
to exceed two per quarter or one per month. Direct Merchants Bank
shall have the right to use other statement inserts (which
includes member association inserts such as MasterValues or other
similar member news items) for products and information, or if
applicable, for Affinity Participants (subject to the limitations
in Section 1.2(j)). Notwithstanding the foregoing, Direct
Merchants Bank agrees not to mail statement inserts to Cardholders
that offer products or services of a Direct Competitor of
Fingerhut except for retailers or catalogues in Master Values or
other similar member news items. Requests by Fingerhut for
additional space will be reviewed in good faith by Direct
Merchants Bank. Notwithstanding, Direct Merchants Bank reserves
the right to decrease the number of inserts Fingerhut is allowed,
as provided herein, in the event applicable laws, rules or
regulations require Direct Merchants Bank to communicate
Cardholder changes via a statement insert. In the event of such
insert decrease, Fingerhut's inserts will be inserted in the next
statement mailing so as not to reduce Fingerhut's total statement
insert to less than six.
(i) "Bangtails". Fingerhut or Direct Merchants Bank,
subject to Direct Merchants Bank's discretion, may use space on
billing envelopes which is commonly referred to as the "bangtail";
provided, however, that such user pays for developing the
"bangtail", and for the corresponding remittance envelopes as well
as any other costs incurred or incident to this process including,
but not limited to, the cost of transmitting cardholder orders
from the "bangtail".
(j) Engagement of Affinity Participants. Subject to
Fingerhut's prior written approval, not to be unreasonably
withheld, Direct Merchants Bank or Metris may enter into contracts
providing for the participation of Affinity Participants to
enhance the value of the Fingerhut Card. Administration of the
relationship with Affinity Participants shall be the sole
responsibility of Direct Merchants Bank or Metris. Except for
Affinity Participants permitted by Fingerhut prior to execution of
this Agreement, Direct Merchants Bank or Metris will not engage
Affinity Participants to market to the Cardholder which are Direct
Competitors of Fingerhut. Metris or Direct Merchants Bank may
request Fingerhut's prior written consent to offer such product of
an Affinity Participant to a Cardholder. The Parties confirm that
Fingerhut may reasonably withhold its consent for purposes of this
paragraph (j), if an offer or contract with an Affinity
Participant may have an adverse effect on the value or usefulness
of the Fingerhut name or reputation or on Fingerhut's business or
prospects or on its competitive position relative to a Direct
Competitor and the Fingerhut Card.
Direct Merchants Bank and Metris agree that they will
not enter into any agreements with Affinity Participants which (i)
conflict with the terms of this Agreement, or (ii) impose any
additional obligations on any other Party without such other
Party's prior written consent. In addition, neither Direct
Merchants Bank, Metris nor Fingerhut will be liable for any
obligations assumed by any other Party with Affinity Participants
in any agreement other than as contemplated by the preceding
sentence.
(k) Review of Solicitation, Advertising and Marketing
Materials. All solicitation, advertising and marketing materials
(including statement inserts, "bangtails," and all other
communications to Cardholders) for the Fingerhut Card shall be
reviewed by the Parties for legal, regulatory compliance as well
as compliance with direct mail requirements. Any Party hereto
may withhold approval of any solicitation, advertisement or
marketing material which such Party, in its reasonable opinion,
considers a violation of any law, regulation or requirement
applicable to the Party or in its reasonable opinion would have an
adverse impact on the Fingerhut Card. Direct Merchants Bank shall
be solely responsible for ensuring compliance with legal and
regulatory requirements applicable to the Fingerhut Card of all
solicitation, advertising and marketing materials approved by
Direct Merchants Bank. Fingerhut shall be solely responsible for
ensuring compliance with legal and regulatory requirements
applicable to Fingerhut of all solicitation, advertising and
marketing materials approved by Fingerhut. Each Party agrees to
provide comments on or approval of solicitation, advertising and
marketing materials within 5 business days after receipt. All
solicitation, advertising or other marketing material shall
identify Direct Merchants Bank as the issuer of the Fingerhut
Card.
(l) Fingerhut agrees that Direct Merchants Bank, or
Metris may solicit, each at its own expense, the Cardholder List
for products offered by Direct Merchants Bank, or Metris. Direct
Merchants Bank agrees that Fingerhut may solicit at its expense
the Cardholder List for merchandise offered by Fingerhut. The
Cardholder List is subject to the confidentiality requirements of
Section 4.1(b). Direct Merchants Bank and Metris agree that,
except as otherwise expressly provided in this Agreement or
otherwise agreed to in writing by the Parties, Fingerhut shall
have the exclusive right to offer merchandise sold by it to the
Cardholder List.
ARTICLE 2 - ADMINISTRATION
2.1 Use of Fingerhut Name and Logo. During the term of this
Agreement, Direct Merchants Bank shall have the nonexclusive right
to use the name "Fingerhut" and the "Fingerhut" logo which
Fingerhut has provided to Direct Merchants Bank for the limited
purposes described herein on the Fingerhut Card Cardholder
statements, Cardholder customer service letters and marketing
materials mailed to Cardholder, and for other purposes approved in
advance by Fingerhut in connection with the Fingerhut Card.
Fingerhut reserves the right to prohibit use of its name and logo
on collection letters or other collection communication from
Direct Merchants Bank.
2.2 Right to Access. Each Party will (i) permit the other
Party or Parties, as applicable and its authorized representatives
or regulatory auditors reasonable access, during normal business
hours, to audit the books and records of the other Party as they
relate to compliance of the other Party with the terms and
conditions of this Agreement, and (ii) cause its personnel to
provide the other Party with reasonable assistance in its
performance of such audit and investigation; provided, however,
that such audit and investigation will be conducted by such Party
in a manner which does not unreasonably interfere with the other
Party's normal operations; and provided further that the other
Party will not be required to divulge any records, including
certain customer information, to the extent prohibited by
applicable statutes or regulations or subject to attorney client
or other privilege.
2.3 Compliance With Laws. Direct Merchants Bank and Metris,
in accomplishing their duties under this Agreement, will, in
relation to the Cardholder Account Agreements and Accounts, comply
in all material respects with all applicable federal and state
laws, rules and regulations including (i) the Federal Consumer
Credit Protection Act and its implementing regulations and (ii)
all regulations of VISA, MasterCard or other member association.
2.4 Securitization. Fingerhut agrees Direct Merchants Bank
shall have the right to (i) take any action required consistent
with industry practices to effect a Securitization of an Account,
(ii) engage in hedging transactions consistent with industry
practices including but not limited to interest rate swaps or
interest caps with respect to revenue anticipated or received from
such Securitized Account, and (iii) determine the terms,
conditions and provisions of any documentation, arrangements or
agreements relating to such Securitization and hedging
transactions.
ARTICLE 3 - COMPENSATION
3.1 Compensation. Direct Merchants Bank will pay to
Fingerhut for each Account Booked the fees as specified in Exhibit
A.
3.2 Settlement of Payment. Direct Merchants Bank will pay
Fingerhut and Fingerhut will pay Direct Merchants Bank or Metris,
as applicable, in immediately available funds and not later than
the thirtieth (30th) business day following the end of each
calendar month, all amounts due and payable to the other pursuant
to this Agreement and Exhibit A.
ARTICLE 4 - CERTAIN COVENANTS
Direct Merchants Bank, Metris and Fingerhut each covenant and
agree that:
4.1 Cooperation.
(a) Cooperation. Each Party will cooperate fully in
furnishing any information or performing any action reasonably
requested by the other Party or Parties, as applicable, which
information or action is necessary to the timely, and successful
consummation of the transactions contemplated by this Agreement.
4.2 Confidentiality.
(a) Confidentiality. Proprietary information furnished
prior to and after execution of this Agreement by one Party to the
other in connection with this Agreement and the transactions
contemplated hereby will be kept in confidence by such other
Party, including its Affiliates, in accordance with its policies
for maintaining the confidence of its own information of similar
content. The term "Confidential Information" shall mean and
include (i) all trade secrets and other confidential business
information learned in the course of performance by either Party
of its obligations hereunder, (ii) the Fingerhut credit score and
any other information provided by Fingerhut with respect to
Prospects or data which is disclosed by a Party to the other Party
under or in contemplation of this Agreement. "Confidential
Information" may be either the property of the disclosing Party or
information provided to the disclosing Party by a corporate
Affiliate of the disclosing Party or by a third party.
(b) Notwithstanding the foregoing, the term
"Confidential Information shall not include information which (i)
is already known to such other Party when received, (ii)
thereafter becomes generally obtainable by a Party other than as a
result of an unauthorized disclosure by the Party taking advantage
of this clause, (iii) is required by law, regulation or court
order to be disclosed by such Party, provided that in the case of
this clause, prior notice of such disclosure has been given to the
Party which furnished such information, when legally permissible,
and that such other Party which is required to make the disclosure
uses its best efforts to provide sufficient notice to permit the
Party which furnished such information to take legal action to
prevent the disclosure, or (iv) reasonably necessary, in the
opinion of counsel, to be disclosed in the context of a legal
proceeding or regulatory investigation provided that prior notice
shall be given to the party which furnished the information. Any
Party may disclose information to VISA or MasterCard or other
member association pursuant to their respective requirements or to
either Party's respective Affiliates, auditors, counsel rating
agencies, or regulators.
(c) In addition, notwithstanding anything contained in
this Section 4.2 to the contrary, Direct Merchants Bank or Metris
may (i) with an appropriate confidentiality agreement in place,
disclose such information relating to this Agreement and the
transactions contemplated hereby as may be reasonably necessary to
Affinity Participants, and (ii) with an appropriate
confidentiality agreement in place, disclose such information to
others with a reasonable business need; provided, however, that
neither Direct Merchants Bank or Metris will disclose any of
Fingerhut's confidential information without Fingerhut's prior
written consent. Direct Merchants Bank, Metris and Fingerhut
shall not be obligated to disclose to any of the others any
information relating to Cardholders which is required by
applicable law to be kept confidential or is otherwise prohibited
from disclosure by this Agreement, or would cause either party, in
its reasonable interpretation, to be deemed a credit reporting
agency as defined under applicable state or federal law. This
Section 4.2 shall survive any termination of this Agreement for
five (5) years.
4.3 Covenants.
(a) Covenant of Fingerhut. Fingerhut agrees that,
during the term of this Agreement, including any renewals,
Fingerhut will not own (directly or indirectly) the credit card
(secured or unsecured) account or receivables on an account,
issue, process, manage or enter into an agreement with a third
party to own (directly or indirectly), issue, process, or manage
another Fingerhut Card (including a credit or charge card, or
travel and entertainment card or other general purpose credit
card). Direct Merchants Bank and Metris agree Fingerhut or any of
its Affiliates may own, issue, manage or process itself a private
label open or closed end credit card which is not (x) a credit
card bearing the same logo as the Fingerhut Card, or (y) processed
for use as a general purpose credit card by or bearing the name
and logo of a member association as a general purpose credit card.
(b) Covenant of Direct Merchants Bank. Direct
Merchants Bank agrees that during the term of this Agreement,
including any renewals, Direct Merchants Bank will not solicit the
Cardholder List to offer a co-branded, affinity or jointly branded
credit card or product of a Direct Competitor.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
5.1 Representation and Warranties of Direct Merchants Bank.
Direct Merchants Bank hereby represents and warrants to Fingerhut
as follows:
(a) Organization. Direct Merchants Bank is a national
banking association duly organized and validly existing under the
laws of the United States.
(b) Capacity; Authority; Validity. Direct Merchants
Bank has all necessary corporate power and authority to enter into
this Agreement and to perform or cause to be performed all of its
obligations under this Agreement. This Agreement and the
consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action of
Direct Merchants Bank, and this Agreement has been duly executed
and delivered by Direct Merchants Bank and constitutes the valid
and binding obligation of Direct Merchants Bank, enforceable in
accordance with its terms (except as such enforcement may be
limited by bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally
and by general equity principles).
(c) Conflicts; Defaults. Neither the execution and
delivery of this Agreement by Direct Merchants Bank, nor the
consummation of the transactions contemplated hereby by Direct
Merchants Bank, will (i) result in a breach of, constitute a
material default under, or accelerate the performance required by
the terms of any contract, instrument or commitment to which
Direct Merchants Bank is a party or by which Direct Merchants Bank
is bound, (ii) violate the charter or by-laws of Direct Merchants
Bank, or any other equivalent organizational document of Direct
Merchants Bank, (iii) require any consent or approval under any
judgment, order, decree, permit or license to which Direct
Merchants Bank is a party or by which Direct Merchants Bank is
bound, or (iv) require the consent or approval of any governmental
authority or other party to any contract, instrument or commitment
to which Direct Merchants Bank is a party or by which it is bound,
except as have been obtained or as contemplated by the Parties
with respect to MasterCard, VISA, or other member associations.
5.2 Representation and Warranties of Fingerhut. Fingerhut
hereby represents and warrants to Direct Merchants Bank as
follows:
(a) Organization. Fingerhut is a business corporation
duly organized, validly existing and in good standing under the
laws of the State of Minnesota.
(b) Capacity; Authority; Validity. Fingerhut has all
necessary corporate power and authority to enter into this
Agreement and to perform all of its obligations under this
Agreement. This Agreement and the consummation by Fingerhut of
the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action of Fingerhut, and
this Agreement has been duly executed and delivered by Fingerhut
and constitutes the valid and binding obligation of Fingerhut,
enforceable in accordance with its terms (except as such
enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and by general equity principles).
(c) Conflicts; Defaults. Neither the execution and
delivery of this Agreement. by Fingerhut nor the consummation of
the transactions contemplated hereby by Fingerhut will (i) result
in a material breach of, constitute a default under, or accelerate
the performance required by the terms of any contract, instrument
or commitment to which Fingerhut is a party or by which Fingerhut
is bound, (ii) violate the charter or by-laws of Fingerhut, or any
other equivalent organizational document of Fingerhut, (iii)
require any consent or approval under any judgment, order, decree,
permit or license to which Fingerhut is a party or by which
Fingerhut is bound, or (iv) require the consent or approval of any
other party to any contract, instrument or commitment to which
Fingerhut is a party or by which it is bound.
5.3 Representation and Warranties of Metris. Metris hereby
represents and warrants to Direct Merchants Bank as follows:
(a) Organization. Metris is a business corporation
duly organized, validly existing and in good standing under the
laws of the State of Delaware.
(b) Capacity; Authority; Validity. Metris has all
necessary corporate power and authority to enter into this
Agreement and to perform all of its obligations under this
Agreement. This Agreement and the consummation by Metris of the
transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action of Metris, and this
Agreement has been duly executed and delivered by Metris and
constitutes the valid and binding obligation Metris, enforceable
in accordance with its terms (except as such enforcement may be
limited by bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights, generally
and by general equity principles).
(c) Conflicts; Defaults. Neither the execution and
delivery of this Agreement. by Metris nor the consummation of the
transactions contemplated hereby by Metris will (i) result in a
breach of, constitute a material default under, or accelerate the
performance required by the terms of any contract, instrument or
commitment to which Metris is a party or by which Metris is bound,
(ii) violate the charter or by-laws of Metris, or any other
equivalent organizational document of Metris, (iii) require any
consent or approval under any judgment, order, decree, permit or
license to which Metris is a party or by which Metris is bound, or
(iv) require the consent or approval of any other party to any
contract, instrument or commitment to which Metris is a party or
by which it is bound.
ARTICLE 6 - INDEMNIFICATION
6.1 Indemnification Obligations
(a) By Direct Merchants Bank. Direct Merchants Bank
shall be liable to and shall defend, indemnify and hold harmless
Fingerhut and its Affiliates, and their respective officers,
directors, employees and permitted assigns harmless from and
against any and all Losses (as hereinafter defined) incurred by
reason of or related to (i) Direct Merchants Bank's breach of any
representation, warranty or covenant hereunder, (ii) Direct
Merchants Bank's failure to perform its obligations hereunder, and
(iii) any claim by a Cardholder or an Affinity Participant based
on the act or omission of Direct Merchants Bank with respect to
the Fingerhut Card, except that Direct Merchants Bank shall not be
liable for any claim of a Cardholder or an Affinity Participant
caused by the act or omission of Fingerhut or a Fingerhut
Affiliate.
(b) By Fingerhut. Fingerhut shall be liable to and
shall defend, indemnify and hold harmless Direct Merchants Bank,
Metris and their Affiliates, and their respective officers,
directors, employees and permitted assigns harmless from and
against any and all Losses (as hereinafter defined) incurred by
reason of or related to (i) Fingerhut's breach of any
representations, warranty or covenant hereunder, and (ii) failure
to perform its obligations hereunder; except that Fingerhut shall
not be liable for any claim of a Cardholder or an Affinity
Participant caused by the act or omission of Direct Merchants
Bank, Metris, or their Affiliates.
(c) Metris. Metris shall be liable to and shall
defend, indemnify and hold harmless Direct Merchants Bank,
Fingerhut, and their Affiliates, and their respective officers,
directors, employees and permitted assigns harmless from and
against any and all Losses (as hereinafter defined) incurred by
reason of or related to (i) Metris' breach of any representations,
warranty or covenant hereunder, and (ii) failure to perform its
obligations hereunder; except any claim of a Cardholder or an
Affinity Participant caused by the act or omission of Direct
Merchants Bank.
(d) "Losses" Defined. For purpose of this Section 6.1,
the term "Losses" shall mean any liability, damages, costs, losses
and expenses, including attorneys' fees, disbursements and court
costs, reasonably incurred by Direct Merchants Bank, Metris or
Fingerhut in connection with any threatened, pending, or
adjudicated claim, demands , action, suit or proceeding (whether
civil, criminal, administrative or investigated by an unaffiliated
third party without regard to whether or not such Losses would be
deemed material under this Agreement.
6.2 Procedures.
(a) Notice of Claims. The Parties agree that in case
any claim is made, or any suit or action is filed or served
(whichever is the earlier) which, if not corrected, may give rise
to a right of indemnification for a Party hereunder ("Indemnified
Party") from the other Party ("Indemnifying Party"), the
Indemnified Party will give notice to the Indemnifying Party as
promptly as practicable after the receipt by the Indemnified Party
of such notice or knowledge of such claim, suit, or action. On a
best efforts basis, notice to the Indemnifying Party shall be
given no later than fifteen days after receipt by the Indemnified
Party in the event a suit or action has commenced or thirty days
under all other circumstances; provided, however, that the failure
to give prompt notice shall not relieve an Indemnifying Party of
its obligation to indemnify except to the extent the Indemnifying
Party is materially prejudiced by such failure. The Indemnified
Party shall make available to the Indemnifying Party and its
counsel and accountants at reasonable times and for reasonable
periods, during normal business hours, all books and records of
the Indemnified Party relating to any such possible claim for
indemnification, and each Party will render to the other such
assistance as it may reasonably require of the other in order to
ensure prompt and adequate defense of any suit, claim or
proceeding based upon a statement of facts which may give rise to
a right of indemnification hereunder.
(b) Selection of Counsel. The Indemnifying Party shall
have the right to defend, compromise and settle any suit, claim or
proceeding in the name of the Indemnified Party to the extent that
the Indemnifying Party may be liable to the Indemnified Party
under Section 6.1 above in connection therewith; provided,
however, that the Indemnifying Party shall not compromise or
settle a suit, claim or proceeding unless it assumes the
obligation to indemnify for all Losses relating thereto. In the
event two of the parties to this Agreement must indemnify the
third, the parties agree the two Indemnifying Parties must agree
to select one to be the Indemnifying Party to the third
Indemnified Party and the third Indemnified Party shall look to
one party to this Agreement for indemnification. The Indemnifying
Party shall notify the Indemnified Party within ten days of having
been notified pursuant to Section 6.2(a) of this Agreement if the
Indemnifying Party elects to assume the defense of any such claim,
suit or action and employ counsel in a reasonable exercise of its
discretion. The Indemnified Party shall have the right to
participate in such defense compromise or settlement through
counsel chosen by it, but the fees and expenses of such counsel
shall be at the Indemnified Party's expense, unless the
Indemnifying Party shall not have employed counsel to take charge
of the defense thereof.
(c) Settlement of Claims. The Indemnified Party may at
any time notify the Indemnifying Party of its intention to settle
or compromise any claim, suit or action against the Indemnified
Party in respect of which indemnification payments may be sought
from the Indemnifying Party hereunder, but shall not settle or
compromise any matter for which indemnification may be sought
without the consent of the Indemnifying Party. Any settlement or
compromise of any claim, suit or action in accordance with the
preceding sentence, or any final judgment or decree entered on or
in any claim, suit or action which the Indemnifying Party did not
assume the defense of in accordance herewith, shall be deemed to
have been consented to by, and shall be binding upon, the
Indemnifying Party as fully as if the Indemnifying Party had
assumed the defense thereof and a final judgment or decree had
been entered in such suit or action, or with regard to such claim,
by a court of competent jurisdiction for the amount of such
settlement, compromise, judgment or decree.
(d) Subrogation. The Indemnified Party shall be
subrogated to any claims or rights of the Indemnifying Party as
against any other persons with respect to any amount paid by the
Indemnified Party under this Article 6. The Indemnified Party
shall cooperate with the Indemnifying Party, at the Indemnifying
Party's expense, in the assertion by the Indemnifying Party of any
such claim against such other persons.
(e) Indemnification Payments . Amounts owing under this
Article 6 shall be paid promptly upon written demand for
indemnification containing in reasonable detail the facts giving
rise to such liability; provided, however, if the Indemnifying
Party notifies the Indemnified Party within thirty (30) days of
receipt of such demand that it disputes its obligation to
indemnify and the Parties are not otherwise able to reach
agreement, the controversy shall be settled by final order entered
by a court of competent jurisdiction.
6.3 Survival of Indemnification. The provisions of this
Article 6 shall expressly survive any termination of this
Agreement under Article 7 below or otherwise for a period of ten
(10) years.
ARTICLE 7 - TERM AND TERMINATION
7.1 Term. This Agreement will continue until July 18, 2003
(the "Initial Term") . Thereafter, this Agreement will
automatically renew for one term of three (3) years ("Renewal
Term"), unless one Party provides written notice to the other
Party not less than twelve (12) months prior to the end of the
Initial Term or any Subsequent Renewal Term of its intent to
terminate this Agreement. Six (6) months prior to the conclusion
of the Renewal Term, the Parties may extend this Agreement in
three (3) year increments upon mutual agreement. In the event a
replacement agreement has not been agreed upon by the Parties at
the end of the Renewal Term or any other mutually agreed upon
extension, the Parties shall continue to cooperate and to carry
out their respective responsibilities and duties under the terms
of this Agreement for up to eighteen (18) months beyond such
Renewal Term or other mutually agreed upon extension to facilitate
an orderly transition.
Notwithstanding anything contained in this Section 7.1
to the contrary, this Agreement may be terminated prior to the end
of the Initial Term or any Renewal Term upon the mutual written
agreement of the Parties. The termination of this Agreement
pursuant to this Article 7 will not terminate, affect or impair
any rights (including the right to commence a suit or claim for
breach of this Agreement), obligations or liabilities of either
Party hereto which may accrue prior to such termination or which,
under the terms of this Agreement, continue after such
termination.
7.2 Termination. Any Party may terminate this Agreement
reserving all other remedies and rights hereunder in whole or in
part and otherwise available in law or in equity, upon the
following conditions:
(a) Event of Default. Upon the occurrence of an Event
of Default, (as hereinafter defined) the non-defaulting Party may
terminate this Agreement by giving no less than 120 days prior
written notice of its intent to terminate. Such written notice
shall describe the Event of Default. If the defaulting Party
corrects the condition which resulted in the Event of Default
within 90 days from the date of delivery of the notice from the
other Party, this Agreement shall remain in full force and effect.
For purposes of this Section 7.2, the following events shall be
"Events of Default": (i) any Party materially defaults in the
performance of any of its duties or obligations under this
Agreement and continues after notice, (ii) a breach by a Party of
its material covenants, representations and warranties set forth
herein which are not remedied, (iii) Direct Merchants Bank loses
its membership in either VISA, MasterCard, or any other member
association and such loss of membership materially adversely
impacts Direct Merchants Bank's issuance of the Fingerhut Card,
(iv) any Party acts in a manner which causes significant harm to
the goodwill of the other and adversely impacts the Fingerhut
Card, and (v) Direct Merchants Bank sells the Accounts to a
third person; provided, however, it shall not be an Event of
Default if Direct Merchants Bank sells a Securitized Account or an
account for collection in the ordinary course of business, or any
other such sale of the Account which is necessary in the ordinary
course of business.
(b) Bankruptcy. A Party may, to the extent permitted
by law, terminate this Agreement at any time upon written notice
to the other in the event a petition in bankruptcy or for
reorganization or debt consolidation under the federal bankruptcy
laws or under any comparable law, or other similar state or
federal banking regulatory action related to bankruptcy, is filed
by or against the other Party and not dismissed within 90 days, or
upon the other Party's making of an assignment of its assets for
the benefit of creditors, or upon the application of the other
Party for the appointment of a receiver or trustee of its assets
or if the other Party becomes insolvent or unable to pay its debts
as they mature. The Party which becomes subject to any proceeding
under this Section 7.2(b) will promptly notify the other Parties
to this Agreement.
(c) Force Majeure. In the event any Party fails to
perform its obligations under this Agreement in whole or in part
as a consequence of an act of God, including fire, explosion,
earthquake, public utilities failure, accident, flood, embargo,
war, nuclear disaster, or riot (a "Force Majeure Occurrence"),
such failure to perform shall not be considered a breach of this
Agreement during the period of such disability. The disabled
Party shall promptly and in writing notify the other Parties to
this Agreement of the Force Majeure Occurrence and advise the
other Parties of the extent of the disabled Party's disability and
the expected duration of the disabled Party's inability to perform
its obligations hereunder. This Agreement may be terminated by
either Party receiving such notice on or after the 180th day
following receipt of notice from the disabled Party if the failure
to perform has not been cured at the end of such 180 day period.
(d) Change in Law. In the event there is a change in
law that materially impairs the goals and objectives of this
Agreement, any Party may terminate this Agreement by giving no
less than one hundred twenty (120) days prior written notice of
its intent to terminate. Such written notice shall describe the
law which materially impairs the goals and objectives of this
Agreement.
(e) Change in Control. Fingerhut shall have the right
to terminate this Agreement by written notice to Metris upon the
occurrence of a Change of Control (as defined below) with respect
to Metris. A "Change in Control" shall be deemed to have occurred
if (a) any person or group (within the meaning or Rule 13d-5 of
the Securities Exchange Act of 1934 as in effect on the date
hereof) other than Fingerhut shall own directly or indirectly,
beneficially or of record, shares representing more than 25% of
the aggregate ordinary voting power represented by the issued and
outstanding capital stock of Metris; (b) a majority of the seats
(other than vacant seats) on the board of directors of Metris
shall at any time be occupied by persons who were neither (i)
nominated by Fingerhut, or by the Board of Directors of Metris,
nor (ii) appointed by directors so nominated; or (c) any person or
group other than Fingerhut shall otherwise directly or indirectly
have the power to exercise a controlling influence over the
management or policies of Metris.
7.3 Obligations Upon Termination.
(a) Ownership of Accounts. Upon termination of this
Agreement pursuant to this Article 7, unless the accounts are
sold, Direct Merchants Bank shall continue to own the Accounts,
and shall have the right to re-issue the Fingerhut Card with a
card which does not use the Fingerhut name or logo or under any
other name or logo it may choose in its sole discretion.
(b) Remedies. Each of the Parties hereto shall be
liable to the other for damages arising out of or in connection
with any breach of this Agreement, subject to the duty of the non-
breaching party to take all reasonable actions in order to
mitigate such damages. The Parties agree that in no event shall
any Party to this Agreement be liable to the other for punitive,
indirect, special or consequential damages arising out of a breach
of this Agreement. It is understood and agreed that monetary
damages may not be a sufficient remedy for breach with respect to
the respective obligations under this Agreement, and that monetary
damages would not be a sufficient remedy for any Event of Default.
Accordingly, the non-breaching Party shall, to the extent
permitted by law or equity, be entitled to specific performance
and injunctive or other equitable relief as a remedy for any
breach of, or Event of Default under this Agreement. The remedies
described in this Section 7.3(b) shall not be deemed to be the
exclusive remedies for any breach of, or Event of Default under
this Agreement, but shall be in addition to all other remedies
available; to the parties at law or in equity, subject to the
limitations with respect to damages set forth in this Section
7.3(b).
7.4 Purchase Upon Termination.
(a) Purchase Right. Except for a termination resulting
from Section 7.2(a), (b), (d) or (e) at the end of the Initial
Term or any subsequent Renewal Term of this Agreement, Fingerhut
(including its permitted assigns under this Agreement), shall have
the right to purchase from Direct Merchants Bank the Accounts,
including Securitized Accounts, and the Cardholder List at a
purchase price determined in accordance with Section 7.4(b) below
and under the terms and conditions of a purchase and sale
agreement. Such right may be exercised upon six months' written
notice to Direct Merchants Bank prior to the end of the Initial
Term or Renewal Term. Notwithstanding the sale of the Accounts,
Securitized Accounts, and Cardholder List, Fingerhut agrees that
Metris and Direct Merchants Bank shall have the exclusive right,
for three years from the date of purchase of the Accounts,
Securitized Accounts, and Cardholder List by Fingerhut, to sell
Card Enhancement Products to the Cardholder List. Such exclusive
right shall include (i) the right to renew any Card Enhancement
Product purchased by a Cardholder prior to the sale of the
Accounts (including Securitized Accounts) and Cardholder List to
Fingerhut; (ii) the right to offer Card Enhancement Products to
Cardholder(s) on the Cardholder List who have previously not
accepted an offer to purchase a Card Enhancement Product
(including renewals); and (iii) the right to offer Card
Enhancement Product (including renewals) to any new Cardholders
which are added to the Cardholder List, whether or not the
Fingerhut Card is reissued or rebranded by Fingerhut. Income
(including renewal income) derived from the sale of Card
Enhancement Products to the Cardholder List shall be the sole
income of Metris and Direct Merchants Bank.
(b) Purchase Price. Fingerhut agrees to pay Direct
Merchants Bank a purchase price for the Accounts and Cardholder
List as follows: The sum of (i) the book value (excluding loan
loss reserves of the Accounts), plus (ii) any earned or unbilled
interest or fees, plus (iii) the preceding three year amortized
cost to acquire the Account(s), plus (iv) any premium assigned to
the Accounts based on an independent third party valuation of the
portfolio.
(c) Purchase Condition. Fingerhut agrees to purchase
the Accounts, subject to any Securitization agreements or
arrangements that Direct Merchants Bank or its Affiliate may have
entered into and subject to any necessary approvals of rating
agencies, trustees or other parties as set forth in such
Securitization transaction. Fingerhut and Direct Merchants Bank
agree to cooperate to take the reasonable necessary actions to
effectuate an orderly transition of the Accounts, including the
Securitized Accounts, to Fingerhut. Direct Merchants Bank further
agrees to take reasonable necessary actions to remove the
Securitized Accounts from the Securitization to enable Fingerhut
to complete the purchase of the Accounts.
ARTICLE 8 - MISCELLANEOUS
8.1 Notices. All notices and other communications by Direct
Merchants Bank, Metris and Fingerhut hereunder shall be in writing
to the other Party and shall be deemed to have been duly given
when delivered in person, or when sent via telecopy transmission
with hard copy sent via first class mail the same day, receipt
requested and mailed via first class mail, or four business days
after posting to the United States postal service registered or
certified mail, with postage prepaid, addressed as follows:
If to Direct Merchants Bank:
Direct Merchants Credit Card Bank, National Association
1455 West 2200 South, Suite 300
Salt Lake City, UT 84119
Attention: President
If to Metris:
Metris Companies Inc.
Interchange Building
600 South Highway 169, Suite 1800
St. Louis Park, Minnesota 55426
Attention: President
If to Fingerhut:
Fingerhut Corporation
4400 Baker Road
Minnetonka, Minnesota 55343
Attention: President
With a copy to the General Counsel
or to such other address as a Party may from time to time
designate by notice.
8.2 Entire Agreement. This Agreement, together with its
Exhibits identified in this Agreement, constitutes the entire
agreement between the Parties and supersedes any other agreement,
whether written or oral, that may have been made or entered into
by Direct Merchants Bank, Metris and Fingerhut (or by any officer
or officers of either of such Parties) relating to the matters
contemplated hereby.
8.3 Amendments and Waivers. This Agreement may be amended,
modified, superseded or canceled, and any of the terms,
representations, warranties or covenants hereof may be waived,
only by written agreement executed by each of the Parties or, in
the case of a waiver, by the Party waiving compliance. In the
course of the negotiating, planning and coordination of this
Agreement, written documents have been exchanged between the
Parties. Such written documents shall not be deemed to amend or
supplement this Agreement. The failure of any Party at any time
or times to require performance of any provision hereof shall in
no manner affect the right at a later time to enforce the same.
No waiver by any Party of any condition or term, representation,
warranty or covenant under this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such condition
or breach or as a waiver of any other condition or any breach of
any other term, representation, warranty or covenant under this
Agreement.
8.4 Assignment; Delegation of Duties. This Agreement and
the rights and obligations created under it shall be binding upon
and inure solely to the benefit of the Parties hereto and their
respective successors and permitted assigns. This Agreement shall
not be assigned or transferred by any Party, except to an
Affiliate or any successor upon written notice to the other
Parties hereto, provided that any such Affiliate or successor
agrees in writing to be bound by the terms of this Agreement,
without the prior written consent of the other. Direct Merchants
Bank or Metris may at any time delegate any duties hereunder to an
Affiliate which normally performs such credit card related
services on behalf of Direct Merchants Bank or Metris.
8.5 Audit Rights. Fingerhut agrees that all records
relating to Direct Merchants Bank's Accounts at all times shall be
subject to inspection and review by the examiners of the Office of
the Comptroller of the Currency (the "OCC") and any other
regulatory agency having jurisdiction over Direct Merchants Bank
or any of its operations. If Fingerhut receives any requests or
demands under authority of law (subpoenas, so called discovery
means, or audit demands of any taxing authority) for access to
information of Direct Merchants Bank, Fingerhut shall immediately
inform Direct Merchants Bank or Metris of such request or demand
and shall not grant access to such information without Direct
Merchants Bank's or Metris' permission not to be unreasonably
withheld.
8.6 Expenses. Unless specifically provided for elsewhere in
this Agreement, each Party will bear all costs and expenses
incurred by it in connection with the transactions herein,
including legal fees, accounting fees and taxes which are imposed
upon that Party based upon its activities hereunder.
8.7 Captions; Counterparts. The captions in this Agreement
are for convenience only and shall not be considered a part of or
affect the construction or interpretation of any provision of this
Agreement. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which
together shall constitute one and the same instrument.
8.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota
without giving effect to the principles of conflicts of laws
thereof.
8.9 Severability. If any provision of this Agreement or
portion thereof is held invalid, illegal, void or unenforceable by
reason of any rule of law, administrative or judicial provision or
public policy, such provision shall be ineffective only to the
extent invalid, illegal, void or unenforceable, and the remainder
of such provision and all other provisions of this Agreement shall
nevertheless remain in full force and effect.
8.10 No Partnership or Joint Venture. This Agreement does
not create a partnership or joint venture between the Parties, and
no Party to this Agreement shall have any authority whatsoever to
bind the other Parties to any obligation.
8.11 No Third Party Beneficiaries. Nothing in this
Agreement, express or implied, is intended or shall be construed
to confer upon any person or entity, other than the Parties and
their respective successors and assigns permitted by this
Agreement, any right, remedy or claim under or by reason of this
Agreement.
IN WITNESS WHEREOF, Direct Merchants Bank, Metris and
Fingerhut have caused this Agreement to be duly executed as of the
date first written above;
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
By:
Title:
FINGERHUT CORPORATION
By:
Title:
METRIS DIRECT, INC.
By:
Title:
EXHIBIT A
COMPENSATION
Solicitation Fee
1. Direct Merchants Bank will pay Fingerhut for each Prospect
for whom there is an Account Booked:
(i) xxx for an unsecured credit line;
(ii) xxx for each secured credit line once the minimum
deposit amount is deposited in an account by the Prospect;
and
(iii) xxx for each secured Account Booked which
subsequently is converted to an unsecured credit line.
Payment of the above fees terminates upon termination of the
Agreement.
Net Purchase Fee
2. Direct Merchants Bank will also pay to Fingerhut a non-
cumulative fee of xx basis points of Net Purchases,
exclusively on Accounts Booked pursuant to this Agreement.
Payment of the Net Purchase fee terminates upon termination
of this Agreement.
EXTENDED SERVICE PLAN AGREEMENT
This Agreement (the "Agreement"), made and entered into
this 31st day of October, 1996, by and among Fingerhut
Corporation, Infochoice USA, Inc. (collectively
"Fingerhut"), and Metris Direct, Inc. ("Metris").
WHEREAS, Fingerhut makes available to purchasers of its
Merchandise (as defined herein), an Extended Service
Agreement (as defined below), providing coverage for defects
in materials and workmanship and for mechanical or
electrical failure of the Merchandise; and
WHEREAS, Metris desires to coordinate and manage all of
the marketing activities for Fingerhut's sales of extended
warranties or service plans to purchasers of its
Merchandise.
WHEREAS, Metris intends to either itself or through a
third party underwriter, insure and service the contractual
obligations of the Extended Service Agreements sold by
Fingerhut;
NOW THEREFORE, in consideration of the mutual promises
contained herein, the parties hereby agree as follows:
DEFINITIONS
The following terms, as used in this Agreement shall
have the following meanings whether used in the singular or
plural:
"Customer" shall mean a customer of Fingerhut who purchases
Merchandise for personal, family and household purposes
within the U.S. and its territories, where applicable.
"Extended Service Agreement" shall mean a repair or
replacement service agreement sold by Fingerhut between
Customer (as defined herein) and the applicable service plan
underwriter, and managed by Metris, covering mechanical or
electrical failure of Merchandise and defects in materials
and workmanship.
"Marketing Management Fee" shall mean the amount of the Net
Price, as set forth in Exhibit A and Schedule attached
hereto and incorporated herein by reference that Fingerhut
is required to pay Metris for coordinating and managing the
marketing programs for each Extended Service Agreement sold
under this Agreement.
"Merchandise" shall mean any new goods as identified in
Exhibit B attached hereto and incorporated herein by
reference sold by Fingerhut to a Customer during the term of
this Agreement.
"Merchandise Warranty" shall mean the warranty of the
manufacturer with respect to the Merchandise.
"Net Price" shall mean the amount Fingerhut is required to
pay Metris for each Extended Service Agreement sold under
this Agreement and shall be comprised of the Marketing
Management Fee and the Underwriting and Servicing Fee.
"Sales Price" shall mean the retail sales cash price at
which Fingerhut sells each Extended Service Agreement.
"Underwriting and Servicing Fee" shall mean the amount of
the Net Price, as set forth in Exhibit B attached hereto and
incorporated herein by reference, that Fingerhut is required
to pay Metris for performing, either itself or through a
third party underwriter and servicer, the contractual
obligations of the Extended Service Agreements sold by
Fingerhut.
ARTICLE 1. PROGRAM
Section 1.1. Service.
During the term of this Agreement, including any
renewals, Fingerhut shall sell the Extended Service
Agreement to all of its Customers who purchase Merchandise
eligible for extended service beyond the Merchandise
Warranty in accordance with this Agreement.
Section 1.2. Exclusivity.
During the term of this Agreement, Fingerhut shall
not make available to any Customer, any other agreement
providing for extended service that is competitive, similar,
or an alternative to the Extended Service Agreement offered
by Metris. Notwithstanding the foregoing, in the event
Metris notifies Fingerhut in writing of its inability to
provide an Extended Service Agreement on Merchandise,
Fingerhut may provide directly or contract with a third
party service provider to provide such Extended Service
Agreement.
Section 1.3. Coverage Under the Extended Service
Agreement.
Coverage for parts and labor for each component
protected by the Extended Service Agreement shall begin on
the date following expiration of the parts or labor
Merchandise Warranty applicable to each Merchandise
component indicated in the Merchandise Warranty. Coverage
will continue for the period shown in Exhibit B for each
product.
Section 1.4. Service Coverage.
Metris shall be responsible for the fulfillment of
the contractual obligations to the Customer, either itself
or through a third party underwriter, under each Extended
Service Agreement from the date sold to a Customer by
Fingerhut; provided however, the Merchandise covered under
the Extended Service Agreement was received by the Customer
in an undamaged state and that Metris has received the
appropriate Net Price from Fingerhut for each Extended
Service Agreement as required under Section 1.5. Fingerhut
agrees to pay the Net Price. Upon payment of the Net Price
by Fingerhut, Metris shall become contractually liable
directly to the Customer and Metris will pay the full amount
of any claim provided that such claim is within the terms of
coverage of the Extended Service Agreement and the Extended
Service Agreement is sold within a state in which Metris is
legally authorized to fulfill such obligations.
If Merchandise covered under the Extended Service
Agreement is to be replaced, Fingerhut agrees to provide the
Customer with such replacement product in accordance with
Fingerhut's product replacement policies in effect from time
to time. In such case, Metris shall reimburse Fingerhut for
the cost of such product at Fingerhut's standard cost plus
xx% to cover shipping and handling. Additionally, if
Fingerhut repairs any Merchandise covered under the Extended
Service Agreement, Metris shall reimburse Fingerhut for the
cost of such repair. All such reimbursements shall be
netted against any remittances required by Fingerhut under
Section 1.5, on a monthly basis, provided detail supporting
such reimbursement has been previously provided to and
approved by Metris. Fingerhut and Metris shall, in good
faith, mutually agree on the Sales Price of the Extended
Service Agreement.
Section 1.5. Remittances Required by Fingerhut.
(a) Fingerhut shall have the right to offer
(either directly or through third parties) the Customer
financing for the Customer's warranty purchase using any
credit offer Fingerhut or its Customers may choose, however;
Metris shall have no collection risk with respect to any
Extended Service Agreement financed by Fingerhut or a third
party.
(b) Daily, Fingerhut shall send Metris via system
data transfer the names, addresses and other information
necessary for fulfillment of all Customers who purchased
Extended Service Agreements. Within ten (10) days after the
close of each Fingerhut accounting month, Fingerhut shall
remit the sales report and other information for that month
to Metris for each such Extended Service Agreement sold and
for all cancellations; such report will also provide the net
amount due to Metris. Metris shall send Fingerhut an
invoice for the Net Price, which shall include the Marketing
Management Fee and Underwriting and Servicing Fee for all
Extended Service Agreements sold during the month for
Merchandise that has been shipped, less cancellations or
returns of such Extended Service Agreements. Terms shall be
30 days from the last day of the accounting month in which
the Extended Service Agreements were sold or cancelled.
Section 1.6. Merchandise Covered.
The list of Merchandise in Exhibit B shall
constitute the eligible goods for which an Extended Service
Agreement may be sold. The list may be amended by mutual
written agreement of the parties. Any Merchandise, other
than jewelry and furniture, that does not have a Merchandise
Warranty, shall not be eligible goods for which an Extended
Service Agreement may be sold.
Section 1.7. Records/Audits.
Both parties shall maintain records related to the
Extended Service Agreements sold under this Agreement. The
parties shall each allow its auditors or other designees to
audit performance under this Agreement. Such audits shall
be subject to reasonable notice and conducted during normal
business hours.
Section 1.8. Solicitation.
Unless Metris and Fingerhut agree to use
Fingerhut's direct mail solicitation or telemarketing media,
Metris shall develop media sources for direct mail
solicitations or telemarketing. If Metris uses Fingerhut's
direct mail solicitation and telemarketing media, Metris
shall reimburse Fingerhut for the cost of such catalog or
other mail space that it uses, and the variable cost of
telemarketing services, plus a reasonable allocation of
fixed overhead, at a combined rate per hour of telemarketing
time used, all as mutually agreed to at the beginning of
each calendar year during this Agreement by the parties to
this Agreement. Metris and Fingerhut agree to cooperate in
good faith to develop direct mail solicitations, and
telemarketing programs that meet applicable regulatory
guidelines and requirements and are designed to provide the
most cost effective use of customer service time.
Section 1.9. Ownership of Customer Names.
Metris agrees that Fingerhut has and shall have
exclusive ownership of all of its Customer names,
information, marketing methods and business practices
(collectively "Customer Names"). Metris shall not use or
provide to any other firm or entity, any names or
information developed in the term of this Agreement or
furnished to Metris by Fingerhut, for any purpose whatsoever
except as contemplated herein. Metris will hold all
customer names and information as confidential information
and will provide appropriate security measures to protect
such information from unauthorized use.
Section 1.10. Program Literature.
Neither Fingerhut, nor anyone on its behalf, shall
in any document or advertising describe the coverage offered
under the Extended Service Agreement in terms other than
those used in the Extended Service Agreement and as
otherwise approved by Metris. Metris shall notify Fingerhut
in writing of its objections to any such advertising within
ten (10) business days of receipt of the advertising from
Fingerhut. Fingerhut agrees its name may be used in any
advertising for Extended Service Agreements provided such
use is approved prior to use and does not imply that
Fingerhut has any contractual obligation under the Extended
Service Agreement.
ARTICLE 2. INDEMNIFICATION
Section 2.1. Obligations.
(a) By Metris. Metris shall be liable to and
shall defend, indemnify and hold harmless Fingerhut and its
Affiliates, and its respective officers, directors,
employees and permitted assigns from and against any and all
Losses (as hereinafter defined) incurred by reason of or
related to Metris' breach of its obligations hereunder.
(b) By Fingerhut. Fingerhut shall be liable to
and shall defend, indemnify and hold harmless Metris and its
Affiliates, and its respective officers, directors,
employees and permitted assigns from and against any and all
Losses (as hereinafter defined) incurred by reason of or
related to Fingerhut's breach of any of its obligations
hereunder.
(c) "Losses" Defined. For purposes of this
Section 2.1., the term "Losses" shall mean any liability,
damages, costs, losses and expenses, including attorneys'
fees, disbursements and court costs, reasonably incurred by
Metris or Fingerhut in connection with any threatened,
pending or adjudicated claim, demand, action, suit or
proceeding (whether civil, criminal, administrative or
investigative by an unaffiliated third party) without regard
to whether or not such Losses would be deemed material under
this Agreement.
Section 2.2. Procedures.
(a) Notice of Claims. The Parties agree that in
case any claim is made, or any suit or action is commenced
which, if not corrected, may give rise to a right of
indemnification for a Party hereunder ("Indemnified Party")
from the other Party ("Indemnifying Party"), the Indemnified
Party will give notice to the Indemnifying Party as promptly
as practicable after the receipt by the Indemnified Party of
such notice or knowledge of such claim, suit, or action. On
a best efforts basis, notice to the Indemnifying Party shall
be given no later than fifteen days after receipt by the
Indemnified Party in the event a suit or action has
commenced or thirty days under all other circumstances;
provided, however, that the failure to give prompt notice
shall not relieve an Indemnifying Party of its obligation to
indemnify except to the extent the Indemnifying Party is
materially prejudiced by such failure. The Indemnified
Party shall make available to the Indemnifying Party and its
counsel and accountants at reasonable times and for
reasonable periods, during normal business hours, all books
and records of the Indemnified Party relating to any such
possible claim for indemnification, and each Party will
render to the other such assistance as it may reasonably
require of the other in order to ensure prompt and adequate
defense of any suit, claim or proceeding based upon a
statement of facts which may give rise to a right of
indemnification hereunder.
(b) Selection of Counsel. The Indemnifying Party
shall have the right to defend, compromise and settle any
suit, claim or proceeding in the name of the Indemnified
Party to the extent that the Indemnifying Party may be
liable to the Indemnified Party under Section 2.1. above in
connection therewith; provided, however, that the
Indemnifying Party shall not compromise or settle a suit,
claim or proceeding unless it assumes the obligation to
indemnify for all Losses relating thereto. The Indemnifying
Party shall notify the Indemnified Party within ten days of
having been notified pursuant to Section 2.2.(a) of this
Agreement if the Indemnifying Party elects to assume the
defense of any such claim, suit or action and employ counsel
in a reasonable exercise of its discretion. The Indemnified
Party shall have the right to employ its own counsel if the
Indemnifying Party so elects to assume such defense, but the
fees and expenses of such counsel shall be at the
Indemnified Party's expense, unless the Indemnifying Party
shall not have employed counsel to take charge of the
defense thereof.
(c) Settlement of Claims. The Indemnified Party
may at any time notify the Indemnifying Party of its
intention to settle or compromise any claim, suit or action
against the Indemnified Party in respect of which
indemnification payments may be sought from the Indemnifying
Party hereunder, but shall not settle or compromise any
matter for which indemnification may be sought without the
consent of the Indemnifying Party. Any settlement or
compromise of any claim, suit or action in accordance with
the preceding sentence, or any final judgment or decree
entered on or in any claim, suit or action which the
Indemnifying Party did not assume the defense of in
accordance herewith, shall be deemed to have been consented
to by, and shall be binding upon, the Indemnifying Party as
fully as if the Indemnifying Party had assumed the defense
thereof and a final judgment or decree had been entered in
such suit or action, or with regard to such claim, by a
court of competent jurisdiction for the amount of such
settlement, compromise, judgment or decree.
(d) Subrogation. The Indemnified Party shall be
subrogated to any claims or rights of the Indemnifying Party
as against any other persons with respect to any amount paid
by the Indemnifying Party under this Article 2. The
Indemnified Party shall cooperate with the Indemnifying
Party, at the Indemnifying Party's expense, in the assertion
by the Indemnifying Party of any such claim against such
other persons.
(e) Indemnification Payments. Amounts owing
under this Article 2 shall be paid promptly upon written
demand for indemnification containing in reasonable detail
the facts giving rise to such liability; provided, however,
that if the Indemnifying Party notifies the Indemnified
Party within thirty (30) days of receipt of such demand that
it disputes its obligation to indemnify and the Parties are
not otherwise able to reach agreement, the controversy shall
be settled by final order entered by a court of competent
jurisdiction.
Section 2.3. Survival of Indemnification.
The provisions of this Article 2 shall expressly
survive any termination of this Agreement for five (5)
years.
ARTICLE 3. CONFIDENTIALITY
Section 3.1. Confidential Information.
Confidential Information will be kept in
confidence by such other party, including its subsidiaries,
affiliates, officers, directors, employees, agents,
consultants and contractors, in accordance with its policies
for maintaining the confidence of its own information of
similar content. The term "Confidential Information" shall
mean and include: (i) all trade secrets and other
confidential business information learned in the course of
performance by any party of its obligations hereunder, and
(ii) any information or data which is disclosed by a party
to the other party under or in contemplation of this
Agreement.
Notwithstanding the foregoing, the term
Confidential Information shall not include information
which: (i) is already known to such other party when
received, (ii) thereafter becomes generally obtainable by a
party other than as a result of an unauthorized disclosure
by the party taking advantage of this clause, or (iii) is
required by law, regulation or court order to be disclosed
by such party, provided that in the case of this clause,
prior notice of such disclosure has been given to the party
which furnished such information, when legally permissible,
and that such other party which is required to make the
disclosure uses its best efforts to provide sufficient
notice to permit the party which furnished such information
to take legal action to prevent the disclosure or (iv) is
reasonably necessary in the opinion of counsel, to be
disclosed in the context of a legal proceeding or regulatory
investigation, provided that prior notice shall be given by
the party which furnished the information.
The provisions of this Article 3 shall expressly
survive any termination of this Agreement for five (5)
years.
ARTICLE 4. TERM AND TERMINATION
Section 4.1. Term and Termination.
This Agreement shall take effect upon the date
first written above, and shall remain in effect for seven
(7) years ("Initial Term"). Thereafter, this Agreement will
automatically renew for one term of three (3) years
("Renewal Term") unless either Party provides written notice
to the other, not less than twelve (12) months prior to the
end of the Initial Term or Renewal Term, of its intent to
terminate this Agreement. Either Party may terminate this
Agreement reserving all other remedies and rights hereunder
in whole or in part and otherwise available at law or in
equity, upon the occurrence of an Event of Default, as
defined herein. Upon the occurrence of an Event of Default,
the non-defaulting Party may terminate this Agreement by
giving notice of its intent to terminate. Such written
notice shall describe the Event of Default.
Fingerhut shall also have the right to terminate
this Agreement by written notice to Metris upon the
occurrence of a Change of Control (as defined below) with
respect to Metris. A "Change in Control" shall be deemed to
have occurred if (a) any person or group (within the meaning
of Rule 13d-5 of the Securities Exchange Act of 1934 as in
effect on the date hereof) other than Fingerhut shall own
directly or indirectly, beneficially or of record, shares
representing more than 25% of the aggregate ordinary voting
power represented by the issued and outstanding capital
stock of Metris; (b) a majority of the seats (other than
vacant seats) on the Board of Directors of Metris shall at
any time be occupied by persons who were neither (1)
nominated by Fingerhut, or by the Board of Directors of
Metris, nor (2) appointed by directors so nominated; or (3)
any person or group other than Fingerhut shall otherwise
directly or indirectly have the power to exercise a
controlling influence over the management or policies of
Metris.
Section 4.2 Event of Default.
An "Event of Default" shall be deemed to have
occurred upon the occurrence of any of the following:
(a) A material breach of a representation,
agreement, covenant or other obligation of any of the
parties to this Agreement (any such breach is herein
referred to as a "Material Breach"); provided, however, that
no Event of Default shall be deemed to have occurred unless
and until a non-breaching party provides the breaching party
with written notice of such Material Breach, describing in
reasonable detail the nature of such Material Breach, and
(i) the breaching party shall have had an opportunity to
cure such Material Breach (which is capable of being cured)
within sixty (60) days after such notice (unless such
Material Breach is with respect to a monetary matter, the
cure of which requires only the payment of a specified
amount of money pursuant to the terms of this Agreement, in
which case the breaching party shall have an opportunity to
cure within five (5) business days after such notice), (ii)
the breaching party does not cure such Material Breach
within the applicable time period, or, if such Material
Breach, other than a Material Breach relating to a monetary
matter, cannot reasonably be cured within sixty days, but is
curable, the breaching party does not; (x) undertake to cure
such Material Breach within such sixty day period and (y)
after such sixty day period, diligently and continuously use
all reasonable efforts to cure, and (iii) the notifying
party thereafter declares an Event of Default. In respect
of clause (ii) of this Section 4.2, such extended cure
period shall continue so long as the parties hereto
reasonably agree that the actions being taken by the
breaching party are reasonably expected to cure such
Material Breach.
(b) If, at any time within twelve (12) months
following the expiration of any cure period provided in
Section 4.2(a) above, there shall occur a Material Breach
(the "Second Material Breach") and such Second Material
Breach is of the same nature as the Material Breach (the
"First Material Breach") by the breaching party that gave
rise to such cure period, then an Event of Default shall be
deemed to have occurred upon the delivery of notice of such
Second Material Breach to the breaching party by the
notifying party referred to in Section 4.2(a) and upon such
notifying party declaring an Event of Default.
(c) If there shall occur a "Bankruptcy," as
hereinafter defined, of either Party, the non-Bankruptcy
party may declare an Event of Default. For purposes of this
Agreement, the term "Bankruptcy" shall mean: (i) the entry
of a decree or order for relief by a court of competent
jurisdiction in any involuntary case under any bankruptcy,
insolvency or similar law now or hereafter in effect and
such decree or order shall not be vacated, set aside or
stayed within ninety (90) days after its entry, (ii) the
entry of a decree or order appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator or
similar agent for any substantial part of the assets or
property of such party and such decree or order shall not be
vacated, set aside or stayed within ninety (90) days after
its entry, (iii) the ordering of the winding up or
liquidation of the affairs of a party and such order shall
not be vacated, set aside or stayed within one hundred
twenty (120) days after its entry, (iv) the filing of a
petition in any such involuntary bankruptcy case, which
petition remains undismissed for a period of ninety (90)
days or which is not dismissed or suspended pursuant to
Section 305 of Title 11 of the United States Code (or any
corresponding provision of any future United States
Bankruptcy law), (v) the commencement of a voluntary case
under any bankruptcy, insolvency or similar law now or
hereafter in effect, (vi) the consent to the entry of an
order for relief in an involuntary case under any such law
or to the appointment of or taking possession of any
substantial part of the assets or property by a receiver,
liquidator, assignee, trustee, custodian, sequestrator or
similar agent, or (vii) the making of any general assignment
for the benefit of creditors.
ARTICLE 5. MISCELLANEOUS
Section 5.1. Notices.
Any notice given in accordance with the provisions
of this Agreement must be in writing and sent by registered
or certified mail return receipt requested to the respective
addresses of the parties shown at the beginning of this
Agreement. Notices shall be sent to Metris and to Fingerhut
and shall be addressed as follows:
If to Metris:
Metris Direct, Inc.
Interchange Building
600 South Highway 169, Suite 1800
St. Louis Park, Minnesota 55426
Attention: Chief Executive Officer
If to Fingerhut:
Fingerhut Corporation
4400 Baker Road
Minnetonka, Minnesota 55343
Attention: Senior Vice President of
Marketing
With a copy to the General Counsel
Section 5.2. Applicable Law.
This Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto,
shall be governed by and construed in accordance with the
internal laws of the State of Minnesota without giving
effect to the principles or conflicts of laws thereof.
Section 5.3. Severability.
If any provision of this Agreement or portion
thereof is held invalid, illegal, void or unenforceable by
reason of any rule of law, administrative or judicial
provision or public policy, such provision shall be
ineffective only to the extent invalid, illegal, void or
unenforceable, and the remainder of such provision and all
other provisions of this Agreement shall nevertheless remain
in full force and effect.
Section 5.4. No Partnership or Joint Venture.
This Agreement does not create a partnership or
joint venture between the Parties, and neither Party to this
Agreement shall have any authority whatsoever to bind the
other Party to any obligation.
Section 5.5. No Third Party Beneficiaries.
Nothing in this Agreement, express or implied, is
intended or shall be construed to confer upon any person or
entity, other than the Parties and their respective
successors and assigns permitted by this Agreement, any
right, remedy or claim under or by reason of this Agreement.
Section 5.6. Captions: Counterparts.
The captions in this Agreement are for convenience
only and shall not be considered a part of or affect the
construction or interpretation of any provision of this
Agreement. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of
which together shall constitute one and the same instrument.
Section 5.7. Amendments and Waivers.
Neither the waiver by any party hereto of a breach
of or a default under any of the provisions of this
Agreement, nor the failure of any party hereto, on one or
more occasions, to enforce any of the provisions of this
Agreement or to exercise any right, remedy or privilege
hereunder shall thereafter be construed as a waiver of any
such provisions, rights, remedies or privileges hereunder.
Any of the terms, covenants, representations, warranties, or
conditions hereof may be waived only by a written instrument
executed by the party waiving compliance. This Agreement
may only be amended or modified by a subsequent written
agreement by and among the parties hereto.
Section 5.8. Assignment.
No party to this Agreement shall have the right to
assign or otherwise transfer its rights or obligations under
this Agreement, except with the prior written consent of the
other; notwithstanding, either party may assign or otherwise
transfer its rights or obligations under this Agreement to a
subsidiary or affiliate (in the case of Fingerhut however,
only to a subsidiary or affiliate to which the rights to
sell merchandise to Fingerhut Customers was also
transferred) upon notice to the other. Regardless of the
party to whom an assignment is made pursuant to this
Section 5.8., the assignee shall, as a condition to such
assignment, by written undertaking satisfactory to the
other, represent and warrant that the assignment was made in
accordance with all applicable laws and regulations and
assume and agree to be bound by the terms, provisions and
conditions of this Agreement to the same extent as the
assignor; provided, however, that no such assignment shall
relieve the assignor of its obligations (which shall be
primary and which may be discharged in whole or in part by
the assignee) under this Agreement, to the extent
applicable. Any unauthorized assignment and any assignment
made in contravention of this Section 5.8. shall be null and
void.
Section 5.9 Governing Law.
This Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto,
shall be governed by and construed in accordance with the
internal laws of the State of Minnesota without giving
effect to the principles or conflicts of laws thereof.
Section 5.10 Execution In Counterparts.
To facilitate execution, this Agreement may be
executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of, or on behalf
of, each party, or that the signatures of all Persons
required to bind any party, appear on each counterpart; but
it shall be sufficient that the signature of, or on behalf
of, each party, or that the signatures of the Persons
required to bind any party, appear on one or more of the
counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in
making proof of this Agreement to produce or account for
more than the number of counterparts containing the
respective signatures of, or on behalf of all of the parties
hereto.
Section 5.11 No Agency.
This Agreement shall not be deemed expressly or by
implication to create an agency, employee, or servant
relationship between or among any of the parties hereto, or
any affiliates of the parties hereto for any purpose
whatsoever.
Section 5.12 Force Majeure.
No party shall be liable for any failure of or
delay in the performance of this Agreement for the period
that such failure or delay is due to acts of God, public
enemy, war, strikes or labor disputes, or any other cause
beyond the parties' reasonable control; it being understood
that lack of financial resources is not to be deemed a cause
beyond a party's control. Each party shall notify the other
parties promptly of the occurrence of any such cause and
carry out this Agreement as promptly as practicable after
such cause is terminated; provided, however, that the
existence of any such cause shall not extend the term of
this Agreement.
Section 5.13 Amendment and Modification.
This Agreement may only be amended or modified by
a subsequent written agreement mutually agreed to by and
among the parties hereto.
Section 5.14 Management Review.
(a) Unless otherwise mutually agreed to by the
parties, on or before January 1, 2001, Fingerhut and Metris
agree to evaluate the Marketing Management Fee and the
Underwriting and Servicing Fee (collectively, the "Fees") as
set forth in this Agreement and Exhibit. The purpose of
such evaluation shall be to determine the then arms-length
market rate for the Fees. The parties agree to meet and
negotiate in good faith to reach a mutual agreement on the
market rate for the Fees. Any failure by the parties to
reach mutual agreement on the market rate of the Fees as a
result of the negotiations conducted pursuant to this
subsection (a) shall not be deemed by either party to be a
breach of this Agreement and unless otherwise terminated as
provided herein, this Agreement shall remain in full force
and effect.
(b) In the event Fingerhut and Metris are unable to
agree on the then market rate for the Fees to be charged
hereunder by January 1, 2001, they agree to send out within
5 days after January 1, 2001, requests for proposals
("RFPs") to three (3) reputable companies that are in the
business of providing extended product service or extended
warranty coverage for retailers to sell to their customers
(the "Independent Providers"). The identity of the three
Independent Providers who are sent RFPs and the
assumptions/parameters to be set forth in the RFPs will be
as mutually agreed upon by Fingerhut and Metris. The
Independent Providers will be instructed to respond with bid
proposals within 5 days of receipt of the RFPs. The parties
agree to use the middle price bid proposal submitted by the
Independent Providers as the market rate for the Fees for
the services provided by Metris for the balance of the term
of this Agreement. Any failure by the parties to reach
mutual agreement on the market rate of the Fees as a result
of the failure to agree on the Independent Providers to whom
RFPs would be sent or on the assumptions/parameters of the
RFPs under this subsection (b) shall not be deemed by either
party to be a breach of this Agreement and unless otherwise
terminated as provided herein, this Agreement shall remain
in full force and effect.
(c) In the event Fingerhut and Metris are unable to
reach a mutually acceptable agreement under subsection (a)
above or to agree on the three Independent Providers or on
the assumptions/parameters to be included in the RFPs for
the procedure set forth in subsection (b) above, then the
issue of the market price of the Fees will be submitted on a
binding basis to an arbitrator selected by mutual agreement
of the parties. If the parties are unable to agree upon a
single mutually acceptable arbitrator, each party will
select one arbitrator and the two arbitrators will select a
third arbitrator. In consultation with the arbitrator(s),
the parties will select or devise an alternative dispute
resolution ("ADR") procedure by the which arbitrator(s) will
attempt to resolve the dispute. The ADR procedure will be
held in Minneapolis, Minnesota unless the parties mutually
agree on another location. The parties agree to participate
in good faith in the ADR procedure to its reasonable and
prompt (not to exceed 45 days) conclusion. The
arbitrator(s) will be required to conduct the ADR in
accordance with the rules and procedures of the American
Arbitration Association.
(d) Each party agrees that the decision of the
arbitrator(s) shall be binding on all parties. Each party
will bear equally all fees, costs and expenses of the ADR,
and each party will bear its own legal expenses, attorneys'
fees and costs of any experts and/or witnesses.
(e) The fact that arbitration has commenced will not
impair the exercise of any termination rights in accordance
with the provisions of this Agreement.
(f) The parties agree to make amendments to this
Agreement pursuant to Section 5.13 to reflect the mutually
acceptable agreements under subsection (a) or subsection (b)
above or the final decision of the arbitrator(s), as
applicable. A party's refusal to amend this Agreement to
reflect the final decision of the arbitrator(s) under
subsections (c) and (d) above shall be deemed to be a breach
of this Agreement.
IN WITNESS WHEREOF, the duly authorized
representatives of the parties have executed this Agreement
as of the day and year first above written.
FINGERHUT CORPORATION METRIS DIRECT, INC.
By: By:
Title: Title:
INFOCHOICE USA, INC.
By:
Title:
jb-19b
EXHIBIT A
I. CALCULATION AND DETERMINATION OF THE NET PRICE AND MARKETING MANAGEMENT
FEE
Upon Metris' receipt from Fingerhut of the system data
transfer information necessary for fulfillment of all
Customers who purchased Extended Service Agreements, Metris
will issue and mail or contract with a third party to issue
and mail an Extended Service Agreement to the Customer. The
Extended Service Agreements will be mailed to each Customer
within ten (10) business days of receipt of the fulfillment
information.
Metris will calculate a percentage of the Extended
Service Agreement's Sales Price to be deducted from such
price in determining the amount payable by Fingerhut to
Metris (the "Net Price") for managing the marketing programs
and for servicing and fulfilling the obligations for each
Extended Service Agreement sold under such plan or
contracting with a third party to fulfill such obligations.
From the Net Price, Metris shall calculate and deduct the
Underwriting and Servicing Fee in accordance with the fee
schedule in Exhibit B as compensation to Metris for
servicing and fulfilling the obligations for each Extended
Service Agreement sold. The amount of the Net Price
remaining after deduction for the Underwriting and Servicing
Fee shall become the Marketing Management Fee.
The percentage to be deducted from the Net Price to
determine the allocation between the fixed Underwriting and
Servicing Fee and the variable Marketing Management Fee is
to be determined based on the sales method used to solicit
the sale, and based on the effort expended by Fingerhut in
soliciting the sale using certain of its advertising or
offering media versus other media produced by Metris with
little input or effort conducted by Fingerhut or its
representatives. Such percentage schedule shall initially
be as found below, based on each sales method as further
defined below:
On-Page (Any Extended Service
Agreement plan sale or order
received by Fingerhut at the
same time as the product order
without the inbound xx%
telemarketing representative
offering the Extended Service
Agreement separately as an
addition to a customer's order.)
Add-On (An inbound or
outbound telemarketing
call made at or within
10 days of the
original product order
during which the
Fingerhut xx%
telemarketing
representative
specifically solicits
the customer for the
purchase of an
Extended Service
Agreement in addition
to their merchandise
order.)
Stand-Alone (A
telemarketing call
made by a Fingerhut or
a Metris telemarketing xx%
representative or
Metris' agent offering
an Extended Service
Agreement product
greater than 10 days
after Merchandise
purchase.
Renewal (An offer
conducted by Metris to xx%
renew Extended Service
Agreement coverage
after the original
term of the Extended
Service Agreement.)
Any offers or methods of further offering Extended
Service Agreements developed subsequent to the execution of
this contract which do not meet any of the definitions noted
above, shall be conducted under an amended percentage
schedule to be mutually agreed to by the parties based on
the sales method used to solicit the sale, and also
determined based on the effort expended by Fingerhut in
soliciting the sale using certain of its advertising or
offering methods versus other methods conducted by Metris
with minimal input or effort conducted by Fingerhut or its
representatives as noted above.
II. ADJUSTMENTS TO THE NET PRICE AND THE MARKETING
MANAGEMENT FEE
After December 31, 1996, the percentage of the Extended
Service Agreement's Sales Price to be deducted in
determining the Net Price, shall be adjusted annually, on a
calendar year basis, to reflect Fingerhut's efforts to
increase serviceable product sales thereafter. Such
adjustment shall be reflected as a reduction in the
Marketing Management Fee and shall be calculated by taking
each of the percentages in paragraph three of Section I and
increasing them by xx%, then multiplying such increased
percentages by sales method by the Sales Price for all
Extended Service Agreements sold in any calendar year in
excess of the sum of all of the Sales Prices of the Extended
Service Agreements sold in the calendar year ended December
31, 1996. However, no such increased percentages shall be
reflected until the sum of all of the Sales Prices in any
given calendar year exceed that of the calendar year ended
December 31, 1996, regardless of whether the sum of the
Sales Prices by certain sales methods exceed the sum of the
Sales Prices of that same sales method in calendar year
1996. The increase in the percentages noted above shall
only occur once and will apply thereafter only to total
Sales Price increases in excess of the base calendar year
ended December 31, 1996.
Extended Service Agreement returns or cancellation of
such agreement may only be accepted by Fingerhut under its
normal return policy terms and conditions. In accordance
therewith, Metris shall pay to Fingerhut the amount of the
Net Price paid by Fingerhut (less xx% after December 31,
1996) for any Merchandise cancelled or returned by a
Customer to Fingerhut within the relevant Merchandise
Warranty period and for which Fingerhut has given full
refund of the Sales Price to the Customer. Fingerhut will
provide Metris details in writing of any such refund within
ten business days after the calendar month in which such
refund occurs. Any such payment due from Metris will be
considered paid when Fingerhut deducts the amount of the Net
Price for such Merchandise from the next payment to be made
in accordance with the remittance provisions of Section 1.5.
In the event that a Customer cancels a Service Agreement
after the Merchandise Warranty expires, Metris shall
calculate and reimburse Fingerhut for a pro rata portion of
the Net Price less any claims incurred by such Customer and
paid by Metris (and less xx% of this amount after December
31, 1996). The pro-rata portion shall be computed by
dividing the Net Price by the term in months of the Extended
Service Agreement and then multiplying that monthly rate
times the number of months from the Extended Service
Agreement return to the original month of its expiration.
However, in no event shall the amount reimbursed exceed the
Net Price of the Customer contract.
III. ADVERTISING AND OTHER COST REIMBURSEMENTS
Metris shall reimburse Fingerhut for the advertising
cost it expends in directly offering extended service plans
through its own advertising media for the reasons previously
mentioned in Section I above. Such advertising cost
reimbursements shall be determined and calculated based on
an advertising cost standard, including both fixed and
variable costs, developed specifically for Metris' Extended
Service Agreement product offers within each sales method as
denoted in Section I above. The method and details of such
calculation, including the basis for cost reimbursement,
(i.e., orders received within each media or a flat charge
per catalog shipped or telephone call made or received)
shall be provided to Metris management in writing for their
review and approval within a reasonable time prior to the
establishment of such a charge or reimbursement.
Additionally, such standard may be adjusted periodically, in
conjunction with Fingerhut's normal adjustment of all of its
advertising cost standards, based on actual cost data and
experience with the advertising for Extended Service
Agreement products within the Fingerhut media and with prior
review and approval by Metris management. This
reimbursement will be calculated and determined monthly with
prior review and approval by Metris management and will be
deducted from the monthly payment to be made in accordance
with the remittance provisions of Section 1.5.
Metris may also periodically receive various products
and services directly from Fingerhut to assist Metris in its
management and coordination of the Extended Service
Agreement marketing programs. Such products and services
shall initially include the additional premiums provided to
a Customer in conjunction with an Add-On Extended Service
Agreement sale and printing and shipping services for the
preparation and delivery of the actual service agreements.
The provision and standard cost for such additional products
and services provided by Fingerhut to Metris shall be
mutually agreed upon by both Metris and Fingerhut prior to
such services being performed or products delivered and may
be adjusted periodically in accordance with the provisions
of the paragraph above. Reimbursement for such additional
products and services shall also be performed consistent
with the terms for advertising costs noted in the paragraph
above.
EXHIBIT B
UNDERWRITING AND SERVICING FEES
MERCHANDISE/PRICING RECOMMENDATIONS
Section I - Electronics
Audio
Product Term
Audio Components Coverage from Date
of Purchase
(Receivers, compact disc, cassette 2 Year/3
Year
decks, turntables, equalizers)
2 Component Rack "
3 Component Rack "
4 Component Rack "
5 Component Rack "
6 Component Rack "
Audio/Visual System
(With television only) "
Audio/Visual System
(With TV and VCR) "
Compact Stereo "
Portable Stereo "
Mobile Electronics
Car Stereo "
Radar Detector "
Auto Alarms "
Cellular Phones "
Police Scanners "
CB Radios "
Walkie Talkies "
Home Office
Typewriter "
Computer with or without Monitor "
Printer "
Word Processor "
Product Term
Fax Machine "
Copy Machine "
Corded Phone "
Cordless Phone "
Telephone Answering Machine "
Phone with Answering Machine "
Telephone/Answer Machine/Clock Radio "
Tape Recorder "
Paper Shredder "
Computer/Printer/Monitor "
Appliances
*Refrigerator Coverage from Date
of Purchase
2 Year/3 Year
*Compact Refrigerator "
*Freezer "
*Range "
*Microwave "
*Air Conditioner "
*Washer "
*Dryer "
*Dishwasher "
Video
*Color TV (27" or less) "
*Color TV (28" - 35") "
*Big Screen/Projection "
VCR "
Camcorder "
TV/VCR Combo "
Black & White TV "
Video Games "
Video Disc Player "
Housewares
Vacuum Cleaner "
Carpet Extractor "
Floor Polisher "
Sewing Machine "
Kitchen Electrics "
Product Term
Fans "
Clock Radios "
Personal Care Items "
Tools, Lawn and Hardware
Snowblower "
Power Tools "
Air Compressors "
Battery Chargers "
Portable Generators "
Portable Welders "
Lawn Mowers "
Snow Blowers "
Riding Lawnmower "
Electric Trimmer/Blower/Vacuum "
Gas Trimmers/Blower/Vacuums "
Cultivator "
Chainsaws "
Logsplitters "
Shredder/Chipper "
Miscellaneous
*Home Security System Coverage from Date
of Purchase
2 Year/3 Year
Musical Instruments "
Exercise Equipment "
35MM Cameras "
110 Cameras "
Polaroid Cameras "
Suntanning Canopy "
Word Finder/Speller/Translator "
*Denotes in-home service
1) First Purchase Underwriting and Servicing Fees
Item Retail 2 Year Contract 3 Year Contract
$xx - xx xx xx
$xx - xx xx xx
$xx - xx xx xx
$xx - xx xx xx
$xx - xx xx xx
$xx - xx xx xx
$xx - xx xx xx
2) 5 Year Step-Up Appliance Underwriting and Servicing
Fees
Item 5 Year Contract Cost
Refrigerator, Freezer, Washing $xx
Machine
Refrigerator with Icemaker $xx
3) Renewal Underwriting and Servicing Fees
Item 3rd Year 4th Year 5th Year
Retail Renewal Renewal Renewal
$xx - xx xx xx xx
$xx - xx xx xx xx
$xx - xx xx xx xx
$xx - xx xx xx xx
$xx - xx xx xx xx
$xx - xx xx xx xx
$xx - xx xx xx xx
Limitations
* All Extended Service Agreements are inclusive of the
manufacturer's warranty and begin on date of purchase.
* Commercial use is excluded.
* Only those products with a manufacturer's warranty of
at least 90 days' parts and labor are eligible for extended
service.
* Products with a 2 year manufacturer's labor and parts
warranty are not eligible for a 2 year service agreement and
products with a 3 year manufacturer's labor and parts
warranty are not eligible for a 3 year service agreement.
Section II
Quality Furniture Care
Extended Service Agreement provides stain coverage for
upholstered furniture; lifting, peeling, cracking of solid
wood, veneered or laminated furniture; structural defects to
frames; warpage, breakage, or bending of metal components on
recliners and sleeper mechanisms, glass coverage on tables,
wall units and cabinets; and foam resiliency to cushions and
mattresses.
PRODUCT RETAILS UNDERWRITING AND
SERVICING FEES
$xx - $ xx $xx
xx - xx xx
xx - xx xx
xx+ xx
Term of coverage - 2 years from date of purchase.
Product Categories
Upholstered furniture End tables/soft tables
Wood furniture Recliners
Wall units/cabinets Leather furniture
Laminated furniture Mattresses
Room rugs
Section III
Quality Jewelry Care
Extended Service Agreement provides labor and materials
necessary to maintain the jewelry purchased for 2 years from
date of purchase, and if the item cannot be repaired it will
be replaced. Benefits include ring resizing, stone
tightening, prong retipping, polishing; chain and bracelet
soldering, earring and clasp repair.
UNDERWRITING AND
PRODUCT RETAILS SERVICING FEES
$ xx - $ xx $xx
xx - xx xx
xx - xx xx
xx - xx xx
xx+ xx
Product Categories
Rings - 10K/14K Necklaces
Bracelets Earrings
Broaches Chains
Pendants
17
DATABASE ACCESS AGREEMENT
THIS AGREEMENT is made as of this 31st day of October, 1996,
by and between Metris Direct, Inc. ("Metris"), a corporation duly
organized under the laws of the State of Minnesota, with offices
at 600 South Highway 169, Suite 1800, St. Louis Park, Minnesota
55426 and Fingerhut Corporation ("Fingerhut"), a corporation duly
organized under the laws of the State of Minnesota with offices at
4400 Baker Road, Minnetonka, Minnesota 55343.
WITNESSETH:
WHEREAS, Fingerhut (itself or through subsidiaries or
affiliates) owns a customer database and maintains such database
on its systems; and
WHEREAS, Metris is in the business of providing financial
service products and services; and
WHEREAS, Fingerhut desires to license to Metris exclusive
access to its customer database to market financial service
products (as defined herein);
NOW, THEREFORE in consideration of the mutual promises set
forth and other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged by the parties, the
parties agree as follows:
I. LICENSE USAGE
Section 1.1 Grant of License. During the term of this
Agreement, including renewals, and subject to the terms and
conditions hereof, Fingerhut hereby grants to Metris and its
subsidiaries the exclusive license to use the customer lists,
models and other information related thereto described in
Exhibit A attached hereto and incorporated herein by reference
(hereinafter the "Customer Database") for the sole purpose of
marketing financial service products identified in Exhibit B
attached hereto and incorporated herein by reference ("Financial
Service Products") of Metris, its subsidiaries and unaffiliated
third parties. Such license includes the right to access the
computer systems which maintain the Customer Database; the right
to perform file selection, segmentation and modeling of the
Customer Database; the right to develop marketing lists using the
Customer Database or segments thereof for use on behalf of itself,
subsidiaries, and unaffiliated third parties; the right to append
third party demographic data for aggregate analysis and other
rights which the parties may mutually agree to in writing from
time to time. Such license does not include the right to access a
consumer name and credit report (as defined under applicable laws
and regulations) to determine such consumer's eligibility for
credit or insurance. Fingerhut reserves for itself, its
affiliates and subsidiaries, and its licensees, the right to use
the Customer Database, including the right to license the use of
the Customer Database to unaffiliated third parties; except in no
event shall Fingerhut for itself, its affiliates and subsidiaries
or its licensed third parties have the right to use the Customer
Database to offer Financial Service Products. Fingerhut and
Metris confirm that Fingerhut may continue to license use of the
Customer Database (specifically the Fingerhut Customer file) to
the unaffiliated third parties for the services identified in
Exhibit D, attached hereto and incorporated herein by reference,
on the terms and conditions as set forth in such Exhibit D.
Section 1.2 Delivery of Information. At Metris' request,
Fingerhut will provide or provide access to, on a timely basis in
accordance with Fingerhut's standard internal practices, the
Customer Database or any subset thereof, in a format as the
parties may, in good faith, agree from time to time. Fingerhut
and Metris will cooperate in good faith to ensure that Metris'
written production and solicitation deadlines are met. Throughout
the term of this Agreement, Fingerhut shall update the Customer
Database with all additions, deletions and other amendments to the
Customer Database ("Updates") made or developed by Fingerhut in
the ordinary course of its business, including, without
limitation, the addition of the name and other information related
thereto of all persons which may, from time to time, come within
the definition of the Customer Database set forth in Exhibit A,
and such Updates shall thereafter become part of the Customer
Database for purposes of this Agreement.
During the term of this Agreement, Fingerhut agrees to
maintain a backup, archival or disaster recovery copy ("Back-up
Copy") of the Customer Database. Metris shall have the right to
access such Back-up Copy in the event of (i) Fingerhut's
Bankruptcy (as defined herein), (ii) failure of Fingerhut's main
computer system, and (iii) the expiration of the cure period as
defined in Section 5.1 following an Event of Default by Fingerhut.
Section 1.3 Limits of Disclosure. Nothing in this
Agreement shall require Fingerhut to disclose to Metris (i)
confidential information received by Fingerhut from third parties,
including without limitation, customer lists from third party
sources, which confidential information Fingerhut is precluded by
written agreement from disclosing to others, or (ii) information
which Fingerhut, in its reasonable interpretation, is precluded
from disclosing under any applicable law, regulation or other
industry practices related to consumer privacy.
Section 1.4 Ownership of Behavioral Models. Fingerhut
agrees that any behavioral models or similar credit scoring
algorithms which are developed by Metris or developed by Fingerhut
expressly for or on behalf of Metris from the Customer Database
("Behavioral Models") shall be owned, unencumbered, by Metris;
Fingerhut, further agrees, that Metris has the sole right to use
of such Behavioral Models for Financial Service Products during
the term of this Agreement, including any renewals, and Metris
retains sole ownership of such Behavioral Models upon termination
of this Agreement.
II. COMPENSATION
Section 2.1 Compensation. Metris agrees to pay Fingerhut
(in immediately available funds) in accordance with the terms and
conditions set forth in Exhibit C, attached hereto and
incorporated herein by reference. Payment of the Database License
Fee shall be made by the fifteenth of the first month within each
calendar year during the Initial Term or subsequent Renewal Term.
Payment of the Solicitation Fee and the Suppress File Fee shall be
made not later than the thirtieth business day of each month
following the end of a calendar quarter for all amounts due and
owing for the immediately preceding calendar quarter. Fingerhut
and Metris agree that upon mutual written consent, Exhibit C may
be amended from time to time.
III. OWNERSHIP AND REPRESENTATIONS AND WARRANTIES
Section 3.1 Ownership of Information. Fingerhut
represents and warrants that (i) it is the owner of the entire
right, title and interest to and in the Customer Database, subject
to any licenses that have previously been granted, (ii) it is
under no legal impediment that would prevent its entering into
this Agreement or granting to Metris the licenses described
herein, (iii) the licenses granted hereby and Metris' use of the
Customer Database as described herein, will not infringe upon the
rights of any third party or violate any existing license,
agreement, arrangement or understanding of Fingerhut or any
subsidiary or affiliate of Fingerhut with any third party, (iv) it
has no knowledge of any infringement of the rights granted to
Metris pursuant to Section 1.1 above, and (v) it has not granted
any rights to any third party that conflict with the rights
granted to Metris pursuant to Section 1.1 above (except those
identified in Exhibit D).
Section 3.2 No Sale or Assignment. Except as otherwise
provided herein, nothing in this Agreement shall be construed as a
sale, assignment or other complete transfer of any title to, or
ownership of the Customer Database, including any and all trade
secrets, copyrights and proprietary rights and interests in and to
the Customer Database. Fingerhut shall retain all right, title
and interest in and to all trade secrets, copyrights and other
proprietary rights and interests in and to the Customer Database,
subject only to the license granted under this Agreement.
Section 3.3 Metris Authority. Metris hereby represents
and warrants, as of the date of this Agreement, as follows:
(a) Metris is a duly organized corporation, validly
existing, and in good standing under the laws of the
State of Delaware. Prior to its use of the Customer
Database, Metris will be duly qualified or licensed to
do business necessary and will be in good standing in
each jurisdiction in which its business or the exercise
of its rights, powers or authority under this Agreement
renders such qualification necessary.
(b) Metris has the requisite corporate power and authority
to enter into, and to carry out its obligations under
this Agreement.
(c) The execution and delivery Metris of this Agreement and
the consummation by Metris of the transactions
contemplated hereby have been duly authorized prior to
the date of this Agreement by all necessary corporate
action on its part.
(d) This Agreement has been duly executed and delivered by
Metris and constitutes a valid and binding obligation of
Metris enforceable against Metris in accordance with its
terms.
(e) Metris is not subject to, or obligated under any
provision of (i) its articles of incorporation, (ii) any
agreement, arrangement or understanding, (iii) any
license, franchise or permit, or (iv) any law,
regulation, order, judgment or decree that would be
breached or violated, or in respect of which a right of
termination or acceleration or any encumbrance on any of
its assets would be created by the execution, delivery
and performance of this Agreement by Metris, or the
consummation by Metris of the transactions contemplated
by this Agreement.
(f) No authorization, consent or approval of, waiver or
exemption by, or filing or registration with any public
body, court, third party or authority is necessary on
the part of Metris for the consummation by Metris of the
transactions contemplated by this Agreement.
Section 3.4 Fingerhut Authority. Fingerhut hereby
represents and warrants, as of the date of this Agreement, as
follows:
(a) Fingerhut is a corporation duly organized, validly
existing, and in good standing under the laws of the
State of Minnesota, and is duly qualified or licensed to
do business and is in good standing in each jurisdiction
in which its business or the exercise of its rights,
powers or authority under this Agreement renders such
qualification necessary.
(b) Fingerhut has the requisite corporate power and
authority to enter into, and to carryout its obligations
under this Agreement.
(c) The execution and delivery by Fingerhut of this
Agreement and the consummation by Fingerhut of the
transactions contemplated hereby have been duly
authorized prior to the date of this Agreement by all
necessary corporate action on its part.
(d) This Agreement has been duly executed and delivered by
Fingerhut and constitutes a valid and binding obligation
of Fingerhut enforceable against Fingerhut in accordance
with its terms.
(e) Fingerhut is not subject to, or obligated under any
provision of (i) its articles of incorporation or
bylaws, (ii) any agreement, arrangement or
understanding, (iii) any license, franchise or permit,
or (iv) any law, regulation, order, judgment or decree
that would be breached or violated, or in respect of
which a right of termination or acceleration or any
encumbrance on any of its assets would be created by the
execution, delivery and performance of this Agreement by
Fingerhut, or the consummation by Fingerhut of the
transactions contemplated by this Agreement.
(f) No authorization, consent or approval of, waiver or
exemption by, or filing or registration with any public
body, court, third party or authority is necessary on
the part of Fingerhut for the consummation by Fingerhut
of the transactions contemplated by this Agreement.
IV. CONFIDENTIALITY
Section 4.1 Confidentiality of Customer Database. All
Customer Database disclosed hereunder is confidential and
proprietary to Fingerhut. Metris, its subsidiaries, affiliates,
officers, directors, employees, agents, consultants and
contractors shall not use any of the Customer Database and the
Behavioral Models for any purpose other than as expressly
permitted hereunder. Metris shall not disclose or provide any of
such Customer Database and the Behavioral Models to any third
party, except as provided in Sections 1.1, 4.2 and 4.3 below, and
shall take all reasonable measures to limit any such disclosure by
its affiliates, subsidiaries, officers, directors, employees,
agents, contractors or consultants to a need to know basis during
the term of this Agreement. Metris agrees it will not provide
Customer Database and Behavioral Models that are proprietary to
Fingerhut to a third party without a written agreement that
prohibits, among other things, such third party from using or
disclosing the information hereunder except as permitted pursuant
to this Agreement.
Section 4.2 Other Confidential Information. This
Agreement and the transactions contemplated hereby will be kept in
confidence by such other party, including its subsidiaries,
affiliates, in accordance with its policies for maintaining the
confidence of its own information of similar content. The term
"Confidential Information" shall mean and include (i) the Customer
Database, (ii) all trade secrets and other confidential business
information learned in the course of performance by either party
of its obligations hereunder, and (iii) any information or data
which is disclosed by a party to the other party under or in
contemplation of this Agreement.
Notwithstanding the foregoing, the term
Confidential Information shall not include information which (i)
is already known to such other party when received, (ii)
thereafter becomes generally obtainable by a party other than as a
result of an unauthorized disclosure by the party taking advantage
of this clause, or (iii) is required by law, regulation or court
order to be disclosed by such party, provided that in the case of
this clause prior notice of such disclosure has been given to the
party which furnished such information, when legally permissible,
and that such other party which is required to make the disclosure
uses its best efforts to provide sufficient notice to permit the
party which furnished such information to take legal action to
prevent the disclosure.
Section 4.3 Required or Requested Information. If Metris
is required to disclose any information contained in the Customer
Database to any regulatory or governmental agency, department or
other regulatory entity or court of law, Metris may not disclose
such information without the prior written approval of Fingerhut,
and gives all available information and assistance to enable
Fingerhut to take the measures (consistent with requirements of
applicable laws and regulations) that, in its sole discretion, it
deems appropriate or necessary to protect the Customer Database
from disclosure. Sections 4.1 and 4.2 shall survive any
termination of this Agreement for five (5) years.
Metris or Fingerhut shall not be obligated to
disclose to the other any information which is required by
applicable law to be kept confidential or is otherwise prohibited
from disclosure by applicable federal or state laws and
regulations or would cause either party, in its reasonable
interpretation, to be deemed a credit reporting agency as defined
under applicable state or federal law.
V. EVENT'S OF DEFAULT AND REMEDIES
Section 5.1 Event of Default. An "Event of Default" shall
be deemed to occur upon the occurrence of any of the following:
(a) A material breach of a representation, agreement,
covenant or other obligation of any of the parties to
this Agreement (any such breach is herein referred to as
a "Material Breach"); provided, however, that no Event
of Default shall be deemed to have occurred unless and
until a non-breaching party provides the breaching party
with written notice of such Material Breach, describing
in reasonable detail the nature of such Material Breach,
and (i) the breaching party shall have had an
opportunity to cure such Material Breach (which is
capable of being cured) within sixty (60) days after
such notice (unless such Material Breach is with respect
to a monetary matter, the cure of which requires only
the payment of a specified amount of money pursuant to
the terms of this Agreement, in which case the breaching
party shall have an opportunity to cure within five (5)
business days after such notice), (ii) the breaching
party does not cure such Material Breach within the
applicable time period, or, if such Material Breach,
other than a Material Breach relating to a monetary
matter, cannot reasonably be cured within sixty days,
but is curable, the breaching party does not; (x)
undertake to cure such Material Breach within such sixty
day period and (y) after such sixty day period,
diligently and continuously use all reasonable efforts
to cure, and (iii) the notifying party thereafter
declares an Event of Default. In respect of clause (ii)
of this Section 5.1(a), such extended cure period shall
continue so long as the parties hereto reasonably agree
that the actions being taken by the breaching party are
reasonably expected to cure such Material Breach.
(b) If, at any time within twelve (12) months following the
expiration of any cure period provided in Section 5.1(a)
above, there shall occur a Material Breach (the "Second
Material Breach") and such Second Material Breach is of
the same nature as the Material Breach (the "First
Material Breach") by the breaching party that gave rise
to such cure period, then an Event of Default shall be
deemed to have occurred upon the delivery of notice of
such Second Material Breach to the breaching party by
the notifying party referred to in Section 5.1(a) and
upon such notifying party declaring an Event of Default.
(c) If there shall occur a "Bankruptcy," as hereinafter
defined, of either Party, the non-Bankruptcy party may
declare an Event of Default. For purposes of this
Agreement, the term "Bankruptcy" shall mean (i) the
entry of a decree or order for relief by a court of
competent jurisdiction in any involuntary case under any
bankruptcy, insolvency or similar law now or hereafter
in effect and such decree or order shall not be vacated,
set aside or stayed within ninety (90) days after its
entry, (ii) the entry of a decree or order appointing a
receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar agent for any substantial part
of the assets or property of such party and such decree
or order shall not be vacated, set aside or stayed
within ninety (90) days after its entry, (iii) the
ordering of the winding up or liquidation of the affairs
of a party and such order shall not be vacated, set
aside or stayed within one hundred twenty (120) days
after its entry, (iv) the filing of a petition in any
such involuntary bankruptcy case, which petition remains
undismissed for a period of ninety (90) days or which is
not dismissed or suspended pursuant to Section 305 of
Title 11 of the United States Code (or any corresponding
provision of any future United States Bankruptcy law),
(v) the commencement of a voluntary case under any
bankruptcy, insolvency or similar law now or hereafter
in effect, (vi) the consent to the entry of an order for
relief in an involuntary case under any such law or to
the appointment of or taking possession of any
substantial part of the assets or property by a
receiver, liquidator, assignee, trustee, custodian,
sequestrator or similar agent, or (vii) the making of
any general assignment for the benefit of creditors.
Section 5.2 Remedies. Each of the parties hereto shall be
liable to the other for damages arising out of or in connection
with any breach of this Agreement, subject to the duty of the non-
breaching party to take all reasonable actions in order to
mitigate such damages. The parties agree that in no event shall
any party to this Agreement be liable to the other for punitive,
indirect, special or consequential damages arising out of a breach
of this Agreement. It is understood and agreed to by the parties
that monetary damages may not be a sufficient remedy for breach
with respect to their respective obligations under this Agreement.
Accordingly, the non-breaching party shall, to the extent
permitted by law or equity, be entitled to seek specific
performance and injunctive or other equitable relief as a remedy
for any breach of, or Event of Default under this Agreement. The
remedies described in this Section 5.2 shall not be deemed to be
the exclusive remedies for any breach of, or Event of Default,
under this Agreement, but shall be in addition to all other
remedies available to the parties at law or equity, subject to the
limitations with respect to damages set forth above in this
Section 5.2.
VI. INDEMNIFICATION
Section 6.1 Indemnification by Fingerhut. Fingerhut shall
indemnify, hold harmless and defend Metris, its officers,
directors, partners, employees, agent or permitted assigns of
Metris from and against any and all losses, claims, damages,
liabilities, whether joint or several, expenses (including legal
fees and expenses), judgments, fines and other amounts paid in
settlement, incurred or suffered by any such person(s) in
connection with any threatened, pending or completed claim,
demand, action, suit or proceeding (whether civil, criminal,
administrative or investigative, and whether formal or informal)
by an unaffiliated third party arising out of or in connection
with any breach or alleged breach of this Agreement by Fingerhut;
including without limitation any claim or allegation that (i) any
Customer Database provided to Metris constitutes an infringement
of any copyright, (ii) the Customer Database provided to Metris
contains, embodies or incorporates any trade secret or proprietary
information of any third party. In the event the Customer
Database is held to infringe and its use is enjoined, the sole
obligation of Fingerhut (and the exclusive remedy of Metris) shall
be as provided pursuant to Sections 6.1 and 6.3.
Section 6.2 Indemnification by Metris. Metris shall
indemnify, hold harmless and defend Fingerhut, and each person
that is a stockholder, officer, director, partner, employee or
agent of Fingerhut, from and against any and all losses, claims,
damages, liabilities, whether joint or several, expenses
(including legal fees and expenses), judgments, fines and other
amounts paid in settlement incurred or suffered by any such
person(s) in connection with any threatened, pending or completed
claim, demand, action, suit or proceeding (whether civil,
criminal, administrative or investigative, and whether formal or
informal) by an unaffiliated third party arising out of or in
connection with any breach or alleged breach of this Agreement by
Metris.
Section 6.3 Rights Upon Indemnification. The rights of
the parties hereto to be indemnified pursuant to this Agreement
shall be governed by the following:
(a) Within a reasonable time (not to exceed 30 days from
receipt) after receipt by an indemnified party of notice
of any claim or the commencement of any action which may
result in a claim for indemnification pursuant to
Sections 6.1 or 6.2, an indemnified party will notify in
writing the indemnifying party thereof within a
reasonable time thereafter; the omission to so notify
any indemnifying party will relieve it of any liability
for indemnification thereunder as to the particular item
for which indemnification may then be sought (except to
the extent that the failure to give notice shall not
have been prejudicial to such indemnifying party), but
not from any other liability which it may have to any
indemnified party.
(b) An indemnified party shall have the right (i) to employ
separate counsel chosen by it in any action as to which
indemnification may be sought under any provision of
this Agreement and to participate in the defense
thereof, or (ii) to the extent that it may wish, jointly
with any other indemnified party, to assume the defense
of any such action with counsel reasonably satisfactory
to the indemnifying party, but the fees and expenses of
such counsel shall be at the expense of such indemnified
party unless; (x) the indemnifying party has agreed in
writing to pay such fees and expenses, (y) the
indemnifying party has failed to employ counsel and
assume the defense thereof without reservation and
employ counsel within a reasonable period of time after
being given the notice required above, and as a
consequence thereof, the indemnified party is required
to employ separate counsel to protect its rights, or (z)
the named parties to any such action (including any
impleaded parties) include both such indemnified party
and the indemnifying party and such indemnified party
shall have been advised by its counsel that
representation of such indemnified party and the
indemnifying party by the same counsel would be
inappropriate under applicable standards of professional
conduct (whether or not such representation by the same
counsel has been proposed) due to actual or potential
conflict of interest between them. It is understood,
however, that the indemnifying party shall, in
connection with any one such action or separate but
substantially similar or related actions in the same
jurisdiction, arising out of the same general
allegations or circumstances, be liable for the
reasonable fees and expenses of only one separate
counsel (in addition to any local counsel) at any time
for all such indemnified parties having actual or
potential differing interests with the indemnifying
party.
(c) The indemnifying party shall not be liable for any
settlement of any such action effected without its
written consent, which consent shall not be unreasonably
withheld, but if settled with such written consent, or
if there be a final judgment against any indemnified
party in any such action, the indemnifying party agrees
to indemnify and hold harmless any indemnified parties
to the extent provided above from and against any loss,
claim, damage, liability or expense by reason of such
settlement or judgment.
(d) The indemnification obligations set forth in Sections
6.1, 6.2 and 6.3 shall survive the termination this
Agreement.
VII. TERM AND TERMINATION
Section 7.1 Term and Termination. This Agreement shall
take effect upon the date first written above, and shall remain in
effect for seven (7) years ("Initial Term"). Thereafter, this
Agreement will automatically renew for one term of three (3) years
("Renewal Term") unless either Party provides written notice to
the other, not less than twelve (12) months prior to the end of
the Initial Term or Renewal Term, of its intent to terminate this
Agreement. Either Party may terminate this Agreement reserving
all other remedies and rights hereunder in whole or in part and
otherwise available in law or equity, upon the occurrence of an
Event of Default, as defined herein. Upon the occurrence of an
Event of Default, the non-defaulting Party may terminate this
Agreement by giving notice of its intent to terminate. Such
written notice shall describe the Event of Default. Fingerhut
shall have the right to terminate this Agreement by written notice
to Metris upon the occurrence of a Change of Control (as defined
below) with respect to Metris. A "Change in Control" shall be
deemed to have occurred if (a) any person or group (within the
meaning or Rule 13d-5 of the Securities Exchange Act of 1934 as in
effect on the date hereof) other than Fingerhut shall own directly
or indirectly, beneficially or of record, shares representing more
than 25% of the aggregate ordinary voting power represented by the
issued and outstanding capital stock of Metris; (b) a majority of
the seats (other than vacant seats) on the board of directors of
Metris shall at any time be occupied by persons who were neither
(i) nominated by Fingerhut, or by the board of directors of
Metris, nor (ii) appointed by directors so nominated; or (c) any
person or group other than Fingerhut shall otherwise directly or
indirectly have the power to exercise a controlling influence over
the management or policies of Metris.
VIII. MISCELLANEOUS PROVISIONS
Section 8.1 Additional Actions and Documents. Each of the
parties hereto agrees to take or cause to be taken such further
actions, to execute, acknowledge, deliver and file or cause to be
executed, acknowledged, delivered and filed such further documents
and instruments, and to use all reasonable efforts to obtain such
consents, as may be necessary or as may be reasonably requested in
order to fully effectuate the purposes, terms and conditions of
this Agreement.
Section 8.2 Notice. All notices, demands, requests or
other communications which may be or are required to be given
pursuant to this Agreement shall be in writing and shall be
personally delivered, mailed by first class, registered or
certified mail, postage prepaid, or sent by electronic or
facsimile transmission, addressed as follows:
(a) If to Metris:
Metris Companies Inc.
Interchange Building
600 South Highway 169, Suite 1800
St. Louis Park, Minnesota 55426
Attention: Chief Executive Officer
(b) If to Fingerhut:
Fingerhut Corporation
4400 Baker Road
Minnetonka, Minnesota 55343
Attention: Senior Vice President
With a copy to the General Counsel
Each party may designate by notice in writing a new address
to which any notice, demand, request or communication may
thereafter be so given, served or sent. Each notice, demand,
request or communication which shall be delivered, mailed or
transmitted in the manner described above shall be deemed
sufficiently given, served, sent or received for all purposes at
such time as it is delivered to the addressee or at such time as
delivery is refused by the addressee upon presentation.
Section 8.3 Severability. Whenever possible, each
provision of this Agreement shall be interpreted in such a manner
as to be effective and valid under applicable law, but if one or
more of the provisions of this Agreement is subsequently declared
invalid or unenforceable, such invalidity or unenforceability
shall not in any way affect the validity or enforceability of the
remaining provisions of this Agreement (unless those provisions
which are invalidated or unenforceable are clearly material and
inseparable from such other provisions). In the event of such
declaration of invalidity or unenforceability, this Agreement, as
so modified, shall be applied and construed so as to reflect
substantially the intent of the parties and achieve the same
economic effect as originally intended by the terms hereof. In
the event that the scope of any provision to this Agreement is
deemed unenforceable by a court of competent jurisdiction, the
parties agree to the reduction of the scope of such provision as
such court shall deem reasonably necessary to make such provision
enforceable under the circumstances.
Section 8.4 Survival. It is the express intention and
agreement of the parties hereto that all covenants, agreements,
statements, representations, warranties and indemnities made in
this Agreement shall survive the execution and delivery of this
Agreement.
Section 8.5 Waivers. Neither the waiver by any party
hereto of a breach of or a default under any of the provisions of
this Agreement, nor the failure of any party hereto, on one or
more occasions, to enforce any of the provisions of this Agreement
or to exercise any right, remedy or privilege hereunder shall
thereafter be construed as a waiver of any such provisions,
rights, remedies or privileges hereunder. Any of the terms,
covenants, representations, warranties, or conditions hereof may
be waived only by a written instrument executed by the party
waiving compliance.
Section 8.6 Exercise of Rights. No failure or delay on
the part of any party hereto in exercising any right, power or
privilege hereunder and no course of dealing among the parties
hereto shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of
any other right, power or privilege. The rights and remedies
herein expressly provided are cumulative and not exclusive of any
other rights or remedies which any party hereto would otherwise
have at law or in equity or otherwise.
Section 8.7 Binding Effect. Subject to any provisions
hereof restricting assignment, this Agreement shall be binding
upon and shall inure to the benefit of the parties and their
respective successors and permitted assigns.
Section 8.8 Entire Agreement. This Agreement contains the
entire agreement among the parties hereto with respect to the
matters contained herein, and supersedes all prior oral or written
agreements, commitments or understandings with respect to the
matters provided for herein.
Section 8.9 Pronouns. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine,
neuter, singular or plural, as the identity of the Person may
require.
Section 8.10 Headings. Section headings contained in this
Agreement are inserted for convenience of reference only, shall
not be deemed to be a part of this Agreement for any purpose, and
shall not in any way define or affect the meaning, construction or
scope of any of the provisions hereof.
Section 8.11 Governing Law. This Agreement, the rights and
obligations of the parties hereto, and any claims or disputes
relating thereto, shall be governed by and construed in accordance
with the internal laws of the State of Minnesota without giving
effect to the principles of conflicts of laws thereof.
Section 8.12 Execution In Counterparts. To facilitate
execution, this Agreement may be executed in as many counterparts
as may be required; and it shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures
of all Persons required to bind any party, appear on each
counterpart; but it shall be sufficient that the signature of, or
on behalf of, each party, or that the signatures of the Persons
required to bind any party, appear on one or more of the
counterparts. All counterparts shall collectively constitute a
single agreement. It shall not be necessary in making proof of
this Agreement to produce or account for more than the number of
counterparts containing the respective signatures of, or on behalf
of all of the parties hereto.
Section 8.13 Assignment. No party to this Agreement shall
have the right to assign or otherwise transfer its rights or
obligations under this Agreement, except with the prior written
consent of the other; notwithstanding, either party may assign or
otherwise transfer its rights or obligations under this Agreement
to a subsidiary or affiliate upon notice to the other. Regardless
of the party to whom an assignment is made pursuant to this
Section 8.13, the assignee shall, as a condition to such
assignment, by written undertaking satisfactory to the other,
represent and warrant that the assignment was made in accordance
with all applicable laws and regulations and assume and agree to
be bound by the terms, provisions and conditions of this Agreement
to the same extent as the assignor; provided, however, that no
such assignment shall relieve the assignor of its obligations
(which shall be primary and which may be discharged in whole or in
part by the assignee) under this Agreement, to the extent
applicable. Any unauthorized assignment and any assignment made
in contravention of this Section 8.13 shall be null and void.
Section 8.14 No Agency. This Agreement shall not be deemed
expressly or by implication to create an agency, employee, or
servant relationship between or among any of the parties hereto,
or any affiliates of the parties hereto for any purpose
whatsoever.
Section 8.15 Force Majeure. No party shall be liable for
any failure of or delay in the performance of this Agreement for
the period that such failure or delay is due to acts of God,
public enemy, war, strikes or labor disputes, or any other cause
beyond the parties' reasonable control; it being understood that
lack of financial resources is not to be deemed a cause beyond a
party's control. Each party shall notify the other parties
promptly of the occurrence of any such cause and carry out this
Agreement as promptly as practicable after such cause is
terminated; provided, however, that the existence of any such
cause shall not extend the term of this Agreement.
Section 8.16 Time. Time is to be considered of the essence
for the purposes of this Agreement.
Section 8.17 Amendment and Modification. This Agreement
may only be amended or modified by a subsequent written agreement
by and among the parties hereto.
Section 8.18 Adherence To Applicable Law. In connection
with the performance of their respective obligations and the
exercise of their respective rights hereunder, each of the parties
hereto agrees, on behalf of itself and its subsidiaries or
affiliates, to comply in all material respects with all applicable
state, federal and local laws and regulations.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement effective as of the date first set forth above.
FINGERHUT CORPORATION
By:
Its:
METRIS DIRECT, INC.
By:
Its:
jb-6d
EXHIBIT A
CUSTOMER DATABASE
Customer Database includes information solely of Fingerhut's which
relates to its transactions or experiences with all of its
customers (including all past and current customers [name,
address, telephone and account numbers] as well as prospective
customers). The Customer Database does not include any
information of third parties which Fingerhut does not have by
contract or otherwise the right to provide to Metris. The
Customer Database also includes but is not limited to, as updated
from time to time, the following:
* Credit or behavioral data (including but not limited to
customer payment histories, behavior scores, fraud, deceased, bad
debt and other collection data),
* All existing or developed models (including algorithms and
documentation) that derive credit scores related to such datas;
* Demographic (including promotional database) data and models;
* Attitudinal data (such as order level purchasing
preferences); and
* Psychographic data (including customer surveys).
EXHIBIT B
FINANCIAL SERVICE PRODUCTS
Insurance Products* Brokerage Services (real
estate, financial, insurance)
Warranty or Extended Service Auto Lending/Leasing
Plans
Tax Preparation Services Equity Loans, Mortgages
Deposit Products Bank Credit Cards
Investment Services Secured Bank Cards
(Annuities, Mutual Funds, Prepaid Cards
CDs)
Car Buying Services Smart Cards
Debit Cards
Consumer Loans (other than Co Branded Cards, Credit Card
closed end installment or Registration
revolving credit loans to Private label cards (that are
Fingerhut customers for the in competition with the
exclusive Fingerhut private label card)
purchase of merchandise) Auto Clubs
Credit Enhancement Products
Affinity Bank Credit Cards
Travel Services
Student Loans Mobile Home Financing
Mail Grams
Travelers Checks, Money Orders
*except for any Insurance products offered within the closed-end
installment loan coupon book or credit insurance which is directly
tied to a revolving credit balance owed directly to Fingerhut or
its wholly owned subsidiaries or the wholly owned subsidiaries of
its parent.
Fingerhut confirms that it will endorse the [name omitted]
product until such time as Metris no longer offers
the xxx product. In the event Metris requests Fingerhut's
endorsement of other Financial Service Products, the parties agree
to cooperate in good faith to develop a mutually agreed Fingerhut
endorsed product.
EXHIBIT C
COMPENSATION
Metris shall pay Fingerhut a non-refundable Database License Fee
as set forth below:
1996 $xxx
1997 $xxx
1998 $xxx
1999 $xxx
2000 $xxx
2001 $xxx
2002 $xxx
In addition to the Database License Fee, Metris shall pay
Fingerhut a Solicitation Fee and Suppress File Fee as set forth
below:
Solicitation $xxx per consumer name mailed from the Customer
Fee: Database solely for solicitation by Metris on
behalf of unaffiliated third parties to sell
Financial Services Products as set forth in
Exhibit B.
Suppress File $xxx for each consumer name obtained from a third
Fee: party that is matched to the Fingerhut suppress
file solely for purposes of elimination from a
solicitation.
The above fees terminate upon termination of this agreement.
EXHIBIT D
Mailer
[names omitted]
Fingerhut and Metris agree that Fingerhut may continue to license
the use of the Customer Database to the above identified companies
until December 31, 1996. Thereafter, Fingerhut shall either (a)
assign its contract with such company to Metris or (b) terminate
its agreement with such company effective January 1, 1997.
Until December 31, 1996, Fingerhut agrees to pay to Metris xx% of
revenues it receives from the above named companies to license use
of the Customer Database.
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT ( the
"Agreement") is made and entered into as of the 31st day of
October, 1996 by and among Fingerhut Companies, Inc., a
Minnesota corporation, ("FCI"), Direct Merchants Credit Card
Bank, National Association ("Direct Merchants Bank"), a
national banking association, and Metris Companies Inc.
("Metris"), a Delaware corporation.
WHEREAS, FCI has performed and following the initial
public offering of Metris will continue to perform (or cause
to be performed) certain Services (as defined herein) on
behalf of Direct Merchants Bank, Metris and their
subsidiaries; and
WHEREAS, Direct Merchants Bank and Metris, desire to
use the Services of FCI;
NOW THEREFORE, in consideration of the mutual promises
and agreements set forth herein, the parties hereby agree as
follows:
I. SERVICES
Section 1.1 Services. During the term of this
Agreement, FCI agrees to perform the services (herein
"Services") set forth in Exhibits 1 through 8 (including any
schedules to such Exhibits) attached hereto and incorporated
herein by reference. Exhibit 9, attached hereto and
incorporated herein by reference, reflects Services which
Metris has agreed to perform for FCI. Each Exhibit shall be
subject to the terms as identified in the Exhibit. In the
event any Exhibit is terminated, the Agreement shall remain
in effect unless otherwise terminated as provided herein.
The Exhibits may be amended from time to time as the parties
may mutually agree as evidenced by an amendment signed by
the President, and/or Chief Financial Officer of each party.
The most recent of each Exhibit shall supersede all earlier
dated Exhibits. In the event of any conflict between the
terms of this Agreement and any Exhibit, the terms of this
Agreement shall govern. For purposes of this Agreement,
Services and resources provided by FCI shall include
services rendered and resources provided by any of its
subsidiaries or affiliates other than Metris and Direct
Merchants Bank.
Section 1.2 Performance of Services.
(a) FCI shall perform the Services with the same
degree of care, skill and prudence customarily exercised for
its own operations. In the event FCI changes the degree of
care, skill and prudence customarily exercised for its own
operations, the Services performed hereunder may be modified
by FCI to meet its revised internal performance standards
for the Services hereunder. It is understood and agreed
that the Services will be substantially identical in nature
and quality to the Services performed by FCI during the
years prior to the execution of this Agreement, except as
required by Metris becoming a public company.
(b) Each party acknowledges that the Services will be
provided only with respect to the business (including joint
ventures and partnerships) of the party receiving such
Services and its subsidiaries as such businesses exist as of
the execution of this Agreement or as otherwise mutually
agreed by the parties. Services will not be requested for
the benefit of any entity other than Direct Merchants Bank,
Metris and their respective subsidiaries. Each party agrees
that it will use the Services only in accordance with all
applicable federal, state and local laws, regulations and
tariffs, and in accordance with reasonable conditions,
rules, regulations and specifications which are or may be
set forth in any manuals, materials, documents or
instructions of the party providing the Services. The
parties hereto each reserve the right to take all actions,
including the termination of any Services, in order to
assure that the Services are provided in accordance with any
applicable laws, regulations and tariffs.
(c) Any input or information needed by either party to
perform the Services pursuant to the provisions of this
Agreement shall be provided by the other party or its
subsidiaries, as the case may be, in a manner consistent
with the practices employed by the parties during the year
prior to the execution of this Agreement. Should the
failure to provide such input or information render the
performance of the Services impossible or unreasonably
difficult, the party providing the Services may, upon
reasonable notice to the other parties hereto, refuse to
provide such Services.
Section 1.3 Compensation. FCI shall be compensated
for the Services rendered under this Agreement and Services
rendered prior to this Agreement as determined and as set
forth in the Exhibits hereto. Metris shall be responsible
for payments owed to FCI hereunder. In the event Metris
incurs an Event of Default and after FCI has exercised its
remedies pursuant to Section 4.2, Direct Merchants Bank and
any other subsidiary of Metris shall be responsible for
payment to FCI for Services it received hereunder. Payments
shall be made by the thirtieth (30th) of the month following
the month in which such Services are performed either by
check or wire transfer. If there are additional Services,
and to the extent charges are to be agreed upon in the
future in accordance with any Exhibit, the charges will be
determined as follows:
(i) Charges for Services performed by a third party
shall be equal to the incremental costs charged by such
third party to perform those Services as agreed to by the
parties. With respect to all other Services not to be
provided by a third party, the parties hereto will negotiate
in good faith, fees to be charged on a monthly basis. Fees
for Services not provided by third parties shall be based on
the estimated costs of providing such Services, which shall
include a reasonable allocation of direct and indirect
overhead costs (including, without limitation, employee
salaries, benefits and other costs) expected to be incurred
in connection therewith.
(ii) If any additional Services provided by FCI and as
set forth in the Exhibits attached hereto, or if the scope
or nature of Services provided at any time under this
Agreement change materially, the parties hereto will
negotiate in good faith new fees based on the estimated cost
of providing such additional or revised Services. Fees for
Services not provided by third parties shall be based on the
estimated costs of providing such Services, which shall
include a reasonable allocation of direct and indirect
overhead costs (including, without limitation, employee
salaries, benefits and other costs) expected to be incurred
in connection therewith.
II. CONFIDENTIALITY
Section 2.1 Confidentiality of Information. All
Confidential Information (as hereinafter defined) disclosed
by any of the parties to any other party hereunder is
confidential and proprietary to such disclosing party. Each
party, its affiliates, and officers, directors, employees,
agents, consultants and contractors shall not use any of the
Confidential Information for any purpose other than as
expressly permitted hereunder. Confidential Information
furnished by any of the parties to any other in connection
with this Agreement (or previously disclosed prior to
execution of this Agreement) and the transactions
contemplated hereby will be kept in confidence by such other
party, including its affiliates or subsidiaries, in
accordance with its policies for maintaining the confidence
of its own information of similar content. The term
Confidential Information shall mean and include: (i) all
trade secrets and other confidential business information
learned in the course of performance by any party of its
obligations hereunder, (ii) any information, data, software
or computer programs which are disclosed by any party to the
other party under or in contemplation of this Agreement.
Confidential Information may be either the property of the
disclosing party or information provided to the disclosing
party by a corporate affiliate of the disclosing party or by
a third party. Notwithstanding the foregoing, the term
"Confidential Information" shall not include information
which: (i) is already known to such other party when
received (except for information previously disclosed which
the parties have identified as Confidential Information and
subject to the confidentiality requirements of this
Agreement), (ii) thereafter becomes generally obtainable by
a party other than as a result of an unauthorized disclosure
by the party taking advantage of this clause, (iii) is
required by law, regulation or court order to be disclosed
by such party, provided that in the case of this clause,
prior notice of such disclosure has been given to the party
which furnished such information, when legally permissible,
and that such other party which is required to make the
disclosure uses its best efforts to provide sufficient
notice to permit the party which furnished such information
to take legal action to prevent the disclosure or (iv) is
reasonably necessary, in the opinion of counsel, to be
disclosed in the context of a legal proceeding or regulatory
investigation provided that prior notice shall be given to
the party which furnished the information. This Section 2.1
shall survive any termination of this Agreement for five (5)
years.
III. CONFLICT RESOLUTION
Section 3.1 Conflict Resolution. Any dispute,
controversy or claim relating to this Agreement (a
"Dispute") shall initially be referred to the executive
management of each of the parties to the Dispute. In the
event executive management cannot come to an agreement on a
particular Dispute, then the matter shall be submitted to
the respective Chief Executive Officers and General Counsel
("Designated Officers") of the parties to the Dispute. The
Designated Officers of each party then shall investigate and
evaluate the dispute. The parties agree to cooperate in
this process by exchanging relevant information unless such
information is privileged. The Designated Officers or their
respective designees shall meet as appropriate to, in good
faith, resolve the dispute.
IV. EVENTS OF DEFAULT AND REMEDIES
Section 4.1 Event of Default. An "Event of Default"
shall be deemed to occur upon the earliest to occur of the
following:
(a) A material breach of a material representation,
agreement or other obligation of any of the parties to this
Agreement (any such breach is herein referred to as a
"Material Breach"); provided, however, that no Event of
Default shall be deemed to have occurred unless and until:
(i) a non-breaching party provides the breaching party with
written notice of such Material Breach, describing in
reasonable detail the nature of such Material Breach, (ii)
the breaching party shall have had an opportunity to cure
such Material Breach within sixty (60) days after such
notice, (unless such Material Breach is with respect to a
monetary matter, the cure of which requires only the payment
of a specified amount of money pursuant to the terms of this
Agreement, in which case the breaching party shall have had
an opportunity to cure within ten (10) business days after
such notice); (iii) the breaching party does not cure such
Material Breach within the applicable time period, or, if
such Material Breach, other than a Material Breach relating
to a monetary matter, cannot reasonably be cured within such
period, but is curable, the breaching party does not (x)
undertake to cure such Material Breach within such sixty
(60) day period and (y) after such sixty (60) day cure
period, diligently and continuously use all reasonable
efforts to cure, and (iv) the notifying party thereafter
declares an Event of Default. In respect of clause (iii),
(x), (y) of this Section 4.1(a), such extended cure period
shall continue so long as the parties hereto reasonably
agree that the actions being taken by the breaching party
are reasonably expected to cure such Material Breach.
(b) If, at any time within twelve (12) months
following the expiration of any cure period provided in
Section 4.1(a) above, there shall occur a Material Breach
(the "Second Material Breach") and such Second Material
Breach is of the same nature as the Material Breach (the
"First Material Breach") by the breaching party that gave
rise to such cure period, then an Event of Default shall be
deemed to have occurred upon the delivery of notice of such
Second Material Breach to the breaching party by the
notifying party referred to in paragraph (a) of this Section
4.1 and upon such notifying party declaring an Event of
Default.
(c) If there shall occur a "Bankruptcy," as
hereinafter defined, of any party, any non-bankruptcy party
may declare an Event of Default. For purposes of this
Agreement, the term "Bankruptcy" shall mean (i) the entry of
a decree or order for relief by a court of competent
jurisdiction in any involuntary case under any bankruptcy,
insolvency or similar law now or hereafter in effect, and
such decree or order shall not be vacated, set aside or
stayed within ninety (90) days after its entry, (ii) the
entry of a decree or order appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator or
similar agent for any substantial part of the assets or
property and such decree or order shall not be vacated, set
aside or stayed within ninety (90) days after its entry,
(iii) the ordering of the winding up or liquidation of the
affairs of a party and such order shall not be vacated, set
aside or stayed within one hundred twenty (120) days after
its entry, (iv) the filing of a petition in any such
involuntary bankruptcy case, which petition remains
undismissed for a period of ninety (90) days or which is not
dismissed or suspended pursuant to Section 305 of Title 11
of the United States Code (or any corresponding provision of
any future United States Bankruptcy law), (v) the
commencement of a voluntary case under any bankruptcy,
insolvency or similar law now or hereafter in effect, (vi)
the consent to the entry of an order for relief in an
involuntary case under any such law or to the appointment of
or taking possession of any substantial part of the assets
or property by a receiver, liquidator, assignee, trustee,
custodian, sequestrator or similar agent, or (vii) the
making of any general assignment for the benefit of
creditors
Section 4.2 Remedies. Each of the parties hereto
shall be liable to the other parties for damages arising out
of or in connection with any breach of this Agreement
including any breach by their respective subsidiaries
(except to the extent that Direct Merchants Bank and Metris
are subsidiaries of FCI) to the extent permitted by law,
subject to the duty of the non-breaching parties to take all
reasonable actions in order to mitigate such damages. The
parties agree that in no event shall any party to this
Agreement be liable to the other parties for punitive,
indirect, special or consequential damages arising out of a
breach of this Agreement. It is understood and agreed that
monetary damages may not be a sufficient remedy for any
Event of Default. Accordingly, the non-breaching parties
shall, to the extent permitted by law or equity, be entitled
to specific performance and injunctive or other equitable
relief as a remedy for any breach of, or Event of Default
under this Agreement. The remedies described in this
Section 4.2 shall not be deemed to be the exclusive remedies
for any breach of, or Event of Default under this Agreement,
but shall be in addition to all other remedies available to
the parties at law or in equity, subject to the limitations
with respect to damages set forth above in this Section 4.2.
V. INDEMNIFICATION
Section 5.1 Indemnification Obligations
(a) By Direct Merchants Bank. Direct Merchants Bank
shall be liable to and shall defend, indemnify and hold
harmless, Metris, FCI and their affiliates, and their
respective officers, directors, employees and permitted
assigns, from and against any and all Losses (as hereinafter
defined) incurred by any of them by reason of or related to
Direct Merchants Bank's failure to perform its obligations
hereunder.
(b) By FCI. FCI shall be liable to and shall defend,
indemnify and hold harmless, Direct Merchants Bank, Metris
and their affiliates, and their respective officers,
directors, employees and permitted assigns, from and against
any and all Losses (as hereinafter defined) incurred by
reason of or related to FCI's failure to perform its
obligations hereunder.
(c) By Metris. Metris shall be liable to and shall
defend, indemnify and hold harmless, Direct Merchants Bank,
FCI and their affiliates, and their respective officers,
directors, employees and permitted assigns from and against
any and all Losses (as hereinafter defined) incurred by any
of them by reason of or related to Ff.'s failure to perform
its obligations hereunder.
(d) "Losses" Defined. For purposes of this Section
5.1, the term "Losses" shall mean any losses, liability,
claims, damages, costs, and expenses, including attorney's
fees, disbursements and court costs, reasonably incurred by
an indemnified party, judgments, fines and other amounts
paid in settlement, incurred or suffered by an indemnified
party in connection with any threatened, pending or
adjudicated claim, demand, action, suit or proceeding
(whether civil, criminal, administrative or investigative,
by an unaffiliated third party arising out of or in
connection with any breach or alleged breach of this
Agreement) without regard to whether or not such Losses
would be deemed material under this Agreement.
Section 5.2 Procedures
(a) Notice of Claims. The parties agree that in case
any claim is made, or any suit or action is commenced which,
if not corrected, may give rise to a right of
indemnification by a party hereunder ("Indemnified Party")
from one of the other parties ("Indemnifying Party"), the
Indemnified Party will give notice to the Indemnifying party
as promptly as practicable after the receipt by the
Indemnified party of such notice or knowledge of such claim,
suit, or action. On a best efforts basis, notice to the
Indemnifying Party shall be given no later than fifteen days
after receipt by the Indemnified Party in the event a suit
or action has commenced or thirty days under all other
circumstances; provided, however, that the failure to give
prompt notice shall not relieve an Indemnifying Party of its
obligation to indemnify except to the extent that the
Indemnifying Party is materially prejudiced by such failure.
The Indemnified Party shall make available to the
Indemnifying Party and its counsel and accountants at
reasonable times and for reasonable periods, during normal
business hours, all books and records of the Indemnified
Party relating to any such possible claim for
indemnification, and each party will render to the other
such assistance as it may reasonably require of the other in
order to ensure prompt and adequate defense of any suit,
claim or proceeding based upon a statement of facts which
may give rise to a right of indemnification hereunder.
(b) Selection of Counsel. The Indemnifying Party
shall have the right to defend, compromise and settle any
suit, claim or proceeding in the name of the Indemnified
Party to the extent that the Indemnifying Party may be
liable to the Indemnified Party under Section 5.1 above in
connection therewith; provided, however, that the
Indemnifying Party shall not compromise or settle a suit,
claim or proceeding unless it assumes the obligation to
indemnify for all Losses related thereto. In the event two
of the parties to this Agreement must indemnify the third,
the parties agree the two Indemnifying Parties must agree to
select one to be the Indemnifying Party to the third
Indemnified Party and the third Indemnified Party shall look
to one party to this Agreement for indemnification. The
Indemnifying Party shall notify the Indemnified Party within
ten days of having been notified pursuant to Section 5.2(a)
of this Agreement if the Indemnifying Party elects to assume
the defense of any such claim, suit or action and employ
counsel in a reasonable exercise of its discretion. The
Indemnified Party shall have the right to employ its own
counsel to participate in such defense, compromise or
settlement, but the fees and expenses of such counsel shall
be at the Indemnified Party's expense, unless the
Indemnifying Party shall not have employed counsel to take
charge of the defense thereof.
(c) Settlement of Claims. The Indemnified Party may
at any time notify the Indemnifying Party of its intention
to settle or compromise any claim, suit or action against
the Indemnified Party in respect of which indemnification
payments may be sought from the Indemnifying Party
hereunder, but shall not settle or compromise any matter for
which indemnification may be sought without the consent of
the Indemnifying Party. Any settlement or compromise of any
claim, suit or action in accordance with the preceding
sentence, or any final judgment or decree entered on or in
any claim, suit or action which the Indemnifying Party did
not assume the defense of in accordance herewith, shall be
deemed to have been consented to by, and shall be binding
upon, the Indemnifying Party as fully as if the Indemnifying
Party had assumed the defense thereof and a final judgment
or decree had been entered in such suit or action, or with
regard to such claim, by a court of competent jurisdiction
for the amount of such settlement, compromise, judgment or
decree.
(d) Subrogation. The Indemnifying Party shall be
subrogated to any claims or rights of the Indemnified Party
as against any other persons with respect to any amount paid
by the Indemnifying Party under this Section 5. The
Indemnified Party shall cooperate with the Indemnifying
Party, at the Indemnifying Party's expense, in the assertion
by the Indemnifying Party of any such claim against such
other persons.
(e) Indemnification Payments. Amounts owing under
this Section 5 shall be paid promptly upon written demand
for indemnification containing in reasonable detail the
facts giving rise to such liability; provided, however, if
the Indemnifying Party notifies the Indemnified Party within
thirty (30) days of receipt of such demand that it disputes
its obligation to indemnify and the Parties are not
otherwise able to reach agreement, the controversy shall be
settled by final order entered by a court of competent
jurisdiction.
Section 5.3 Survival of Indemnification. The
provisions of this Section 5 shall expressly survive any
termination of this Agreement or otherwise for a period of
five (5) years.
VI. TERM AND TERMINATION
Section 6.1 Term and Termination. This Agreement
shall take effect upon the date first written above, and
shall remain until December 31, 1998 ("Initial Term").
Thereafter, this Agreement will automatically renew for an
additional term of one (1) year ("Renewal Term") unless each
party provides written notice to the other parties to this
Agreement of not less than six (6) months prior to the end
of the Initial Term or Renewal Term of its intent to
terminate this Agreement. Any party may terminate this
Agreement reserving all other remedies and rights hereunder
in whole or in part and otherwise available in law or in
equity, upon the following conditions:
(a) the occurrence of an Event of Default. Upon the
occurrence of an Event of Default, a non-defaulting party
may terminate this Agreement by giving no less than 30 days
prior written notice of its intent to terminate to each of
the other parties to this Agreement which notice shall
describe the Event of Default;
(b) at any time upon mutual agreement of the parties
upon 90 days' prior written notice;
(c) any party may terminate any Exhibit upon mutual
agreement of the parties during any Initial Term or Renewal
Term without terminating this Agreement; or
(d) FCI shall have the right to terminate this
Agreement by written notice to Metris and Direct Merchants
Bank upon the occurrence of a Change of Control (as defined
below) with respect to Metris. A "Change in Control" shall
be deemed to have occurred if (i) any person or group
(within the meaning of Rule 13d-5 of the Securities Exchange
Act of 1934 as in effect on the date hereof) other than FCI
shall own directly or indirectly, beneficially or of record,
shares representing more than 25% of the aggregate ordinary
voting power represented by the issued and outstanding
capital stock of Metris; (ii) a majority of the seats (other
than vacant seats) on the Board of Directors of Metris shall
at any time be occupied by persons who were neither (1)
nominated by FCI or by the Board of Directors of Metris, nor
(2) appointed by directors so nominated; or (iii) any person
or group other than FCI shall otherwise directly or
indirectly have the power to exercise a controlling
influence over the management or policies of Metris.
VII. MISCELLANEOUS
Section 7.1 Additional Actions and Documents. Each
of the parties hereto agrees to take or cause to be taken
such further actions, to execute, acknowledge, deliver and
file or cause to be executed, acknowledged, delivered and
filed such further documents and instruments, and to use all
reasonable efforts to obtain such consents, as may be
necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this
Agreement.
Section 7.2 Notice. All notices, demands, requests
or other communications which may be or are required to be
given pursuant to this Agreement shall be in writing and
shall be personally delivered, mailed by first class,
registered or certified mail postage prepaid, or sent by
electronic or facsimile transmission, addressed as follows:
(a) If to Metris:
Metris Companies Inc.
600 South Highway 169, Suite 1800
St. Louis Park,
Minnesota 55426
Attention:
President
(b) If to FCI:
Fingerhut
Companies, Inc.
4400 Baker Road
Minnetonka,
Minnesota 55343
Attention:
General Counsel
(c) If to Direct
Merchants Bank:
Direct Merchants Credit Card
Bank, National Association
1455 West 2200 South, Suite 300
Salt Lake City, Utah 84119
Attention: President
Each party may designate by notice in writing a
new
address to which any notice, demand, request or
communication may thereafter be so given, served
or sent. Each notice, demand, request or
communication which shall be delivered, mailed
or transmitted in the manner described above
shall be deemed sufficiently given, served, sent
or received for all purposes at such time as it
is delivered to the addressee or at such time as
delivery is refused by the addressee upon
presentation.
Section 7.3 Severability. Whenever
possible, each provision of this Agreement shall
be interpreted in such a manner as to be
effective and valid under applicable law, but if
one or more of the provisions of this Agreement
is subsequently declared invalid or
unenforceable, such invalidity or
unenforceability shall not in any way affect the
validity or enforceability of the remaining
provisions of this Agreement (unless those
provisions which are invalidated or
unenforceable are clearly material and
inseparable from such other provisions). In the
event of such declaration of invalidity or
unenforceability, this Agreement, as so
modified, shall be applied and construed so as
to reflect substantially the intent of the
parties and achieve the same economic effect as
originally intended by the terms hereof. In the
event that the scope of any provision to this
Agreement is deemed unenforceable by a court of
competent jurisdiction, the parties agree to the
reduction of the scope of such provision as such
court shall deem reasonably necessary to make
such provision enforceable under the
circumstances.
Section 7.4 Survival. It is the express
intention
and agreement of the parties hereto that all
covenants, agreements, statements,
representations, warranties and indemnities made
in this Agreement shall survive the execution
and delivery of this Agreement.
Section 7.5 Waivers. Neither the waiver
by any party hereto of a breach of or a default
under any of the provisions of this Agreement,
nor the failure of any party hereto, on one or
more occasions, to enforce any of the provisions
of this Agreement or to exercise any right,
remedy or privilege hereunder shall thereafter
be construed as a waiver of any such provisions.
The provisions, rights, remedies, warranties and
conditions of this Agreement may be waived only
by a written instrument executed by the party
warning compliance.
Section 7.6 Audit Rights. Each party
agrees that all records relating to this
Agreement at all times shall be subject to
inspection and review by each party's internal
auditors or its designees and the examiners of
any regulatory agency, having jurisdiction over
each party to
this Agreement. If any party to this Agreement
receives any requests or demands under authority
of law (subpoenas, so called discovery means, or
audit demands of any taxing authority) for
access to information of any other party, the
party receiving such request or demand but shall
immediately inform the party from whom such
information is requested of such request or
demand but shall not grant access to such
information without FCI's, Metris' and/or Direct
Merchant Bank's permission. By entering into
this Agreement, FCI agrees that the appropriate
bank regulatory agency will have the authority
and responsibility to do all things required or
contemplated by applicable banking laws or
regulations provided to the other regulatory
agencies relating to services performed by
contract or otherwise for a bank or bank holding
company. FCI further agrees to reasonably
cooperate with and provide any reasonable
information to the appropriate bank regulatory
agency.
Section 7.7 Binding Effect. Subject to
any
provisions hereof restricting assignment, this
Agreement shall be binding upon and shall inure
to the benefit of the parties and their
respective successors and permitted assigns.
Section 7.8 Pronouns. All pronouns and
any
variations thereof shall be deemed to refer to
the masculine, feminine, neuter, singular or
plural, as the identity of the person may
require.
Section 7.9 Headings. Section headings
contained in
this Agreement are inserted for convenience of
reference only, shall not be deemed to be a part
of this Agreement for any purpose, and shall not
in any way define or affect the meaning,
construction or scope of any of the provisions
hereof.
Section 7.10 Governing Law. This
Agreement, the
rights and obligations of the parties hereto,
and any claims or disputes relating thereto,
shall be governed by and construed in accordance
with the internal laws of the State of
Minnesota without giving effect to the
principles of conflicts of laws thereof.
Section 7.11 Execution In Counterparts.
To
facilitate execution, this Agreement may be
executed in as many counterparts as may be
required; and it shall not be necessary that the
signatures of, or on behalf of, each party, or
that the signatures of all persons required to
bind any party, appear on each counterpart; but
it shall be sufficient that the signature of, or
on behalf of, each party, or that the signatures
of the persons required to bind any party,
appear on one or more of the counterparts. All
counterparts shall collectively constitute a
single agreement. It shall not be necessary in
making proof of this Agreement to produce or
account for more than the number of counterparts
containing the respective signatures of, or on
behalf of all of the parties hereto.
Section 7.12 Assignment. No party to
this Agreement
shall have the right to assign or otherwise
transfer its rights or obligations under this
Agreement, except with the prior written consent
of the other parties hereto; notwithstanding,
any party may assign or otherwise transfer its
rights or obligations under this Agreement to a
successor in interest, subsidiary or affiliate
upon notice to the other parties. Regardless of
the party to whom an
assignment is made pursuant to this Section
7.13, the assignee shall, as a condition to such
assignment, by written undertaking satisfactory
to the other parties, represent and warrant that
that assignment was made in accordance with all
applicable laws and regulations and assume and
agree to be bound by the terms, provisions and
conditions of this Agreement to the same extent
as the assignor; provided, however, that no such
assignment shall relieve the assignor of its
obligations (which shall be primary and which
may be discharged in whole or in part by the
assignee) under this Agreement, to the extent
applicable. Any unauthorized assignment and any
assignment made in contravention of this Section
7.12 shall be null and void.
Section 7.13 No Agency. This Agreement
shall not be deemed expressly or by implication
to create an agency, employee, or servant
relationship between or among any of the parties
hereto, or any affiliates of the parties hereto
for any purpose whatsoever.
Section 7.14 Force Majeure. No party
shall be liable for any failure of or delay in
the performance of this Agreement for the period
that such failure or delay is due to acts of
God, public enemy, war, strikes or labor
disputes, or any other cause beyond the parties'
reasonable control; it being understood that
lack of financial resources is not to be deemed
a cause beyond a party's control. Each party
shall notify the other parties promptly of the
occurrence of any such cause and carry out this
Agreement as promptly as practicable after such
cause is terminated; provided, however, that the
existence of any such cause shall not extend the
term of this Agreement.
Section 7.15 Time. Time is to be considered
of the
essence for the purposes of this Agreement.
Section 7.16 Amendment and Modification.
This Agreement or any Exhibits may only be
amended or modified by a subsequent written
agreement by and among the parties hereto.
Section 7.17 Adherence To Applicable Law.
In connection with the performance of their
respective obligations and the exercise of their
respective rights hereunder, each of the parties
hereto agrees, on behalf of itself, and its
subsidiaries or affiliates (except to the extent
that Direct Merchants Bank and Metris are
affiliates of FCI), to comply in all material
respects with all applicable state, federal and
local laws and regulations.
Section 7.18 Entire Agreement. This
Agreement and the Exhibits represent the entire
undertaking of the parties hereto with respect
to the subject matter hereof. This Agreement
and the Exhibits supersede all prior agreements
and all contemporaneous agreements not required
or contemplated hereby, whether oral or written,
and all representations, warranties,
undertakings, and understandings by and between
the parties with respect to the subject matter
hereof.
IN WITNESS WHEREOF, the parties hereto have
executed
this Agreement on the date and year first
written above.
FINGERHUT COMPANIES,
INC.
By
Title
DIRECT MERCHANTS CREDIT
CARD BANK, NATIONAL ASSOCIATION
By
Title
METRIS COMPANIES INC.
By
Title
EXHIBIT 1
Treasury Services
FCI agrees that it has or will on behalf of
Direct Merchants Bank and/or Metris (including
subsidiaries) as the case may be:
1. Use its best reasonable efforts to arrange
and will
administer all financing arrangements,
including the securitization of assets, any
corporate financing and execution of any
leases.
2. Arrange and Administer all interest rate
and similar
hedging transactions, and the leasing or
sale leaseback of any real or personal
property, including the execution of any
leases.
3. Provide cash management administration and
banking
advisory services.
Duration:
Effective through December 31, 1996.
Compensation:
1. Incremental third party expenses, and
2. A Pro rata share of department expenses as
agreed to by
the parties for each of the calendar years
ended as reflected below:
1991 1992 1993
1994
1995 1996
$xxx $xxx $xxx $xxx
$xxx
$xxx
EXHIBIT 2
General Accounting and Administrative Services
1. Tax Services
FCI agrees that it has or will on behalf of
Direct Merchants Bank and/or Metris (including
subsidiaries) as the
case may be:
1. Prepare all Federal tax filings,
including any extensions thereof, and any payroll
tax filings for Metris, or its
predecessor, and its subsidiaries and
affiliates, including Metris Financial
Services Receivables, Inc. ("MFSRI")
and Direct Merchants Bank. Prepare
and file any and all estimated tax
installments required hereunder
pursuant to the Tax Sharing Agreement
dated October 31, 1996.
.
2. Prepare any and all state tax filings,
any extensions thereof, and any other non-
federal tax filings, including any
payroll tax filings, for Metris, or
its predecessor and subsidiaries and
affiliates, and for the states of
Minnesota, Utah and Oklahoma. Any tax
filings for other states where it is
determined that Metris or its
predecessor and its subsidiaries and
affiliates have income tax nexus shall
require an amendment to this Exhibit.
Prepare and file any and all estimated
tax installments required hereunder
pursuant to the Tax Sharing Agreement
dated October 31,1996.
3. Assist in the analysis of any and all
securitization, interest rate hedging
and other financing arrangements and
any and all other transactions or
arrangements which may have tax
ramifications for the purpose of
determining the proper tax treatment
for such transactions or arrangements;
4. Assist in the analysis of any and all
employee compensation issues from a tax
perspective
5. Assist with any tax planning and
research for Metris, or its predecessor, and their
subsidiaries or affiliates; and
6. Be the sole and exclusive agent and
representative of Metris, or its predecessor, and
subsidiaries and affiliates, in any
matters relating to the tax filings
noted above, and subject to
examination by representatives of the
Internal Revenue Service or any
similar state agency pursuant to the
Tax Sharing Agreement dated October
31, 1996.
Duration:
Effective through December 31, 1997.
2. Insurance Services/Risk Management
FCI agrees that it has or will:
Use its best reasonable efforts to arrange and
will administer all existing insurance
arrangements, including: Workman's
Compensation Insurance, Property and Casualty
Insurance, excess liability insurance, Employee
Blanket Bond Insurance, Director and Officer
liability insurance and any other types of
insurance reasonably required by Metris, or its
predecessor, and its subsidiaries and
affiliates, including Direct Merchants Bank.
FCI may, subject to notification of Metris,
fulfill its obligation with respect to any of
the identified coverages by arranging for
Metris and its subsidiaries and affiliates
to be included under FCI's policies.
Duration:
Effective through December 31, 1997
3. General Accounting Services
FCI agrees that it has or will:
1. Provide the assistance of its Chief
Financial Officer, Corporate Controller and
other accounting staff in the
preparation of the financial
statements and other financial
information of Metris for internal and
external business needs, or its
predecessor, and its subsidiaries and
affiliates including Direct Merchants
Bank. Such FCI personnel will also
assist such parties by providing
financial advice and guidance, where
necessary, in the conduct of their
business, including financial advice
provided in the negotiation of any
contractual arrangements and other
financial transactions;
2. Provide Metris, or its predecessor,
and its subsidiaries and affiliates,
including Direct Merchants Bank with
access and use of FCI's general ledger
system for the recording and analyzing
of such entities financial
transactions;
3. Provide accounts payable and other
disbursement services for Metris, or
its predecessor, and its subsidiaries
and affiliates, including Direct
Merchants Bank; and
4. Provide payroll and other employee
compensation accounting services for Metris, or its
predecessor, and its subsidiaries and
affiliates, including Direct Merchants
Bank
Compensation:
1. Incremental third party expenses; and
2. A pro rata share of expenses as agreed to
by the parties for each of the calendar years ended
as reflected below:
1991 1992 1993 1994 1995 1996 1997
$xxx $xxx $xxx $xxx $xxx $xxx xxx*
* To be negotiated in good faith subsequent to
the execution of this agreement.
EXHIBIT 3
Human Resource Services
FCI agrees that it has or that it will on behalf
of Direct Merchants Bank and/or Metris
(including subsidiaries) as the case may be:
1. Use its best reasonable efforts to arrange
and will administer all human resource activities,
including the development and
administration of all policies and
procedures for the determination of all
Metris, or its predecessor and its
subsidiaries and affiliates, including
Direct Merchants Bank employee compensation
and benefits including the development and
administration of all related benefit plans
which such employees may now, have been or
hereafter may be participants in.
2. Assist in the review and determination of
all hiring and termination decisions of employees of
Metris, or its predecessor, and Direct
Merchants Bank, and its subsidiaries,
including the development of policies and
procedures therefor; and including
assistance in interviewing, placing adds
and hiring search firms for new employees
3. Assist in the counseling process for
employees,including all job performance reviews, and
maintain all personnel records, including those
required by the laws, rules and regulations of
the states or the Federal Government.
Duration:
Effective through December 31, 1997.
Compensation:
1. Incremental third party expenses; and
2. A pro-rata share of department expenses as
agreed to by the parties for each of the
calendar years ended as reflected below:
1991 1992 1993 1994 1995 1996 1997
$xxx $xxx $xxx $xxx $xxx $xxx xxx*
*To be negotiated in good faith subsequent to
the execution of this agreement.
EXHIBIT 4
Legal Services
FCI agrees that it has or that it will on behalf
of Direct Merchants Bank and/or Metris
(including subsidiaries) as the case may be,
provide legal services, including the retention
and management of outside counsel:
1. Assist in the preparation and review of all
contractual obligations of Metris, Direct Merchants
Bank and their subsidiaries.
2. Assist in the assessment of the
applicability and subsequent compliance of the laws, rules
and regulations of the various authorities
which have jurisdiction over Metris, Direct
Merchants Bank and their subsidiaries.
3. Review and recommend changes to the legal
structure and organization of the business of Metris.
Direct Merchants Bank and their
subsidiaries.
4. Provide counsel on all other business
issues as appropriate
5. Assist in the preparation and review of all
required filings with the SEC, OCC, FDIC, the
Federal Reserve and any other applicable
authority having jurisdiction over Metris,
Direct Merchants Bank and their
subsidiaries.
6. Any matter which any party deems to create
a conflict or possible conflict with any other party
shall be handled by separate independent
counsel on behalf of each party. FCI's
legal department shall only represent FCI
in any such matter, even if the conflict or
potential conflict is between FFS and
Direct Merchants Bank.
Duration:
Effective date through December 31, 1997.
Compensation:
1. Incremental third party expenses, and;
2. A pro-rata share of department expenses as
agreed to by the parties in this agreement
for each of the calendar years ended as reflected below:
1991 1992 1993 1994 1995 1996 1997
$xxx $xxx $xxx $xxx $xxx $xxx xxx*
* To be negotiated in good faith subsequent to
the execution of this agreement.
EXHIBIT 5
Internal Audit
FCI agrees that it has or it will on behalf of
Direct Merchants Bank and/or Metris (including
subsidiaries) as the case may be:
1. Conduct periodic audits and reviews of the
operations and the level of compliance with both Metris, or
its predecessor, Direct Merchants Bank and
their subsidiaries' policies and procedures
and the rules and regulations of the
various authorities having jurisdiction
over them; Assess the adequacy of the
internal control structure of both Metris,
Direct Merchants Bank and their
subsidiaries and provide written reports
summarizing the conclusions from such
audits and reviews, including
recommendations for improvement in
the areas audited or reviewed.
Duration:
Effective date through December 31, 1997.
Compensation:
1. Incremental third party expenses,
and;
2. A pro-rata share of department expenses as
agreed to by the parties to this agreement for each of
the calendar years ended as reflected below:
1996 1997
$xxx xxx*
*To be negotiated in good faith subsequent to
the execution of this agreement.
EXHIBIT 6
Marketing Analysis
FCI agrees that it has or that it will on behalf
of Direct Merchants Bank and/or Metris
(including subsidiaries) as the case may be:
1. Provide the equivalent of up to one full
time analyst in the marketing analysis department to
assist with access, review, selection and
segmentation of the Customer Database as
allowed for under separate agreements
between FCI and/or its subsidiaries, and
Metris and/or its subsidiaries, including
Direct Merchants Bank. Also, assist Metris
and Direct Merchants Bank and their
subsidiaries, in conducting marketing
research, including present customer and
potential customer surveys and competitive
analysis, among other similar projects.
Duration:
Effective through December 31, 1996.
Compensation:
1. Incremental third party expenses, and;
2. A pro-rata share of department expenses as
agreed to by the parties to this agreement for each of
the calendar years ended as reflected below:
1991 1992 1993
1994
1995 1996
$xxx $xxx $xxx $xxx $xxx
$xxx
EXHIBIT 7
Executive Time & Space/Property Allocations
(ended prior to execution of this
agreement)
FCI agrees that it has or it will on
behalf of Direct
Merchants Bank and/or Metris (including
subsidiaries) as the case may be:
1. Provide executive time and leadership in the
development of the businesses of Metris, or its
predecessor, Direct Merchants Bank and their
subsidiaries.
2. Review and conclude on all business deals,
contracts
and transactions of Metris, or its
predecessor, Direct Merchants Bank or their
subsidiaries which would normally require
such level of review and approval. Provide
any other assistance normally required of
executive talent where necessary.
3. Provide adequate space and fixed assets
necessary for
the conduct of the business of Metris or its
predecessor, Direct Merchants Bank and their
subsidiaries, including mainframe computer
and peripherals access and use.
Duration:
Effective through December 31, 1995 (no
allocations for 1996)
Compensation:
1. Incremental third party expenses, including
leases in
Tulsa, Oklahoma, and Salt Lake City, Utah,
but excluding the lease at the Interchange Tower
in St. Louis Park, Minnesota or at the Seagate
Building in Minnetonka, Minnesota.
2. A pro-rata portion of executive time and
space, other
than that noted in 1 above, and a pro-rata
portion of the depreciation and amortization
expense of fixed assets utilized by Metris,
Direct Merchants Bank, and their
subsidiaries, other than that which Metris
already owns or has contracted for itself
directly, including mainframe computer and
peripherals usage as agreed to by the
parties to this agreement for each of the
calendar years ended as noted below:
1991 1992 1993
1994 1995
$xxx $xxx $xxx $xxx $xxx
EXHIBIT 8
Information Systems Services
FCI agrees that it has or that it will on behalf
of Direct Merchants Bank and/or Metris (including
subsidiaries) as the case may be:
I Provide certain "Systems", which shall mean
certain
data processing hardware and software that
Metris and/or Direct Merchants Bank do not
own because they do not have the processing
needs to justify ownership of such hardware
or software, or where such hardware and
software is proprietary to FCI, but such
hardware and software is integral to the
ongoing business operations of Metris and
its subsidiaries and affiliates. Such
hardware and software shall include but not
be limited to mainframe computers, certain
data and voice communication hardware and
software, certain telephone lines, certain
telecommunications equipment. and
certain local and wide area networking services,
software and equipment.
2. Provide certain "System Resources", which
shall mean
certain skilled employees or independent
contractors of FCI who are programmers,
system analysts, data processing and data
communications technical support staff who
support the Systems. Such System Resources
shall not include those personnel who are
employees or independent contractors of
Metris, and its subsidiaries and affiliates
and shall primarily be those personnel whose
functions Metris or its subsidiaries and
affiliates cannot justify a full-time need
for. Metris and FCI may mutually agree to
transfer System Resources to the cost center
of Metris.
3. During the service periods noted below,
provide the
System Resources and maintain the Systems,
in accordance with the Service Level
Agreement attached hereto and incorporated
herein by reference as Schedule I to Exhibit
8, in connection with the services to be
provided to Metris in the operation of its
businesses.
4. Ensure that the operations, hardware
configurations,
software and other facilities and procedures
relating to access to, operation and use of
the Systems Resources and Systems made
available by FCI shall, throughout the term
of this Agreement, be consistent with the
Operating System and Procedures of FCI as in
effect immediately prior to the date hereof,
except as described in any "Change Control
Procedures" which shall be agreed to in
writing by the signatories to this Agreement
prior to any such Change Control Procedures
taking place.
5. Upon notification from Metris of non-
application
processing errors, and as reasonably
practicable to do so after discovery thereof
by Metris, use its reasonable best efforts
to correct any non-application processing
errors with respect to the System.
6. FCI agrees to maintain Metris' and Direct
Merchant
Bank's customer data ("Customer Data") on
its computers (i.e. data processing
equipment and software), and to maintain
(including update) Metris and Direct
Merchant Bank Customer Data with the same
degree of care it uses to maintain its
customer database information. FCI will
segregate Metris and Direct Merchant Bank
Customer Data from customer database
information and will maintain procedures
that FCI, in its sole discretion, does not
become a credit reporting agency as defined
under the Fair Credit Reporting Act and its
implementing regulations.
7. Maintain Metris', and its subsidiaries and
affiliates,
including Direct Merchants Bank, customer
data (hereinafter "Metris Customer Data") on
its computers (i.e. data processing
equipment and software), and to maintain
(including updates) such Metris Customer
Data with the same degree of care it uses to
maintain customer data. Subject to the
confidentiality requirements of Section 2.1
in the Agreement, FCI agrees that it has and
it will continue to segregate Metris
Customer Data from its customer data and
will maintain procedures such that FCI does
not become a credit reporting agency as
defined under the Fair
Credit Reporting Act and its implementing
regulations. Metris' use and its unlimited
exclusive access to the Metris Customer Data
shall include file selection, segmentation,
response modeling, storage, updating, and
maintenance of Metris Customer Data.
Additionally, FCI agrees that has or that it
will provide, on a timely basis, the
requested Metris Customer Data via magnetic
tape or such other forms as the parties may
from time to time agree. FCI also will
continue to provide the requested data on a
timely basis to ensure Metris' production
and solicitation deadlines are met,
Throughout the term of this Agreement, FCI
will also update the Metris Customer Data
with all additions, deletions, and other
amendments ("Updates") made or developed by
Metris in the ordinary course of its
business, including without limitation, the
addition of name and other information
related thereto of all persons on the Metris
Customer Database, and such Updates shall
thereafter become part of the Metris
Customer Database for purposes of this
Exhibit to this Agreement.
FCI also agrees that it has or that it will
maintain a backup, archival or disaster
recovery copy ("Back-up Copy") of the Metris
Customer Data. Metris shall have the right
to access such Back-Up Copy in the event of
(1) FCI's or Fingerhut Corporation's
Bankruptcy (as defined within Section 4.1
(c) of the Agreement), (ii) FCI's main
computer system is unable to process its
files, and (iii) upon expiration of this
Agreement without renewal.
8. Maintain for the benefit of Metris an
adequate supply
of tape cartridges, desk spaces and general
computer supplies or the operation of the
business contracted for herein.
9. Maintain hours of operation for the Systems
Resources
and the Systems performed and provided by
FCI hereunder on a basis consistent with the
practice of FCI for the periods prior to the
execution of this Agreement, except as
otherwise provided in the Service Level
Agreement, as provided in Schedule I to this
Exhibit. If such hours of operations are
interrupted for any reasons whatsoever,
Metris shall be notified as soon as
reasonably possible.
10. If for any reason, including without
limitation, system failures, power failures,
interruption of data communication lines or
otherwise (but excluding periods of "down
time" scheduled in advance for any purpose
consistent with the practice of FCI prior to
the execution of this Agreement, i.e.
systems maintenance or systems
modifications), FCI shall not be able to
provide Metris the Systems Resources and the
Systems during the hours of operation (in
each case, a "System Failure"), (i) notify
Metris as soon as reasonably possible
thereafter of each such System Failure, (ii)
use its reasonable best efforts to correct
each such System Failure, and (iii) keep
Metris informed on a reasonably frequent
basis during each such System Failure as to
the status thereof. As a result of such
System Failure, and subject to the
provisions of item #15 below and except in
the case that any such System Failure
results from or arises out of FCI's gross
negligence or willful misconduct, FCI shall
not be liable to Metris for any damages
(direct or indirect, consequential or
otherwise), losses or other liabilities
arising from or caused by any System Failure
or any failure by FCI to provide any notice
required to be provided hereby, except for
an appropriate credit, as agreed upon by the
parties to this Exhibit 8, in an amount
equal to the full amount of the Systems
Resources and Systems which were not
provided or performed due to such System
Failure. Subject also to the provisions of
item #15 below, in the event any System
Failure continues for more than 24
consecutive hours, in addition to Metris'
right to receive a credit as noted above,
Metris shall have the right to obtain the
provision and/or performance of the System
Resources and Systems from a third party
provider.
11. Exercise and provide back-up procedures and
systems consistent with the practice of FCI
in the event circumstances beyond the
control of FCI prevent FCI from being able
to provide the Systems Resources and Systems
as provided for hereunder. FCI further
agrees that it will continue to use the same
level of care, consistent with the practice
of FCI to minimize the likelihood of all
damages, losses of data, delays and errors
resulting from uncontrollable events; and
should such damages, losses of data, delays
or errors occur, that FCI will use its
reasonable best efforts, consistent with the
practice of FCI to mitigate the effects of
such occurrence.
12. Take such precautions and observe such
procedures to protect the security of the
Confidential Information. Such precautions
and procedures shall include, without
limitation, the restriction of physical and
electronic access to the Confidential
Information to those persons identified in
Article 11 of this Agreement as authorized
to have access thereto, in all cases at
least to the extent that FCI protects its
own confidential and proprietary information
and data. In addition, consistent with
FCI's standard security policies and
procedures, take such precautions to protect
the Confidential Information against
unauthorized access by persons who pursuant
to the terms of this Exhibit and the
Agreement, or otherwise, are not authorized
to access the Confidential Information,
including without limitation, taking
reasonable precautions against unauthorized
access over phone lines, data networks or
other communications means.
Should any employee, agent or consultant, or
any other party that obtains access to the
Confidential Information through FCI or
within the scope of their employment with
FCI, improperly access, use, transfer,
distribute or disclose (or otherwise provide
unauthorized access to) such Confidential
Information, FCI agrees that it has or that
it will, notify Metris, as soon as
reasonably practicable after learning of (or
having reasonable reason to suspect) any
such conduct, and, at its own expense for
its legal fees and other expenses, cooperate
with Metris (and, as appropriate, any third
party whose data or other proprietary
information may have been comprised) to
assist Metris or such third party to enjoin
and otherwise redress
such conduct, and discourage any repetitions
by the offending individual, entity or
others similarly situated, and will take
such further steps as Metris (or such third
party) shall reasonably request (including
complaints to law enforcement authorities).
In the event that civil litigation is
desired by Metris (or such third party), and
subject further to the indemnification
provisions of Article V of the Agreement,
Metris (or such third party) shall have
supervision and control and, in defense of
any counterclaim, the parties shall, to the
extent it is mutually beneficial, cooperate
in preparing such defense and consider a
joint defense, and generally, shall conduct
and defend any litigation in such manner as
to preserve the attorney client and work-
product privileges and maintain the
Confidential Information in confidence, such
as through entry of appropriate protective
orders.
Duration.
Effective date through December 31, 1996.
Compensation:
A Systems and Systems Resource user fee, broken
out between those costs which would be
capitalizable for software development projects
and those costs which would not be capitalizable,
all as in accordance with generally accepted
accounting principles, is as reflected for the
Service Periods below:
Service Periods: 1995
1996
Non-Capitalizable Services (NCS) $xxx
$xxx Capitalizable Software Development
$xxx $xxx Services (CS)
SCHEDULE 1
SERVICE LEVEL AGREEMENT
1. Service Level Review and Change Procedure
A review of the Service Level Agreement may be
called for by FCI or Metris at
any time. Consistent with past practices,
Fingerhut shall reasonably cooperate with Metris to
address additional needs and particular
requirements.
A formal review will be held after the first
six months of implementation and as
necessary thereafter.
2. Statement of Intent
This document defines the Service Level Agreement
between the Fingerhut Data
Center and Metris.
The scope of this agreement covers the
level of service provided by the Fingerhut
Data Center. The primary areas of service are:
* Hours of operation
* Online transaction response time
* Batch job turnaround time
The intent is to provide service to Metris
at the same level as Fingerhut. This will be
accomplished by using Fingerhut's existing
standards and practices.
3. Participant's Signatories.
Service Supplier (Fingerhut Data Center)
Tom Bozlinski
4. Service Communications
Service levels are measured monthly to be
documented via e-mail to Metris.
5. Service Details
[omitted]
6. Help Desk
The Fingerhut Help Desk will be used to report
all problems. Problems not reported through the
Help Desk will not be considered against the Service
Level Agreement.
Calls to the Fingerhut Help Desk will be assigned one
of
three severity codes:
[omitted]
Metris retains the right to address all problems
with their own resources. Standards and
procedures need to be strictly adhered to.
Metris will provide Fingerhut with their problem
notification process to be used for all SEV 1,
SEV 2 and SEV 3 problems. Updates and changes to
this process will be communicated to the Fingerhut
Help Desk.
7. Class Structure
[omitted]
8. Telecommunications
Fingerhut will provide management, design,
installation and ongoing support for Metris
telephone systems, voice/data cabling, public
switched and dedicated
private line network services and network
equipment. This support to be provided using Fingerhut
personnel or by
coordinating/managing service through Metris
personnel and/or service contracts under Metris
agreements.
As requested, Fingerhut will provide
project management and project analysis for Metris
projects.
As requested, Fingerhut will provide/manage
maintenance contract support analysis and
justification for vendor support services under
existing AT&T/Fingerhut/Metris
maintenance agreements.
Fingerhut will manage all documentation,
invoicing and chargebacks for all LAC (Local
Exchange Carrier) services and IXC (Inter
Exchange Carrier) services for all Metris
sites.
Inbound and Outbound rate per minute and
rates for point-to-point services will be at
the same rate provided to Fingerhut.
Service Levels
Every effort will be made to provide
uninterrupted telecommunications services to
all Metris sites. The
public switched network and the switching
hardware chosen and installed by Fingerhut are
engineered to provide maximum level of
availability. Fingerhut vendors (and
subsequently Fingerhut) are indemnified against
responsibility for
damages or losses incurred due to a
Telecommunications outage. Beyond prescheduled
outages for Metris requested upgrades or
manufacture maintenance upgrade, Fingerhut will
provide the following service levels.
[omitted]
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT dated as of October 31,
1996, is made and entered into by Fingerhut Companies, Inc.,
a Minnesota corporation ("FCI") and Metris Companies Inc., a
Delaware corporation ("Metris"), and the Metris Affiliates.
RECITALS
WHEREAS, FCI is the common parent corporation of an
affiliated group of corporations within the meaning of
Section 1504(a) of the Internal Revenue Code of 1986, as
amended (the "CODE") and of combined groups as defined under
similar laws of other jurisdictions, and Metris and the
Metris Affiliates are members of such groups; and
WHEREAS, the groups of which FCI is the common parent
and Metris and the Metris Affiliates are members, file or
intend to file Consolidated Returns and Combined Returns;
and
WHEREAS, FCI and Metris desire to provide for the
allocation of liabilities, procedures to be followed, and
other matters with respect to certain taxes for taxable
periods beginning after December 31, 1993.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual
covenants and promises contained herein, and other good and
valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
SECTION 1. DEFINITIONS
1.1. "AUDIT" includes any audit, assessment of Taxes,
other examination by any Tax Authority, proceeding, or
appeal of such proceeding relating to Taxes, whether
administrative or judicial.
1.2. "COMBINED GROUP" means a group of corporations or
other entities that files a Combined Return.
1.3. "COMBINED RETURN" means any Tax Return with
respect to Non-Federal Taxes filed on a consolidated,
combined (including nexus combination, worldwide
combination, domestic combination, line of business
combination or any other form of combination) or unitary
basis wherein one or more members of the Metris Group join
in the filing of a Tax Return with FCI or a FCI subsidiary
that is not also a member of the Metris Group.
1.4. "CONSOLIDATED GROUP" means the affiliated group of
corporations within the meaning of Section 1504(a) of the
Code of which FCI is the common parent and which includes
the Metris Group.
1.5. "CONSOLIDATED RETURN" means any Tax Return with
respect to Federal Income Taxes filed by FCI and its
subsidiaries pursuant to Section 1501 of the Code.
1.6. "DECONSOLIDATION" means any event pursuant to
which the FCI or the Metris Group cease to be includible in
the Consolidated Group or the Combined Group.
1.7. "DECONSOLIDATION DATE" means the close of business
on the day on which a Deconsolidation occurs. Unless
otherwise required by the relevant Tax Authority or a court
of competent jurisdiction, FCI and Metris, for itself and
the Metris Group, agree to file all Tax Returns, and to take
all other actions, relating to Federal Income Taxes or Non-
Federal Combined Taxes in a manner consistent with the
position that Metris and the Metris Group are includible in
the Consolidated Group and the Combined Group for all days
from December 31, 1993 through and including a
Deconsolidation Date.
1.8. "ESTIMATED TAX INSTALLMENT DATE" means the
installment due dates prescribed in Section 6655(c) of the
Code (presently April 15, June 15, September 15 and December
15).
1.9. "FCI GROUP" means FCI and its affiliates other
than the Metris Group.
1.10. "FEDERAL INCOME TAXES" means any tax imposed
under Subtitle A of the Code (including the taxes imposed by
Sections 11, 55, 59A and 1201(a) of the Code), including any
interest, additions to tax, or penalties applicable thereto,
and any other income based United States federal taxes which
are hereinafter imposed upon corporations.
1.11. "FINAL DETERMINATION" means (a) the final
resolution of any tax (or other matter) for a taxable
period, including any related interest or penalties, that,
under applicable law, is not subject to further appeal,
review or modification through proceedings or otherwise,
including (1) the expiration of a statute of limitations
(giving effect to any extension, waiver or mitigation
thereof) or a period for the filing of claims for refunds,
amended returns, appeals from adverse determinations, or
recovering any refund (including by offset), (2) a decision,
judgment, decree, or other order by a court of competent
jurisdiction, which has become final and unappealable, (3) a
closing agreement or an accepted offer in compromise under
Section 7121 or 7122 of the Code, or comparable agreements
under laws of other jurisdictions, (4) execution of an
Internal Revenue Service Form 870 or 870AD, or by a
comparable form under the laws of other jurisdictions
(excluding, however, any such form that reserves (whether by
its terms or by operation of law) the right of the taxpayer
to file a claim for refund and/or the right of the Tax
Authority to assert a further deficiency), or (5) any
allowance of a refund or credit, but only after the
expiration of all periods during which such refund or credit
may be recovered (including by way of offset) or (b) the
payment of tax by any member of the Consolidated Group or
Combined Group with respect to any item disallowed or
adjusted by a Tax Authority provided that FCI determines
that no action should be taken to recoup such payment.
1.12. "METRIS AFFILIATE" means any corporation or
other entity directly or indirectly owned or controlled by
Metris (including direct or indirect subsidiaries of
Fingerhut Companies, Inc. and including the extended service
plan business of Fingerhut Corporation), as of the date of
execution of this Agreement, which is includible in the
Metris Group. Such corporations or other entities shall
specifically, without limitation, include DMCCB Inc.; Direct
Merchants Credit Card Bank, National Association; Fingerhut
Financial Services Receivables, Inc.; and the extended
service plan business of Fingerhut Corporation.
1.13. "METRIS GROUP" means the affiliated group of
corporations as defined in Section 1504(a) of the Code, or
similar group of entities as defined under similar laws of
other jurisdictions, including Metris and the Metris
affiliates, of which Metris is deemed to be the common
parent, and any corporation or other entity which may have
been, may be or may become a member of such group from time
to time.
1.14. "METRIS GROUP COMBINED TAX LIABILITY" means,
with respect to any taxable year, the Metris Group's
liability for Non-Federal Combined Taxes as determined under
Section 2.3 of this Agreement.
1.15. "METRIS GROUP FEDERAL INCOME TAX LIABILITY"
means, with respect to any taxable year, the Metris Group's
liability for Federal Income Taxes as determined under
Section 2.2 of this Agreement.
1.16. "NON-FEDERAL COMBINED TAXES" means any Non-
Federal Domestic Taxes with respect to which a Combined
Return is filed.
1.17. "NON-FEDERAL SEPARATE TAXES" means any Non-
Federal Domestic Taxes that are not Non-Federal Combined
Taxes.
1.18. "NON-FEDERAL DOMESTIC TAXES" includes all
domestic state and local taxes, charges, fees, levies,
imposts, duties, or other assessments of a similar nature,
including, without limitation, income, alternative or add-on
minimum, gross receipts, excise, employment, sales, use,
transfer, license, payroll, franchise, severance, stamp,
occupation, windfall profits, withholding, Social Security,
unemployment, disability, ad valorem, estimated, highway
use, commercial rent, capital stock, paid up capital,
recording, registration, property, real property gains,
value added, business license, custom duties, or other tax
or governmental fee of any kind whatsoever, imposed or
required to be withheld by any domestic Tax Authority
(excluding any federal governmental agency of the United
States), including any interest, additions to tax, or
penalties applicable thereto.
1.19. "POST-DECONSOLIDATION PERIOD" means a taxable
period beginning after the Deconsolidation Date.
1.20. "PRE-DECONSOLIDATION PERIOD" means a taxable
period ending on or prior to the Deconsolidation Date.
1.21. "PRO FORMA METRIS GROUP COMBINED RETURN"
means a pro forma Metris Combined Return or other schedule
prepared pursuant to Section 2.3 of this Agreement.
1.22. "PRO FORMA METRIS GROUP CONSOLIDATED RETURN"
means a pro forma Consolidated Return prepared pursuant to
Section 2.2 of this Agreement.
1.23. "REDETERMINATION AMOUNT" means, with respect
to any taxable year, the amount determined under Section 3.7
of this Agreement.
1.24. "SPECIAL TAX ATTRIBUTES" means any net
operating loss, net capital loss, investment tax credit,
charitable deduction or any other deduction, credit or tax
attribute which could reduce taxes (including without
limitation deductions and credits related to alternative
minimum taxes).
1.25. "STRADDLE PERIOD" means a taxable period
beginning on or prior to and ending after the
Deconsolidation Date.
1.26. "TAX AUTHORITY" includes the Internal Revenue
Service and any state, local, or other governmental
authority responsible for the administration of any Taxes.
1.27. "TAXES" means Federal Income Taxes and Non-
Federal Taxes.
1.28. "TAX RETURN" means any return, declaration,
statement, report, schedule, certificate, form, information
return or any other document (and any related or supporting
information) including an amended tax return required to be
supplied to, or filed with, a Tax Authority with respect to
Taxes.
SECTION 2. TAX SHARING
2.1. METRIS LIABILITY FOR FEDERAL INCOME TAXES AND NON-
FEDERAL COMBINED TAXES. With respect to each taxable year,
Metris shall pay to FCI (or FCI shall pay to Metris) in
accordance with the procedures set forth in Section 3, an
amount equal to the sum of the Metris Group Federal Income
Tax Liability (or refund) and the Metris Group Combined Tax
Liability (or refund) for such taxable year.
2.2. METRIS GROUP FEDERAL INCOME TAX LIABILITY.
(a) IN GENERAL. With respect to any taxable
year, the Metris Group Federal Income Tax Liability shall be
the sum, for such taxable year, of (1) the Metris Group's
liability for Federal Income Taxes as determined on the Pro
Forma Metris Group Consolidated Return, and (2) any
interest, penalties and other additions applicable to such
taxes.
(b) PRO FORMA FEDERAL RETURN. With respect to
each taxable year, FCI shall prepare or cause to be prepared
a pro forma consolidated federal income tax return or other
comparable schedules for the Metris Group ("Pro Forma Metris
Group Consolidated Return") as if (except as provided in
Section 2.2(c)) the Metris Group was not, nor ever was a
part of the Consolidated Group, but rather was a separate
affiliated group of corporations, consisting of Metris and
the Metris affiliates of which Metris was the common parent
filing a consolidated federal income tax return pursuant to
Section 1501 of the Code.
(c) OPERATING RULES. The Pro Forma Metris Group
Consolidated Return shall be prepared:
(1) reflecting the elections, methods of
accounting, and positions with respect to specific items to
be made or used in the Consolidated Return;
(2) giving effect to any deduction or credit
for any Metris Special Tax Attribute as determined on the
Pro Forma Metris Group Consolidated Return. In addition,
Metris shall receive the benefit of any deduction or credit
for any Metris Special Tax Attributes for which a tax
benefit is actually received in a Consolidated Return, but
for this purpose, if the Metris Group and the FCI Group
contribute like Special Tax Attributes to a Consolidated
Return (not necessarily in the same taxable year) which are
partially or fully limited under the Code, the Metris Group
shall only receive benefit for such like Special Tax
Attributes to the extent that the Special Tax Attributes for
which a tax benefit is actually received in a Consolidated
Return exceed such like Special Tax Attributes contributed
by the FCI Group;
(3) applying the top marginal income tax
rate used in the Consolidated Return;
(4) reflecting transactions with members of
the Consolidated Group that are not also members of the
Metris Group as if such transactions were not with members
of the same Consolidated Group. Metris personnel would be
responsible for identifying all such transactions in each
taxable year, and providing such information to FCI for
review and approval within sixty (60) days of year end, in
order to assist FCI in preparing the Pro Forma Metris Group
Consolidated Return; and
(5) reflecting deductions for Non-Federal
Combined Taxes estimated as provided for in Section 2.3 of
this agreement.
2.3 METRIS GROUP COMBINED TAX LIABILITY
(a) IN GENERAL. With respect to any taxable
year, the Metris Group Combined Tax Liability shall be the
sum, for such taxable year, of (1) the Metris Group's
liability for Non-Federal Combined Taxes as determined on
the Pro Forma Metris Group Combined Return and (2) any
interest, penalties and other additions to such taxes.
(b) PRO FORMA COMBINED RETURN. Each taxable
year, FCI shall prepare or cause to be prepared a pro forma
combined tax return or other schedule for the Metris Group
("Pro Forma Metris Group Combined Return") determined as if
the Metris Group was not and never was part of the Combined
Group, but rather was a separate group of which Metris was
the common parent filing a combined tax return.
(c) OPERATING RULES. The Pro Forma Metris Group
Combined Return shall be prepared by reference to:
(1) the Metris Group's taxable income or
loss from Line 28 (or other similar line representing
taxable income before net operating loss deduction and
special deductions) of the Pro Forma Metris Group
Consolidated Return, adjusted to take into account (i) those
members of the Metris Group which are included in the
Combined Return; (ii) Metris Group Special Tax Attributes;
and (iii) material adjustments necessary to reflect the laws
of the applicable jurisdiction;
(2) apportionment factors determined by
taking into account only those members of the Metris Group
which are included in the Combined Return;
(3) the highest applicable tax rate without
regard to any graduated rates; and
(4) the fact that if a Metris Group Special
Tax Attribute cannot be fully utilized in the Pro Forma
Metris Group Combined Return, the Metris Group will only be
able to realize a benefit from such Special Tax Attribute to
the extent it is allowed to utilize such Special Tax
Attribute when carried forward or carried back to a Pro
Forma Metris Group Combined Return in future or prior years.
SECTION 3. PAYMENT OF TAXES AND TAX SHARING AMOUNTS
3.1 FEDERAL INCOME TAXES. FCI shall pay timely to the
Internal Revenue Service all Federal Income Taxes, if any,
of the Consolidated Group (including the Metris Group) due
and payable for all Pre-Deconsolidation Periods.
3.2. NON-FEDERAL COMBINED TAXES. FCI shall pay timely
to the appropriate Tax Authorities all Non-Federal Combined
Taxes, if any, of the Combined Group (including the Metris
Group) due and payable for all Pre-Deconsolidation Periods
and Straddle Periods.
3.3. NON-FEDERAL SEPARATE TAXES. Metris shall pay
timely to the appropriate Tax Authorities all Non-Federal
Separate Taxes, if any, of the Metris Group due and payable
for all Pre-Deconsolidation Periods and Straddle Periods.
3.4. OTHER FEDERAL TAXES. The parties shall each pay
timely to the appropriate governmental authorities all of
their respective other federal taxes (excluding Federal
Income Taxes for Pre-Deconsolidation Periods, which are
governed by Section 3.1 of this Agreement), if any, due and
payable for all Pre-Deconsolidation Periods, Straddle
Periods, and Post-Deconsolidation Periods.
3.5. TAX SHARING INSTALLMENT PAYMENTS.
(a) FEDERAL INCOME TAXES. Not later than five
(5) business days after each Estimated Tax Installment Date
with respect to any Pre-Deconsolidation Period or Straddle
Period, FCI shall determine under Section 6655 of the Code
the estimated amount of the related installment of the
Metris Group Federal Income Tax Liability and shall notify
Metris of such amount in writing. Metris shall review such
calculation and shall then pay to FCI, not later than ten
(10) business days after such Estimated Tax Installment
Date, the amount thus determined. In addition, the
provisions of this Section 3.5(a) shall apply to any federal
income tax payment made with the filing of the extension of
the Consolidated Return.
(b) NON-FEDERAL COMBINED TAXES. Not later than
May 1 of the year subsequent to each taxable year with
respect to any Pre-Deconsolidation Period or Straddle
Period, FCI shall deliver to Metris, in writing, an estimate
of the Metris Group Combined Tax Liability for such taxable
year determined by using the apportionment factors
applicable to such taxable year. Metris shall review such
calculation and shall then pay to FCI, not later than ten
(10) business days after receipt of such estimate, the
amount thus determined.
3.6. TAX SHARING TRUE UP PAYMENTS.
(a) FEDERAL INCOME TAXES. Not later than ninety
(90) business days after the Consolidated Return is filed
with respect to any Pre-Deconsolidation Period or Straddle
Period, FCI shall deliver to Metris a Pro Forma Metris Group
Consolidated Return or other comparable schedules reflecting
the Metris Group Federal Income Tax Liability. Not later
than ten (10) business days after the date such pro forma or
other schedules are delivered, Metris shall review such
return or other comparable schedules and shall pay to FCI,
or FCI shall pay to Metris, as appropriate, an amount equal
to the difference, if any, between the Metris Group Federal
Income Tax Liability for such taxable year, as adjusted, and
the aggregate amount paid by Metris with respect to such
taxable year under Section 3.5(a) of this Agreement.
(b) NON-FEDERAL COMBINED TAXES. Not later than
December 15 following each taxable year with respect to any
Pre-Deconsolidation Period or Straddle Period, FCI shall
deliver to Metris a Pro Forma Metris Group Combined Return
or other comparable schedules reflecting the Metris Group
Combined Tax Liability for such taxable year. Not later
than ten (10) business days following delivery of such pro
forma or other schedules, Metris shall review such return or
other comparable schedules and shall pay to FCI, or FCI
shall pay to Metris, as appropriate, an amount equal to the
difference, if any, between the Metris Group Combined Tax
Liability, for the taxable year and the amount paid by
Metris with respect to such taxable year under Section
3.5(b) of this Agreement.
3.7. REDETERMINATION AMOUNTS.
(a) IN GENERAL. In the event of any
redetermination of any item of income, gain, loss, deduction
or credit of any member of the Consolidated Group or
Combined Group as a result of a Final Determination or any
settlement or compromise with any Tax Authority (including
any amended tax return or claim for refund filed by FCI),
Metris shall pay FCI or FCI shall pay Metris, as the case
may be, the Redetermination Amount.
(b) COMPUTATION. The Redetermination Amount
shall be the difference, if any, between all amounts
previously determined under Section 2 of this Agreement and
all amounts that would have been determined under Section 2
of this Agreement taking such redetermination into account
(including any additions to tax or penalties applicable
thereto), together with interest for each day calculated (1)
with respect to redeterminations affecting Federal Income
Taxes, at the rate determined, in the case of payment by
Metris, under Section 6621(a)(2) of the Code and, in the
case of payment by FCI, under Section 6621(a)(1) of the
Code, and (2) with respect to redeterminations affecting Non-
Federal Combined Taxes, under similar laws, if any, of other
jurisdictions.
(c) PAYMENT. FCI shall deliver to Metris a
schedule reflecting the computation of any Redetermination
Amount with respect to any taxable year. Not later than ten
(10) days after the date such schedule is delivered, Metris
shall review such schedule and shall pay FCI, or FCI shall
pay Metris, such Redetermination Amount.
3.8. INTEREST. Payments under this Section 3 that are
not made within the prescribed period shall thereafter bear
interest at the Federal short-term rate established pursuant
to Section 6621 of the Code.
SECTION 4. PROCEDURAL MATTERS
4.1. AGENT, PREPARATION AND FILING OF RETURNS. Until
Deconsolidation, FCI shall be the sole and exclusive agent
of Metris and any member of the Metris Group in any and all
matters relating to (a) Federal Income Taxes of the
Consolidated Group and (b) any Non-Federal Combined Taxes
for all Pre-Deconsolidation Periods and Straddle Periods.
Until December 31, 1997, FCI shall have the sole and
exclusive responsibility for the preparation and filing of
any (a) Consolidated Return or (b) Combined Return for all
Pre-Deconsolidation Periods and Straddle Periods. In its
sole discretion, FCI shall have the exclusive right with
respect to any such Consolidated Return or Combined Return
(a) to determine (1) the manner in which such Tax Return
shall be prepared and filed, including, without limitation,
the manner in which any item of income, gain, loss,
deduction or credit shall be reported, (2) whether any
extensions may be requested, (3) the elections that will be
made by any member of the Consolidated Group or Combined
Group, and (4) whether any amended tax returns should be
filed, (b) to control, contest, and represent the interests
of the Consolidated Group and Combined Group in any Audit
and to resolve, settle, or agree to any adjustment or
deficiency proposed, asserted or assessed as a result of any
Audit, (c) to file, prosecute, compromise or settle any
claim for refund, and (d) to determine whether any refunds,
to which the Consolidated Group or Consolidated Group may be
entitled, shall be paid by way of refund or credited against
the tax liability of the Consolidated Group and Combined
Group. Metris, for itself and its subsidiaries, hereby
irrevocably appoints FCI as its agent and attorney-in-fact
to take such action (including the execution of documents)
as FCI may deem appropriate to effect the foregoing.
4.2. FURNISHING INFORMATION. Each member of the Metris
Group shall (a) furnish to FCI in a timely manner such
information and documents as FCI may reasonably request for
purposes of (1) preparing any original or amended
Consolidated Return or Combined Return, (2) contesting or
defending any Audit, and (3) making any determination or
computation necessary or appropriate under this Agreement,
(b) cooperate in any Audit of any Consolidated Return or
Combined Return, (c) retain and provide on demand books,
records, documentation or other information relating to any
tax return until the later of (1) the expiration of the
applicable statute of limitations (giving effect to any
extension, waiver, or mitigation thereof) and (2) in the
event any claim is made under this Agreement for which such
information is relevant, until a Final Determination with
respect to such claim is made, and (d) take such action as
FCI may deem appropriate in connection therewith. FCI shall
provide the Metris Group with any assistance reasonably
required in providing any information requested pursuant to
this Section 4.2.
4.3. EXPENSES. Metris shall reimburse FCI for its
reasonable portion of third party legal and accounting
expenses incurred by FCI in the course of the planning and
preparation of any tax returns, the conduct of any Audit
regarding the tax liability of the Combined Group or
Consolidated Group, and for any other expense incurred by
FCI in the course of any litigation relating thereto, to the
extent such costs are reasonably attributable to the Metris
Group and provided FCI has conferred with Metris as to the
portion of such costs relating to the Metris Group.
Notwithstanding the foregoing, FCI shall have the sole
discretion to control, contest, represent, file, prosecute,
challenge or settle any Audit.
SECTION 5. DECONSOLIDATION
5.1. CONTINUING COVENANTS. Metris, for itself and the
Metris Affiliates, covenants that on or after a
Deconsolidation it will not, nor will it cause or permit any
member of the Metris Group to, make or change any tax
election, change any accounting method, amend any tax return
or take any tax position on any tax return, take any action,
omit to take any action or enter into any transaction that
results in any increased tax liability or reduction of any
Special Tax Attributes of the Metris Group in respect of any
Pre-Deconsolidation Period or Straddle Period.
5.2. REATTRIBUTION OF SPECIAL TAX ATTRIBUTES. In the
event of a Deconsolidation, FCI may, at its option, elect to
reattribute to itself certain Special Tax Attributes of the
Metris Group pursuant to Treasury Regulations Section 1.1502-
20(g) or similar provisions of other jurisdictions. If FCI
makes such an election, Metris shall comply with any
applicable requirements, including those of Treasury
Regulations Section 1.1502-20(g)(5).
5.3. CARRYBACKS. FCI agrees to pay to Metris the
actual tax benefit received by the FCI Group from the use in
any Pre-Deconsolidation Period of a carryback of any Special
Tax Attributes of the Metris Group from a Post-
Deconsolidation Period. Such benefit shall be considered
equal to the lesser of (a) the benefit Metris would have
received had such Special Tax Attributes arisen in a Pre-
Deconsolidation Period and (b) the excess of (1) the amount
of Federal Income Taxes imposed on the Consolidated Group or
the amount of Combined Taxes imposed on the Combined Group,
as the case may be, that would have been payable by the
Consolidated Group or Combined Group in the absence of such
carryback over (2) the amount of Federal Income Taxes or
Combined Taxes, as the case may be, actually paid. Payment
of the amount of such benefit shall be made within ninety
(90) days of the filing of the applicable tax return for the
taxable year in which the Special Tax Attributes are
utilized. If subsequent to the payment by FCI to Metris of
any such amount, there shall be (a) a Final Determination
which results in a disallowance or a reduction of the
Special Tax Attributes so carried back or (b) a reduction in
the amount of the benefit realized by the FCI Group as a
result of any other Special Tax Attributes that arise in a
Post-Deconsolidation Period, Metris shall receive support
for such disallowance or reduction in writing, and shall
repay to FCI, within ninety (90) days of such event, any
amount which would not have been payable to Metris pursuant
to this Section 5.3 had the amount of the benefit been
determined in light of these events. Metris shall hold FCI
harmless for any penalty, addition to tax or interest
payable by any member of the FCI Group as a result of any
such event. Any such amount shall be provided to Metris in
writing and shall be paid by Metris to FCI within ninety
(90) days after notice to Metris of the payment by FCI, or
any member of the Consolidated Group or Combined Group of
any such penalty, addition to tax, or interest. Nothing in
this Section 5.3 shall require FCI to file a claim for
refund of Federal Income Taxes or Combined Taxes.
SECTION 6. DISPUTES
6.1. ACCOUNTING FIRM. If the parties are unable to
agree on the amount which is allocable or due to one party
from the other under this Agreement (including any payments
due under Section 3.5, 3.6 or 3.7), or on whether an action
or failure to act has the effect of minimizing taxes, then
either party may invoke this procedure by giving notice to
the other. Upon receipt of such notice, the parties shall
select and notify a single public accounting firm to resolve
the dispute. If the parties cannot agree on a single firm
within ten (10) days, they shall each select a nationally
recognized public accounting firm, which may include the
public accounting firm which regularly opines on either
party's financial statements ("Auditor). Those two firms
shall jointly select and notify, within ten (10) days, a
third independent nationally recognized public accounting
firm, which shall not be the Auditor of either party, to
resolve the dispute.
6.2 RESOLUTION OF DISPUTE. The chosen public
accounting firm (the "Arbitrator") shall be provided with
written arguments by each party and all supporting documents
which each party deems necessary within thirty (30) days of
selection of the Arbitrator. Each party shall provide the
other party with copies of all written arguments, documents,
and correspondence submitted to the Arbitrator. Either
party may discuss the issues with the Arbitrator provided
the other party is given the opportunity to be present.
Within sixty (60) days of selection of Arbitrator, the
Arbitrator may request each party to respond to the written
arguments provided by the other party. The Arbitrator may
also set a date, time and place for oral arguments. Within
sixty (60) days of any oral arguments or the last written
arguments, whichever is later, the Arbitrator shall notify
the parties of its decision. If in the opinion of the
Arbitrator, an expedited decision is necessary to protect
either party's rights, the Arbitrator shall accelerate the
dates for submissions, arguments and decision so as to
protect the rights of the parties.
6.3 BINDING RESOLUTION. The determination made by the
Arbitrator under Section 6.2 hereof shall be conclusive and
binding upon the parties and shall not be subject to appeal,
except in the case of manifest mathematical error.
6.4 COSTS OF DISPUTE RESOLUTION. The parties shall
share equally in all fees and costs of the Arbitrator.
SECTION 7. MISCELLANEOUS
7.1. TERM. This Agreement shall expire upon the
Deconsolidation Date; provided, however, that all rights and
obligations arising hereunder with respect to a Pre-
Deconsolidation Period or Straddle Period shall survive
until they are fully effectuated or performed and, provided,
further, that notwithstanding anything in this Agreement to
the contrary, all rights and obligations arising hereunder
with respect to a Post-Deconsolidation Period shall remain
in effect and its provisions shall survive for the full
period of all applicable statutes of limitation (giving
effect to any extension, waiver or mitigation thereof).
7.2. ALLOCATIONS. All computations with respect to the
Pre-Deconsolidation Period ending on the Deconsolidation
Date, the immediately following taxable period of Metris and
the Metris Group and any Straddle Period shall be made
pursuant to the principles of Treasury Regulations Section
1.1502-76(b), taking into account such elections thereunder
as FCI, in its sole discretion, shall make.
7.3. CHANGES IN LAW. Any reference to a provision of
the Code or a similar law of another jurisdiction shall
include a reference to any successor provision to such
provision.
7.4. CONFIDENTIALITY. Each party shall hold and cause
its advisors and consultants to hold in strict confidence,
unless compelled to disclose by judicial or administrative
process or, in the opinion of its counsel, by other
requirements of law, all information (other than any such
information relating solely to the business or affairs of
such party) concerning the other parties hereto furnished it
by such other party or its representatives pursuant to this
Agreement (except to the extent that such information can be
shown to have been (a) previously known by the party to
which it was furnished, (b) in the public domain through no
fault of such party, or (c) later lawfully acquired from
other sources not under a duty of confidentiality by the
party to which it was furnished), and each party shall not
release or disclose such information to any other person,
except its auditors, attorneys, financial advisors, bankers
and other consultants who shall be advised of and agree to
be bound by the provisions of this Section 7.4. Each party
shall be deemed to have satisfied its obligation to hold
confidential information concerning or supplied by the other
party if it exercises the same care as it takes to preserve
confidentiality for its own similar information.
7.5. SUCCESSORS. This Agreement shall be binding on
and inure to the benefit of any successor, by merger,
acquisition of assets or otherwise, to any of the parties
hereto (including any successor of FCI and Metris succeeding
to the tax attributes of such party under Section 381 of the
Code), to the same extent as if such successor had been an
original party.
7.6. AUTHORIZATION, ETC. Each of the parties hereto
hereby represents and warrants that it has the power and
authority to execute, deliver and perform this Agreement,
that this Agreement has been duly authorized by all
necessary corporate action on the part of such party, that
this Agreement constitutes a legal, valid and binding
obligation of each such party and that the execution,
delivery and performance of this Agreement by such party
does not contravene or conflict with any provision of law or
of its charter or bylaws or any agreement, instrument or
order binding on such party.
7.7. ENTIRE AGREEMENT. This Agreement contains the
entire agreement among the parties hereto with respect to
the subject matter hereof and supersedes all prior
agreements.
7.8. SECTION CAPTIONS. Section captions used in this
Agreement are for convenience and reference only and shall
not affect the construction of this Agreement.
7.9. GOVERNING LAW. This Agreement shall be governed
by and construed in accordance with the laws of the State of
Minnesota without giving effect to laws and principles
relating to conflicts of law.
7.10. COUNTERPARTS. This Agreement may be executed
in any number of counterparts, each of which shall be deemed
an original, but all of which together shall constitute one
and the same Agreement.
7.11. WAIVERS AND AMENDMENTS. This Agreement shall
not be waived, amended or otherwise modified except in
writing, duly executed by all of the parties hereto.
7.12. SEVERABILITY. In case any one or more of the
provisions in this Agreement should be invalid, illegal or
unenforceable, the enforceability of the remaining
provisions hereof will not in any way be effected or
impaired thereby.
7.13. NO THIRD PARTY BENEFICIARIES. This Agreement
is solely for the benefit of the parties to this Agreement
and the other members of the Consolidated Group and should
not be deemed to confer upon third parties any remedy,
claim, liability, reimbursement, claim of action or other
rights in excess of those existing without this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has
caused this Agreement to be executed by a duly authorized
officer as of the date first above written.
FINGERHUT COMPANIES, INC.
By:
Name:
Title:
METRIS COMPANIES INC.
By:
Name:
Title:
Exhibit 10.p
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated
as of October 24, 1996, between Fingerhut Companies, Inc., a
Minnesota corporation ("FCI"), and Metris Companies Inc., a
Delaware corporation (the "Company").
WHEREAS, as of the date hereof FCI, through one of its
subsidiaries, is the owner of all of the issued and outstanding
shares of the common stock (the "Common Stock"), of the Company;
WHEREAS, the Company is offering and selling to the
public by means of a Registration Statement on Form S-1 (the
"Registration Statement") up to 3,258,333 shares of the Common
Stock; and
WHEREAS, the Company and FCI desire to provide for
certain registration rights with respect to the shares of Common
Stock held by FCI (the "Shares").
NOW THEREFORE, in consideration of the mutual covenants
and agreements set forth herein and for other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
ARTICLE I
Effectiveness of Agreement; Term
SECTION 1.01. Closing Date. This Agreement shall take
effect upon the closing (the "Closing Date") of the sale of
shares of Common Stock offered by the Company pursuant to the
Registration Statement (File No. 333-10831) filed with the
Securities and Exchange Commission (the "SEC").
SECTION 1.02. Term. This Agreement shall remain in
effect from the Closing Date until that date (the "Termination
Date") which is five years after the date on which FCI ceases to
own at least 50% of the outstanding shares of stock of the
Company entitled to vote generally in the election of directors;
provided, however, that this Agreement shall remain in effect
until the completion of any registration of shares under Article
II or Article III which commenced prior to the Termination Date
notwithstanding the Termination Date.
ARTICLE II
Demand Registration
SECTION 2.01. Notice. Upon the terms and subject to
the conditions set forth herein, upon written notice of FCI or
its Permitted Transferees (as defined in Section 2.04) (FCI and
such Permitted Transferees being collectively referred to herein
as the "Holders") requesting that the Company effect the
registration under the Securities Act of 1933, as amended (the
"Securities Act"), of any or all of the Shares held by it, which
notice shall specify the intended method or methods of
disposition of such Shares, the Company will promptly give
written notice of the proposed registration to all other Holders
and will use its best efforts to effect (at the earliest possible
date) the registration under the Securities Act of such Shares
(and the Shares of any other Holders joining in such request as
are specified in a written notice received by the Company within
20 days after receipt of the Company's written notice of the
proposed registration) for disposition in accordance with the
intended method or methods of disposition stated in such request;
provided, however, that:
(a) if the Company shall have previously effected two
registrations with respect to Shares pursuant to this Article II
within the previous 18 months, the Company shall not be required
to effect a registration pursuant to this Article II until 18
months shall have elapsed from the effective date of the second
most recent such registration;
(b) if, upon receipt of a registration request
pursuant to this Article II, the Company is advised in writing,
with a copy to the Holders of Shares proposed to be included in
the offering (the "Selling Holders"), by a recognized independent
investment banking firm selected by the Company and reasonably
acceptable to the Selling Holders that, in such firm's opinion, a
registration at the time and on the terms requested would
adversely affect any public offering of securities by the
Company, other than in connection with employee benefit and
similar plans (a "Company Offering") that had been contemplated
by the Company prior to the notice by the Holders requesting
registration, the Company shall not be required to effect a
registration pursuant to this Article II until the earliest of
(i) four months after the completion of such Company Offering,
(ii) the termination of any "blackout" period required by the
underwriters, if any, to be applicable to the Holders in
connection with such Company Offering, (iii) promptly after
abandonment of such Company Offering or (iv) six months after the
date of written notice by the Holders requesting registration;
(c) if, while a registration request is pending
pursuant to this Article II, the Company determines in the good
faith judgment of the general counsel of the Company that the
filing of a registration statement would require the disclosure
of material information which the Company has a bona fide
business purpose for preserving as confidential and the
disclosure of which would have a material adverse effect on the
Company or the Company is unable to comply with SEC requirements,
the Company shall not be required to effect a registration
pursuant to this Article II until the earlier of (i) the date
upon which such material information is disclosed to the public
or ceases to be material or (ii) 90 days after the Company makes
such good faith determination; and
(d) the number of Shares registered pursuant to any
registration requested pursuant to this Article II shall
represent not less than 5% of the Shares then held by the
Holders.
SECTION 2.02. Registration Expenses.
(a) All Registration Expenses (as defined in Article
VIII) for the first three (plus the number of Blackout
Termination Rights provided for by Section 4.03(b)) registrations
effected pursuant to this Article II shall be paid by the Company
on behalf of any Holders; provided, however, that if any
securities are registered for sale for the account of any Person
(as such term is defined in Section 2(2) of the Securities Act)
other than the Selling Holders pursuant to Section 2.03, each
such other Person shall bear its pro rata share of the
Registration Expenses (or such other amount as shall be
determined by the Company and such Person) and the Company shall
bear the remaining share of the Registration Expenses.
(b) The Company and FCI shall each bear one half of
the Registration Expenses (as defined in Article VIII) for all
registrations effected pursuant to this Article II subsequent to
those provided for by Section 2.02(a); provided, however, that if
any securities are registered for sale for the account of any
Person (as such term is defined in Section 2(2) of the Securities
Act) other than the Selling Holders pursuant to Section 2.03,
each such other Person shall bear its pro rata share of the
Registration Expenses, and the Company and FCI shall each bear
one half of the remaining share of the Registration Expenses.
SECTION 2.03. Third Person Shares. The Company shall
have the right to cause the registration of securities for sale
for the account of any Person (other than the Selling Holders) in
any registration of Shares requested pursuant to this Article II;
provided, however, that the Company shall not have the right to
cause the registration of such securities of such other Persons
if:
(a) the Selling Holders are advised in writing (with a
copy to the Company) by a recognized independent investment
banking firm selected by the Selling Holders and reasonably
acceptable to the Company that, in such firm's opinion,
registration of such securities would adversely affect in a
significant manner the offering and sale of Shares then
contemplated by the Selling Holders; or
(b) the Selling Holders do not receive assurances
reasonably satisfactory to them that such other Person for whose
account such securities are being registered will pay a pro rata
share of the Registration Expenses pursuant to Section 2.02
(provided that for purposes of this clause (b), the guarantee by
the Company to the Selling Holders of payment of such share of
the Registration Expenses shall constitute satisfactory assurance
to the Selling Holders).
SECTION 2.04. Permitted Transferees. As used in this
Agreement, "Permitted Transferees" shall mean any transferee,
whether direct or indirect, of Shares designated by FCI in a
written notice to the Company as provided for in Section 9.05.
Such written notice shall be signed by both FCI and the Permitted
Transferees so designated and shall include an undertaking by the
Permitted Transferees to comply with the terms and conditions of
this Agreement applicable to FCI.
ARTICLE III
Incidental Registration
SECTION 3.01. Notice and Registration. If the Company
proposes to register any of the Common Stock ("Other Securities")
for public sale under the Securities Act (whether proposed to be
offered for sale by the Company or any other Person), on a form
and in a manner which would permit registration of Shares for
sale to the public under the Securities Act, it will give prompt
written notice to the Holders of its intention to do so, and upon
the written request of any or all of the Holders delivered to the
Company within 10 business days after the giving of any such
notice (which request shall specify the Shares intended to be
disposed of by such Holders and the intended method of
disposition thereof) the Company will use its best efforts to
effect, in connection with the registration of the Other
Securities, the registration under the Securities Act of all
Shares which the Company has been so requested to register by
such Holders (which shall then become Selling Holders), to the
extent required to permit the disposition (in accordance with the
intended method or methods thereof as aforesaid) of the Shares so
to be registered; provided, however, that:
(a) if, at any time after giving such written notice
of its intention to register any Other Securities and prior to
the effective date of the registration statement filed in
connection with such registration, the Company shall determine
for any reason not to register the Other Securities, the Company
may, at its election, give written notice of such determination
to the Selling Holders (or, if prior to delivery of the Holders'
written request described above in this Section 3.01, the
Holders) and thereupon the Company shall be relieved of its
obligation to register such shares in connection with the
registration of such Other Securities (but not from its
obligation to pay Registration Expenses to the extent incurred in
connection therewith as provided in Section 3.02), without
prejudice, however, to the rights (if any) of any Selling Holders
immediately to request that such registration be effected as a
registration under Article II;
(b) the Company shall have the right to exclude all
the Shares from registration, or limit the number of Shares to be
registered, pursuant to this Article III if an underwriter of the
registration shall advise the Company in writing (with a copy to
the Selling Holders or, if prior to delivery of the Holders'
written request described above in this Section 3.01, the
Holders) that, in such underwriter's opinion, a registration of
all Shares which the Company has been requested to register at
that time would adversely affect the Company Offering; and
(c) the Company shall not be required to effect any
registration of Shares under this Article III incidental to the
registration of any of its securities in connection with mergers,
acquisitions, exchange offers, subscription offers, dividend
reinvestment plans or stock option or other employee benefit
plans.
No registration of Shares affected under this Article
III shall relieve the Company of its obligation to effect a
registration of Shares pursuant to Article II.
SECTION 3.02. Registration Expenses. The Company and
the Selling Holders will each pay their respective pro rata
shares of the Registration Expenses in connection with any
registration pursuant to this Article III.
ARTICLE IV
Registration Procedures
SECTION 4.01. Registration and Qualification. If and
whenever the Company is required to use its best efforts to
effect the registration of any Shares under the Securities Act as
provided in Articles II and III, the Company will as promptly as
is practicable:
(a) prepare, file and use its best efforts to cause to
become effective a registration statement under the Securities
Act regarding Shares to be offered;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the
provisions of the Securities Act with respect to the disposition
of all Shares until the earlier of (i) such time as all of such
Shares have been disposed of in accordance with the intended
methods of disposition by the Selling Holders set forth in such
registration statement or (ii) the expiration of nine months
after such registration statement becomes effective;
(c) furnish to the Selling Holders and to any
underwriter of such Shares such number of conformed copies of
such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such
number of copies of the prospectus included in such registration
statement (including each preliminary prospectus and any summary
prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in such
registration statement or prospectus, and such other documents as
the Selling Holders or such underwriter may reasonably request;
(d) use its best efforts to register or qualify all
Shares covered by such registration statement under such other
securities or blue sky laws of such United States jurisdictions
as the Selling Holders or any underwriter of such Shares shall
reasonably request, and do any and all other acts and things
which may be necessary or advisable to enable the Selling Holders
or any underwriter to consummate the disposition in such
jurisdictions of its Shares covered by such registration
statement, except that the Company shall not for any such purpose
be required to qualify generally to do business as a foreign
corporation in any jurisdiction where it is not so qualified, or
to subject itself to taxation in any such jurisdiction, or to
consent to general service of process in any such jurisdiction;
(e) (i) furnish to the Selling Holders, addressed to
them, an opinion of counsel for the Company, dated the date of
the closing under the underwriting agreement, and (ii) use its
best efforts to furnish to the Selling Holders, addressed to
them, a "cold comfort" letter signed by the independent public
accountants who have certified the Company's financial statements
included in such registration statement, covering substantially
the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the
date of such financial statements, as are customarily covered in
opinions of issuer's counsel and in accountants' letters
delivered to underwriters in underwritten public offerings of
securities and such other matters as the Selling Holders may
reasonably request; and
(f) immediately notify the Selling Holders at any time
when a prospectus relating to a registration pursuant to Article
II or III is required to be delivered under the Securities Act of
the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under
which they were made, not misleading, and at the request of the
Selling Holders prepare and furnish to the Selling Holders a
reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Shares, such prospectus shall
not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances
under which they are made, not misleading.
The Company may require the Selling Holders to furnish
the Company with such information regarding the Selling Holders
and the distribution of such securities as the Company may from
time to time reasonably request in writing and as shall be
required by law, the SEC or any securities exchange on which any
shares of Common Stock are then listed for trading in connection
with any registration.
SECTION 4.02. Underwriting. If requested by the
underwriters for any underwritten offering of Shares pursuant to
a registration requested hereunder (including any registration
under Article III which involves, in whole or in part, an
underwritten offering), the Company will enter into an
underwriting agreement with such underwriters for such offering,
such agreement to contain such representations and warranties by
the Company and such other terms and provisions as are
customarily contained in underwriting agreements with respect to
secondary distributions, including, without limitation,
indemnities and contribution to the effect and to the extent
provided in Article VI and the provision of opinions of counsel
and accountants' letters to the effect and to the extent provided
in Section 4.01(e). The Company may require that Shares
requested to be registered pursuant to Article III be included in
such underwriting on the same terms and conditions as shall be
applicable to the Other Securities being sold through
underwriters under such registration. The Selling Holders of
Shares to be distributed by such underwriters shall be parties to
any such underwriting agreement, and the representations and
warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be
made to and for the benefit of such Selling Holders.
SECTION 4.03. Blackout Periods.
(a) At any time when a registration statement effected
pursuant to Article II relating to Shares is effective, upon
written notice from the Company to the Selling Holders that the
Company determines in the good faith judgment of the general
counsel of the Company that the Selling Holders sale of Shares
pursuant to the registration statement would require disclosure
of material information which the Company has a bona fide
business purpose for preserving as confidential and the
disclosure of which would have a material adverse effect on the
Company or the Company is unable to comply with SEC requirements
(an "Information Blackout"), the Selling Holders shall suspend
sales of Shares pursuant to such registration statement until the
earlier of (i) the date upon which such material information is
disclosed to the public or ceases to be material, (ii) 90 days
after the Company makes such good faith determination or (iii)
such time as the Company notifies the Selling Holders that sales
pursuant to such registration statement may be resumed (the
number of days from such suspension of sales of the Selling
Holders until the day when such sales maybe resumed hereunder is
hereinafter called a "Sales Blackout Period").
(b) Any delivery by the Company of notice of an
Information Blackout during the 90 days immediately following
effectiveness of any registration statement effected pursuant to
Article II shall give the Selling Holders the right, by notice to
the Company within 20 days after the end of such blackout period,
to cancel such registration and obtain for the Holders one
additional registration right (a "Blackout Termination Right")
under Section 2.01(a).
(c) If there is an Information Blackout and the
Selling Holders do not exercise the cancellation right, if any,
pursuant to clause (b) of this Section 4.03, or, if such
cancellation right is not available, the period set forth in
Section 4.01(b)(ii) shall be extended for a number of days equal
to the number of days in the Sales Blackout Period.
SECTION 4.04. Listing. In connection with the
registration of any offering of Shares pursuant to this
Agreement, the Company agrees to use its best efforts to effect
the listing of such Shares on any securities exchange on which
any shares of the Common Stock are then listed or otherwise
facilitate the public trading of such shares.
ARTICLE V
Preparation; Reasonable Investigation
SECTION 5.01. Preparation; Reasonable Investigation.
In connection with the preparation and filing of each
registration statement registering Shares under the Securities
Act, the Company will give the Selling Holders and the
underwriters, if any, and their respective counsel and
accountants, such reasonable and customary access to its books
and records and such opportunities to discuss the business of the
Company with its officers and the independent public accountants
who have certified its financial statements as shall be
necessary, in the opinion of the Selling Holders and such
underwriters or their respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
ARTICLE VI
Indemnification and Contribution
SECTION 6.01. Indemnification and Contribution.
(a) In the event of any registration of any Shares
hereunder, the Company will enter into customary indemnification
arrangements to indemnify and hold harmless each of the Selling
Holders, each of their respective directors and officers, each
Person who participates as an underwriter in the offering or sale
of such securities, each officer and director of each
underwriter, and each Person if any, who controls each such
Selling Holder or any such underwriter within the meaning of the
Securities Act against any losses, claims, damages, liabilities
and expenses, joint or several, to which such Person may be
subject under the Securities Act or otherwise insofar as such
losses, claims, damages, liabilities or expenses (or actions or
proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which
such securities were registered under the Securities Act, any
preliminary prospectus or final prospectus included therein, or
any amendment or supplement thereto, or any document incorporated
by reference therein, or (ii) any omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Company will reimburse each such Person, as incurred, for any
legal or any other expenses reasonably incurred by such Person in
connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided, however, that the
Company shall not be liable in any such case to the extent that
any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such
preliminary prospectus or final prospectus, amendment or
supplement in reliance upon and in conformity with written
information furnished to the Company by the Selling Holders or
such underwriter specifically for use in the preparation thereof.
Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Selling Holders
or any such Person and shall survive the transfer of such
Securities by the Selling Holders. The Company also shall agree
to provide for contribution as shall reasonably be requested by
the Selling Holders or any underwriters in circumstances where
such indemnity is held unenforceable.
(b) The Selling Holders, by virtue of exercising their
respective registration rights hereunder, agree and undertake to
enter into customary indemnification arrangements to indemnify
and hold harmless (in the same manner and to the same extent as
set forth in clause (a) of this Section 6.01) the Company, each
director of the Company, each officer of the Company who shall
sign such registration statement, each Person who participates as
an underwriter in the offering or sale of such securities, each
officer and director of each underwriter, and each Person, if
any, who controls the Company or any such underwriter within the
meaning of the Securities Act, with respect to any statement in
or omission from such registration statement, any preliminary
prospectus or final prospectus included therein, or any amendment
or supplement thereto, if such statement or omission was made in
reliance upon and in conformity with written information
furnished by the Selling Holders to the Company specifically for
inclusion in such registration statement or prospectus. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any such
director, officer or controlling Person and shall survive the
transfer of the registered securities by the Selling Holders.
The Selling Holders also shall agree to provide for contribution
as shall reasonably be requested by the Company for any
underwriters in circumstances where such indemnity is held
unenforceable.
(c) Indemnification and contribution similar to that
specified in the preceding subdivisions of this Section 6.01
(with appropriate modifications) shall be given by the Company
and the Selling Holders with respect to any required registration
or other qualification of such Shares under any federal or state
law or regulation of governmental authority other than the
Securities Act.
ARTICLE VII
Benefits and Termination of Registration Rights
SECTION 7.01. Benefits and Termination of Registration
Rights. The Holders may jointly exercise the registration rights
granted hereunder in such manner and proportions as they shall
agree among themselves; provided, however, any Permitted
Transferees of Shares shall be subject to and bound by all of the
terms and conditions hereof applicable to FCI (in addition to
those terms and conditions expressly applicable to Holders or
Selling Holders). The registration rights hereunder shall cease
to apply to Shares when:
(a) a registration statement with respect to the sale
of such Shares shall have become effective under the Securities
Act and such Shares shall have been disposed of in accordance
with such registration statement;
(b) they shall have been sold to the public pursuant
to Rule 144 under the Securities Act (or any successor
provision);
(c) they shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further
transfer shall have been delivered by the Company, and subsequent
public distribution of them shall not require registration or
qualification of them under the Securities Act or any similar
state law then in force; or
(d) they shall have ceased to be outstanding.
ARTICLE VIII
Registration Expenses
SECTION 8.01. Registration Expenses. As used in this
Agreement, the term "Registration Expenses" means all expenses
incident to the Company's performance of or compliance with the
registration requirements set forth in this Agreement including,
without limitation, the following:
(a) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the
registration of Shares to be disposed of under the Securities
Act;
(b) all expenses in connection with the preparation,
printing and filing of the registration statement, any
preliminary prospectus or final prospectus, any other offering
document and amendments and supplements thereto and the mailing
and delivering of copies thereof to the underwriters and dealers;
(c) the cost of printing and producing any
agreement(s) among underwriters, underwriting agreement(s), and
blue sky or legal investment memoranda, any selling agreements
and any amendments thereto or other documents in connection with
the offering, sale or delivery of Shares to be disposed of;
(d) all expenses in connection with the qualification
of Shares to be disposed of for offering and sale under state
securities laws, including the fees and disbursements of counsel
for the underwriters in connection with such qualification and in
connection with any blue sky and legal investment surveys;
(e) the filing fees incident to securing any required
review by NASDAQ of the terms of the sale of Shares to be
disposed of;
(f) the costs of preparing stock certificates; and
(g) the costs and charges of the Company's transfer
agent and registrar. Registration Expenses shall not include
underwriting discounts and underwriters commissions attributable
to the Shares being registered for sale on behalf of the Selling
Holders, and the fees, disbursements and expenses of the Selling
Holders' counsel, which shall be paid by the Selling Holders.
ARTICLE IX
Miscellaneous
SECTION 9.01. No Inconsistent Agreements. The Company
shall not on or after the date of this Agreement enter into any
agreement with respect to its securities that violates the rights
expressly granted to the Holders in this Agreement.
SECTION 9.02. Assignment. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by
the parties hereto and with respect to the Company, its
respective successors and assigns, and with respect to FCI, any
Permitted Transferees of the Shares.
SECTION 9.03. Governing Law; Jurisdiction. This
Agreement shall be construed, performed and enforced in
accordance with, and governed by, the laws of the State of
Minnesota applicable to contracts executed in and to be performed
in that State.
SECTION 9.04. Severability. In the event that any
part of this Agreement is declared by any court or other judicial
or administrative body to be null, void or unenforceable, said
provision shall survive to the extent it is not so declared, and
all of the other provisions of this Agreement shall remain in
full force and effect.
SECTION 9.05. Notices. All notices, requests, demands
and other communications under this Agreement shall be in writing
and shall be deemed to have been fully given:
(a) on the date of service if served personally on the
party to whom notice is to be given;
(b) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, and telephonic
confirmation of receipt is obtained promptly after completion of
transmission;
(c) on the day after delivery to Federal Express or
similar overnight courier or the Express Mail service maintained
by the United States Postal Service; or
(d) on the fifth day after mailing, if mailed to the
party to whom notice is to be given, by first class mail,
registered or certified, postage prepaid and properly addressed,
to the party as follows:
If to FCI or any other Holder:
Fingerhut Companies, Inc.
4400 Baker Road
Minnetonka, MN 55343
Attn: General Counsel
Telecopy: (612) 936-5412
If to the Company:
Metris Companies Inc.
600 South Highway 169, Suite 1800
St. Louis Park, Minnesota 55426
Attn: General Counsel
Telecopy: (612) 525-5070
Any party may change its address for the purpose of
this Section by giving the other party written notice of its new
address in the manner set forth above.
SECTION 9.06. Amendments; Waivers. This Agreement may
be amended or modified, and any of the terms, covenants or
conditions hereof may be waived, only by a written instrument
executed by the parties hereto, or in the case of a waiver, by
the party waiving compliance. Any waiver by any party of any
condition, or of the breach of any provision, term or covenant
contained in this Agreement, in any one or more instances, shall
not be deemed to be nor construed as furthering or continuing
waiver of any such condition, or of the breach of any other
provision, term or covenant of this Agreement.
SECTION 9.07. Section and Paragraph Headings. The
section and paragraph headings in this Agreement are for
reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
SECTION 9.08. Counterparts. This Agreement may be
executed in counterparts, each of which shall be deemed an
original, but all of which shall constitute the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto
duly authorized as of the date first above written.
METRIS COMPANIES INC.,
By
Name:
Title:
FINGERHUT COMPANIES, INC.,
By
Name:
Title:
DATA SHARING AGREEMENT
THIS AGREEMENT dated the 31st day of October, 1996, between
Fingerhut Corporation (hereinafter referred to as "Fingerhut"), a
corporation duly organized under the laws of the State of
Minnesota, with offices at 4400 Baker Road, Minnetonka, Minnesota
55343, and Direct Merchants Credit Card Bank, National
Association, a national banking association (hereinafter referred
to as "Direct Merchants Bank") with offices at 1400 West 2200
South, Salt Lake City, Utah, 84119.
WHEREAS, Direct Merchants Bank and Fingerhut create and
maintain files on their customers (as defined herein); and
WHEREAS, Direct Merchants Bank and Fingerhut desire to
exchange certain customer data;
NOW THEREFORE, in consideration of the mutual agreements
herein contained, the parties hereto agree as follows:
I. DEFINITIONS
The following terms, as used herein, shall have the
following meanings whether used in the singular or plural:
"Account Booked" means a consumer credit account which meets
Direct Merchant Bank's underwriting criteria for approval with a
credit line opened greater than Direct Merchant Bank's minimum
credit line in effect at time of approval. Account Booked shall
not mean an account which is determined to be fraudulent.
"Behavior Model " means one or more attributes which rank a
Customer's credit performance with Fingerhut or Direct Merchants
Bank, as the case may be, with a credit score.
"Customer" means any consumer name and address which resides on
the data processing systems of Direct Merchants Bank or
Fingerhut, as the case may be.
"Customer File" means a name, address and other identifying
information of a Customer who has an account or other
relationship with Fingerhut or Direct Merchants Bank, as the case
may be, and includes any updates of such information.
II. SERVICES
Section 2.1 File Access.
Fingerhut agrees to provide the Fingerhut Customer File
to Direct Merchants Bank for its use to solicit offers for all
credit products issued by Direct Merchants Bank. Fingerhut
agrees to provide the requested Customer File on a timely basis
so as to ensure that Direct Merchants Bank meets its production
and solicitation dates for its credit product offers; provided
that Direct Merchants Bank has provided such production and
solicitation dates in writing to Fingerhut at least one week
prior to the date it needs such Customer File.
Section 2.2 Compensation.
Direct Merchants Bank agrees to pay Fingerhut (in
immediately available funds) in accordance with the terms and
conditions set forth in Exhibit A, attached hereto and
incorporated herein by reference. Payment of the fees shall be
made not later than the thirtieth (30th) business day of each
month following the end of a calendar quarter, within each
calendar year during the Initial Term or subsequent Renewal Term.
Section 2.3 Use of Information.
Direct Merchants Bank and Fingerhut agree to provide to
each other, without charge, their own transaction and experience
data on their own Customer list which shall also include a
Behavior Model derived from each parties own transaction and
experience data. The parties agree to update such Customer list
and Behavior Models in accordance with their own business
practices for updating such information. Other than as set forth
in this Agreement, Fingerhut agrees that it, any subsidiary or
affiliate or on behalf of third parties, will not directly or
indirectly solicit via direct mail or telemarketing Direct
Merchants Bank Customers for any products or services without the
prior written consent of Direct Merchants Bank. Subject to
compliance with banking applicable laws and regulations related
to transactions with affiliates, Fingerhut and Direct Merchants
Bank agree that, during the term of this Agreement, Fingerhut
will be the exclusive provider of retail merchandise offers to
the Customer list of Direct Merchants Bank (excluding Direct
Merchants Bank Customers that have a cobrand, affinity, private
label or other third party affiliation credit account). The
parties shall cooperate in good faith and mutually agree on the
parameters for merchandise offers. The parties confirm Direct
Merchants Bank may reasonably withhold approval of a merchandise
offer if such offer does not comply with applicable laws and
regulations.
Section 2.4 Restrictions on Use.
The Customer File and Behavior Models will only contain
data on each party's own transactions or experiences with its
customers and shall not contain any information provided by third
parties, or other information, that would cause either party in
its reasonable interpretation, to be deemed a consumer reporting
agency as defined under applicable state or federal law. Nothing
in this Agreement shall require either party to disclose to the
other: (i) confidential information it received from third
parties, including without limitation, customer lists from third
party sources, or (ii) information which either party, in its
reasonable interpretation, is precluded from disclosing under any
applicable laws, rules, regulations or industry practices related
to consumer privacy.
III. TERM
Section 3.1 Term and Termination.
This Agreement shall terminate on September 23, 2003
("Initial Term"). Unless otherwise terminated as provided
herein, at the end of the Initial Term, this agreement will
automatically renew for successive one year terms ("Renewal
Term"). This Agreement may also be terminated by either party
under the following conditions:
a. If either party materially breaches its
obligations and such breach is not cured within thirty (30) days
of receipt of written notice of breach by the non-breaching
party.
b. Upon ninety (90) days' written notice prior to the
end of the Initial Term or any Renewal Term.
c. Fingerhut shall have the right to terminate this
Agreement by written notice to Direct Merchants Bank upon the
occurrence of a Change of Control (as defined below) with respect
to Direct Merchants Bank. A "Change of Control" shall be deemed
to have occurred if (i) any person or group (within the meaning
of Rule 13d-5 of the Securities Exchange Act of 1934 as in effect
on the date hereof) other than Fingerhut shall own directly or
indirectly, beneficially or of record, shares representing more
than 25% of the aggregate ordinary voting power represented by
the issued and outstanding capital stock of Direct Merchants
Bank; (ii) a majority of the seats (other than vacant seats) on
the Board of Directors of Direct Merchants Bank shall at any time
be occupied by persons who were neither (a) nominated by
Fingerhut or by the Board of Directors of Direct Merchants Bank,
nor (b) appointed by directors so nominated; or (iii) any person
or group other than Fingerhut shall otherwise directly or
indirectly have the power to exercise a controlling influence
over the management or policies of Direct Merchants Bank.
IV. CONFIDENTIALITY
Section 4.1 Confidential Information.
a. All Confidential Information (as hereinafter
defined) disclosed by any of the parties to any other party
hereunder is confidential and proprietary to such disclosing
party. Each party, its affiliates, and officers, directors,
employees, agents, consultants and contractors shall not use any
of the Confidential Information for any purpose other than as
expressly permitted hereunder. Confidential Information
furnished by any of the parties to any other in connection with
this Agreement and the transactions contemplated hereby will be
kept in confidence by such other party, including its affiliates
or subsidiaries, in accordance with its policies for maintaining
the confidence of its own information of similar content. The
term Confidential Information shall mean and include: (i)
Customer data, Customer Files and Behavior Models, (ii) all trade
secrets and other confidential business information learned in
the course of performance by any party of its obligations
hereunder, or (iii) any information or data which is disclosed by
any party to the other party under or in contemplation of this
Agreement.
b. Confidential Information may be either the
property of the disclosing party or information provided to the
disclosing party by a corporate affiliate of the disclosing party
or by a third party. Notwithstanding the foregoing, the term
"Confidential Information" shall not include information which:
(i) is already known to such other party when received, except
for information periodically disclosed which is identified as
confidential prior to execution of this Agreement, (ii)
thereafter becomes generally obtainable by a party other than as
a result of an unauthorized disclosure by the party taking
advantage of this clause, (iii) is required by law, regulation or
court order to be disclosed by such party, provided that in the
case of this clause, prior notice of such disclosure has been
given to the party which furnished such information, when legally
permissible, and that such other party which is required to make
the disclosure uses its best efforts to provide sufficient notice
to permit the party which furnished such information to take
legal action to prevent the disclosure, or (iv) is reasonably
necessary, in the opinion of counsel, to be disclosed in the
context of a legal proceeding or regulatory investigation
provided that prior notice shall be given to the party which
furnished the information. This Section 4.1 shall survive any
termination of this Agreement for two (2) years.
V. REPRESENTATIONS & WARRANTIES
Section 5.1 Representations & Warranties of Fingerhut
Fingerhut hereby represents and warrants, as of the
date of this Agreement, as follows:
a. Fingerhut is a duly organized corporation, validly
existing, and in good standing under the laws of the State of
Minnesota. Fingerhut is duly qualified or licensed to perform
any business necessary under this Agreement and will be in good
standing in each jurisdiction in which its business or the
exercise of its rights, powers or authority under this Agreement
renders such qualification necessary.
b. Fingerhut has the requisite corporate power and
authority to enter into, and to carry out its obligations under
this Agreement.
c. The execution and delivery by Fingerhut of this
Agreement and the consummation by Fingerhut of the transactions
contemplated hereby have been duly authorized prior to the date
of this Agreement by all necessary corporate action on its part.
d. This Agreement has been duly executed and
delivered by Fingerhut and constitutes a valid and binding
obligation of Fingerhut enforceable against Fingerhut in
accordance with its terms.
e. Fingerhut is not subject to, or obligated under
any provision of (i) its articles of incorporation, (ii) any
material agreement, arrangement or understanding, (iii) any
license, franchise or permit, or (iv) any law, regulation, order,
judgment or decree that would be breached or violated, or of
which a right of termination or acceleration or any encumbrance
on any of its assets would be created by the execution, delivery
and performance of this Agreement by Fingerhut, or the
consummation by Fingerhut of the transactions contemplated by
this Agreement.
f. No authorization, consent or approval of, waiver
or exemption by, or filing or registration with any public body,
court, third party or authority is necessary on the part of
Fingerhut for the consummation by Fingerhut of the transactions
contemplated by this Agreement.
Section 5.2. Direct Merchants Bank Representations and
Warranties.
Direct Merchants Bank hereby represents and warrants,
as of the date of this Agreement, as follows:
a. Direct Merchants Bank is a national banking
association duly organized, validly existing, and in good
standing under the laws of the United States of America, and is
duly qualified or licensed to do business and is in good standing
in each jurisdiction in which its business or the exercise of its
rights, powers or authority under this Agreement renders such
qualification necessary.
b. Direct Merchants Bank has the requisite power and
authority to enter into, and to carryout its obligations under
this Agreement.
c. The execution and delivery by Direct Merchants
Bank of this Agreement and the consummation by Direct Merchants
Bank of the transactions contemplated hereby have been duly
authorized prior to the date of this Agreement by all necessary
action on its part.
d. This Agreement has been duly executed and
delivered by Direct Merchants Bank and constitutes a valid and
binding obligation of Direct Merchants Bank enforceable against
Direct Merchants Bank in accordance with its terms.
e. Direct Merchants Bank is not subject to, or
obligated under any provision of (i) its articles of
incorporation or bylaws, (ii) any material agreement, arrangement
or understanding, (iii) any license, franchise or permit, or (iv)
any law, regulation, order, judgment or decree that would be
breached or violated, or which a right of termination or
acceleration or any encumbrance on any of its assets would be
created by the execution, delivery and performance of this
Agreement by Direct Merchants Bank, or the consummation by Direct
Merchants Bank of the transactions contemplated by this
Agreement.
f. No authorization, consent or approval of, waiver
or exemption by, or filing or registration with any public body,
court, third party or authority is necessary on the part of
Direct Merchants Bank for the consummation by Direct Merchants
Bank of the transactions contemplated by this Agreement.
VI. INDEMNIFICATION
Section 6.1 Indemnification Obligations
a. By Direct Merchants Bank. Direct Merchants Bank
shall be liable to and shall defend, indemnify and hold harmless,
Fingerhut and its affiliates, and its respective officers,
directors, employees and permitted assigns, from and against any
and all Losses (as hereinafter defined) incurred by any of them
by reason of or related to Direct Merchants Bank's failure to
perform its obligations hereunder.
b. By Fingerhut. Fingerhut shall be liable to and
shall defend, indemnify and hold harmless, Direct Merchants Bank
and its affiliates, and its respective officers, directors,
employees and permitted assigns, from and against any and all
Losses (as hereinafter defined) incurred by reason of or related
to Fingerhut's failure to perform its obligations hereunder.
c. "Losses" Defined. For purposes of this Section
6.1, the term "Losses" shall mean any losses, liability, claims,
damages, costs, and expenses, including attorney's fees,
disbursements and court costs, reasonably incurred by an
indemnified party, judgments, fines and other amounts paid in
settlement, incurred or suffered by an indemnified party in
connection with any threatened, pending or adjudicated claim,
demand, action, suit or proceeding (whether civil, criminal,
administrative or investigative) by an unaffiliated third party
arising out of or in connection with any breach or alleged breach
of this Agreement), without regard to whether or not such Losses
would be deemed material under this Agreement.
Section 6.2 Procedures
a. Notice of Claims. The parties agree that in case
any claim is made, or any suit or action is commenced which, if
not corrected, may give rise to a right of indemnification by a
party hereunder ("Indemnified Party") from one of the other
parties ("Indemnifying Party"), the Indemnified Party will give
notice to the Indemnifying party as promptly as practicable after
receipt by the Indemnified party of such notice or knowledge of
such claim, suit, or action. On a best efforts basis, notice to
the Indemnifying Party shall be given no later than fifteen days
after receipt by the Indemnified Party in the event a suit or
action has commenced or thirty days under all other
circumstances; provided, however, that the failure to give prompt
notice shall not relieve an Indemnifying Party of its obligation
to indemnify except to the extent that the Indemnifying Party is
materially prejudiced by such failure. The Indemnified Party
shall make available to the Indemnifying Party and its counsel
and accountants at reasonable times and for reasonable periods,
during normal business hours, all books and records of the
Indemnified Party relating to any such possible claim for
indemnification, and each party will render to the other such
assistance as it may reasonably require of the other in order to
ensure prompt and adequate defense of any suit, claim or
proceeding based upon a statement of facts which may give rise to
a right of indemnification hereunder.
b. Selection of Counsel. The Indemnifying Party
shall have the right to defend, compromise and settle any suit,
claim or proceeding in the name of the Indemnified Party to the
extent that the Indemnifying Party may be liable to the
Indemnified Party under Section 6 above in connection therewith;
provided, however, that the Indemnifying Party shall not
compromise or settle a suit, claim or proceeding unless it
assumes the obligation to indemnify for all Losses related
thereto. The Indemnifying Party shall notify the Indemnified
Party within ten days of having been notified pursuant to Section
6 of this Agreement if the Indemnifying Party elects to assume
the defense of any such claim, suit or action and employ counsel
in a reasonable exercise of its discretion. The Indemnified
Party shall have the right to employ its own counsel to
participate in such defense, compromise or settlement, but the
fees and expenses of such counsel shall be at the Indemnified
Party's expense, unless the Indemnifying Party shall not have
employed counsel to take charge of the defense thereof.
c. Settlement of Claims. The Indemnified Party may
at any time notify the Indemnifying Party of its intention to
settle or compromise any claim, suit or action against the
Indemnified Party in respect of which indemnification payments
may be sought from the Indemnifying Party hereunder, but shall
not settle or compromise any matter for which indemnification may
be sought without the consent of the Indemnifying Party. Any
settlement or compromise of any claim, suit or action in
accordance with the preceding sentence, or any final judgment or
decree entered on or in any claim, suit or action which the
Indemnifying Party did not assume the defense of in accordance
herewith, shall be deemed to have been consented to by, and shall
be binding upon, the Indemnifying Party as fully as if the
Indemnifying Party had assumed the defense thereof and a final
judgment or decree had been entered in such suit or action by a
court of competent jurisdiction for the amount of such
settlement, compromise, judgment or decree.
d. Subrogation. The Indemnified Party shall be
subrogated to any claims or rights of the Indemnifying Party as
against any other persons with respect to any amount paid by the
Indemnifying Party under this Section 6. The Indemnified Party
shall cooperate with the Indemnifying Party, at the Indemnifying
Party's expense, in the assertion by the Indemnifying Party of
any such claim against such other persons.
e. Indemnification Payments. Amounts owing under
this Section 6.2 shall be paid promptly upon written demand for
indemnification containing in reasonable detail the facts giving
rise to such liability; provided, however, if the Indemnifying
Party notifies the Indemnified Party within thirty (30) days of
receipt of such demand that it disputes its obligation to
indemnify and the Parties are not otherwise able to reach
agreement, the controversy shall be settled by final order
entered by a court of competent jurisdiction.
Section 6.3. Survival of Indemnification.
The provisions of this Section shall expressly survive
any termination of this Agreement, under Section 3.1, or
otherwise for a period of five (5) years.
VII. MISCELLANEOUS
Section 7.1 Notices. Any notice provided for herein shall be
in writing and shall be hand delivered or mailed by first class,
registered or certified mail, postage prepaid return receipt
requested, or sent by electronic or facsimile transmission,
addressed as follows:
If to Direct Merchants Bank:
Direct Merchants Credit Card Bank, National Association
1455 West 2200 South, Suite 300
Salt Lake City, Utah 84119
Attention: President
with a copy to:
Metris Companies Inc.
600 South Highway 169, Suite 1800
St. Louis Park, Minnesota 55426
Attention: President
If to Fingerhut:
Fingerhut Corporation
4400 Baker Road
Minnetonka, Minnesota 55426
Attention: President
With a copy to the General Counsel
Or at such other place as may be directed in writing by the
party to receive notice.
Section 7.2. Assignment. This Agreement may be assigned by the
parties to any affiliate, subsidiary or successor of such party
upon notice, provided that any affiliate, subsidiary or successor
agrees in writing to be bound by the Terms of this Agreement.
This Agreement may not otherwise be assigned without the prior
written consent of the non-assigning party.
Section 7.3 No Joint Venture. In performing the obligations
under this Agreement, the parties are independent contractors.
This Agreement is not intended to create and shall not be
construed to create a partnership, joint venture or agency
relationship.
Section 7.4 Captions. The captions and headings used in this
Agreement have been inserted for convenience and for reference
only and shall not be deemed to limit or define the text of this
Agreement.
Section 7.5 Validity. If any provision or portion thereof of
this Agreement is held invalid, illegal, void or unenforceable by
reason of any rule or law, administrative order, judicial
decision or public policy, all other provisions of this Agreement
shall remain in full force and effect.
Section 7.6 Amendments. Except as provided herein, neither
this Agreement nor any of its provisions shall be amended or
modified except in writing executed by a duly authorized officer
of each of the parties.
Section 7.7 Audit. Each party agrees to allow the other, upon
reasonable notice, to audit its performance under this agreement.
Section 7.8 Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of
Minnesota without giving effect to the principles of conflicts of
laws thereof.
Section 7.9 Force Majeure. No party shall be liable for any
failure of or delay in the performance of this Agreement for the
period that such failure or delay is due to acts of God, public
enemy, war, strikes or labor disputes, or any other cause beyond
the parties' reasonable control; it being understood that lack of
financial resources is not to be deemed a cause beyond a party's
control. Each party shall notify the other parties promptly of
the occurrence of any such cause and carry out this Agreement as
promptly as practicable after such cause is terminated; provided,
however, that the existence of any such cause shall not extend
the term of this Agreement.
Section 7.10 Waiver. No party shall deemed to have waived any
of its rights, powers or remedies under this Agreement unless
such waiver is given in writing by such party.
Section 7.11 Entire Agreement. This Agreement constitutes the
entire agreement between the parties in connection with the
services hereunder and supersedes all prior agreements,
negotiations and communications on such subject matter.
IN WITNESS WHEREOF, the parties hereto have signed this
Agreement effective as of the date and year first above written:
FINGERHUT CORPORATION
By
Title
DIRECT MERCHANTS CREDIT CARD
BANK, NATIONAL ASSOCIATION
By
Title
EXHIBIT A
Compensation
Direct Merchants Bank agrees to pay Fingerhut a fee of xxx
dollars (xxx) for each Fingerhut Customer name and address
subject to the following conditions: (i) the Fingerhut customer
name and address was first obtained from the Fingerhut Customer
File, and (ii) such Fingerhut Customer name and address results
in a Direct Merchants Bank Account Booked, notwithstanding
whether such Account Booked was a jointly marketed product
between Direct Merchants Bank and an unaffiliated third party.
Direct Merchants Bank shall not pay such fee to Fingerhut for any
Account Booked pursuant to the Co-brand Credit Card Agreement
between Fingerhut and Direct Merchants Bank dated October 31,
1996. In addition, Direct Merchants Bank shall pay a non-
cumulative fee of xx basis points of net purchases on an Account
Booked excluding any Account Booked pursuant to the Co-brand
Credit Card Agreement. Payment of the $xxx and xx basis points
of net purchases terminates upon termination of this Agreement.
Exhibit 11
Metris Companies Inc. and Subsidiaries
Computation of Earnings Per Share
(in thousands, except share and per share data)
Years Ended December 31,
1996 1995 1994
Primary:
Net income $ 20,016 $ 4,581 $ 2,198
Weighted average shares of common 16,572,040 15,966,667 15,966,667
stock outstanding (1)
Common stock equivalents (2) 557,578 402,479 303,660
Weighted average common and common 17,129,618 16,369,146 16,270,327
equivalent shares
Net income per share $ 1.17 $ 0.28 $ 0.14
Fully Diluted:
Net Income $ 20,016 $ 4,581 $ 2,198
Weighted average shares of common 16,572,040 15,966,667 15,966,667
stock outstanding (1)
Common stock equivalents (2) 670,258 472,740 303,660
Weighted average common and common 17,242,298 16,439,407 16,270,327
equivalent shares
Net income per share $ 1.16 $ 0.28 $ 0.14
(1) Assume shares outstanding as if the Company reorganization had
occurred at the beginning of the years shown.
(2) Based on the treasury stock method using the average market price for
primary earnings per share and the higher of the average or year-end market
price for fully diluted earnings per share. Prior to October 25, 1996, the
initial public offering price of $16 was used.
Selected Financial Data
(dollars in thousands, except per share and as noted)
<TABLE>
Year Ended December 31,
1996 1995 1994 1993 1992
Income Statement Data (Managed
Basis) (1):
<S> <C> <C> <C> <C> <C>
Net Interest Income $ 143,491 $ 26,354 $ 487 $ 279 $ 149
Provision for Loan Losses 136,305 26,234
Other Operating Income 126,647 52,969 14,238 10,053 7,630
Other Operating Expense 101,287 45,640 11,222 8,333 4,658
Income Before Income Taxes 32,546 7,449 3,503 1,999 3,121
Tax Rate 38.5% 38.5% 37.3% 36.9% 36.1%
Net Income $ 20,016 $ 4,581 $ 2,198 $ 1,262 $ 1,995
Per Common Share Statistics:
EPS - fully diluted (2) $ 1.16 $ 0.28 $ 0.14 $ 0.08 $ 0.12
Stock Price (year end) $ 24.00
Shares Outstanding (year end) 19,225 15,967 15,967 15,967 15,967
(000s)
Shares Used to Compute EPS 17,242 16,439 16,270 15,967 15,967
(fully diluted) (000s)
Credit Card Data (Managed
Basis) (1):
Total Accounts 1,418,062 702,891
Year-end Managed Loans $ 1,615,940 $ 543,619
Year-end Managed Assets 1,687,227 622,983 $ 9,856 $ 6,615 $ 5,061
Average Managed Loans 1,018,856 183,274
Average Interest-earning Assets 1,040,924 193,086 6,615 4,531 2,497
Average Managed Assets 1,078,346 214,363 7,076 5,191 2,561
Average Equity 92,852 30,083 5,365 3,904 2,006
Net Interest Margin (3) 13.78% 13.65% 7.36% 6.16% 5.97%
Return on Average Assets 1.86% 2.14% 31.06% 24.31% 77.09%
Return on Average Equity 21.56% 15.23% 40.96% 32.32% 99.45%
Loan Loss Reserves $ 95,669 $ 22,219
Delinquency Ratio (4) 5.53% 3.95%
Loan Loss Reserves Ratio 5.92% 4.09%
Net Charge-off Ratio (5) 6.17% 2.19%
Extended Service Plan Data:
Net Extended Service Plan $ 20,420 $ 17,779 $ 12,244 $ 7,935 $ 5,906
Revenues
Warrantable Product Unit 24.4% 20.4% 15.3% 12.9% 13.3%
Penetration Rates (6)
Fee-Based Products and Services
Data:
Fee-based Product Revenues $ 29,853 $ 6,662 $ 1,994 $ 2,118 $ 1,726
</TABLE>
(1) The Company analyzes its financial performance on a managed loan
portfolio basis whereby the income statement and balance sheet are
adjusted to reverse the effects of securitization.
(2) Earnings per share is calculated assuming the Company reorganization
occurred at the beginning of the first year shown. Amounts are also
calculated based on the treasury stock method using the initial public
offering price for periods prior to the Company's initial public offering
(see Notes 1 and 2 to the Consolidated Financial Statements).
(3) Includes the Company's actual cost of funds plus all costs associated with
asset securitizations, including the interest expense paid to the
certificateholders and amortization of the discount and fees.
(4) Delinquencies represent credit card loans that were at least 30 days
contractually past due at year end.
(5) Net charge-offs reflect actual principal amounts charged-off, less
recoveries, as a percentage of average managed credit card loans.
(6) Warrantable product sales penetration rates reflect the percentage of
extended service plans sold to total warrantable products sold.
Percentages for all years 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.
METRIS COMPANIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results of
operations of Metris Companies Inc. and subsidiaries (collectively, the
"Company"), including Metris Direct, Inc., Direct Merchants Credit Card Bank,
National Association ("Direct Merchants Bank") and Metris Receivables, Inc.
This discussion should be read in conjunction with the consolidated financial
statements and the related notes thereto.
General
The Company is an information-based direct marketer and provider of
consumer credit products, extended service plans 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 issued by Direct Merchants Bank. 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, overlimit, 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.
Extended Service Plans
The Company provides extended service plans that extend warranty service
coverage beyond the manufacturer's warranty on selected products sold by
Fingerhut Corporation ("Fingerhut"), an affiliate. Extended service plan
profitability is directly affected 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 debt
waiver programs, card registration, third party insurance and membership clubs,
to its credit card customers, approximately half of whom are Fingerhut
customers. Profitability for fee-based products and services is affected by the
response rates to product solicitation efforts, the targeted solicitation
plans, the commission rates received from and paid to the Company's product
partners and other operating expenses.
Results of Operations
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Net income for the year ended December 31, 1996, was $20.0 million, or
$1.16 per share, an increase of $15.4 million over net income of $4.6 million,
or $.28 per share, for 1995. The 337% increase in net income is the result of
an increase in net interest income and other operating income partially offset
by increases in the provision for loan losses and other operating expenses.
These increases are largely attributable to the growth in average managed loans
to $1.0 billion for 1996 from $183 million for 1995, an increase of 456%, and
growth in total credit card accounts to 1.4 million at December 31, 1996 from
0.7 million at December 31, 1995.
The provision for loan losses on a managed basis was $136.3 million in
1996, compared to $26.2 million in 1995. The increase primarily reflects an
increase in credit card loans as well as an increase in net charge-offs
consistent with the continued seasoning of the portfolio and industry trends.
The managed net charge-off rate was 6.17% for 1996, compared to 2.19% in 1995.
Other operating income on a managed basis increased $73.7 million to
$126.6 million, primarily due to credit card fees, interchange and other
credit card income, which increased to $88.3 million for 1996, up 298% over
$22.2 million for 1995. In addition, fee-based product revenues increased 348%
to $29.9 million for 1996, up from $6.7 million for 1995. These increases were
primarily due to the growth in total accounts and outstanding receivables in
the managed credit card loan portfolio.
Other operating expenses increased to $101.3 million in 1996, compared to
$45.6 million in 1995. The increase in operating costs was due to continued
investments in the infrastructure of the business to support the growth of the
Company's business lines: consumer credit products, fee-based products and
services and extended service plans. However, the Company's operating
effectiveness as measured by the Company's managed operating efficiency ratio
improved to 37.5% in 1996 from 57.5% in 1995.
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 , or
$.28 per share, an increase of $2.4 million over net income of $2.2
million, or $.14 per share, for the year ended December 31, 1994. The
improvement in net income was largely attributable to a $4.8 million
increase in debt waiver product revenues and an increase in net extended
service plan revenues of $5.5 million, or 45.2%, over 1994. This increase
was largely driven by an increase in sales of extended service plans
covering consumer electronic products and the introduction of two new
extended service plan products, Quality Jewelry Care(R) and Quality
Furniture Care(SM), 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 initial fixed
infrastructure to manage these operations, did not cause a material reduction
in net income during 1995. This was primarily a result of the high response
rates achieved by the Company's credit card marketing campaigns, followed by
the high rates of activation on credit card accounts booked. Total credit
card accounts reached 702,891 and total managed loans stood at $543.6 million
at December 31,1995.
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 funding for the Company. The effect on the Company's
consolidated financial statements from securitization is to remove credit card
loans sold with limited recourse from the consolidated 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 change in these estimates could have a material impact
on the Company's financial condition and results of operations.
The securitization and sale of credit card loans changes the Company's
interest in such loans from lender to servicer, with a corresponding change in
how revenues and expenses are reported in the income statement. For securitized
and sold credit card loans, amounts that otherwise would have been recorded as
net interest income, fee income and provision for loan losses are instead
reported in other operating income as net securitization and credit card
servicing income.
The Company has receivables from or payables to the Trust as a result of
securitizations including amounts deposited in an investor reserve account held
by the trustee for the benefit of the Trust's certificateholders ("Investor
Deposit"), the excess servicing asset, which represents the net gain recorded
at any point in time for loans sold under the asset securitizations, net of
recourse reserves for securitized loans and normal and excess servicing fee
receivables. The change in the "Other receivables/payables due from/to credit
card securitizations, net" on the consolidated balance sheets of $68.2 million
is primarily due to the increase in recourse reserves for securitized loans due
to the growth in the loan portfolio and the decrease in the receivable from the
trust with respect to the Investor Deposit.
Managed Loan Portfolio
The Company analyzes its financial performance on a managed loan portfolio
basis. To do so, the income statement and balance sheet are adjusted to reverse
the effects of securitization. The Company's discussion of revenues, where
applicable, and provision for loan losses includes comparisons to amounts
reported in the Company's consolidated 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 is not an asset of the Company, and,
therefore, is not shown on the Company's consolidated balance sheets.
The following tables summarize the Company's managed loan portfolio:
December 31,
1996 1995
Dollars in thousands
Year-end balances:
Credit card loans:
Loans held for securitization $ 14,164 $ 15,337
Retained interests in loans
securitized 201,165 79,727
Investors' interests in
securitized loans 1,400,611 448,555
Total managed loan portfolio $ 1,615,940 $ 543,619
Year Ended December 31,
1996 1995
Dollars in thousands
Average balances:
Credit card loans:
Loans held for securitization $ 28,632 $ 7,741
Retained interests in loans
securitized 121,177 32,091
Investors' interests in
securitized loans 869,047 143,442
Total managed loan portfolio $ 1,018,856 $ 183,274
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 consolidated statements of income for each of the years presented:
Year Ended December 31,
Dollars in thousands 1996 1995 1994
Statements of Income (owned
basis):
Net interest income $ 26,088 $ 6,399 $ 487
Provision for loan losses 18,477 4,393
Other operating income 126,222 51,083 14,238
Other operating expense 101,287 45,640 11,222
Income before income taxes $ 32,546 $ 7,449 $ 3,503
Adjustments for
Securitizations:
Net interest income $ 117,403 $ 19,955 $
Provision for loan losses 117,828 21,841
Other operating income 425 1,886
Other operating expense
Income before income taxes $ $ $
Statements of Income (managed
basis):
Net interest income $ 143,491 $ 26,354 $ 487
Provision for loan losses 136,305 26,234
Other operating income 126,647 52,969 14,238
Other operating expense 101,287 45,640 11,222
Income before income taxes $ 32,546 $ 7,449 $ 3,503
Other Data:
Owned Basis:
Average interest earning
assets $ 171,877 $ 49,644 $ 6,615
Return on average assets 9.56% 6.46% 31.06%
Return on average equity 21.56% 15.23% 40.96%
Net interest margin (1) 15.18% 12.89% 7.36%
Managed Basis:
Average interest earning
assets $ 1,040,924 $ 193,086 $ 6,615
Return on average assets 1.86% 2.14% 31.06%
Return on average equity 21.56% 15.23% 40.96%
Net interest margin (1) 13.78% 13.65% 7.36%
(1) Net interest margin is equal to net interest income divided by average
interest-earning assets.
Net Interest Income
Net interest income consists primarily of interest earned on the Company's
credit card loans less interest expense on borrowings to fund the loans.
Managed net interest income for the year ended December 31, 1996 was $143.5
million compared to $26.4 million for the same period in 1995, an increase of
$117.1 million. This increase was primarily due to an $836 million increase
in average managed loans over the comparable period in 1995. The average yield
on managed interest earning assets increased to 19.1% for the year ended
December 31, 1996, from 18.8% for the year ended December 31, 1995, primarily
due to the increase in average credit card loans as a percentage of total
interest-earnings assets. The Company has used variable rate funding in its
credit card securitization transactions and in its short-term borrowings, or
has swapped fixed rates on such transactions to variable rates. The average
yield on interest-earning assets on an owned basis increased to 17.6% for the
year ended December 31, 1996, from 15.3% for the same period in 1995. This
increase is primarily due to an increase in average credit card loans as a
percentage of total interest-earning assets.
Managed net interest income for the year ended December 31, 1995 increased
to $26.4 million compared to $0.5 million in 1994. 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 $543.6 million at December 31, 1995.
The following tables provide an analysis of interest income and expense, net
interest spread, net interest margin and average balance sheet data for the
years ended December 31, 1996, 1995 and 1994:
Analysis of Average Balances, Interest and Average Yields and Rates
<TABLE>
Year Ended December 31,
1996 1995
Dollars in thousands Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Owned Basis
Assets:
Interest-earning assets:(1)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 16,299 $ 867 5.3% $ 8,501 $ 487 5.7%
Short-term investments 5,769 299 5.2% 1,311 75 5.7%
Credit card loans 149,809 29,028 19.4% 39,832 7,054 17.7%
Loans to FCI
Total interest-earning $ 171,877 $ 30,194 17.6% $ 49,644 $ 7,616 15.3%
assets
Cash and due from banks 5,878 1,572
Accrued interest and fees 2,347 1,497
Other amounts due from 8,390 12,235
securitization
Other assets 28,214 7,122
Allowance for loan losses (7,407) (1,149)
Total assets $ 209,299 $ 70,921
Liabilities and Equity:
Interest-bearing
liabilities:
Interest-bearing deposit $ 1,000 $ 48 4.8% 700 $ 36 5.2%
Short-term borrowings 56,708 4,058 7.2% 20,822 1,181 5.7%
Total interest-bearing 57,708 4,106 7.1% 21,522 $ 1,217 5.7%
liabilities
Other liabilities 58,739 19,316
Total liabilities 116,447 40,838
Stockholders'/division equity 92,852 30,083
Total liabilities and equity $ 209,299 $ 70,921
Net interest income and $ 26,088 15.2% $ 6,399 12.9%
interest margin (2)
Net interest rate spread (3) 10.5% 9.6%
Managed Basis
Credit card loans $ 1,018,856 $197,467 19.4% $ 183,274 $ 35,775 19.5%
Total interest-earnings 1,040,924 198,633 19.1% 193,086 36,337 18.8%
Total interest-bearing 926,755 55,142 5.9% 164,964 9,983 6.1%
Net interest income and 143,491 13.8% 26,354 13.7%
interest margin (2)
Net interest rate spread(3) 13.2% 12.7%
</TABLE>
(1) There were no taxable equivalent adjustments necessary for the periods
presented.
(2) Net interest margin is computed by dividing net interest income by average
total interest-earning assets.
(3) The interest rate spread is the yield on average interest-earning assets
minus the funding rate on average interest-bearing liabilities.
Analysis of Average Balances, Interest and Average Yields and Rates (continued)
<TABLE>
Year Ended December 31,
1995 1994
Dollars in thousands Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets: (1)
<S> <C> <C> <C> <C> <C> <C> <C>
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 12,235
securitizations
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% $
Short term borrowings 20,822 1,181 5.7%
Total interest-bearing 21,522 1,217 5.7%
liabilities
Other liabilities 19,316 1,711
Total liabilities 40,838 1,711
Stockholders'/division 30,083 5,365
equity
Total liabilities and equity $ 70,921 $ 7,076
Net interest income and $ 6,399 12.9% $ 487 7.4%
interest margin (2)
Net interest rate spread(3) 9.6% 7.4%
Off-Balance Sheet
Credit card loans $ 183,274 36,337 19.5%
Total interest-earning 193,086 7,616 18.8% 6,615 487 7.4%
assets
Total interest-bearing 164,964 9,983 6.1%
liabilities
Net interest income and 26,354 13.7% 487 7.4%
interest margin (2)
Net interest rate spread(3) 12.7% 7.4%
</TABLE>
(1) There were no taxable equivalent adjustments necessary for the periods
presented.
(2) Net interest margin is computed by dividing net interest income by average
total interest-earning assets.
(3) The interest rate spread is the yield on average interest-earning assets
minus the funding rate on average interest-bearing liabilities.
Interest Variance Analysis
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average 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:
Year Ended December 31, Year Ended December 31,
1996 vs. 1995 1995 vs. 1994
Change due to* Change due to*
<TABLE>
Dollars in thousands Increase Volume Rate Increase Volume Rate
Interest Income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 380 $ 412 $ (32) $ 487 $ 487 $
Short-term investments 224 230 (6) 75 75
Credit card loans 21,974 21,250 724 7,054 7,054
Loans to FCI (487) (244) (243)
Total interest income 22,578 21,322 1,256 7,129 6,638 491
Interest Expense:
Interest bearing deposits 12 14 (2) 36 36
Short-term borrowings 2,877 2,499 378 1,181 1,181
Total interest expense 2,889 2,506 383 1,217 1 ,217
Net interest income $ 19,689 $ 18,816 $ 873 $ 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
Year Ended December 31,
Dollars in thousands 1996 1995 1994
Other Operating Income:
Net extended service plan revenues $ 20,420 $ 17,779 $ 12,244
Net securitization and credit card 49,921 16,003
servicing income
Credit card fees, interchange and 26,028 10,639
other credit card income
Fee-based product revenues 29,853 6,662 1,994
Total $126,222 $ 51,083 $ 14,238
Other operating income contributes substantially to the Company's results
of operations, representing 81% of owned revenues for the year ended December
31, 1996. Fee-based product revenues, particularly from debt waiver products,
continue to provide an increasing percentage of other operating income. Debt
waiver products and other fee-based product revenues are expected to increase
with growth in credit card accounts and as the Company continues to offer other
fee-based products to its customer base and other third parties.
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 service plan revenues - Net extended service plan revenues
include revenues received from sales of extended service plans, net of a
provision for service plan returns, and the change in 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, fee 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 trust, provision for loan losses, 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% ofaverage securitized loans on an annualized basis.
Credit card fees, interchange and other credit card income - Credit card
fees include annual membership, cash advance, overlimit, past-due, and other
credit card fee income derived from on-balance sheet loans. Also included in
this amount is interchange income generated from total accounts, which
represents fees 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 debt waiver protection for unemployment, disability, and
death, third party insurance, card registration, shopping and dining clubs, and
revenues from targeted list programs.
Other operating income increased $75.1 million for the year ended
December 31, 1996 over 1995, primarily due to income generated from the growth
in average securitized credit card loans. Additionally, fee-based product
revenues increased 348% to $29.9 million as the Company's marketing efforts to
cross-sell other products and services to its customers were successful.
Specifically, debt waiver product revenue increased by $20.6 million to $25.5
million for the year ended December 31, 1996, as the Company continued to add
new credit card customers with debt waiver protection.
Other operating income increased by $36.8 million for the year ended
December 31, 1995 over 1994, 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.
Other Operating Expense
Year Ended December 31,
Dollars in thousands 1996 1995 1994
Other Operating Expense:
Credit card account and other
product solicitation and $ 29,297 $ 23,089 $ 3,739
marketing expense
Employee compensation 23,068 2,466 442
Data processing services and 12,757 3,090 109
communications
Third party servicing expense 9,207 5,300 473
Warranty and debt waiver
underwriting and claims 10,024 6,552 4,109
servicing expense
Credit card fraud losses 2,276 775
Other 14,658 4,368 2,350
Total $101,287 $ 45,640 $ 11,222
Total other operating expenses include direct and allocated expenses from
Fingerhut Companies, Inc. ("FCI") for administrative services provided to the
Company under the Administrative Services Agreement. Additionally, total other
operating expenses reflect the retroactive effects of additional intercompany
agreements and contracts between the Company and FCI or its subsidiaries (See
Note 1 to the Consolidated Financial Statements).
Total other operating expenses for the year ended December 31, 1996
increased $55.6 million over 1995, largely due to costs associated with the
growth of the Company's business activities. Credit card account and other
product solicitation and marketing expenses rose by $6.2 million over the same
period in the prior year. New credit card account solicitation programs were
implemented in 1996, increasing the number of credit card accounts and loans
outstanding. The Company also incurred increased solicitation costs in its
efforts to increase the penetration of fee-based products and services sold to
the Company's customers and extended service plan sales on warrantable products
sold by Fingerhut. Also, total other operating expenses increased due to
increases in data processing services and communications expenses and third-
party servicing expenses of $9.7 million and $3.9 million, respectively. These
cost increases were largely due to the growth in credit card accounts,
transaction volumes and loan balances. Employee compensation also increased
$20.6 million to $23.1 million for the year ended December 31, 1996, due to
increased management incentive plan expenses, increased staffing needs to
support the increase in credit card accounts and the internalization of credit
card collections and other functions.
Total other operating expenses for the year ended December 31, 1995
increased by $34.4 million over 1994, primarily due to the Company's launch of
its credit card business in early 1995 and the corresponding generation of new
accounts and transactions and loan volumes during 1995. Additionally, product
solicitation and marketing expenses also increased over 1994 in efforts to
increase sales of extended service plans. Employee compensation and other
expenses also increased during 1995 related to the launch of the credit card
business 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.
Income Taxes
The Company's provision for income taxes includes both federal and state
income taxes. Applicable income tax expense was $12.5 million, $2.9 million and
$1.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively. This tax expense represents an effective tax rate of 38.5%, 38.5%
and 37.3% for the years ended December 31, 1996, 1995 and 1994, respectively.
The increase in the effective tax rate for 1995 over 1994 was principally due
to an increase 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.
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, 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. However, absolute levels at which delinquencies and
loss rates may peak and then stabilize are not specifically known.
Additionally, consistent with the credit card industry, the Company experienced
a rise in bankruptcy filings in 1996 compared to 1995. At December 31, 1996, 52%
of managed accounts and 65% of managed loans were less than 12 months old.
Accordingly, the Company believes that its loan portfolio will experience
increased levels of delinquency and loan losses as the Company's accounts
continue to season.
These trends are reflected in the increase in the Company's net charge-off
ratio. For the year ended December 31, 1996, the Company's managed net charge-
off ratio was 6.17% compared to 2.19% for the year ended December 31, 1995.
The Company believes, consistent with its statistical models and other credit
analyses, 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, risk-based pricing and active collection
strategies based on the perceived risk of credit card accounts. Under this
strategy, interest margins are established for credit card accounts based on
the perceived risk profile. Loan losses are further managed by offering credit
lines that are generally lower than the current standard in the industry.
Accounts and their related credit lines are also continually managed using
various marketing, credit and other management processes.
Delinquencies
Delinquencies not only have the potential to affect 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:
Managed Loan Delinquency
December 31 % of December 31 % of
1996 Total 1995 Total
Dollars in thousands
Managed loan $1,615,940 100% $543,610 100%
portfolio
Loans delinquent:
30 to 59 days 32,114 1.99% 7,546 1.39%
60 to 89 days 20,398 1.26% 4,952 0.91%
90 or more days 36,857 2.28% 8,996 1.65%
Total $ 89,369 5.53% $ 21,494 3.95%
The above numbers reflect continued seasoning of the Company's managed
loan portfolio and industry trends. The Company intends to continue to focus
its resources on its collection efforts to minimize the negative impact to
net loan losses that results 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 balances, 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. The following table presents the Company's net charge-offs
for the periods indicated as reported in the consolidated financial statements
and on a managed portfolio basis:
Year Ended December 31,
1996 1995
Dollars in thousands
On-balance sheet portfolio:
Average loans outstanding $ 149,809 $ 39,832
Net charge-offs 9,327 714
Net charge-offs as a
percentage of average 6.23% 1.79%
loans outstanding
Managed loan portfolio:
Average loans outstanding $1,018,856 $ 183,274
Net charge-offs 62,855 4,015
Net charge-offs as a
percentage of average 6.17% 2.19%
loans outstanding
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,
inherent in the existing on-balance-sheet loan portfolio.
The provision for loan losses on an owned basis for the year ended
December 31, 1996 totaled $18.5 million compared to a provision of $4.4 million
in 1995. 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 in
1996 compared to 1995 is primarily reflective of the large increase in on-
balance-sheet loans and the overall seasoning of the portfolio. The following
table presents the change in the Company's allowance for loan losses and other
ratios on both an owned and a managed portfolio basis for the periods presented:
Analysis of Allowance for Loan Losses
Year Ended December 31,
Dollars in thousands 1996 1995
(Owned Basis)
Balance at beginning of year $ 3,679 $
Provision for loan losses 18,477 4,393
Loans charged off 9,514 720
Recoveries 187 6
Net loan charge-offs 9,327 714
Balance at end of year $ 12,829 $3,679
Ending allowance as a percent 5.96% 3.87%
of loans
Year Ended December 31,
Dollars in thousands 1996 1995
(Managed Basis)
Balance at beginning of year $ 22,219 $
Provision for loan losses 136,305 26,234
Loans charged off 64,083 4,047
Recoveries 1,228 32
Net loan charge-offs 62,855 4,015
Balance at end of year $ 95,669 $ 22,219
Ending allowance as a percent of 5.92% 4.09%
loans
Management believes the allowance for loan losses on both an owned and a
managed basis is adequate to cover probable losses in the loan portfolio under
current conditions and expected trends. However, there can be no assurance as
to the future credit losses that may be incurred in connection with the
Company's loan portfolio, nor can there be any assurance that the loan loss
allowance that has been established by the Company will be sufficient to absorb
such future loan losses. Management will continue to monitor the allowance for
loan losses and make additional provisions to the allowance as it deems
appropriate and necessary given the circumstances.
Derivatives Activities
The Company uses derivative financial instruments for the purpose of
managing its exposure to interest rate risks and 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 and the Company'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 Metris
Master Trust. In connection with the issuance of the $512.6 million Metris
Master Trust Series 1995-1 variable funding certificates in May 1995, the
Company entered into an eight-year agreement capping the certificates' interest
rate at 11.2%. Also, in connection with the issuance of additional Series 1995-
1 certificates related to the September 1996 amendment of Series 1995-1, the
Company entered into additional six-and-two-thirds year agreements capping the
certificates' interest rate at 11.2%. Additionally, FCI, on behalf of the
Company, entered into two interest rate swap agreements in April 1996 to
synthetically alter the fixed rate of the Metris Master Trust Series 1996-1
certificates to a floating rate. Total notional amounts of these swap
transactions amounted to $605.5 million. The Company receives the benefits and
bears the obligations of these swap transactions. The obligations of the
Company and the counterparties under these swap agreements are settled on a
monthly basis.
Liquidity, Funding and Capital Resources
The Company's goal is to maintain an adequate level of liquidity, both
short-term and long-term, through active management of assets and liabilities.
Because the characteristics of the Company's assets and liabilities change,
liquidity management is a dynamic process affected by the pricing and maturity
of the Company's assets and liabilities. This process is also affected by
changes in the relationship between short-term and long-term interest rates.
Therefore, to facilitate liquidity management, the Company uses a variety of
funding sources to establish a maturity pattern with 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 the Company or by FCI.
A significant source of funding for the Company has been the securitization
of credit card loans. At December 31, 1996 and 1995, the Company had received
cumulative net proceeds of approximately $1.4 billion and $445 million,
respectively, from sales of credit card loans, of which $17.0 million and $25.8
million, respectively, was deposited in an investor reserve account held by the
trustee of the Metris Master Trust for the benefit of the Trust's
certificateholders. Cash generated from these transactions was used to reduce
short-term borrowings and to fund credit card loan growth.
The Company's liquidity needs and funding sources may change over time. On
September 16, 1996, the Company executed agreements for the following credit
facilities: (1) a $300 million, five-year revolving credit facility (the
"Revolving Credit Facility"), guaranteed by FCI; and (2) an amendment to Series
1995-1 under the Metris Master Trust to (a) increase the Class A Variable
Funding Certificate to support a $400 million increase to $1.2 billion (of
which the Company may use up to $800 million) of the Fingerhut Owner Trust
Commercial Paper Program in which the Company participates; and (b) issue
$112.6 million of additional asset-backed certificates to support the
increase in the Commercial Paper Program.
The Company borrows under the Revolving Credit Facility and from FCI to
fund on-balance-sheet loans and for other general business purposes. At
December 31, 1996, the Company had outstanding borrowings of $50.0 million under
the Revolving Credit Facility and outstanding borrowings from FCI of $4.2
million. At December 31, 1995, the Company had borrowed $63.5 million from FCI.
The Revolving Credit Facility is guaranteed by FCI and is further
supported by the pledge of the stock of certain subsidiaries of the Company and
certain accounts receivable and interests held therein by the Company. The
Revolving Credit Facility contains certain financial covenants standard for
revolving credit facilities of this type, including minimum net worth, minimum
equity to managed assets ratio, maximum leverage and a limitation on
indebtedness. In addition, the FCI guarantee includes certain covenants
including interest coverage, leverage and minimum net worth for FCI. At
December 31, 1996, the Company and FCI were in compliance with these covenants.
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 or its subsidiaries. Such restrictions
were not material to the operations of the Company at December 31, 1996 and
1995.
As the portfolio of credit card loans grows, or as the Trust certificates
amortize or are otherwise paid, the Company's funding needs will increase
accordingly. The Company believes that its asset securitization program,
together with the Revolving Credit Facility and other sources of capital, will
provide adequate liquidity to the Company for meeting its anticipated cash
needs, although no assurance can be given to that effect.
Capital Adequacy
The Company has improved its financial position, as reflected by an
increase in stockholders' equity, through the completion of an initial public
offering of its common shares, which raised net proceeds of approximately $47.4
million, receipt of $60.0 million in capital contributions from FCI, and
retention of earnings.
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 December 31, 1996 and 1995, Direct Merchants Bank exceeded the
minimum required capital levels and was considered a "well-capitalized"
depository institution under regulations of the OCC.
Newly Issued Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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 Statement of
Financial Accounting Standards 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 from transfers that
are secured borrowings with a pledge of collateral. The Company has reviewed
this statement and believes that it will not have a material effect on the
classification and valuation of certain financial assets and liabilities on its
balance sheets relating to its retained interests in loans securitized and
derivative financial instruments related to such financial assets and
liabilities.
Forward-Looking Statements
This annual report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These statements include
statements regarding intent, belief or current expectations of the Company and
its management. Stockholders and prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements. Among the factors that could cause actual results to differ
materially from those indicated by such forward-looking statements are the
Company's limited operating history as a stand-alone entity; the Company's
limited experience with respect to originating and servicing credit card
accounts, including limited delinquency, default and loss experience; the lack
of seasoning of its credit card portfolio, which makes the predictability of
delinquency and loss levels more difficult; risks associated with unsecured
credit transactions, particularly to moderate income consumers; interest rate
risks; dependence on the securitization of the Company's credit card loans to
fund operations; general economic conditions affecting consumer income which
may increase consumer bankruptcies, defaults and delinquencies; state and
federallaws and regulations, including consumer and debtor protection laws; and
the highly competitive industry in which the Company operates. Each of these
factors is more fully discussed in Exhibit 99 to the Company's Annual Report on
Form 10-K. Reference to this Cautionary Statement or Exhibit 99 in the context
of a forward-looking statement or statements shall be deemed to be a statement
that any one or more of these factors may cause actual results to differ
materially from those anticipated in such forward-looking statement or
statements.
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
AND INTERNAL CONTROL
The accompanying consolidated financial statements, related financial data,
and other information in this annual report were prepared by the management of
Metris Companies Inc. Management is responsible for the integrity and
objectivity of the data presented, including amounts that must necessarily be
based on judgments and estimates. The consolidated financial statements were
prepared in conformity with generally accepted accounting principles.
Management of Metris Companies Inc. depends on its accounting systems and
internal control structures in meeting its responsibilities for reliable
consolidated financial statements. In management's opinion, these systems and
structures provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with management's
authorizations. As an integral part of these systems and structures, the
Company utilizes a professional staff of internal auditors of Fingerhut
Companies, Inc., who conduct operational and special audits and coordinate
audit coverage with Company management and the independent auditors.
The consolidated financial statements have been audited by the Company's
independent auditors, KPMG Peat Marwick LLP, whose independent professional
opinion appears separately. Their opinion on the consolidated financial
statements is based on auditing procedures that include performing selected
tests of transactions and records as they deem appropriate. These auditing
procedures are designed to provide reasonable assurance that the consolidated
financial statements are free of material misstatement.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the internal auditors, the independent
auditors and management to review the work of each and ensure that each is
properly discharging its responsibilities. The independent auditors have free
access to the Committee to discuss the results of their audit work and their
findings.
Ronald N. Zebeck Robert W. Oberrender
President and Senior Vice President,
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Metris Companies Inc.
We have audited the accompanying consolidated balance sheets of Metris
Companies Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders'/division
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metris
Companies Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 23, 1997
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
December 31, December 31,
1996 1995
Assets:
Cash and due from banks $ 8,902 $ 4,185
Federal funds sold 19,001 29,144
Short-term investments 4,179 1,414
Cash and cash equivalents 32,082 34,743
Credit card loans:
Loans held for securitization 14,164 15,337
Retained interests in loans securitized 201,165 79,727
Less: Allowance for loan losses 12,829 3,679
Net credit card loans 202,500 91,385
Premises and equipment, net 5,163 1,476
Accrued interest and fees receivable 2,942 2,223
Other receivables due from credit card
securitizations, net 31,597
Prepaid expenses and deferred charges 4,826 4,517
Deferred income taxes 31,528 4,306
Other assets 7,575 4,181
Total assets $286,616 $174,428
Liabilities:
Interest-bearing deposit from affiliate $ 1,000 $ 1,000
Short-term borrowings 54,163 63,482
Accounts payable 15,583 21,334
Other payables due to credit card
securitizations, net 36,619
Current income taxes payable to FCI 1,460 5,178
Deferred income 23,183 10,087
Accrued expenses and other liabilities 15,890 2,029
Total liabilities 147,898 103,110
Stockholders'/Division Equity:
Preferred stock, par value $.01 per share;
10,000,000 shares authorized, none issued
or outstanding
Common stock, par value $.01 per share;
100,000,000 shares 192
authorized,19,225,000 shares issued and
outstanding
Paid-in/contributed capital 107,220 60,028
Retained earnings 31,306 11,290
Total stockholders'/division equity 138,718 71,318
Total liabilities and $286,616 $174,428
stockholders'/division equity
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(dollars in thousands, except share and per share data)
Year Ended December 31,
1996 1995 1994
Interest Income:
Credit card loans $ 29,028 $ 7,054 $
Federal funds sold 867 487
Other 299 75 487
Total interest income 30,194 7,616 487
Interest Expense:
Deposit 48 36
Short-term borrowings 4,058 1,181
Total interest expense 4,106 1,217
Net Interest Income 26,088 6,399 487
Provision for loan losses 18,477 4,393
Net interest income after
provision for loan losses 7,611 2,006 487
Other Operating Income:
Net extended service plan 20,420 17,779 12,244
revenues
Net securitization and credit 49,921 16,003
card servicing income
Credit card fees, interchange
and other credit card income 26,028 10,639
Fee-based product revenues 29,853 6,662 1,994
126,222 51,083 14,238
Other Operating Expense:
Credit card account and other
product solicitation
and marketing expenses 29,297 23,089 3,739
Employee compensation 23,068 2,466 442
Data processing services and 12,757 3,090 109
communications
Third-party servicing expense 9,207 5,300 473
Warranty debt waiver
underwriting and claims 10,024 6,552 4,109
servicing expense
Credit card fraud losses 2,276 775
Other 14,658 4,368 2,350
101,287 45,640 11,222
Income Before Income Taxes 32,546 7,449 3,503
Income taxes 12,530 2,868 1,305
Net Income $ 20,016 $ 4,581 2,198
Earnings Per Share:
Primary $ 1.17 $ .28 $ .14
Fully diluted $ 1.16 $ .28 $ .14
Weighted average common and
common 17,242,298 16,439,407 16,270,327
equivalent shares - fully
diluted
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders'/Division Equity
(dollars in thousands)
<TABLE>
Paid-In/ Total
Common Contributed Retained Stockholders'/Division
Stock Capital Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1993 $ $ 28 $ 4,511 $ 4,539
Net income 2,198 2,198
BALANCE, DECEMBER 31, 1994 $ $ 28 $ 6,709 $ 6,737
Net income 4,581 4,581
Contributions from FCI 60,000 60,000
BALANCE, DECEMBER 31, 1995 $ $ 60,028 $ 11,290 $ 71,318
Net income 20,016 20,016
Company reorganization 160 (160)
Issuance of common stock 32 47,352 47,384
BALANCE, DECEMBER 31, 1996 $ 192 $107,220 $ 31,306 $138,718
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries (collectively, the "Company"). The
Company is an information-based direct marketer of consumer credit products,
extended service plans, and other fee-based products and services to moderate-
income consumers. The Company's business is conducted through Metris Direct,
Inc., Direct Merchants Credit Card Bank, National Association ("Direct Merchants
Bank") and Metris Receivables, Inc. ("MRI"), each a wholly-owned subsidiary of
MCI.
Prior to September 1996, MCI operated as a division of Fingerhut Companies,
Inc. ("FCI"). During September 1996, FCI reorganized the business through the
formation of MCI. The stock of Metris Direct, Inc., Direct Merchants Bank,
DMCCB, Inc., and MRI, in addition to the assets, liabilities and equity of
certain portions of the retail extended service plan business, was contributed
to the Company from FCI and its subsidiaries. In October 1996, the Company
completed an initial public offering of its common stock (see Note 7).
In early 1995, the Company's need for cash to fund credit card loans and
for other general business purposes exceeded the cash generated by its other
businesses. Consequently, the Company borrowed funds or obtained capital from
FCI to fund its ongoing operation from early 1995 to late 1996. The
consolidated financial statements include an allocation of FCI's interest
expense for the Company's net borrowings from FCI. The consolidated financial
statements also 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 approximately 10% of total managed
assets at the end of each month).
The consolidated financial statements also include an allocation of
expenses for certain data processing and information systems, audit,
accounting, 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 that, in the opinion of management, are
reasonable. During 1996, FCI and the Company entered into an administrative
services agreement that 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 consolidated financial
statements also reflect the retroactive effects of intercompany agreements
entered into during 1996, including co-brand credit card, database access, data
sharing and extended service plan agreements with Fingerhut, and a tax sharing
agreement with FCI. These agreements have terms ranging up to seven years.
All significant intercompany balances and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with the current year's presentation.
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
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.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
Year Ended December 31,
1996 1995 1994
Operating Activities:
<S> <C> <C> <C> <C> <C>
Net income $ 20,016 $ 4,581 $ 2,198
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Provision for loan losses 18,477 4,393
Depreciation and amortization 7,329 2,808 26
(Gain)/net amortization of gain on 6,194 (7,267)
securitization of credit card loans
Changes in operating assets and
liabilities:
Accrued interest and fees receivable (719) (2,223)
Other receivables due to/from credit card 61,542 (24,572)
securitizations
Prepaid expenses and deferred charges (6,045) (6,696) 176
Deferred income taxes (27,222) (4,108) (27)
Accounts payable and accrued expenses 8,110 20,374 1,198
Current income taxes payable to FCI (3,718) 5,051 (86)
Deferred income 13,096 10,084 (69)
Other (4,084) (4,431) (4)
Net cash provided by (used in) operating 92,976 (2,006) 3,412
activities
Investing Activities:
Proceeds from sales of loans 952,055 448,555
Net loans originated or collected (1,081,644) (528,864)
Credit card portfolio acquisition (15,469)
Net decrease (increase) in loans to FCI 9,375 (3,215)
Additions to premises and equipment (4,113) (1,353) (239)
Net cash used in investing activities (133,702) (87,756) (3,454)
Financing Activities:
Increase in interest-bearing deposit 1,000
Net (decrease) increase in short-term (9,319) 63,482
borrowings
Net proceeds from issuance of common stock 47,384
Capital contributions from FCI 60,000
Net cash provided by financing activities 38,065 124,482
Net (decrease) increase in cash and cash (2,661) 34,720 (42)
equivalents
Cash and cash equivalents at beginning of 34,743 23 65
year
Cash and cash equivalents at end of year $ 32,082 $ 34,743 $ 23
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share and as noted)
Pervasiveness of Estimates
The consolidated 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 consolidated 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 consolidated 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
that 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.
Securitization, 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 principal
receivables 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 lender to servicer, with a corresponding change in
how revenue is reported in the income statement. For securitized and sold
credit card loans, amounts that otherwise would have been recorded as interest
income, interest expense, fee income and provision for loan losses are instead
reported in other operating income as "Net securitization and credit card
servicing income."
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 probable future
losses of principal and earned interest, net of recoveries, 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 affect the adequacy of the allowance for
loan losses in the near term.
Credit card accounts are generally charged off at the end of the month
during which the loan becomes contractually 180 days past due, with the
exception of bankrupt accounts, which are charged off immediately upon formal
notification of bankruptcy, and accounts of deceased cardholders without a
surviving, contractually liable individual, or an estate large enough to pay
the debt in full, which are also charged off immediately upon notification.
Debt Waiver Products
Direct Merchants Bank offers various debt waiver products to its credit
card customers for which it retains the claims risk. Revenue for such products
is recognized ratably over the coverage period, generally one month, and
reserves are provided for pending claims based on Direct Merchants Bank's
historical experience with settlement of such claims. Revenues recorded for
debt waiver products are included in the consolidated statements of income
under "Fee-based product revenues" and were $25,487, $4,845, and $0 for the
years ended December 31, 1996, 1995 and 1994, respectively. Unearned revenues
and reserves for pending claims are recorded in the consolidated balance sheets
in "Accrued Expenses and Other Liabilities" and amounted to $2,460 and $698 as
of December 31, 1996 and 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, up to 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 the marketing activities for Fingerhut's sales of
extended service plans. Revenues for extended service plans sold, and related
provisions for service contract returns, are recorded at the time of
Fingerhut's shipment to the customer of the related merchandise. The provision
for service contract returns charged against revenues for the years ended
December 31, 1996, 1995 and 1994 amounted to $4,493, $3,626 and $2,558,
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 Fingerhut. These media cost reimbursements were $4,847, $4,166,
and $2,780 for the years ended December 31, 1996, 1995 and 1994, 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. The Company
began performing these administrative services and retained the claims risk for
new extended service plans sold on or after January 1, 1997.
Credit Card Fees and Origination Costs
Credit card fees include annual membership, late payment, over-credit
limit, returned check, and cash advance transaction fees. These fees are
assessed according to the terms of the related cardholder agreements.
The Company defers direct credit card origination costs associated with
successful credit card solicitations that it incurs in transactions with
independent third parties, and certain other costs that it incurs in connection
with loan underwriting and the preparation and processing of loan documents.
These deferred credit card origination costs are netted against the related
credit card annual fee, if any, and amortized on a straight-line basis over the
cardholder's privilege period, generally 12 months. Net deferred fees were
$14,263 and $6,036 as of December 31, 1996 and 1995, respectively.
Solicitation Expenses
Credit card account and other product solicitation costs, including
printing, credit bureaus, list processing costs, telemarketing and postage, are
generally expensed as incurred over the two to three month period during which
the related responses to such solicitation are received.
Credit Card Fraud Losses
The Company experiences credit card fraud losses from the unauthorized use
of credit cards. These fraudulent transactions are expensed when identified,
through the establishment of a reserve for the full amount of the transactions.
These amounts are charged off after 90 days, after all attempts to recover the
amounts from such transactions, including chargebacks to merchants and claims
against cardholders, are exhausted.
Interest Rate Risk Management 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 risk management contracts such
as interest rate swap and cap agreements in the management of its interest rate
exposure. These interest rate risk management 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" on the
consolidated statements of income. Premiums paid for such contracts and the
related interest payable or receivable under such contracts are classified
under "Other payables/receivables due to/from credit card securitization,
net," on the consolidated 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 consolidated 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 based only on the Company's financial results as if the Company
filed its own federal and state income tax returns. Deferred taxes are
determined based on the temporary differences between the financial statement
and tax bases of assets and liabilities that will result in future taxable or
deductible amounts using enacted tax rates that are expected to apply for the
year in which the differences are expected to reverse.
Statements of Cash Flows
The Company prepares its consolidated 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 consolidated statements of
cash flows, cash and cash equivalents include cash and due from banks, federal
funds sold, short-term investments, (mainly money market funds) and all other
highly liquid investments with original maturities of three months or less.
Cash paid for interest during the years ended December 31, 1996, 1995 and
1994 was $4,106, $1,217, and $0 respectively. Cash paid for income taxes for
the same years was $41,625, $2,004, and $1,589, respectively.
Stock-Based Employee Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock
(see Note 8).
Earnings Per Share
Earnings per share is computed using net income applicable to common stock
and the weighted-average number of common and common equivalent shares
outstanding, after giving retroactive effect to the shares outstanding as if
the Company reorganization that occurred during September 1996 (see Note 1) had
occurred at the beginning of the first period shown. The common equivalent
shares outstanding were calculated using the treasury stock method, using the
initial public offering price for the years prior to the initial public
offering. In addition, common equivalent shares outstanding were calculated
assuming that certain options (see Note 8) were converted into shares of the
Company's common stock at the beginning of the first year shown.
NOTE 3 - CREDIT CARD SECURITIZATIONS
The Company securitizes and sells a portion of its credit card loans to
both public and private investors through the Metris Master Trust (the "Trust").
Credit card loans are transferred to the Trust, which issues certificates
representing undivided ownership interests in the Trust. The Company also
retains participation interests in the Trust (under "Retained interests in
loans securitized" on the consolidated 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 and the associated loans are
not reflected on the consolidated balance sheets. The Company has receivables
from or payables to the Trust as a result of securitizations including amounts
deposited in an investor reserve account held by the trustee for the benefit of
the Trust's certificateholders ("Investor Deposit"), the excess servicing
asset, which represents the net gain recorded at any point in time for loans
sold under the asset securitizations, net of recourse reserves for securitized
loans and normal and excess servicing fee receivables.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
Year Ended December 31,
1996 1995
Balance at beginning of year $ 3,679 $
Provision for loan losses 18,477 4,393
Loans charged off 9,514 720
Recoveries 187 6
Net loan charge-offs 9,327 714
Balance at end of year $ 12,829 $ 3,679
NOTE 5 - PREMISES AND EQUIPMENT
The carrying value of premises and equipment is as follows:
December 31,
1996 1995
Furniture and equipment $ 1,013 $ 300
Computer equipment 1,339 1,110
Computer software in 1,445 110
development
Construction in progress 1,710 48
Leasehold improvements 248 74
Total $ 5,755 $ 1,642
Less: Accumulated depreciation 592 166
and amortization
Balance at end of year $ 5,163 $ 1,476
Depreciation and amortization expense for the years ended December 31,
1996, 1995 and 1994 was $426, $127, and $26, respectively.
NOTE 6 - SHORT TERM BORROWINGS
On September 16, 1996, the Company executed agreements for the following
credit facilities: (1) a $300 million, five-year revolving credit facility for
the Company (the "Revolving Credit Facility"), guaranteed by FCI; and (2) an
amendment to Series 1995-1 under the Metris Master Trust to (a) increase the
Class A Variable Funding Certificate to support a $400 million increase to $1.2
billion (of which the Company may use up to $800 million) of the Fingerhut
Owner Trust Commercial Paper Program in which the Company participates; and
(b) issue $112.6 million of additional asset-backed certificates to support the
aforementioned increase in the Commercial Paper Program.
The Company borrows under the Revolving Credit Facility and from FCI to
fund on-balance sheet loans and for other general business purposes. At
December 31, 1996, the Company had outstanding borrowings of $50.0 million
under the Revolving Credit Facility and outstanding borrowings from FCI of $4.2
million. At December 31, 1995, the Company had borrowed $63.5 million from
FCI.
The weighted average interest rate on the Revolving Credit Facility
borrowings at December 31, 1996 was 5.9%. The weighted average interest rate
on the borrowings from FCI was 7.1% at December 31, 1996 and 1995.
The Revolving Credit Facility is guaranteed by FCI and is further supported
by the pledge of the stock of certain subsidiaries of the Company and certain
accounts receivable and interests held therein by the Company. The Revolving
Credit Facility also contains certain financial covenants standard for
revolving credit facilities of this type including minimum net worth, minimum
equity to managed assets ratio, maximum leverage and a limitation on
indebtedness. In addition, the FCI guarantee includes certain covenants
including interest coverage, leverage and minimum net worth for FCI. At
December 31, 1996, the Company and FCI were in compliance with these covenants.
NOTE 7 - INITIAL PUBLIC OFFERING
In October, 1996, the Company completed an initial public offering of
3,258,333 shares of its common stock at $16 a share. The transaction reduced
FCI's ownership interest in the Company to approximately 83%. The Company
realized net cash proceeds of approximately $47.4 million from the sale of such
shares after underwriting discounts, commissions and expenses of the offering.
NOTE 8 - STOCK OPTIONS
In connection with the initial public offering of the Company (see Note 7),
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 and awards and gives the Company flexibility in tailoring its long-term
compensation programs. It provides that up to 1,860,000 shares of common stock,
subject to adjustment in certain circumstances, are available for awards of
stock options or other stock-based awards. At December 31, 1996, 461,300
shares were available for grant.
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 Incentive Stock Options ("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 are
eligible to receive nonqualified options and awards (only full or part-time
employees in the case of ISOs).
Effective March 1994, FCI granted the Company's Chief Executive Officer
("CEO") a tandem option (the "Tandem Option") for either (a) 55,000 shares of
FCI's common stock at an exercise price of $15 per share or (b) a 3.3% equity
interest in the portion of the Company that exceeds two times the estimated
fair value of the Company in March 1994. The exercise of either option
terminates the other. In connection with the initial public offering, the 3.3%
equity interest was converted into options for 656,075 shares of the Company's
common stock with an exercise price of $2.76 per share, which vests over five
years from the effective date. Compensation expense of $7.8 million related to
these options was recorded for the year ended December 31, 1996
In addition, at the time of the initial public offering the Company
granted options to purchase an aggregate of 742,625 shares of common stock to
officers and employees of the Company and Fingerhut, and others. Of these,
646,500 options were granted at an exercise price of $16 and the balance were
granted at a below-market exercise price per share, for which expense of $1.2
million was recorded for the year ended December 31, 1996. All options granted
to current officers and employees of the Company and Fingerhut were at the
initial offering price.
The Company also adopted the Metris Companies Inc. Non-Employee Director
Stock Option Plan (the "Director Plan"). It provides that up to 20,000 shares
of common stock, subject to adjustments in certain circumstances, are available
for awards of stock options. Of these, 10,000 options were granted at an
exercise price of $16. At December 31, 1996, 10,000 shares were available for
grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Accordingly, the Company continues to account for stock-based
compensation under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". 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.
Had compensation cost for these plans been determined based on the fair value
methodology prescribed by SFAS 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
1996 1995
Net earnings - as $ 20,016 $ 4,581
reported
Net earnings - pro forma $ 19,837 $ 4,581
Earnings per share - as $ 1.16 $ .28
reported
Earnings per share - pro $ 1.15 $ .28
forma
The above pro forma amounts may not be representative of the effects on
reported net earnings for future years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model.
The following weighted-average assumptions were used for grants in 1996:
dividend yield of 0.17%; expected volatility of 25.1%; risk-free interest
rate of 6.48% for the Stock Option Plan and the Director Plan and 6.53% for
the Tandem Option Plan; and expected lives of 6.5 years for the Stock Option
Plan and 7 years for the Tandem Option Plan. There were no options granted in
1995.
Information regarding the Company's stock option plans for 1996, 1995 and 1994
is as follows:
<TABLE>
Year Ended December 31,
1996 1995 1994
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
Options outstanding,
<S> <C> <C> <C> <C> <C>
beginning of year 656,075 $ 2.76 656,075 $ 2.76
Options exercised
Options granted 752,625 14.31 656,075 $ 2.76
Options
canceled/forfeited
Options outstanding, end
of year 1,408,700 8.93 656,075 2.76 656,075 2.76
Weighted-average fair
value of options,
granted during the year 5.87
Weighted-average exercise
price of options, 2.76 2.76 2.76
exercisable at end of
year
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
Options Outstanding Options Exercisable
Weighted-
Number Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Exercise at 12/31/96 Contractual Exercise at 12/31/96 Exercise
Price Life Price Price
$ 2.76 752,200 7.04 $ 2.76 376,100 $ 2.76
16.00 656,500 9.83 16.00
NOTE 9 - EMPLOYEE BENEFIT PLANS
Certain employees of the Company are participants in a non-contributory,
defined benefit plan of FCI that covers substantially all employees of FCI.
This plan has a vesting period of five years and provides 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, 1996 and
1995. Due to the small number of the Company's employees with a significant
number of years of service, the actuarial present value of benefit
obligations and the plan assets to be allocated to the Company were
immaterial at December 31, 1996 and 1995. Pension expense allocated to the
Company for the years ended December 31, 1996, 1995 and 1994 was $44, $28 and
$7, respectively.
Certain employees of the Company are also participants in a defined
contribution plan of FCI. Employer contributions to the plan are discretionary
and are generally determined by the Board of Directors of each of the
individual companies that participate in such plans, but are not to exceed 15%
of each individual's compensation. The cost allocated to the Company for this
plan for the years ended December 31, 1996, 1995 and 1994 was $149, $175 and
$30, respectively.
Employees of Direct Merchants Bank participate in a defined contribution
plan maintained by Direct Merchants Bank that covers substantially all of its
employees. The plan is limited to 401(k) provisions with a partial employer
match. The cost to the Company for this plan for the years ended December 31,
1996, 1995 and 1994 was $6, $9 and $4, respectively.
Effective January 1, 1997, substantially all employees of the Company are
eligible to participate in a defined contribution plan maintained by the
Company.
NOTE 10 - INCOME TAXES
The components of the provision for income taxes consisted of the
following:
Years Ended December 31,
1996 1995 1994
Current:
Federal $38,914 $6,238 $
State 4,035 921 126
Deferred (30,419) (4,291) (95)
$12,530 $2,868 $1,305
A reconciliation of the Company's effective income tax rate compared to
the statutory federal income tax rate is as follows:
Years Ended December 31,
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal 3.2% 3.2% 2.2%
benefit
Other, net 0.3% 0.3% 0.1%
Effective income tax rate 38.5% 38.5% 37.3%
The "other net" tax rate in 1996, 1995 and 1994 was composed of miscellaneous
items, none of which was individually significant.
The Company's deferred tax assets and liabilities are as follows:
December 31,
1996 1995
Deferred income tax assets resulting from
future deductible temporary differences:
Allowance for loan losses and recourse $29,910 $8,455
reserves
Deferred annual credit card revenues 1,568 243
Other product reserves 1,482 518
Other 1,265 470
$34,225 $9,686
Deferred income tax liabilities resulting
from future taxable temporary differences:
Net gain on securitization of credit card $ 386 $2,694
loans
Deferred solicitation and origination 1,692 1,594
costs
Accrued interest on credit card loans 578 1,061
Other 41 31
$ 2,697 $5,380
Management believes, based on the Company's history of operating earnings,
expectations for operating earnings in the future, and the expected reversals
oftaxable temporary differences, earnings will be sufficient to fully utilize
the deferred tax assets.
NOTE 11 - 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, 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 income 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 expense or credit during such periods was based on the
average short-term borrowing rates of FCI during the periods presented
(see Note 6).
The Company and Fingerhut have also entered into several other agreements
that detail further business arrangements between the companies. The
retroactive effects of these additional intercompany agreements and business
arrangements have been reflected in the consolidated financial statements of
the Company. The agreements entered into include a Co-Brand Credit Card
Agreement and a Data Sharing Agreement, which provides for payment for every
Fingerhut co-branded 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
Fingerhut 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 was paid in January
1997). The agreement also calls for a solicitation fee per product mailed
to a Fingerhut customer, 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 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 marketing
costs. Additionally, the Company and FCI have entered into a tax sharing
agreement (see Note 2).
Finally, the Company and FCI entered into a registration rights agreement
under which FCI has the right to require the Company to register under the
Securities Act of 1933, as amended, or to qualify for sale, any securities of
the Company that FCI owns, and the Company will be required to use reasonable
efforts to cause such registration to occur, subject to certain limitations and
conditions. The Company will bear the entire cost of the first three demand
registrations attributable to FCI, and FCI will bear one-half of the costs of
any 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.
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
years reflected in the financial statements of the Company:
Year ended December 31,
1996 1995 1994
Revenues:
Interest income $ $ $ 487
Net extended service plan 20,420 17,779 12,244
revenues
Expenses:
Interest expense 3,178 1,181
Credit card account and other
product solicitation 9,335 8,204 3,476
and marketing expenses
Data processing services and 1,324 320 7
communications
Third party customer service and
collections expenses 500 473
Other affiliate cost allocations 950 1,680 1,688
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Commitments to extend credit to consumers represent the unused credit
limits on open credit card accounts. These commitments amounted to $1.2 billion
and $709.5 million as of December 31, 1996 and 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 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 obligations have been
guaranteed by FCI. Rental expense for such operating leases for 1996, 1995 and
1994 was $1,135, $150 and $79, respectively.
Future minimum lease commitments at December 31, 1996 under cancelable
and non-cancelable operating leases are as follows:
1997 $3,181
1998 2,994
1999 1,675
2000 1,296
2001 195
Thereafter 16
Total minimum lease payments $9,357
NOTE 13 - CAPTIAL 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 in accordance with the national bank dividend policy.
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, liquidity and internal controls. At December 31, 1996 and 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 14 - CONCENTRATIONS OF CREDIT RISK
A concentration of credit risk is defined as 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 December 31, 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
December 31, 1996
California $ 27,053 $ 175,892 $ 202,945
Florida 17,505 113,819 131,324
New York 17,034 110,754 127,788
Texas 16,480 107,151 123,631
Ohio 9,409 61,179 70,588
Pennsylvania 8,654 56,267 64,921
Illinois 7,989 51,940 59,929
All others 111,205 723,609 834,814
Total $ 215,329 $1,400,611 $ 1,615,940
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
The Company targets its consumer credit products to moderate income
consumers. Primary risks associated with lending to this market are that they
may be more sensitive to future economic downturns, which may make them more
likely to default on their obligations.
At December 31, 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 all
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.
NOTE 15 - 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". Financial instruments
include both assets and liabilities, whether or not recognized in the Company's
consolidated balance sheets, for which it is practicable to estimate fair value.
Additionally, certain intangible assets recorded on the consolidated balance
sheets, such as purchased credit card relationships, and other intangible
assets not recorded on the consolidated balance sheets (such as the value of
the credit card 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 that are significantly affected by the assumptions used,
including the discount rate and estimated future cash flows. Such assumptions
are based on historical experience and assessment 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 payables/receivables due to/from credit card securitizations, net
The fair value of the excess servicing rights component of other
payables/receivables due to/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 payables/receivables due to/from credit card
securitizations, net, the carrying amount is a reasonable estimate of the fair
value.
Interest-bearing deposit and short-term borrowings
Interest-bearing deposit and short-term borrowings 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 the Company would receive or pay 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>
Year Ended December 31,
1996 1995
Carrying Estimated Carrying Estimated
amount fair value amount fair value
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 32,082 $ 32,082 $34,743 $34,743
Credit card loans, net 202,500 202,500 91,385 91,385
Other payables/receivables due (36,619) (36,619) 31,597 31,597
(to)/from credit card securitizations,
net
Interest-bearing deposit 1,000 1,000 1,000 1,000
Short term borrowings 54,163 54,163 63,482 63,482
Interest rate swap agreements in a net
receivable position
Interest rate cap agreements 4,143 1,989 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 Metris Master Trust.
Particularly, in connection with the issuance of the $512.6 million Metris
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%.
Also, in connection with the issuance of additional Series 1995-1
certificates related to the September 1996 amendment of Series 1995-1, the
Company entered into additional six-and two-thirds-year agreements 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 Metris 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 weighted-average fixed rate of 6.26% for a one-month floating rate
based on the prevailing monthly LIBOR rate. This weighted-average floating
rate for the series 1996-1 certificates was 5.64% at December 31, 1996.
The obligations of the Company and the counterparties under these
swap agreements are settled on a monthly basis.
Interest rate risk management contracts are generally expressed in
notional principal or contract amounts that are much larger than the amounts
potentially at risk for nonpayment by counterparties. Therefore, in the event
of nonperformance by the counterparties, the Company's credit exposure is
limited to the uncollected interest and contract market value related to the
contracts that have become favorable to the Company. Although the Company does
not require collateral from counterparties on its existing agreements, the
Company does control the credit risk of such contracts through established
credit approvals, risk control limits, and the ongoing monitoring of the credit
ratings of counterparties. The Company currently has no reason to anticipate
nonperformance by the counterparties.
Summary of Consolidated Quarterly Financial Information and Stock Data
(dollars in thousands, except per share amounts)(unaudited)
<TABLE>
1996
Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 9,847 $ 7,728 $ 6,916 $ 5,703
Interest Expense 1,283 965 761 1,097
Net Interest Income 8,564 6,763 6,155 4 ,606
Provision for Loan Losses 7,921 5,383 483 4,690
Other Operating Income 40,896 32,030 27,930 25,366
Other Operating Expense 32,889 23,976 25,409 19,013
Income Before Income Taxes 8,650 9,434 8,193 6,269
Net Income $ 5,320 $ 5,802 $ 5,039 $ 3,855
Earnings Per Common Share - $ 0.28 $ 0.35 $ 0.31 $ 0.23
fully diluted
Weighted-average Common and
Common 18,956,457 16,515,684 16,495,936 16,476,188
Equivalent Shares - fully
diluted
Market Prices:
High $ 25 3/4
Low 20 1/8
1995
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest Income $ 3,648 $ 2,508 $ 1,424 $ 36
Interest Expense 387 551 498 (219)
Net Interest Income 3,261 1,957 926 255
Provision for Loan Losses 2,749 1,110 534
Other Operating Income 20,072 14,916 12,090 4,005
Other Operating Expense 19,854 9,183 12,887 3,716
Income (Loss) Before Income 730 6,580 (405) 544
Taxes
Net Income (Loss) 449 4,047 (249) 334
Earnings (Loss) Per Common $ 0.03 $ 0.25 $ (0.02) $ 0.02
Share - fully diluted
Weighted-average Common and
Common 16,439,407 16,402,625 16,365,844 16,329,062
Equivalent shares - fully
diluted
</TABLE>
Stock Data
The Company's common stock, which is traded under the symbol "MTRS", has been
listed on the Nasdaq National Market since October 25, 1996. As of February
28, 1997, there were 27 holders of record of the Company's common stock.
Dividend Policy
The Company was a wholly-owned indirect subsidiary of Fingerhut Companies, Inc.,
until the completion of the initial public offering in October 1996 and, as
such, did not pay regular dividends. The Company 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 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.
Exhibit 21
Subsidiaries of the Registrant
NAME JURISDICTION OF INCORPORATION
Direct Merchants Credit Card National banking association
Bank, National Association
(d/b/a Direct Merchants Bank)
Metris Direct, Inc. Minnesota
(d/b/a Metris Direct)
Metris Receivables, Inc. Delaware
DMCCB, Inc. Minnesota
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Metris Companies Inc. for the fiscal year
ended December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,902
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,001
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 215,329
<ALLOWANCE> 12,829
<TOTAL-ASSETS> 286,616
<DEPOSITS> 1,000
<SHORT-TERM> 54,163
<LIABILITIES-OTHER> 92,735
<LONG-TERM> 0
0
0
<COMMON> 192
<OTHER-SE> 138,526
<TOTAL-LIABILITIES-AND-EQUITY> 286,616
<INTEREST-LOAN> 29,028
<INTEREST-INVEST> 867
<INTEREST-OTHER> 299
<INTEREST-TOTAL> 30,194
<INTEREST-DEPOSIT> 48
<INTEREST-EXPENSE> 4,106
<INTEREST-INCOME-NET> 26,088
<LOAN-LOSSES> 18,477
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 101,287
<INCOME-PRETAX> 32,546
<INCOME-PRE-EXTRAORDINARY> 20,016
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,016
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 17.6
<LOANS-NON> 0
<LOANS-PAST> 4,913
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,679
<CHARGE-OFFS> 9,514
<RECOVERIES> 187
<ALLOWANCE-CLOSE> 12,829
<ALLOWANCE-DOMESTIC> 12,829
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
Metris Companies Inc. ("Metris" or "the Company") desires to
take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is filing this
cautionary statement in connection with such safe harbor
legislation. The Company's Form 10-K, the Company's Annual
Report to Shareholders, any Form 10-Q or Form 8-K filed by the
Company or any other written or oral statements made by or on
behalf of the Company may also include forward-looking statements
which reflect the Company's current views with respect to future
events and financial performance. The words "believe," "expect,"
"anticipate," "intends," "estimate," "forecast," "project" and
similar expressions identify forward-looking statements.
The Company wishes to caution investors that any forward-
looking statements made by or on behalf of the Company are
subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to,
the factors listed below (many of which have been discussed in
the Company's prior filings with the Securities and Exchange
Commission). Though the Company has attempted to list
comprehensively these important factors, the Company wishes to
caution investors that other factors may in the future prove to
be important in affecting the Company's results of operations.
New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which
any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
Investors are further cautioned not to place undue reliance
on such forward-looking statements as they speak only of the
Company's views as of the date the statement was made. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.
Dependence on Fingerhut
As of December 31, 1996, customers of Fingerhut Corporation
("Fingerhut Customers") represented approximately 50% of the
Company's credit card accounts and approximately 51% of the
Company's managed loans. In addition, Fingerhut Customers
currently are 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 Fingerhut's proprietary database (the
"Fingerhut Database"), particularly with respect to the
experience of Fingerhut Corporation ("Fingerhut") 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 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.
Fingerhut Companies, Inc. ("FCI") is a guarantor of the
Company's bank revolving credit facility. Breaches of covenants
contained in the guaranty, including various financial covenants
of FCI, would be events of default under the facility. Upon the
occurrence of any such event the facility would be terminable at
the option of the lenders. Such events could have a material
adverse impact on the Company's financial condition and results
of operations. To the extent that the FCI guarantee contains
certain financial covenants and the cost of maintaining
availability and borrowing under the revolving credit facility is
based on FCI's credit rating, the Company will be dependent on
the financial strength and performance of FCI. FCI has been
impacted by the industry-wide increase in paper and postage
rates, which began in early 1995 and continued into 1996.
Primarily as a result such increases in paper and postage rates,
FCI's debt rating was downgraded in 1996 by Standard & Poor's.
FCI is currently rated BBB/Baa2 by Standard & Poor's and Moody's
Investors Service, respectively.
Lack of Prior Operating History as Stand-Alone Entity
FCI's financial services business, including Direct
Merchants Credit Card Bank, National Association ("Direct
Merchants Bank"), recently has been consolidated within Metris
and therefore has operated as a separate operating group for a
limited time. In addition, the Company's management team has
operated the Company as a stand-alone entity for a limited time.
A number of significant changes occurred in the funding and
operations of the Company in connection with the consummation of
the Company's initial public offering. These changes include the
establishment of the Company's revolving credit facility and its
own incentive compensation and stock option plans. 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 the Company's Form
10-K, the Company's Annual Report to Shareholders, any Form 10-Q
or Form 8-K filed by the Company or any other written or oral
statements made by the Company, does not necessarily reflect the
financial position and results of operations of the Company in
the future or what the financial position and results of
operations of the Company would have been had it been operated as
a stand-alone entity during the periods presented. Because FCI
has guaranteed the Company's indebtedness, the Company's funding
costs will not increase in the short-term. FCI is contractually
committed to guarantee the Company's revolving credit facility
for the term of that facility, but if FCI no longer guaranteed
the Company's indebtedness, the Company's funding costs would
increase and the Company's earnings on a stand-alone basis would
be expected to be lower, all other things being equal.
Metris has entered into an Administrative Services
Agreement, under which subsidiaries of FCI have agreed to 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 administrative services without the
assistance previously provided by FCI. The impact of these and
other changes on the Company's operations cannot be fully
predicted.
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. Most
of the Company's credit card accounts were originated within the
last 18 months and over 30% 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. Until the accounts become more
seasoned, it is likely that the levels of such delinquencies and
losses will increase as the average age of the Company's accounts
increases. 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.
Ability to Sustain and Manage Growth
In order to meet its strategic objectives the Company must
continue to achieve growth in its credit card loan portfolio.
Continued growth in the Company's credit card loan portfolio
depends on (i) the Company's ability to attract new cardholders,
(ii) growth in both existing and new account balances, (iii) the
degree to which the Company loses accounts and account balances
to competing card issuers, (iv) levels of delinquencies and
losses (v) the availability of funding (including, but not
limited to, 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 targets 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 focus 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. At December 31, 1996, the
Company's managed credit card loans 30 days or more delinquent
were 5.53% of managed loans compared to 3.95% at December 31,
1995. A portion of this increase is to be expected as the
Company's portfolio continues to season. 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.
Limited History of Credit Card Operations
The Company began originating and servicing credit card
accounts in March 1995, and thus has limited underwriting and
servicing experience, and 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 credit card
business and on the performance of the credit card loans
outstanding.
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.
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.
The Company 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 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 the Company's credit card subsidiary, 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 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.
Direct Merchants Bank is also subject to regulation by the
Federal Reserve Board, the Federal Deposit Insurance Corporation
and the OCC. Such regulations include limitations on the nature
of the businesses Direct Merchants Bank may conduct.
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 further regulate the
credit card industry or to reduce finance charges or other fees or
charges applicable to credit card and other consumer revolving
loan accounts. Such laws, as well as any new laws or rulings
which may be adopted, may adversely affect the Company's ability
to collect on account balances or maintain previous levels of
periodic rate finance charges and other fees and charges with
respect to the accounts. Any failure by the Company to comply
with such legal requirements also could adversely affect its
ability to collect the full amount of the account balances.
Changes in federal and state bankruptcy and debtor relief laws
could adversely affect the Company if such changes result in,
among other things, additional administrative expenses and
accounts being written off as uncollectible.
Competition
As a marketer of consumer credit products, Metris faces
increasing competition from numerous providers of financial
services, many of which have greater resources than the Company.
In particular, the Company's credit card business competes with
national, regional and local bank card issuers as well as other
general purpose credit card issuers, such as American Express,
Discover Card and Diners Club. Over 6,000 issuers are affiliated
with MasterCard alone. Many general purpose credit card issuers
are substantially larger and have more seasoned credit card
portfolios than the Company and often compete for customers by
offering lower interest rates and/or fee levels. In general,
customers are attracted to credit card issuers largely on the
basis of price, credit limit and other product features and
customer loyalty is often limited.
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 and
services market, including insurance companies, financial services
institutions and other membership-based consumer services
providers, many of which are larger, better capitalized and more
experienced than the Company.
Control by FCI
FCI owns approximately 83% of the outstanding shares of the
Company's Common Stock. Through its ability to elect all the
directors of the Company, FCI effectively controls all matters
affecting the Company, including the adoption of amendments to the
Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), any determination with respect to
the acquisition or disposition of Company assets, future issuances
of the Company's common stock, par value $.01 per share (the
"Common Stock") or other securities of the Company, the Company's
incurrence of debt, and any dividend payable on the Common Stock.
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.
Fingerhut Private Label Credit Cards
FCI has established a limited purpose credit card bank
affiliate ("Fingerhut National Bank"), which will issue Fingerhut
private label credit cards. Such cards could be used only to
purchase Fingerhut products and may compete with the Company's
credit cards with respect to such purchases. To the extent that a
Metris cardholder has a Fingerhut credit card or other private
label credit card, his or her use of or availability of credit
under a Metris credit card may be reduced.
The Company believes that FCI's plans to issue Fingerhut
private label credit cards will not have a material negative
effect on the Company. Fingerhut currently provides credit to its
customers for their purchases of Fingerhut products and services,
and private label credit cards would be an extension of the credit
options Fingerhut currently provides. Any Fingerhut private label
credit cards could be used only to purchase Fingerhut products and
services.
Potential Conflicts of Interest; Relationship with FCI
Corporate Opportunities
The relationship between the respective businesses of Metris
and FCI may give rise to certain conflicts of interest regarding
corporate opportunities. Because both the Company and FCI sell to
the same client base, use direct mail and provide credit, business
opportunities may arise that either could pursue. While Fingerhut
will be prohibited under the Co-Brand Credit Card Agreement
between Fingerhut and Metris from directly or indirectly issuing a
competing, general purpose credit card, it traditionally provided
closed-end, fixed payment installment contracts to its customers
and Fingerhut National Bank now provides closed-end or revolving
credit private label credit cards issued to Fingerhut customers
for use in purchasing Fingerhut products and services. As a
result, and as is the case now, FCI and Metris expect that
Fingerhut customers who are also Metris cardholders will generally
continue to use Fingerhut credit for Fingerhut purchases and use
their Metris credit cards for other purposes. In addition,
Fingerhut presently offers various types of credit-related
insurance products in connection with the credit it extends to its
customers, and the bank affiliate will in the future offer such
products in connection with the private label credit cards it
issues.
To address the potential for conflicts between the Company
and FCI, the Certificate of Incorporation contains detailed
provisions concerning the business activities in which the Company
is permitted to engage until the day after the third shareholder
meeting held after FCI owns less than 50% of the Company's voting
stock.
The relevant provisions are intended to permit Metris to
continue all activities in which it currently engages, and to
expand into certain related financial service products. These
provisions generally permit the Company to continue providing
consumer credit products, extended service plans, and fee-based
products and services, and a variety of other financial service
products and services, provided that the Company shall not offer
any closed-end installment or revolving credit loans to Fingerhut
Customers for the exclusive purchase of Fingerhut merchandise.
The Company may engage in any other business with the consent of
FCI or authorized by a majority vote of the shareholders. Because
these limitations may restrict the Company's ability to offer new
products or services, they may limit the Company's ability to
compete.
The Certificate of Incorporation provides that no
opportunity, transaction, agreement or other arrangement to which
FCI or an entity in which FCI has an interest, is a party, shall
be a corporate opportunity of the Company unless such opportunity,
transaction, agreement or other arrangement shall have been
initially offered to the Company before it is offered to FCI or
such other entity, and either (i) the Company has an enforceable
contractual interest in such opportunity, transaction, agreement
or other arrangement or (ii) the subject matter of such
opportunity, transaction, agreement or other arrangement is a
constituent element of an activity in which the Company is then
actively engaged. Even if the foregoing conditions were met, such
fact alone would not conclusively render such opportunity the
property of the Company. The intercompany agreements limit FCI's
ability to engage in the financial services business during the
terms of such agreements, except through its ownership of Common
Stock of the Company. The foregoing provisions of the Certificate
of Incorporation of the Company were determined by FCI after
consultation with management of the Company but were not the
result of arm's-length negotiations.
Other Potential Conflicts of Interest
Conflicts of interest may arise in the future between Metris
and FCI in a number of areas relating to their past and ongoing
relationships, including potential acquisitions of businesses or
properties, the election of new or additional directors,
dividends, incurrence of indebtedness, tax matters, financial
commitments, registration rights, administration of benefit plans,
service arrangements, issuances and sales of capital stock of the
Company and public policy matters. In addition, there are
overlapping directors and executive officers between the Company
and FCI. 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.
The Company 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 between the
Company and FCI, 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.
Dependence on Key Personnel
The Company's management and operations are dependent upon
the skills and experience of a small number of senior management
and operating personnel including Ronald Zebeck, President and
Chief Executive Officer; Peter Michielutti, Senior Vice President,
Business Development; Douglas McCoy, Senior Vice President,
Operations; Robert Oberrender, Senior Vice President, Chief
Financial Officer; Douglas Scaliti, Senior Vice President,
Marketing; and David Reak, Vice President, Credit Risk. The
Company does not have employment agreements with its executive
officers and does not maintain key-man life insurance on any
executive officer. The loss of the services of members of senior
management could have an adverse impact on the Company.
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 for sales on or after January 1, 1997, and currently
administers the extended service plans internally. The Company
will retain the risks associated with performance under the
extended service plans entered into on or after January 1, 1997,
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.
