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 1-8668
December 26, 1997 Commission file number
____________________
FINGERHUT COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1396490
(State of Incorporation) (I.R.S. Employer Identification
No.)
4400 Baker Road, Minnetonka, Minnesota 55343
(Address of principal executive offices)
(612) 932-3100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $.01 Par Value New York Stock Exchange, Inc.
Securities registered pursuant to section 12(g) of the Act: None
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.
As of February 27, 1998, 46,442,360 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 $1,117,010,894 based upon the New York
Stock Exchange closing price on February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Annual Report to Shareholders for the
fiscal year ended December 26, 1997, are incorporated by
reference in Parts II and IV.
Certain portions of the Proxy Statement for the Annual Meeting of
Shareholders of Fingerhut Companies, Inc. to be held on May 6,
1998, which will be filed with the Securities and Exchange
Commission within 120 days after December 26, 1997, are
incorporated by reference in Part III.
TABLE OF CONTENTS
PART I
Page
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7a.Quantitative and Qualitative Disclosures About
Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial
Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 20
Signatures 22
Exhibit Index 24
PART I
Item 1. Business
General
Fingerhut Companies, Inc. (the "Company") is a database
marketing company that sells a broad range of products and
services directly to consumers via catalogs, telemarketing,
television and other media. The Company had 1997 revenues of
$1.8 billion. Its principal subsidiaries are Fingerhut
Corporation ("Fingerhut"), Metris Companies Inc. ("Metris"),
Figi's Inc. ("Figi's") and Fingerhut National Bank ("FNB"). The
Company's Retail segment is conducted by Fingerhut, Figi's and
FNB. Fingerhut has been in the direct mail marketing business
for 50 years and sells general merchandise using catalogs and
other direct marketing solicitations. Fingerhut's 1997 net sales
were $1.420 billion. Figi's markets specialty foods and other
gifts, primarily through catalogs, and had net sales of
approximately $97.8 million in 1997. FNB provides credit for
customers' purchases from Fingerhut, in the form of closed-end
and revolving credit card loans.
The Company's Financial Services segment business is
conducted through Metris (an 83% owned subsidiary), an
information-based direct marketer of consumer credit products,
fee-based services and extended service plans to moderate income
consumers. Metris' subsidiaries include Direct Merchants Credit
Card Bank, National Association ("Direct Merchants Bank") and
Metris Direct, Inc. (formerly Fingerhut Financial Services
Corporation). The Company formed Metris in 1996 and contributed
to it the assets, liabilities and equity in the Company's
financial services business. In October 1996, Metris completed
an initial public offering of approximately 17% of its common
stock. The Company announced in October 1997 that its Board of
Directors had approved the filing of an application with the
Internal Revenue Service (the "IRS") for a ruling on a tax-free
distribution to shareholders of the Company of all of the
Company's ownership in Metris (the "Spin Off"). The Company
filed the ruling request with the IRS on October 23, 1997. The
proposed Spin Off, anticipated in 1998, is subject to the
approval of the Company's Board of Directors and the receipt of a
ruling from the IRS, and is subject to market conditions. There
can be no assurance that the Spin Off will be consummated.
The Company is the successor to the business of several
related companies, the first of which was a partnership formed in
1948. Fingerhut became a publicly-held corporation in 1970 and
was acquired by a predecessor of Travelers Group Inc.
("Travelers") in 1979. The Company was incorporated in 1978 in
connection with Travelers' acquisition of Fingerhut and became a
publicly-held company in May 1990.
Unless the context otherwise indicates, references to the
Company refer to Fingerhut Companies, Inc. and its subsidiaries.
Retail Segment
The Company's Retail segment businesses are conducted by
Fingerhut, Figi's and FNB. The business discussion includes five-
year summaries of key operating statistics and a two-year segment
Statement of Operations to assist in understanding this segment's
results.
Fingerhut Corporation
Introduction
Fingerhut, one of the largest catalog marketers in the United
States, sells general merchandise and financial service products
to moderate income consumers. It is the only large general
merchandise retailer that serves this market exclusively through
catalog direct marketing. The median age of Fingerhut's
customers is slightly higher than the national average and
families are a significant portion of its customer base. FNB
offers extended payment terms on all purchases under either
closed-end installment credit card loans or revolving credit card
loans. Substantially all of Fingerhut's sales are made using
credit card loans made by FNB. Fingerhut's core competency is
the development and use of a proprietary database to provide
credit, target offers and build relationships with its customers.
Fingerhut has used its extensive database, credit programs and
proprietary database segmentation software to establish a
dominant position in this market, with a large base of loyal,
repeat customers. Fingerhut's active list of existing customers
accounts for approximately 84% of its net sales.
Marketing
Marketing activities are divided into three primary programs:
new customer acquisition, a transitional program and existing
customer programs. During 1997, Fingerhut mailed approximately
472 million catalogs and other promotions to existing and
prospective customers.
Fingerhut's new customer acquisition program is designed to
identify and attract new customers on a cost-effective basis.
The primary sources of new customers are rented lists, catalog
requests, customer referrals and other direct marketing
solicitations. Fingerhut mails catalogs and other multi-product
offerings to prospective customers and adds them to its database
as responses are received. These programs are intended to
identify and target new customers who will become long-term
Fingerhut customers. New customers account for approximately 16%
of Fingerhut's net sales.
The decisions on which prospective customers to solicit,
which products to offer and which media to use are based upon the
projected long-term profitability and internal rates of return of
the program. Maintaining acceptable financial rates of return on
new customers depends on balancing the cost of acquisition of new
customers with their long-term profitability to Fingerhut. To
determine whether the cost to obtain new customers is acceptable,
Fingerhut maintains a system that monitors profitability by
source of new customers, by product type and by promotional media
type. Fingerhut continuously tests various media, products,
offerings and incentives and analyzes the results in order to
maximize the effectiveness of its customer acquisition efforts.
Dec. 26, Dec. 27, Dec. 29, Dec. 30, Dec. 31,
For the Fiscal Year Ended: 1997 199 1995 1994 1993
Cost per new customer $11.29 $13.92 $15.36 $8.52 $11.50
New customer mailings 129,199 162,493 193,646 155,050 149,737
(in 000's)
After first-time buyers commence payments on their initial
purchases, they are placed in a transitional program. The time a
person remains in a transitional program and the number and type
of products he or she is offered depends on the buyer's
purchasing and payment practices. A customer is placed on
Fingerhut's promotable customer list after demonstrating his or
her creditworthiness.
Fingerhut reaches its existing customers through extensive
promotional mailing efforts, primarily catalogs, and through
telemarketing. In 1997, Fingerhut mailed 139 different catalogs
and other promotions to its established customers. These
mailings included general merchandise catalogs, specialty
catalogs, small and large multi-product mailers and single
product promotions. Fingerhut also conducted a test catalog
mailing of approximately 90,000 catalogs and multi-product
mailers in the United Kingdom in 1997. In addition, Fingerhut
has a home page on the Internet (www.fingerhut.com) through which
customers can contact Fingerhut customer service, request
catalogs or order merchandise.
Dec. 26, Dec. 27, Dec. 29, Dec. 30, Dec.31,
For the Fiscal Year Ended: 1997 1996 1995 1994 1993
Sales per mailing - $3.19 $3.43 $3.02 $2.91 $3.41
existing customer list
Existing customer mailings 342,643 339,377 404,894 402,476 32,473
(in 000's)
Active customer list 4,299 4,706 5,174 5,104 4,756
(in 000's)*
Contribution margin per $ 98 $ 90 $ 77 $ 78 $ 75
existing customer
*Includes existing customers who have made a purchase from
Fingerhut in the last 12 months.
Fingerhut believes the key factors in maximizing the
profitability of its existing customer list are developing
long-term repeat buyers and balancing customer response with
appropriate credit losses and merchandise return rates for each
segment of its customer list. Fingerhut promotes customer
satisfaction and loyalty by providing credit through FNB, by
using a number of marketing devices (including targeted
promotions, deferred payments, 30-day home trials, a satisfaction
pledge, free gifts, merchandise giveaways, sweepstakes, and
personalized mailings), and by offering attractive brand name and
private label merchandise.
Fingerhut Database
Fingerhut is a leader in the development and use of
information-based marketing concepts and its extensive database
and proprietary database segmentation software afford it a
competitive advantage within its market niche. The database
contains information on more than 30 million consumers, including
approximately 8 million customers who have made a purchase from
Fingerhut within the past 24 months. Included within the
database are up to 3,500 potential data items in a customer
record, including names, addresses, behavioral characteristics,
general demographic information and information provided by the
customer. FNB uses this information, along with sophisticated
proprietary credit scoring models, to produce proprietary credit
scores for Fingerhut customers. The Fingerhut database also
includes a "suppress" file, which contains information on
more than 8 million individuals about whom Fingerhut has
information relating to fraud and similar indicators of
unacceptably high risk. The database is continually updated as
new information is obtained. Fingerhut also uses the database
for marketing decisions and FNB uses it for extending credit.
Fingerhut does not report its credit information to the credit
bureaus, which means this information is not publicly available.
Credit Management
In late 1996, the Company received approval from the Office
of the Comptroller of the Currency to charter a limited-purpose
national bank. FNB is a special purpose credit card bank.
Commencing in January 1997, FNB began extending private label
credit card loans for Fingerhut purchases. Although closed-end
installment loans presently are the predominant form of credit
extended to Fingerhut customers, FNB is increasing its use of
revolving credit for both existing Fingerhut customers and
prospective customers. In addition, FNB offers certain Fingerhut
customers the opportunity to refinance existing closed-end
installment sales contacts originated by Fingerhut and closed-end
credit card loans originated by FNB with new revolving credit
card loans. Revolving credit has been introduced to
approximately 230,000 customers as of March 1998.
FNB generally does not require its customers to provide
traditional credit information in order to approve Fingerhut
purchases on credit. Instead of using traditional credit
applications, FNB uses sophisticated and highly automated
proprietary techniques for evaluating the creditworthiness of new
and existing customers and for selecting those customers who will
receive various categories of mailings. Management believes
Fingerhut's 50 years of experience in the mail order business,
its database containing purchase and payment histories and its
significant investment in computer technology and proprietary
analytical models give FNB a unique ability to analyze the
creditworthiness of customers in its market. The goal of the
analysis is not to achieve the lowest possible credit losses but
to balance credit losses and return rates with customer response,
thereby optimizing overall profitability. Consequently, FNB's
planned credit losses typically are higher than the private label
credit programs of other direct mail and retail companies.
Under the installment plan, once a consumer places an order,
FNB employs proprietary techniques designed to identify consumers
whose orders can be automatically shipped, consumers from whom
additional information, including credit applications, must be
obtained and reviewed and consumers to whom credit is declined.
After purchases are shipped, customer payments are continuously
monitored to identify credit problems as early as possible. FNB
has a flexible policy of working with certain delinquent
customers, including adjusting their payment schedules, which the
Company believes reduces default rates and maintains customer
loyalty.
Substantially all of Fingerhut's sales are made using FNB's
proprietary credit program, which uses either closed-end
installment credit card loans or revolving credit card loans.
Under the installment plan, monthly payments are made by
customers and processed through the use of coupons contained in
payment books delivered with each order shipment. Payment terms
to existing customers generally range from 4 to 36 monthly
payments. Many customers pay their accounts in full before the
end of the scheduled payment term. Payment terms vary based upon
customer activity. In addition, a majority of sales are to
customers who receive a deferred payment option, which extends
the due date of the first payment by approximately four to five
months. Under the revolving credit plan, monthly statements are
sent to customers with payments based on their total outstanding
balance.
Merchandising
Fingerhut offers a broad mix of brand name and private label
consumer products, including electronics, housewares, home
textiles, apparel, furniture, home accessories, jewelry, sporting
goods and toys, tools, automotive, lawn and garden, and financial
service products. In 1997, Fingerhut offered approximately
17,000 different products. Fingerhut's sales mix by product
category for 1997 is shown in the following table:
Fingerhut Corporation 1997 Product Mix
Percent of
Gross Retail Sales
Electronics 22%
Home Textiles 19
Housewares 17
Furniture/Home Accessories 10
Jewelry 8
Leisure 8
Apparel 7
Tools/Automotive/Lawn & Garden 6
Other 3
100%
Fingerhut selects merchandise to be offered to its customers
by evaluating historical product and category demand and by
analyzing emerging merchandise trends in conjunction with
proprietary marketing information. Fingerhut is constantly
developing unique brand name and private label product groupings,
such as coordinated kitchen ensembles, coordinated bed and bath
ensembles and tool sets, targeted to appeal to its customers and
to add value and/or style to its merchandise. Historically,
Fingerhut has offered its customers financial service products,
including credit and property insurance and extended service
agreements. Fingerhut and FNB expect to offer additional
products and services, such as credit card registration,
membership clubs and fee-based services, to Fingerhut customers
with revolving credit card accounts.
Fingerhut's general merchandise catalogs feature a wide array
of products; they are updated and published throughout the year,
including a holiday big book of approximately 500 pages.
Specialty catalogs mailed to targeted portions of Fingerhut's
customer list include outdoor living, jewelry, electronics,
domestics/housewares, gifts, juvenile, home fitness, home
improvement and Spanish-language catalogs.
Vendor Relations
The Company purchases merchandise from approximately 2,300
different suppliers and maintains strong relations with its
vendors. In 1997, the top ten vendors accounted for
approximately 19% of the Company's total merchandise purchases.
No single vendor accounted for more than 5% of the Company's
total merchandise purchases.
The Company maintains close relations with overseas
representatives in Hong Kong, Taiwan, Korea, China, the
Philippines, Thailand and Europe. In 1997, approximately 18% of
the Company's merchandise was imported directly from foreign
vendors and an additional 28% was purchased through importers.
Management Information Systems
Fingerhut was a pioneer in the use of information-based
marketing concepts in the mail order industry, using computer
technology and related software developed by the Company. The
Company continues to be highly dependent on information systems
and its computer operations are among the largest and most
sophisticated in the direct marketing industry.
Fingerhut's management information systems provide data
processing capabilities to Fingerhut, FNB, Metris and Figi's and
support all areas of the Company, including marketing, credit,
order, customer service, inventory control and finance.
Fingerhut's management information systems currently operate on
mainframe computers connected to on-line terminals and client-
server systems used in all aspects of the Company's business.
Year 2000 Compliance
The Company is heavily dependent upon complex computer
systems for all phases of its operations. Since many of the
Company's currently installed computer systems and software
products use only the last two digits to identify a year in the
date field (e.g., "97" for "1997"), some software may fail to
operate properly in the year 2000 if the computer systems or
software are not reprogrammed or replaced to comply with such
"Year 2000" requirements. Problems may also arise earlier than
January 1, 2000 as dates in the next millennium are entered into
non- Year 2000 compliant programs.
In early 1996, Fingerhut started an aggressive conversion
effort to identify and correct the Year 2000 programming issues
in a timely manner. By mid-1996, the most critical mainframe
processing system was converted to be Year 2000 compliant and the
Company initiated a large project to address all remaining
systems. This project consists of many sub-projects that will
span the remainder of 1998 and the first quarter of 1999. This
project will use a combination of internal and external
resources. In late 1997, the Company created a Year 2000 Project
Office to oversee the project, address all related business
issues and facilitate communication with significant suppliers
and service providers. As of December 26, 1997, the Company had
spent approximately $5 million on the project with an estimated
expense ranging from $11 to $13 million remaining on the project.
The Company believes that it will be able to fund the effort
through operating cash flows.
The Company believes that many of its suppliers and
customers also have Year 2000 programming issues which could
affect the Company. The Company is working with its significant
suppliers and service providers to assure that failures in those
organizations will have minimal impact on the Company. There can
be no assurance that the Company's suppliers or service providers
have, or will have, management information systems that are Year
2000 compliant. Therefore, the Company is developing contingency
plans with respect to its significant suppliers and service
providers.
The Company believes that it has allocated adequate
resources to achieve Year 2000 compliance in a timely manner,
however, there can be no assurance to that effect. The Company
presently believes that the cost of its conversion effort will
not have a material effect on the Company's current financial
position or liquidity .
Preparation and Mailing of Promotional Materials
Fingerhut performs a large portion of the production process
for its promotional materials in-house. The Creative Department
uses desktop publishing for the design and production of all
Fingerhut's mailings. A substantial portion of the color
photographs used in Fingerhut's catalogs and other marketing
materials are taken at the in-house photo studio and Fingerhut
prepares color separations for approximately 57% of its
promotional materials. In addition, Fingerhut's eight-color web
printing presses print more than half of its catalog "wraps," the
personalized outside cover used on Fingerhut catalogs.
Substantially all of Fingerhut's promotional materials, except
the wraps, are printed at outside vendors.
Fingerhut's mailing operations are designed to provide the
flexibility and rapid response time required to keep pace with
its changing marketing and merchandising needs. Fingerhut has
two mailing facilities in Minnesota that cut, fold, insert, sort
and deliver to the post office its single and multiple product
promotions. For catalog mailings, Fingerhut personalizes the
catalog wraps and delivers them to its outside printers
pre-sorted for mailing.
Order Processing and Fulfillment
Although most of Fingerhut's customer orders are received by
mail, telephone ordering has become a more important part of
Fingerhut's business. In 1997, Fingerhut processed approximately
17 million Fingerhut orders and approximately 50 million
Fingerhut customer payments.
In 1997, Fingerhut shipped approximately 21 million packages
from its warehouse and distribution facilities in Minnesota and
Tennessee. In order to minimize shipping costs, packages are
trucked to drop points throughout the country where they enter
the United States Postal Service or the United Parcel Service
("UPS") systems for delivery to the customer. In addition,
Fingerhut offers optional express delivery in selected
promotions.
In August 1997, UPS employees went on strike. Because the
Company uses the United States Postal Service to ship
approximately 75% of its customer orders, the strike did not have
a significant impact on the Company's ability to deliver
merchandise.
Figi's Inc.
Figi's is a mail order retailer of specialty food gifts (such
as quality cheeses, smoked meats, candies and baked goods) and
other gifts headquartered in Marshfield, Wisconsin. The Company
acquired Figi's in 1981. Figi's is one of the largest direct
mail food gifts marketers in the United States, with 1997 net
sales of approximately $98 million, which was up 5% over 1996 net
sales of $93 million.
New customers are acquired from sources similar to those used
by Fingerhut, although Figi's customers include both moderate
income consumers attracted by Figi's in-house credit terms and
more affluent customers who use credit cards. Sales using Figi's
interest-free, three payment credit terms constituted
approximately 90% of its net sales in 1997.
Figi's offerings are made predominantly in catalogs mailed
prior to holidays and other gift-giving occasions such as
Christmas, Easter, Valentine's Day and Mother's Day. Figi's
business is highly seasonal, with approximately 82% of its net
sales in the fourth quarter. Figi's seeks to develop repeat
business from customers by offering a satisfaction pledge.
Figi's uses marketing techniques similar to those developed
by Fingerhut, such as sweepstakes and in-house credit terms, to
improve customer response and expand its customer base. Figi's
also uses mailing list evaluation and segmentation techniques
similar to those used by Fingerhut. In addition, Figi's offers
its customers the opportunity to place orders by telephone and
accepts payment by major credit card.
Costs of Mailing
In 1997, the Company spent an aggregate of $246 million on
postage for the Retail segment businesses (including the cost of
parcel shipments that were passed on to customers) of which 49%
was attributable to the mailing of promotional materials, 44% was
attributable to parcel shipments and 7% was attributable to
various correspondence with customers. However, as is customary
in the direct mail industry, the Company passes on the cost of
parcel shipments directly to the customer as part of the shipping
and handling charge. The costs of mailing promotional material
and certain other correspondence (including postage) are not
directly passed on to customers, but are considered in the
Company's overall product pricing and mailing strategies. The
Company anticipates that the Postal Rate Commission will rule on
the rate increase requested by the United States Postal Service
and the United States Postal Service Board of Governor will
approve an increase in postal rates in 1998, however, the amount
of any such increase and the implementation date is currently
unknown.
The Company substantially reduces mailing costs by
effectively using discounts offered by the United States Postal
Service from basic postal rates. For example, Fingerhut sorts
mailings by zip code to the carrier route level and also prints
the "zip plus four" bar-code to obtain optimum postal discounts,
resulting in savings not always available to smaller direct mail
companies. The Company intends to adopt new innovations in mail
processing techniques, as appropriate, and believes the
increasing requirement for dynamic systems to manage the
complexity of the postal rate structure will strengthen the
long-term competitive position of larger, more sophisticated mail
order firms such as the Company.
Other Business Activities
The Retail Segment also includes several other business
activities. Andy's Garage Sale, Inc. is a wholly-owned
subsidiary that allows the Company to market excess inventory on
the Internet. Andy's Garage Saler (www.andysgarage.com) mixes
product offerings with stories of a fictional cast of Minnesota
characters. The Company also derives additional revenues from
wholesaling excess merchandise and list rental and package
inserts. Infochoice USA, Inc., a wholly-owned subsidiary, has
entered into an agreement with Guthy-Renker Corporation, under
which Guthy-Renker manages infomercial production, media
placement and market distribution and Infochoice provides product
development and sourcing, customer service and fulfillment.
Infochoice and Guthy-Renker conduct the business under the
agreement through USA Direct/Guthy-Renker, Inc., a corporation in
which Infochoice and Guthy Renker Corporation each have a 50%
interest. The Company accounts for USA Direct/Guthy-Renker, Inc.
using the equity method of accounting; accordingly, 50% of USA
Direct/Guthy-Renker, Inc.'s profits or losses are recorded in
administrative expenses included in "Administrative and selling
expenses" in the Company's Consolidated Statements of Earnings.
Wiman Corporation manufactures plastic products. Taken together,
such activities accounted for less than 3% of the Company's 1997
net sales.
In 1997, the Company began providing various fulfillment and
distribution services to third parties out of its warehouse and
distribution facilities in Utah and Minnesota. The Company also
partnered with WorldCom to develop a co-branded long distance
calling program that generates revenues via account fees and a
percentage of each customer's bill. The Company intends to
pursue additional third-party service and co-branding ventures,
by utilizing the Company's order servicing, telemarketing, direct
marketing, warehousing, distribution and customer service
capabilities.
Retail Segment
Statements of Operations
For the Fiscal Year Ended
(In thousands of dollars, except Dec. 26, 1997 Dec. 27, 1996
per share data)
Revenues:
Net sales $1,530,228 $1,638,363
Finance income and other
securitization income, net (10,877) (23,361)
1,519,351 1,615,002
Costs and expenses:
Product cost 738,740 827,086
Administrative and selling expenses 596,084 618,082
Provision for uncollectible accounts 97,593 112,084
Interest expense, net 27,946 25,305
1,460,363 1,582,557
Earnings before income taxes 58,988 32,445
Provision for income taxes 21,267 11,322
Net earnings $37,721 $ 21,123
Earnings per share - Basic $ .82 $ .46
Earnings per share - Diluted $ .76 $ .44
Note: In 1997, "discount on sale of accounts receivable," the
"provision for uncollectible accounts" and certain
administrative (collection) costs associated with the
receivables sold, were reclassified to "finance income and
other securitization income, net." All prior-period
financial information has been restated to conform with the
current period's presentation, and the reclassifications had
no effect on net earnings.
Dec. 26, Dec. 27, Dec. 29. Dec. 30, Dec.31,
For the Fiscal Year Ended: 1997 1996 1995 1994 1993
Capital expenditures $20,622 $47,742 $93,089 $69,339 $51,722
(in 000's)
Depreciation (in 000's) $43,622 $45,069 $41,031 $33,543 $25,969
Net earnings (in millions)
Catalog operations $ 36.7 $ 19.5 $ 37.4 $ 69.9 $ 68.1
Television 1.0 1.6 8.9 (26.2) 6.0
Total segment earnings $ 37.7 $ 21.1 $ 46.3 $ 43.7 $ 7.41
Statements of Operations (Managed Basis*)
For the Fiscal Year Ended
(In thousands of dollars, except Dec. 26, 1997 Dec. 27, 1996
per share data)
Revenues:
Net sales $1,530,228 $1,638,363
Finance income and other revenues 232,181 241,130
1,762,409 1,879,493
Costs and expenses:
Product cost 738,740 827,086
Administrative and selling expenses 610,022 633,448
Provision for uncollectible accounts 259,981 283,762
Discount on sale of accounts receivable 66,732 77,447
Interest expense, net 27,946 25,305
1,703,421 1,847,048
Earnings before income taxes 58,988 32,445
Provision for income taxes 21,267 11,322
Net earnings $ 37,721 $ 21,123
Earnings per share - Basic $.82 $.46
Earnings per share - Diluted $.76 $.44
*Presented in a format consistent with prior periods.
Financial Services Segment (Metris)
The Company's Financial Services segment businesses are
conducted by Metris and its subsidiaries. Two-year segment
Statements of Operations and key operating statistics are
included at the end of the business description to assist in
understanding this segment's results.
Metris is an information-based direct marketer of consumer
credit products, extended service plans and fee-based products
and services to moderate income consumers. Metris' consumer
credit products currently are unsecured and secured credit cards
issued by Direct Merchants Bank. Metris' customers and prospects
include existing customers of Fingerhut ("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 that
extend service coverage beyond the manufacturer's warranty.
Metris 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 third party partners.
Metris Companies Inc. is a Delaware corporation incorporated
on August 20, 1996, and is an 83% owned indirect subsidiary of
Fingerhut Companies, Inc. Metris became a publicly-held company
in October 1996 after completing an initial public offering.
Subject to the approval of the Company's Board of Directors, the
receipt of a ruling from the IRS, and market conditions, the
Company anticipates that the Spin Off of all of the Company's
ownership in Metris will occur in 1998. Following the Spin Off,
no individual will hold titles of officer or director at both the
Company and Metris, except for Theodore Deikel, who will be
Chairman of the Board of Metris, and will continue to be Chairman
of the Board, Chief Executive Officer and President of the
Company.
Metris currently operates two businesses: (i) consumer credit
products and (ii) fee-based services and extended service plans.
Metris' principal subsidiaries are Direct Merchants Bank, Metris
Direct, Inc., Metris Funding Co. and Metris Receivables, Inc.
Consumer Credit Products
Products. Consumer credit products currently are unsecured
and secured credit cards, including the Fingerhut co-branded
MasterCardr, the Bally Total Fitness co-branded MasterCard and
the Direct Merchants Bank MasterCardr. and Visar. In addition,
Metris has affinity programs with two other parties. In the
future, Metris 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, 1997,
Direct Merchants Bank had approximately 2.3 million credit card
accounts with over $3.5 billion in managed credit card loans.
Fingerhut customers represented approximately 39% of the accounts
and approximately 39% of the managed loans. At December 31,
1997, according to the Nilson Report, Direct Merchants Bank was
the 14th largest MasterCard issuer in the United States based on
the number of cards issued and the 22nd largest credit card
issuer in the United States based on managed credit card loan
balances. In September 1997, Metris acquired a $317 million
credit card portfolio from Key Bank USA, National Association,
and in October 1997, Metris acquired a $405 million credit card
portfolio from Mercantile Bank National Association.
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.
Pricing. Metris' strategy to maximize customer profitability
relies on 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.
Metris currently offers over 100 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 14.9% to 26.5%, excluding certain portfolio acquisitions
made in the current year. After credit card accounts are opened,
Direct Merchants Bank 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.
For the Year Ended Dec. 31,
Key Statistics: 1997 1996
Managed net charge-off ratio 8.3% 6.2%
Period-end managed loans (in 000's) $3,546,936 $1,615,940
Total accounts (in 000's) 2,293 1,418
Managed loan loss reserves (in 000's) $244,084 95,669
Managed delinquency ratio 6.6% 5.5%
Fee-based Services and Extended Service Plans
In 1997, Metris consolidated its fee-based services and
extended service plan businesses into one business line. Metris
currently sells a variety of fee-based products and services to
its credit card customers, Fingerhut Customers and credit card
customers of third party partners, including (i) debt waiver
protection for unemployment, disability, and death, (ii) programs
such as card registration and club membership, and (iii) third-
party insurance. In addition, Metris develops customized
targeted mailing lists, using both Metris' database and the
Fingerhut database, for external companies to use in their own
noncompeting financial services product solicitation efforts.
Extended service plans provide warranty service coverage
beyond the manufacturer's warranty. In general, Metris' extended
service plans provide customers with the right to have their
covered purchases repaired, cleaned, replaced or in certain
circumstances, the purchase price of the product refunded, within
certain parameters determined by Metris. Metris currently
provides extended service plans for consumer electronics,
furniture, and jewelry ("Warrantable Products") purchased from
Fingerhut. Fingerhut has an extended service plan agreement with
Metris, during the term of which Fingerhut agrees only to offer
Metris' extended service plans to its customers.
ServiceEdgeSM is Metris' extended service plan for consumer
electronics and all other electro-mechanical items that gives
customers the right to have their purchases repaired or replaced
in the event of electrical or mechanical failure or defects in
materials and workmanship for defects after the manufacturer's
warranty expires. Quality Jewelry Carer is Metris' extended
service plan for jewelry. The services provided to Quality
Jewelry Care customers include repair, soldering, ring sizing,
and cleaning, for which Metris has third party jewelers perform
such services. Metris' extended service plan program for
furniture is called Quality Furniture CareSM and the services
include stain cleaning, structural defect or damage repair, or
replacement if the merchandise cannot be repaired. Repairs and
stain cleaning are performed by independent service providers.
Sales and Marketing. When Fingerhut Customers purchase
Warrantable Products, they have the option to buy an extended
service plan. For electro-mechanical products, approximately 31%
of Metris' 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, Metris 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 electro-mechanical items were the responsibility
of a third party. Metris is responsible for claims risk and
claims processing for furniture and jewelry. In 1997, Metris
internalized the claims processing operations related to extended
service plans for electro-mechanical items and incurred the
resulting claims risk for all extended service plans sold on or
after January 1, 1997.
Metris Companies Inc.
Statements of Operations
For the Year Ended Dec. 31,
(In thousands of dollars, except 1997 1996
per share data)
Revenues:
Net sales $ 9,537 $ 22,077
Finance income and other revenues 274,527 133,357
284,064 155,434
Costs and expenses:
Product cost 90 6,463
Administrative and selling expenses 168,401 94,840
Provision for uncollectible accounts 43,989 18,477
Interest expense, net 9,701 3,108
222,181 122,888
Earnings before income taxes and minority interest 61,883 32,546
Provision for income taxes 23,825 12,530
Net earnings before minority interest 38,058 20,016
Minority Interest (6,450) (980)
Net Earnings $31,608 $9,036
Earnings per share - Basic $ .68 $ .41
Earnings per share - Diluted $ .64 $ .39
Other Information
Competition
The direct marketing industry includes a wide variety of
specialty and general merchandise retailers and is both highly
fragmented and highly competitive. The Company sells its
products to customers in all states of the United States and
competes in the purchase and sale of merchandise with all
retailers. Fingerhut's traditional principal competitor in the
business of direct marketing general merchandise to moderate
income customers is J.C. Penney Company, Inc., which operates a
large number of retail stores in addition to its mail order
businesses and generates substantial catalog sales at its retail
premises in addition to direct mail marketing. In the direct
marketing retail industry, Fingerhut also competes with
television shopping marketers, such as QVC Network, Inc. and Home
Shopping Network, Inc. Fingerhut also competes with retail
department stores, discount department stores and variety stores,
many of which are national chains, for the general merchandise
spending of its customers.
The principal methods of competition within the direct
marketing industry and in the Company's market segments include
purchasing convenience, extension of credit, customer service,
free trial and merchandise value. The Company believes that it
is able to compete on the strength of its marketing strategy
despite strong competitive pressures. Although barriers to
entering the direct marketing business are minimal and many new
companies have entered and may continue to enter the industry in
competition with the Company, a substantial capital investment
would be required to develop customer databases and software
capabilities comparable to those of the Company. The Company
believes that these assets are necessary to compete effectively
in the Company's market niche, where the predictability of
response rates and combined credit and return losses is critical.
As a marketer of consumer credit products, Metris faces
increasing competition from numerous providers of financial
services, many of which have greater resources than Metris. In
particular, Metris competes with national, regional and local
bank card issuers as well as other general purpose credit card
issuers, such as American Express and Discover Card. In general,
customers are attracted to credit card issuers largely on the
basis of price, credit limit and other product features; as a
result, customer loyalty is often limited. However, Metris
believes that its strategy of focusing on an underserved market
and its access to information from the Fingerhut database will
allow it to more effectively compete in the market for moderate
income cardholders. During the term of the extended service plan
agreement, Fingerhut will only offer its customers extended
service plans provided by Metris. As Metris 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 Metris.
Seasonality
The Company's business is seasonal. In 1997, approximately
38% of the Company's net sales and approximately 63% of its net
earnings occurred in the fourth quarter. In addition to seasonal
variations, the Company experiences variances in quarterly
results from year to year that result from changes in the timing
of its promotions and the types of customers and products
promoted and, to some extent, variations in dates of holidays and
the timing of quarter ends resulting from a 52/53 week year.
Accordingly, the results of interim periods are not necessarily
indicative of the results for the year.
Employees
As of December 26, 1997, the Company had approximately 9,500
employees, of whom approximately 2,000 were represented by the
Midwest Regional Joint Board or the Tennessee/Kentucky District _
Southern Regional Joint Board of the Union of Needle Trades,
Industrial and Textile Employees. The Company's principal
collective bargaining agreements expire on February 6, 1999 and
February 6, 2000. The Company believes its relations with its
employees and the union are good.
Trademarks and Tradenames
The Company 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.
Governmental Regulation
The Company's Retail segment is subject to regulation by a
variety of state and federal laws and regulations related to,
among other things, advertising, offering and extending of
credit, charging and collecting state sales/use taxes and product
safety. The Company's practices in certain of these areas are
subject to periodic inquiries and proceedings by various
regulatory agencies. None of these laws and regulations has had
a material adverse effect upon the Company.
From time to time the Company has received notices and
inquiries from states with respect to collection of use taxes for
sales to residents of these states. To the extent that any
states are successful in such claims, the Company's cost of doing
business could be increased, although it does not believe any
increase would be material.
Substantially all of the extensions of credit for Fingerhut
purchases prior to early January 1997 were by Fingerhut.
Fingerhut relies on the Minnesota "time-price" doctrine in
extending credit on products sold in many states. Under this
doctrine, the difference between the time price and the cash
price for the same goods is not treated as interest subject to
regulation under laws governing the extension of credit. In
other states, Fingerhut is subject to regulations that limit
maximum finance charges and require refunding of finance charges
to customers under certain circumstances. Fingerhut believes
that its time payment pricing and credit practices were and are
in compliance with applicable state requirements. Certain
individuals who purchased goods from Fingerhut filed suit
challenging the application of the time-price doctrine. See
"Legal Proceedings" below.
In late 1996, FNB began offering credit card loans to finance
purchase of products and services from Fingerhut. Commencing in
January 1997, FNB began extending substantially all credit for
Fingerhut purchases.
Direct Merchants Bank and FNB are limited purpose credit
card banks chartered as national banking associations and members
of the Federal Reserve System, the deposits of which are insured
by the Bank Insurance Fund which is administered by the Federal
Deposit Insurance Corporation (the "FDIC"). Direct Merchants
Bank and FNB are subject to comprehensive regulation and periodic
examination by the Office of the Comptroller of the Currency, the
Federal Reserve Board and the FDIC. Neither Direct Merchants
Bank nor FNB is a "bank" as defined under the Bank Holding
Company Act of 1956, as amended (the "BHCA") because each
(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 or FNB failed to meet
the credit card bank criteria described above, the Company would
become subject to the provisions of the BHCA. The Company
believes that becoming a bank holding company would limit the
Company's ability to conduct its business.
Under current judicial interpretations of Federal law,
national banks such as Direct Merchants Bank and FNB 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 all states, without regard to
the laws of such other states. Direct Merchants Bank is
currently located in Utah and FNB is currently located in South
Dakota.
In 1996, the Supreme Court of the United States 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
and FNB may impose such fees to the extent that they are
permitted by the laws of the states in which they are located.
Direct Merchants Bank's and FNB's activities as credit card
lenders 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 Fair Debt Collection
Practices Act, the Community Reinvestment Act 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 national banks to pay restitution to injured
cardmembers. Individuals 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 and FNB's ability to collect outstanding balances owed by
cardholders who seek relief under these statutes.
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 or FNB.
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.
The Fair Credit Reporting Act (the "FCRA") regulates
"consumer reporting agencies." Under the FCRA, an entity risks
becoming a consumer reporting agency if it furnishes "consumer
reports" to third parties or, in some circumstances, to its
affiliates. 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 Company's objective to conduct its operations in a
manner which would fall outside the definition of "consumer
reporting agency" under the FCRA. If the Company 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.
Executive Officers of the Registrant
Name Age Present Office
Theodore Deikel 62 Chairman of the Board,
Chief Executive Officer and President
Alan F. Bignall 46 Senior Vice President,
Development and Architecture Services
Thomas J. Bozlinski 50 Senior Vice President,
Operations and Network Services
John D. Buck 47 Senior Vice President,
Operations, Information Services
and Human Resources
Andrew V Johnson 42 Senior Vice President,
Market Development
Gerald T. Knight 50 Senior Vice President,
Chief Financial Officer
Peter G. Michielutti 41 Executive Vice President
Chief Operating Officer of
Fingerhut Corporation
Michael P. Sherman 45 Senior Vice President,
Business Development,
General Counsel and Secretary
Richard L. Tate 52 Senior Vice President,
Merchandising
Thomas C. Vogt 51 Corporate Controller
James M. Wehmann 32 Treasurer
Ronald N. Zebeck 43 Executive Vice President
President and Chief Executive Officer of
Metris Companies Inc.
Theodore Deikel has served as Chairman of the Board, Chief
Executive Officer and President since 1989. From 1985 until
rejoining the Company, Mr. Deikel served as Chairman and CEO of
CVN Companies, Inc., a direct marketing company using television
and direct mail. From 1979 to 1983, Mr. Deikel was Executive
Vice President of American Can Company (a predecessor to
Travelers Group Inc.) and Chairman of American Can Company's
specialty retailing division, which included the Company. In
addition, Mr. Deikel was Chief Executive Officer of Fingerhut
from 1975 to 1983.
Alan F. Bignall joined the Company as Senior Vice President,
Development and Architecture Services of the Company in February
1998. Prior to that, he held several positions with American
Express Financial Advisors. From November 1995 to December 1997,
he was Vice President, Technology and from November 1990 to
October 1995, he was Vice President, Financial Planning.
Thomas J. Bozlinski became Senior Vice President, Operations
and Network Services in March 1998. He was Senior Vice
President, Information Systems from January 1996 to February
1998. He was Vice President, Information Systems of the Company
from June 1993 to January 1996. Prior to that he was Managing
Director, Systems & Operations of Northwest Airlines Corp.
John D. Buck has been Senior Vice President, Operations,
Information Services and Human Resources since February 1997. He
was Senior Vice President, Human Resources from March, 1996 to
January 1997. For more than five years prior to that, he was
Vice President, Administration of Alliant Techsystems, Inc., a
supplier of defense products and services to the United States
government and its allies.
Andrew V Johnson has been Senior Vice President, Market
Development of the Company since January 1998. From January 1993
to December, 1997, he was Senior Vice President, Marketing of the
Company.
Gerald T. Knight joined the Company as Senior Vice President,
Chief Financial Officer in June 1997. He was Vice President and
Chief Financial Officer of The Toro Company for more than the
previous five years.
Peter G. Michielutti has been Executive Vice President of
the Company since May 1997 after serving as Chief Financial
Officer of the Company from July 1995 to May 1997 and Senior Vice
President, Business Development of Metris from August 1996 to May
1997. He is also Chief Operating Officer of Fingerhut
Corporation. Prior to that, he held various positions with
divisions/subsidiaries of Household International Inc. (consumer
finance services). He was 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, and Vice
President-Financial Administration of Household Bank FSB from
August 1990 to March 1991.
Michael P. Sherman joined the Company as Senior Vice
President, Business Development, General Counsel and Secretary in
May 1996. He was Executive Vice President, Corporate Affairs,
General Counsel and Secretary of Hanover Direct, Inc., a catalog
retailer, for more than the previous five years.
Richard L. Tate has been Senior Vice President, Merchandising
of the Company since October 1993. From December 1989 to October
1993, he was Vice President, Merchandising of the Company.
Thomas C. Vogt has been Corporate Controller since November
1994. Prior to that time, he was Assistant Controller,
Operations of the Company from August 1991 to October 1994 and
was Vice President and Controller of Hanover Direct, Inc. from
April 1989 to July 1991.
James M. Wehmann became Treasurer of the Company in March
1997. He was Assistant Treasurer from June 1996 to March 1997
and held other finance and treasury positions at Fingerhut since
March 1993. From 1991 until joining Fingerhut, he was a
financial analyst, international finance for Honeywell, Inc.
Ronald N. Zebeck was hired as President of Metris Direct, Inc.
(now a wholly-owned subsidiary of Metris) in March 1994, and
became President and Chief Executive Officer of Metris when it
was formed in August 1996. He is also an Executive Vice
President of the Company. He was Managing Director, GM Card
Operations of General Motors Corporation from 1991 to 1993.
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's executive and administrative offices and
warehouse and distribution facilities are located in a number of
facilities in Minnesota, Tennessee, Wisconsin, Utah, Florida,
Oklahoma, Maryland and South Dakota. The total facilities
presently used by the Company's operations have an aggregate of
approximately 5.5 million square feet, of which approximately 5.3
million square feet, located in Minnesota, Tennessee, Wisconsin,
Utah, Florida and South Dakota, are used for the Retail segment
and 147,000 square feet, located in Minnesota, Utah, Oklahoma and
Maryland, are used for the Financial Services segment. Of these,
Fingerhut owns a 188,000 square foot office building in
Minnetonka, Minnesota, a 186,000 square foot data and technology
center in Plymouth, Minnesota, buildings in St. Cloud, Minnesota
with an aggregate of approximately 1.9 million square feet,
buildings in Alexandria, Minnesota with an aggregate of
approximately 53,000 square feet and buildings in Mora, Minnesota
with approximately 160,000 square feet. Figi's owns buildings in
Marshfield, Wisconsin with an aggregate of approximately 317,000
square feet. Tennessee Distribution, Inc., a subsidiary of the
Company, has beneficial ownership of a one million square foot
warehouse and distribution facility near Bristol, Tennessee.
Western Distribution, Inc., a subsidiary of the Company, owns a
one million square foot warehouse and distribution facility near
Spanish Fork, Utah.
The Company leases the remainder of the facilities it uses,
which consist of office, photo studio, operations and warehouse
space. The Company believes its facilities are suitable to its
businesses and that it will be able to lease or purchase
additional facilities as needed.
Item 3. Legal Proceedings
The Company is a party to various claims, legal actions,
disputes and other complaints arising in the ordinary course of
business. In the opinion of management, any losses that may
occur are adequately covered by insurance, are provided for in
the financial statements, or are without merit and the ultimate
outcome of these matters will not have a material effect on the
financial position or operations of the Company.
In October 1995, the Company was served with a legal action
commenced in federal district court in Arizona by two
shareholders against the Company, a current officer and a former
officer alleging violations of Sections 10(b) and 20 of the
Securities Exchange Act of 1934, as amended and Rule 10b-5
thereunder. The complaint (i) alleges that the Company made
false and misleading statements or omissions with respect to its
plans regarding a proposed television shopping network, (ii)
requests certification as a class action on behalf of
shareholders of the Company who purchased Common Stock during a
specified period and (iii) alleges unspecified damages. The
Company considers the plaintiffs' claims to be without merit and
intends to vigorously defend the matter. Venue has been
transferred to federal district court in Minnesota. On May 29,
1997, the court granted the Company's motion to dismiss with
leave for plaintiffs to file an amended complaint. On July 17,
1997, plaintiffs served their amended complaint. In lieu of an
answer, the Company filed a motion to dismiss on September 15,
1997. The Company's reply brief was filed on January 19, 1998.
On August 14, 1997, Fingerhut Corporation was served with a
summons and class action complaint commenced in Minnesota
District Court, Fourth Judicial District, on behalf of named
plaintiffs in ten states. The alleged class consists of
"Fingerhut customers whose contracts are declared by Fingerhut to
be governed by Minnesota law." The complaint alleges violations
of the usury law, deceptive trade practices and consumer fraud
based on Fingerhut's use of the "time price" doctrine in its
credit sales. The plaintiffs' claims are substantially identical
to the claims asserted in an earlier case brought against
Fingerhut in the same court. The court granted summary judgment
in favor of Fingerhut in that case in March 1997. The plaintiffs
in that case did not appeal the summary judgment, and their
counsel has refiled their claims on behalf of new members of the
purported plaintiff class. Fingerhut responded to the complaint
by filing a motion for judicial reassignment. The court denied
this motion. Fingerhut has filed a motion for summary judgment
on the plaintiffs' claims.
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
26, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The information required by this item is set forth in
"Quarterly Financial and Stock Data" on page 47 of the Company's
Annual Report to Shareholders for the fiscal year ended December
26, 1997 (the "1997 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 "Five Year Summary of Selected Consolidated Financial
Data" on page 15 of the 1997 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
caption "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Forward Looking
Statements" on pages 16 to 24 of the 1997 Annual Report and is
incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk
The information required by this item is set forth under the
caption "Qualitative and Quantitative Disclosures About Market
Risk" on pages 22 to 23 of the 1997 Annual Report and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The audited Consolidated Financial Statements of the
Registrant and independent auditors' report thereon and the
unaudited Quarterly Financial and Stock Data set forth on pages
25 to 47 of the 1997 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 6, 1998, which will be filed
within 120 days of December 26, 1997 (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_Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement and is incorporated herein 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 1997 Annual Report as
part of this report at Item 8 hereof:
Independent Auditors' Report dated January 21, 1998.
Consolidated Statements of Earnings for each of the
three fiscal years ended December 26, 1997.
Consolidated Statements of Financial Position at
December 26, 1997 and December 27, 1996.
Consolidated Statements of Changes in Stockholders'
Equity for each of the three fiscal years
ended December 26, 1997.
Consolidated Statements of Cash Flows for each
of the three fiscal years ended December 26, 1997.
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 1997
Annual Report is not to be deemed filed as part of
this Form 10-K.
2. Financial Statement Schedule: The following
schedule for each of the three years ended
December 26, 1997 is included in this Form 10-K:
Independent Auditors' Report on consolidated
financial statement schedule dated January 21, 1998.
Schedule II - Valuation and Qualifying Accounts.
Certain schedules have been omitted because
they are not required under the related instructions
or are inapplicable, or because the required
information is included elsewhere in the financial
statements or related notes.
(b) Reports on Form 8-K: None
(c) Exhibits: See Exhibit Index on page 25 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 24th day of March, 1998.
FINGERHUT COMPANIES, INC.
(Registrant)
By /s/Theodore Deikel
Theodore Deikel
Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of Fingerhut Companies, Inc., the Registrant, and in
the capacities and on the dates indicated.
Signature Title Date
Principal executive Chairman of the Board, March 24, 1998
officer and director: Chief Executive Officer
and President
/s/ Theodore Deikel
Theodore Deikel
Principal financial officer: Senior Vice President, March 24, 1998
Chief Financial Officer
/s/Gerald T. Knight
Gerald T. Knight
Principal accounting officer: Corporate Controller March 24, 1998
/s/Thomas C. Vogt
Thomas C. Vogt
Directors:
/s/Wendell R. Anderson Director March 13, 1998
Wendell R. Anderson
/s/Edwin C. Gage Director March 24, 1998
Edwin C. Gage
/s/Stanley S. Hubbard Director March 14, 1998
Stanley S. Hubbard
/s/Kenneth A. Macke Director March 18, 1998
Kenneth A. Macke
/sDudley C. Mecum Director March 24, 1998
Dudley C. Mecum
/s/John M. Morrison Director March 23, 1998
John M. Morrison
/s/Christina L. Shea Director March 20, 1998
Christina L. Shea
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
Articles of Incorporation and Bylaws
3.a Amended and Restated Articles of
Incorporation of the Registrant
(restated in electronic format as
amended to July 29, 1993)
(Incorporated by reference to
Exhibit 3.a to Registrant's
Annual Report on Form 10-K
(File No. 1-8668) for the fiscal
year ended December 31, 1993).
3.b Bylaws of the Registrant(restated
in electronic format as amended
to July 29, 1993) (Incorporated
by reference to Exhibit 3.b to
Registrant's Annual Report on
Form 10-K (File No. 1-8668) for
the fiscal year ended December
31, 1993).
Material Contracts
10.a Amended and Restated Pooling and
Servicing Agreement dated as of
January 12, 1997 among Fingerhut
Receivables, Inc., as Transferor,
Fingerhut National Bank, as
Servicer, and The Bank of New
York (Delaware), as Trustee.
(i) Series 1994-2 Supplement
dated as of November 15, 1994
(Incorporated by reference to
Exhibit 10.b(ii) to Registrant's
Annual Report on Form 10-K (File
No. 1-8668) for the fiscal year
ended December 31, 1994).
(ii) Amended and Restated Series 1997-1
Supplement dated as of April 21, 1997
(Incorporated by reference to
Exhibit 10.a(iii) to Registrant's
Quarterly Report on Form 10-Q
(File No. 1-8668) for the second
quarter ended June 27, 1997).
10.b Purchase Agreement dated as of
January 12, 1997 between
Fingerhut Companies, Inc., as
Buyer, and Fingerhut National
Bank, as Seller (Incorporated by
reference to Exhibit 4(g) to
Fingerhut Receivables, Inc.
Registration Statement on Form S-
1 (File No. 333-4559)).
10.c Pooling and Servicing Agreement
dated as of May 26, 1995
among Metris Receivables, Inc.
(formerly 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 Registrant's
Quarterly Report on Form 10-Q
(File No. 1-8668) for the fiscal
quarter ended June 30, 1995).
(i) Amendment No. 1 to the Pooling
and Servicing Agreement dated as
of June 10, 1996 (Incorporated
by reference to Exhibit 10.a(iii)
to Metris Companies Inc.'s
Registration Statement on Form S-1
(No. 333-10831)).
(ii) Amendment No. 2 to the Pooling and
Servicing Agreement dated as of
September 16, 1996 (Incorporated by
reference to Exhibit 10.a(iv) to
Metris Companies Inc.'s Registration
Statement on Form S-
1 (No. 333-10831)).
(iii) Amended and Restated Series 1995-1
Supplement dated as of September 16,
1996 (Incorporated by reference to
Exhibit 10.a(i) to Metris
Companies Inc.'s Registration
Statement on Form S-1 (No. 333-
10831)).
(iv) Series 1996-1 Supplement dated as
of April 23, 1996 (Incorporated
by reference to Exhibit 10.a(ii)
to Metris Companies Inc.'s Registration
Statement on Form S-1 (No. 333-
10831)).
(v) Series 1997-1 Supplement dated as
of May 8, 1997 (Incorporated by
reference to Exhibit 10.a(v) to Metris
Companies Inc. Quarterly Report
on Form 10-Q (File No. 001-12351)
for the fiscal quarter ended June
30, 1997.
(vi) Amendment No. 3 to the Pooling and
Servicing Agreement dated as of
September 30, 1997 (Incorporated by
reference to Exhibit 4(d) to
Metris Receivables, Inc. and
Metris Master Trust Registration
Statement on Form S-3 (No. 333-
36503)).
(vii) Series 1997-2 Supplement dated as
of November 20, 1997 (Incorporated by
reference to Metris Companies
Inc. Annual Report on Form 10-K
(File No. 001-12351) for the
fiscal year ended December 31,
1997).
10.d* Fingerhut Corporation Profit Sharing
and 40l(k) Savings Plan, as amended
and restated.
10.e* Intentionally left blank.
10.f* Fingerhut Corporation Pension Plan
1990 Revision (Incorporated by reference
to Exhibit 10(f) to Registrant's
Registration Statement on Form
S-1 (No. 33-33923)).
10.g* Fingerhut Companies, Inc. Stock Option Plan
(Incorporated by reference to
Exhibit 10(h) to Registrant's
Registration Statement on Form
S-1 (No. 33-33923)).
(i)* Amendment dated as of February 4, 1997
(Incorporated by reference to
Exhibit 10.g(i) to Registrant's
Annual Report on Form 10-K (File
No. 1-8668) for the fiscal year
ended December 27, 19
10.h* Executive Tax Planning/Preparation
and Financial Planning Policy
(Incorporated by reference to
Exhibit 10.h to Registrant's
Annual Report on Form 10-K (File
No. 1-8668) for the fiscal year
ended December 31, 1994).
10.i* Fingerhut Companies, Inc. 1995 Long-
Term Incentive and Stock Option Plan
(Incorporated by reference to Exhibit 10.i
to Registrant's Annual Report on
Form 10-K (File No. 1-8668) for
the fiscal year ended December
29, 1995).
(i)* Amendment dated as of February 4, 1997
(Incorporated by reference to
Exhibit 10.i(i) to Registrant's
Annual Report on Form 10-K (File
No. 1-8668) for the fiscal year
ended December 27, 1996).
(ii)* Form of option agreement (Incorporated
by reference to Exhibit 10.i(i) to
Registrant's Annual Report on
Form 10-K (File No. 1-8668) for
the fiscal year ended December
29, 1995).
(iii)* Form of restricted stock agreement
(Incorporated by reference to
Exhibit 10.i(iii) to Registrant's
Annual Report on Form 10-K (File
No. 1-8668) for the fiscal year
ended December 27, 1996).
10.j* Fingerhut Companies, Inc. 1992 Long-
Term Incentive and Stock Option Plan
(Incorporated by reference to
(Exhibit 10(j) to Registrant's Annual
Report on Form 10-K (File No. 1-8668)
for the fiscal year ended December
25, 1992).
(i)* Amendment dated as of February 4, 1997
(Incorporated by reference to
Exhibit 10.j(i) to Registrant's
Annual Report on Form 10-K (File
No. 1-8668) for the fiscal year
ended December 27, 1996).
10.k* Fingerhut Companies, Inc. and
Subsidiaries 1997 Key Management
Incentive Bonus Plan dated as of
January 1997.
10.l* Stock Option and Valuation Rights
Agreement dated as of March 21,
1994, between Fingerhut Companies,
Inc. and Ronald N. Zebeck, as amended
(Incorporated by reference to
Exhibit 10.l to Registrant's
Annual Report on Form 10-K (File
No. 1-8668) for the fiscal year
ended December 29, 1995).
(i)* Amendment dated as of October 24,
1996 (Incorporated by reference
to Exhibit 10.d(i) to Metris
Companies Inc.'s Annual Report on
Form 10-K (File No. 001-12351)
for the fiscal year ended
December 31, 1996.)
10.m* Fingerhut Companies, Inc. Directors'
Retainer Stock Deferral Plan
(Incorporated by reference to
Exhibit 10.m to Registrant's
Annual Report on Form 10-K
(File No. 1-8668) for the fiscal
year ended December 31, 1993).
10.n Amended and Restated Revolving Credit
and Letter of Credit Facility dated
as of September 16, 1996, among
Fingerhut Companies, Inc., the
Guarantors party thereto, the
Lenders party thereto, the
Issuing Banks party thereto, The
Chase Manhattan Bank, as
Administrative Agent and
NationsBank, N.A., as Co-Agent
(Incorporated by reference to
Exhibit 10.n to Registrant's
Quarterly Report on Form 10-Q
(File No. 1-8668) for the fiscal
quarter ended September 27,
1996).
10.o* Fingerhut Corporation Deferred Compensation Plan.
10.p Revolving Credit and Letter of Credit
Facility Agreement dated as of September
16, 1996 among Metris Companies
Inc., the Lenders party thereto,
the Issuing Banks party thereto,
and The Chase Manhattan Bank, as
Administrative Agent (Incorporated
by reference to Exhibit 10.s to
Metris Companies Inc.'s Registration
Statement on Form S-1 (No. 333-10831)).
10.q* Metris Companies Inc. Long-Term Incentive
and Stock Option Plan (Incorporated by
reference to Exhibit 10.h to
Metris Companies Inc. Annual
Report on Form 10-K (File No. 001-
12351) for the fiscal year ended
December 31, 1996).
(i)* Form of option agreement
(Incorporated by reference to
Exhibit 10.h(i) to Metris
Companies Inc. Annual Report on
Form 10-K (File No. 001-12351)
for the fiscal year ended
December 31, 1996).
10.r Indenture dated as of September 15,
1996 between Fingerhut Companies,
Inc. and First Bank, National Association,
as trustee (Incorporated by
reference to Ex. 4.1 to
Registrant's Registration
Statement on Form S-4 (No. 333-
15491)).
10.s Purchase Agreement dated as of June 15,
1992, relating to $60,500,000 of 8.92%
Senior Unsecured Notes, Series A,
due June 15, 2002 and $14,500,000
of 8.92% Senior Unsecured Notes,
Series B, due June 15, 2004
(Incorporated by reference to
Exhibit 10(s) to Registrant's
Quarterly Report on form 10-Q
(File No. 1-8668) for the fiscal
quarter ended June 26, 1992).
(i) First Amendment Agreement dated
as of June 17, 1994. This document
is being omitted from filing pursuant to
Instruction 2 to Item 601 of
Regulation S-K.
(ii) Second Amendment dated as of October 30,
1995. This document is being omitted
from filing pursuant to
Instruction 2 to Item 601 of
Regulation S-K.
(iii) Fourth Amendment dated as of August 14,
1996 (Incorporated by reference to
Exhibit 10.s(iii) to Registrant's
Quarterly Report on Form 10-Q
(File No 1-8668) for the fiscal
quarter ended September 27,
1996).
10.t Purchase Agreement dated as of August 1,
1993, relating to the sale of
$45,000,000 of 6.83% Senior
Unsecured Notes, Series C, due
August 1, 2000 (Incorporated by
reference to Exhibit 10.t to
Registrant's Quarterly Report on
Form 10-Q (File No. 1-8668) for
the fiscal quarter ending
September 24, 1993).
(i) First Amendment Agreement dated as
of June 17, 1994. This document is being
omitted from filing pursuant to
Instruction 2 to Item 601 of
Regulation S-K.
(ii) Second Amendment Agreement dated as of
October 30, 1995. This document is
being omitted from filing pursuant to
Instruction 2 to Item 601 of
Regulation S-K.
(iii) Fourth Amendment Agreement dated as of
August 14, 1996. This document is
being omitted from filing pursuant to
Instruction 2 to Item 601 of
Regulation S-K.
10.u* Fingerhut Corporation Pension Excess Plan-
1996 Revision (Incorporated by reference to
Exhibit 10.u to Registrant's
Annual Report on Form 10-K (File
No. 1-8668) for the fiscal year
ended December 27, 1996).
10.v* Fingerhut Corporation Profit Sharing Excess
Plan-1996 Revision (Incorporated by
reference to Exhibit 10.v to
Registrant's Annual Report on
Form 10-K (File No. 1-8668) for
the fiscal year ended
December 27, 1996).
10.w* Fingerhut Companies, Inc. Supplemental
Executive Retirement Plan (Incorporated by
reference to Exhibit 10.w to
Registrant's Annual Report on
Form 10-K (File No. 1-8668) for
the fiscal year ended
December 29, 1995).
(i)* First Amendment to the Fingerhut Companies,
Inc. Supplemental Executive Retirement
Plan.
10.x* Fingerhut Companies, Inc. Nonemployee
Director Stock Option Plan (Incorporated by
reference to Exhibit 10.x to
Registrant's Annual Report on
Form 10-K (File No. 1-8668) for
the fiscal year ended December
29, 1995).
10.y Co-Brand Credit Card Agreement
dated as of October 31, 1996
between the Registrant and
Fingerhut Corporation
(Incorporated by reference to
Exhibit 10.k to Metris Companies
Inc.'s Annual Report on Form 10-K
(File No. 001-2351) for the
fiscal year ended December 31,
1996).
10.z Extended Service Plan Agreement
dated as of October 31, 1996
between the Registrant and
Fingerhut Corporation
(Incorporated by reference to
Exhibit 10.l to Metris Companies
Inc.'s Annual Report on Form 10-K
(File No. 001-2351) for the
fiscal year ended December 31,
1996).
10.aa Database Access Agreement dated
as of October 31, 1996 between
the Registrant and Fingerhut
Corporation (Incorporated by
reference to Exhibit 10.m to
Metris Companies Inc.'s Annual
Report on Form 10-K (File No. 001-
2351) for the fiscal year ended
December 31, 1996).
10.bb Administrative Services Agreement
dated as of October 31, 1996
between the Registrant and
Fingerhut Companies, Inc.
(Incorporated by reference to
Exhibit 10.n to Metris Companies
Inc.'s Annual Report on Form 10-K
(File No. 001-2351) for the
fiscal year ended December 31,
1996).
10.cc Tax Sharing Agreement dated as of
October 31, 1996 between the
Registrant and Fingerhut
Companies, Inc. (Incorporated by
reference to Exhibit 10.o to
Metris Companies Inc.'s Annual
Report on Form 10-K (File No. 001-
2351) for the fiscal year ended
December 31, 1996).
10.dd Registration Rights Agreement
dated as of October 31, 1996
between the Registrant and
Fingerhut Companies, Inc.
(Incorporated by reference to
Exhibit 10.p to Metris Companies
Inc.'s Annual Report on Form 10-K
(File No. 001-2351) for the
fiscal year ended December 31,
1996).
10.ee Data Sharing Agreement dated as
of October 31, 1996 between
Fingerhut Corporation and Direct
Merchants Credit Card Bank,
National Association
(Incorporated by reference to
Exhibit 10.q to Metris Companies
Inc.'s Annual Report on Form 10-K
(File No. 001-2351) for the
fiscal year ended December 31,
1996).
10.ff Purchase Agreement dated as of
January 12, 1997 between
Fingerhut Receivables, Inc., as
Buyer, and Fingerhut Companies,
Inc., as Seller (Incorporated by
reference to Exhibit 4(f) to
Fingerhut Receivables, Inc.
Registration Statement on Form S-
1 (File No. 333-4559).
Other Exhibits
11 Computation of Earnings per Share
13 Pages 15 to 47 of the 1997 Annual
Report to Shareholders. The 1997
Annual Report shall not be deemed
to be filed with the Commission
except to the extent that information
is specifically incorporated herein
by reference. Exhibit 13 also
includes a financial statement
schedule, and independent
auditors' report thereon, that
was not part of the 1997 Annual
Report.
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedules for fiscal year ended
December 26, 1997; restated for fiscal years ended
December 29, 1995 and December 27, 1996 and the
fiscal quarters ended March 29, 1996, June 28, 1996
and September 27, 1996; and restated for fiscal
quarters ended March 28, 1997, June 27, 1997 and
September 27, 1997.
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.
Exhibit 10.d
FINGERHUT CORPORATION
PROFIT SHARING AND 401(K) SAVINGS PLAN
Table of Contents
Page
ARTICLE 1. DESCRIPTION AND PURPOSE 1
1.2. Plan Description. 1
1.1. Plan Name. 1
1.3. Plan Background. 1
1.4. Plan Purposes. 2
ARTICLE 2. ELIGIBILITY 3
2.1. Eligibility Requirements. 3
2.2. Transfer Among Participating Employers. 3
2.3. Multiple Employment. 3
2.4. Reentry. 4
2.5. Condition of Participation. 4
2.6. Termination of Participation. 4
ARTICLE 3. CONTRIBUTIONS 5
3.1. Pre-Tax Contributions. 5
3.2. Matching Contributions. 6
3.3. Voluntary Contributions. 7
3.4. Profit Sharing Contributions. 7
3.5. Rollovers and Transfers. 8
3.6. Corrective Contributions. 9
ARTICLE 4. ACCOUNTS AND VALUATION 10
4.1. Establishment of Accounts. 10
4.2. Valuation and Account Adjustment. 10
4.3. Allocations Do Not Create Rights. 11
ARTICLE 5. PARTICIPANT INVESTMENT DIRECTION 12
5.1. Establishment of Investment Funds. 12
5.2. Contribution Investment Directions. 12
5.3. Transfer Among Investment Funds. 13
5.4. Investment of Matching Account in Fingerhut Stock. 13
5.5. Investment Direction Responsibility Resides With
Participants. 13
5.6. Beneficiaries and Alternate Payees. 14
ARTICLE 6. WITHDRAWALS DURING EMPLOYMENT AND LOANS 15
6.1. Hardship Withdrawals. 15
6.2. Withdrawals After Attaining Age 59-1/2. 16
6.3. Other Withdrawals from Voluntary Account, Rollover
Account and Profit Sharing Account. 16
6.4. Rules for Withdrawals. 18
6.5. No Plan Loans. 18
ARTICLE 7. VESTING AND FORFEITURES 19
7.1. Vesting. 19
7.2. Forfeiture Upon Distribution. 19
7.3. Other Forfeitures. 20
7.4. Reallocation of Forfeitures. 20
ARTICLE 8. DISTRIBUTIONS AFTER TERMINATION 22
8.1. Time and Form of Distribution. 22
8.2. Beneficiary Designation. 25
8.3. Assignment, Alienation of Benefits. 26
8.4. Payment in Event of Incapacity. 26
8.5. Payment Satisfies Claims. 27
8.6. Disposition if Distributee Cannot be Located. 27
8.7. Direct Rollovers and Transfers. 27
ARTICLE 9. CONTRIBUTION LIMITATIONS 28
9.1. Pre-Tax Contribution Dollar Limitation. 28
9.2. Actual Deferral Percentage Limitations. 28
9.3. Actual Contribution Percentage Limitations. 31
9.4. Multiple Use Limitation. 33
9.5. Earnings on Excess Contributions. 35
9.6. Aggregate Defined Contribution Limitations. 35
9.7. Aggregate Defined Contribution/Defined Benefit
Limitations. 37
9.8. Administrator's Discretion. 38
ARTICLE 10. SERVICE RULES 39
10.1. Computation Period. 39
10.2. Eligibility Service. 39
10.3. Vesting Service. 39
10.4. Hour of Service. 39
10.5. One-Year Break in Service. 42
10.6. Loss of Service. 43
10.7. Pre-Acquisition Service. 43
10.8. Transition from Elapsed Time. 44
ARTICLE 11. ADOPTION, AMENDMENT AND TERMINATION 45
11.1. Adoption by Affiliated Organizations. 45
11.2. Authority to Amend and Procedure. 45
11.3. Authority to Terminate and Procedure. 46
11.4. Vesting Upon Termination, Partial Termination or
Discontinuance of Contributions. 46
11.5. Distribution Following Termination, Partial Termination
or Discontinuance of Contributions. 46
ARTICLE 12. DEFINITIONS, CONSTRUCTION AND INTERPRETATIONS 47
12.1. Account. 47
12.2. Active Participant. 47
12.3. Administrator. 47
12.4. Affiliated Organization. 47
12.5. Board. 47
12.6. Beneficiary. 48
12.7. Code. 48
12.8. Company. 48
12.9. Disabled. 48
12.10. Effective Date. 48
12.11. Eligible Earnings. 48
12.12. Employee. 49
12.13. Fingerhut Stock. 49
12.14. Fund. 49
12.15. Governing Law. 49
12.16. Headings. 49
12.17. Highly Compensated Employee. 49
12.18. Matching Account. 50
12.19. Matching Contributions. 50
12.20. Normal Retirement Date. 51
12.21. Number and Gender. 51
12.22. Participant. 51
12.23. Participating Employer. 51
12.24. Plan. 51
12.25. Plan Rule. 51
12.26. Plan Year. 51
12.27. Pre-Tax Contribution Account. 51
12.28. Pre-Tax Contributions. 51
12.29. Profit Sharing Account. 51
12.30. Profit Sharing Contributions. 51
12.31. Qualified Employee. 52
12.32. Rollover Account. 52
12.33. Section 415 Wages. 52
12.34. Spousal Consent. 53
12.35. Termination of Employment. 53
12.36. Testing Wages. 54
12.37. Treasury Regulations. 54
12.38. Trust. 54
12.39. Trustee. 54
12.40. Voluntary Contributions. 55
12.41. Voluntary Account. 55
ARTICLE 13. ADMINISTRATION OF PLAN 56
13.1. Administrator, Named Fiduciary. 56
13.2. Compensation and Expenses. 56
13.3. Plan Rules. 56
13.4. Administrator's Discretion. 56
13.5. Indemnification. 57
13.6. Benefit Claim Procedure. 57
13.7. Correction of Errors. 58
ARTICLE 14. MISCELLANEOUS 59
14.1. Merger, Consolidation, Transfer of Assets. 59
14.2. Limited Reversion of Fund. 59
14.3. Top-Heavy Provisions. 60
14.4. No Employment Rights Created. 64
14.5. Special Provisions. 64
14.6. USERRA. 64
FINGERHUT CORPORATION
PROFIT SHARING AND 401(K) SAVINGS PLAN
ARTICLE
1.
DESCRIPTION AND PURPOSE
1.1. Plan Name.
The name of the Plan is the "Fingerhut Corporation Profit Sharing
and 401(k) Savings Plan."
1.2. Plan Description.
The Plan is a profit sharing plan providing for Pre-Tax
Contributions pursuant to a qualified cash or deferred
arrangement, with Matching Contributions and discretionary Profit
Sharing Contributions by Participating Employers. The Plan is
intended to qualify under Code section 401(a) and to satisfy the
requirements of Code sections 401(k) and 401(m). Notwithstanding
the designation of the Plan as a profit sharing plan, a
Participating Employer may make contributions to the Plan even
though it has no current or accumulated earnings and profits.
1.3. Plan Background.
(A) The Plan was originally established, effective January 15,
1960, by Wiman Manufacturing Co. and, effective as of March 28,
1969, sponsorship of the Plan was assumed by the Company.
Effective July 3, 1976, the Plan was amended and restated to
comply with the requirements of the Employee Retirement Income
Security Act of 1974.
(B) For purposes of incorporating Plan amendments adopted after
1976, to conform the Plan document with the requirements of the
Tax Equity and Fiscal Responsibility Act of 1982, the Deficit
Reduction Act of 1984 and the Retirement Equity Act of 1984 and
to make certain other administrative changes to the Plan, the
Plan was amended and restated to read as set forth in the 1985
Revision.
(C) In order to conform with the requirements of the Tax Reform
Act of 1986, the Technical and Miscellaneous Revenue Act of 1988
and rulings and regulations issued subsequent to the adoption of
the 1985 Revision of the Plan and to incorporate into a single
Plan document amendments to the 1985 Revision of the Plan, the
Plan was amended and restated to read as set forth in the 1989
Revision.
(D) Effective generally as of July 1, 1997, the Plan was amended
and restated to add a qualified cash or deferred arrangement
under Code section 401(k), to change the name of the Plan to the
"Fingerhut Corporation Profit Sharing and 401(k) Savings Plan,"
to add a Matching Contribution in the form of Fingerhut Stock, to
eliminate Voluntary Contributions, to comply with changes in
applicable law, to make certain other miscellaneous changes and
to incorporate into a single Plan document amendments to the 1989
Revision of the Plan.
1.4. Plan Purposes.
The purposes of the Plan are to promote effort and cooperation on
the part of Active Participants; to provide a measure of economic
security to Active Participants by accumulating contributions for
distribution upon retirement, as a supplement to other resources
then available; and to permit Active Participants to share in the
profits and growth of their Participating Employer.
ARTICLE
2.
ELIGIBILITY
2.1. Eligibility Requirements.
(A) Each Employee who was eligible to participate in the Plan on
June 30, 1997 will continue to be eligible to participate in the
Plan on July 1, 1997 if he or she continues to be a Qualified
Employee.
(B) An Employee is eligible to participate in the Plan:
(1) for the purpose of having a rollover or transfer made on
his or her behalf pursuant to Section 3.4, on the date on which
he or she first completes an Hour of Service of the type
specified at Section 10.4(A)(1) as a Qualified Employee, and
(2) for the purposes of having Pre-Tax and Matching
Contributions made on his or her behalf pursuant to Sections 3.1
and 3.2 and being eligible to share in the allocation of Profit
Sharing Contributions pursuant to Section 3.3, on the later of
(a) the day on which he or she attains age 21 and (b) the last
day of the first Eligibility Service Computation Period during
which he or she completes one year of Eligibility Service, if he
or she is a Qualified Employee on the date on which he or she
would otherwise be eligible to participate; provided, however,
that any Employee hired prior to July 1, 1997 is not subject to
the requirement that he or she attain age 21 to be eligible to
participate in the Plan.
(C) If an Employee or former Employee has satisfied the age and
service requirements set forth in Subsection (B)(2) but is not a
Qualified Employee on the day on which he or she would otherwise
be eligible to participate in the Plan, he or she will become
eligible to participate as of the first following day on which he
or she performs an Hour of Service of the type specified at
Section 10.4(A)(1) as a Qualified Employee.
(D) Notwithstanding Subsection (B)(2), in conjunction with an
acquisition, the Company's Board may specify a special entry date
for those Qualified Employees with respect to whom pre-
acquisition service is taken into account pursuant to Section
10.7.
2.2. Transfer Among Participating Employers.
A Participant who transfers from one Participating Employer to
another Participating Employer as a Qualified Employee will
participate in the Plan for the Plan Year during which the
transfer occurs on the basis of his or her separate Eligible
Earnings for the Plan Year from each such Participating Employer.
2.3. Multiple Employment.
A Participant who is simultaneously employed as a Qualified
Employee with more than one Participating Employer will
participate in the Plan as a Qualified Employee of all such
Participating Employers on the basis of his or her separate
Eligible Earnings from each such Participating Employer.
2.4. Reentry.
An Active Participant who ceases to be a Qualified Employee will
be eligible to resume active participation in the Plan as of the
first following day on which he or she completes an Hour of
Service of the type specified at Section 10.4(A)(1) as a
Qualified Employee.
2.5. Condition of Participation.
Each eligible Qualified Employee, as a condition of
participation, is bound by all the terms and conditions of the
Plan and must furnish to the Administrator such pertinent
information and execute such instruments as the Administrator may
require.
2.6. Termination of Participation.
A Participant will cease to be such as of the later of the date
on which
(a) he or she ceases to be a Qualified Employee, or
(b) all benefits, if any, to which he or she is entitled
under the Plan have been distributed.
ARTICLE
3.
CONTRIBUTIONS
3.1. Pre-Tax Contributions.
(A) Subject to the limitations of Article IX, for each Plan Year
the Participating Employer of each Active Participant will make
Pre-Tax Contributions to the Trust on behalf of the Participant
in the amount by which the Participant's Eligible Earnings have
been reduced in accordance with the succeeding provisions of this
section. Pre-Tax Contributions will be paid to the Trustee as
soon as administratively practicable after the date on which the
Participant would have received the Eligible Earnings but for the
Participant's election pursuant to this section, but in no event
later than the fifteenth business day of the month following the
month in which the Participant would have received the Eligible
Earnings but for his or her election pursuant to this section.
(B) Except as provided in Subsection (C), an Active
Participant's Eligible Earnings will be reduced in accordance
with the following rules:
(1) An Active Participant may elect to reduce his or her
Eligible Earnings by any one percent increment from one percent
to a maximum of eight percent, and the percentage so elected
will automatically apply to his or her Eligible Earnings as
adjusted from time to time. Plan Rules may, however, specify
a lower maximum percentage for Active Participants who are
Highly Compensated Employees.
(2) In conjunction with an Active Participant's entering or
reentering the Plan pursuant to Article II, reduction of his or
her Eligible Earnings will begin as soon as administratively
practicable after the Administrator or the Administrator's
designate receives the Active Participant's complete and
accurate election. The election must be made in accordance
with and is subject to Plan Rules.
(3) An Active Participant may elect to change the percentage
rate at which his or her Eligible Earnings will be reduced. The
election must be made in accordance with and is subject to Plan
Rules. The election will become effective as soon as
administratively practicable after the date on which the
Administrator or the Administrator's designate receives a
complete and accurate election.
(4) An Active Participant may elect to suspend Eligible
Earnings reductions. The election must be made in accordance
with and is subject to Plan Rules. The election will become
effective as soon as administratively practicable after the
date on which the Administrator or the Administrator's designate
receives a complete and accurate election. Eligible Earnings
reductions for any Active Participant who makes a hardship
withdrawal pursuant to Section 6.1 will be automatically
suspended for the 12-month period beginning on the date of
the withdrawal distribution.
(5) An Active Participant whose Eligible Earnings reductions
have ceased by reason of automatic or voluntary suspension may,
after the end of the suspension period, resume Eligible Earnings
reductions in accordance with clause (3).
(C) Eligible Earnings reductions will be made in accordance with
Plan Rules. If any election or notice made by an Active
Participant in such manner as provided by the Administrator is
not processed on a timely basis or if, for any reason, an Active
Participant's Eligible Earnings are not reduced in accordance
with his or her election, no retroactive adjustments will be made
to take into account the effect of any such delay or failure.
Plan Rules may, however, permit an Active Participant to elect to
reduce his or her Eligible Earnings payable during any remaining
portion of the Plan Year in which the delay or failure occurred
at more than the otherwise applicable percentage to adjust for
the effect of such delay or failure so long as the total
reductions for the Plan Year do not exceed the applicable maximum
percentage or limitations of Article IX. No Pre-Tax
Contributions will be made on behalf of a Participant with
respect to a period during which he or she is not an Active
Participant.
3.2. Matching Contributions.
(A)
(1) Subject to Subsection (D) and the limitations of Article
IX, for each Plan Year the Participating Employer of each
Active Participant will make a Matching Contribution on behalf
of the Participant in an amount equal to the lesser of (a)
50 percent of the Pre-Tax Contributions made by the
Participating Employer on the Participant's behalf for the
Plan Year and (b) one and one-half percent of the
Participant's Eligible Earnings from the Participating
Employer for the Plan Year.
(B) A Participating Employer's Matching Contributions for a Plan
Year will be paid to the Trustee on such date or dates during or
following such Plan Year as the Participating Employer may elect
but in no case more than 12 months after the end of the Plan
Year.
(C) Matching Contributions will be made in the form of cash.
(D) No Matching Contributions will be made with respect to any
portion of an Active Participant's Pre-Tax Contributions that is
distributed to the Participant pursuant to Article IX; provided
that for this purpose unmatched Pre-Tax Contributions will be
deemed to be returned to the Participant first. If the
Administrator determines that any Matching Contributions that
have been added to a Participant's Matching Account should not
have been added by reason of this subsection, the contributions
will be subtracted from such Account as soon as administratively
practicable after the determination and will be applied to
satisfy the Matching Contribution obligations of the
Participating Employer that made the excess Matching
Contributions for the Plan Year in which such excess
contributions were made. If, because of the passage of time, the
excess cannot be applied to satisfy the Participating Employer's
Matching Contribution obligations for the Plan Year in which the
excess contribution was made, the excess will, subject to the
limitations of Article IX, be allocated, in the discretion of the
Administrator
(1) among the Matching Accounts of all Active Participants
who made Pre-Tax Contributions for the Plan Year as Qualified
Employees of the Participating Employer as if it were an
additional Matching Contribution by the Participating Employer
for such Plan Year, or
(2) as a corrective contribution pursuant to Section 3.6.
3.3. Voluntary Contributions.
Effective July 1, 1997, Voluntary Contributions are no longer
permitted under this Plan.
3.4. Profit Sharing Contributions.
(A) Each Participating Employer may, but is not required to,
make a Profit Sharing Contribution for any Plan Year in an
amount, if any, determined by the Participating Employer's Board.
(B) To be eligible to share in a Participating Employer's Profit
Sharing Contribution for a particular Plan Year, a Participant
must have entered the Plan as a Participant for the purpose of
being eligible to share in the allocation of the Profit Sharing
Contribution for the Plan Year, received Eligible Earnings for
the Plan Year from the Participating Employer with respect to a
period during which he or she was an Active Participant employed
by the Participating Employer and either -
(1) completed at least 500 Hours of Service during the Plan
Year and been employed with an Affiliated Organization on
the last day of the Plan Year, or
(2) terminated employment during the Plan Year
(a) at or after his or her Normal Retirement Date,
(b) on account of his or her death, or
(c) on account of his or her becoming Disabled;
provided, that this condition will be applied only
once with respect to a Participant, such sole
application being made for the Plan Year during
which this clause first applies and the conditions
under clause (1) are not satisfied.
(C) Subject to the limitations of Article IX, each eligible
Participant will receive an allocation of his or her
Participating Employer's Profit Sharing Contribution in the same
proportion as his or her Eligible Earnings for the Plan Year
bears to the total Eligible Earnings for the Plan Year of all
Participants eligible to receive an allocation of the
Participating Employer's Profit Sharing Contribution for the Plan
Year.
(D) A Participating Employer's Profit Sharing Contribution for a
Plan Year, if any, will be paid to the Trustee on such date or
dates during or following the Plan Year as the Participating
Employer may elect but in no case later than 12 months after the
end of the Plan Year.
3.5. Rollovers and Transfers.
(A) An Active Participant may, with the prior consent of the
Administrator, contribute to the Trust, in a direct rollover
pursuant to Code section 401(a)(31) or within 60 days of receipt,
(1) the balance of an individual retirement account to which
the only contributions have been one or more "eligible rollover
distributions," within the meaning of Code section 402(c)(4),
from a plan qualified under Code section 401(a), or
(2) an eligible rollover distribution from such a qualified
plan.
(B) With the prior consent of the Administrator, the accounts
under another plan qualified under Code section 401(a) of an
Active Participant may be transferred directly to the Trust.
Other than in connection with an acquisition, such a transfer
will not be permitted if, as a result of the transfer, the Plan
would be required to provide any option with respect to the form
or time of distribution or any other right, benefit or feature
not available under the Plan prior to the transfer.
(C) Other than in connection with an acquisition, any
contribution or transfer to the Trust pursuant to Subsection (A)
or (B) must be made in cash and will be credited to the Active
Participant's Rollover Account.
3.6. Corrective Contributions.
For any Plan Year a Participating Employer may contribute to the
Matching Contribution Accounts or Profit Sharing Accounts of
Active Participants who are not Highly Compensated Employees, or
any group of such Active Participants, such amounts as it deems
advisable to assist the Plan in satisfying the requirements of
Sections 9.2, 9.3 and 9.4, or any other requirement under the
Code or Treasury Regulations, for such Plan Year. Subject to the
limitations of Article IX, such contributions will be allocated
among the Matching Contribution Accounts of such Active
Participants in proportion to the Pre-Tax Contributions made on
their behalf for the Plan Year and to their Profit Sharing
Accounts in proportion to their Eligible Earnings for the Plan
Year. Each such contribution will be treated, for all purposes
of the Plan, in the same manner as other contributions allocated
to the same Account.
ARTICLE
4.
ACCOUNTS AND VALUATION
4.1. Establishment of Accounts.
The following Accounts will be established and maintained for
each Participant:
(a) A Pre-Tax Account, to which there will be credited
any Pre-Tax Contributions made on the Participant's
behalf;
(b) A Matching Account, to which there will be credited
any Matching Contributions made on the Participant's
behalf;
(c) A Profit Sharing Account, to which there will be
credited any Profit Sharing Contributions made on
the Participant's behalf;
(d) A Voluntary Account to which there will be credited
any Voluntary Contributions made by the Participant;
and
(e) A Rollover Account, to which there will be credited
any rollover or trust-to-trust transfers made by or
on behalf of the Participant.
One or more additional accounts may be established for any
Participant or group of similarly situated Participants in
connection with the merger of another plan into the Plan, in
which case provisions of the Plan applicable solely to such
Accounts will be set forth on an exhibit to the Plan in
accordance with Section 14.5.
4.2. Valuation and Account Adjustment.
(A) Subject to Subsection (B), Participants' Accounts will be
separately adjusted on a daily basis in a uniform and equitable
manner to reflect income, expense, gains and losses of the Fund
as well as contributions, withdrawals and distributions.
(B) Participants' Matching Accounts will be accounted for in a
uniform and equitable manner on the basis of the number of full
and fractional shares of Fingerhut Stock credited to the
Accounts. Accordingly, except as otherwise provided in Article 8
with respect to distributions of Matching Account balances in the
form of cash, Participants' Matching Accounts will not be
adjusted for the appreciation or depreciation in the value of
Fingerhut Stock, such appreciation or depreciation being
automatically reflected by the fair market value of shares of
Fingerhut Stock credited to the Accounts.
4.3. Allocations Do Not Create Rights.
The fact that amounts are added to the Accounts of a Participant
does not vest in the Participant any right, title or interest in
or to any portion of the Fund except at the time or times and
upon the terms and conditions expressly set forth in the Plan.
Notwithstanding any addition to an Account, the issuance of any
statement or the distribution of all or any portion of an Account
balance, the Administrator may cause the Account to be adjusted
to the extent necessary to correct any error in such Account,
whether caused by a misapplication of any provision of the Plan
or otherwise, and may recover from any distributee the amount of
any excess distribution. Any such adjustment will be made within
a reasonable time after the error is discovered.
ARTICLE
5.
PARTICIPANT INVESTMENT DIRECTION
5.1. Establishment of Investment Funds.
(A) In order to allow each Participant to determine the manner
in which his or her Accounts will be invested, the Trustee will
maintain, within the Trust, three or more separate investment
funds of such nature and possessing such characteristics as the
Administrator may specify from time to time. Each Participant's
Accounts will be invested in the investment funds in the
proportions directed by the Participant in accordance with the
procedures set forth in Sections 5.2 and 5.3. The Administrator
may, from time to time, establish additional investment funds or
eliminate any existing investment fund.
(B) Notwithstanding any other provision of the Plan to the
contrary, the Administrator may suspend Participant investment
activity (including such activity in connection with the
withdrawals and distributions) in any or all investment funds, or
impose special rules or restrictions of uniform application, for
a period determined by the Administrator to be necessary in
connection with
(1) the establishment or termination of any investment fund,
(2) the receipt by the Trustee from, or transfer by the Trustee
to, another trust of account balances in connection with an
acquisition or divestiture or otherwise,
(3) a change of Trustee or investment manager, or
(4) such other circumstances determined by the Administrator as
making such suspension or special rules or restrictions necessary
or appropriate.
5.2. Contribution Investment Directions.
(A) In conjunction with his or her enrollment in the Plan, a
Participant must direct the manner in which contributions to his
or her Accounts, other than his or her Matching Account, will be
invested among the investment funds maintained pursuant to
Section 5.1. The direction must be made in accordance with and
is subject to Plan Rules. To the extent a Participant fails to
direct the investment of contributions to his or her Accounts,
the contributions will be invested in accordance with Plan Rules.
(B) A Participant may direct a change in the manner in which
future contributions to his or her Accounts, other than his or
her Matching Account, will be invested among the investment funds
maintained pursuant to Section 5.1. The direction must be made
in accordance with and is subject to Plan Rules and will be
effective as soon as administratively practicable after the date
on which the Administrator or the Administrator's designate
receives the direction from the Participant.
(C) Plan Rules will include procedures pursuant to which
Participants are provided with the opportunity to obtain written
confirmation of investment directions made pursuant to this
Section.
5.3. Transfer Among Investment Funds.
(A) A Participant may direct the transfer of his or her Accounts
other than his or her Matching Account among the investment funds
maintained pursuant to Section 5.1. The direction must be made
in accordance with and is subject to Plan Rules and will be
effective on or as soon as administratively practicable after the
date on which the Administrator or the Administrator's designate
receives the direction from the Participant.
(B) Plan Rules will include procedures pursuant to which
Participants are provided with the opportunity to obtain written
confirmation of investment directions made pursuant to this
section.
(C) Plan Rules may impose uniform limitations and restrictions
applicable to transfers into and out of specific investment
funds.
5.4. Investment of Matching Account in Fingerhut Stock.
(A) A Participant's Matching Account will be invested in
Fingerhut Stock.
(B) Cash dividends paid on Fingerhut Stock credited to a
Participant's Matching Account will be used to acquire additional
shares of Fingerhut Stock which will be credited to the Account.
(C) Each Participant will be provided with the opportunity to
direct the manner in which shares of Fingerhut Stock credited to
his or her Matching Account as of the record date of any
stockholder action will be voted in connection with such action.
In the event of a public tender or exchange offer for shares of
Fingerhut Stock, each Participant will be entitled to direct
whether or not the shares of Fingerhut Stock credited to the
Participant's Matching Account will be tendered or exchanged.
The voting decisions relating to Fingerhut stock for which
Participants have failed to provide direction shall be directed
by the Employee Benefits Advisory Committee or its successor.
Voting, tender or exchange decisions will be effected in
accordance with applicable provisions of the Trust and Plan Rules
that are consistent with the provisions of the Trust.
5.5. Investment Direction Responsibility Resides With
Participants.
Neither any Affiliated Organization, the Administrator nor the
Trustee has any authority, discretion, responsibility or
liability with respect to a Participant's selection of the
investment funds or other directed investments in which his or
her Accounts will be invested, the entire authority, discretion
and responsibility for, and any results attributable to, the
selection being that of the Participant.
5.6. Beneficiaries and Alternate Payees.
Solely for purposes of this article, the term "Participant"
includes the Beneficiary of a deceased Participant and an
alternate payee under a qualified domestic relations order within
the meaning of Code section 414(p) unless otherwise provided in
such order, but only after
(1) the Administrator has determined the identity of the
Beneficiary and the amount of the Account balance to which he
or she is entitled in the case of a Beneficiary of a deceased
Participant, or
(2) the Administrator has, in accordance with Plan Rules, made
a final determination that the order is a qualified domestic
relations order and all rights to contest such determination in
a court of competent jurisdiction within the time prescribed by
Plan Rules have expired or been exhausted in the case of an
alternate payee.
ARTICLE
6.
WITHDRAWALS DURING EMPLOYMENT AND LOANS
6.1. Hardship Withdrawals.
(A) Subject to the provisions of Section 6.4, a Participant who
is an Employee may withdraw from his or her Pre-Tax Account an
amount not in excess of the portion of his or her Pre-Tax Account
balance consisting of Pre-Tax Contributions. In addition, a
Participant who is an Employee may withdraw an amount not in
excess of the vested portion of his or her Matching Account or
Profit Sharing Account. Such withdrawal(s) will be made only if
the Administrator or its designate determines that the
distribution is made on account of an immediate and heavy
financial need of the Participant and is necessary to satisfy
such financial need.
(B) A distribution will be deemed to be made on account of an
immediate and heavy financial need only if it is determined by
the Administrator or its designate to be on account of:
(1) expenses for medical care, described in Code section
213(d), incurred or to be incurred by the Participant,
the Participant's spouse or the Participant's dependent
(as described in Code section 152);
(2) costs directly related to the purchase (excluding
mortgage payments) of a principal residence of the Participant;
(3) payment of tuition, related educational expenses and room
and board expenses for the next 12 months of post-secondary
education for the Participant or his or her spouse, child or
other dependent;
(4) payments necessary to prevent the eviction of the
Participant from his or her principal residence or foreclosure
of the mortgage on the Participant's principal residence; or
(5) other hardships identified in Treasury Regulations.
(C) A distribution will be deemed to be necessary to satisfy the
immediate and heavy financial need only if the Administrator or
its designate determines that each of the following requirements
is satisfied.
(1) The distribution is not in excess of the sum of the amount
of the immediate and heavy financial need of the Participant
plus, if elected by the Participant, the amount necessary to
pay any federal, state or local taxes or penalties that the
Participant will incur in connection with the distribution, as
estimated by the Administrator in accordance with Plan Rules.
(2) The Participant has received all withdrawals and has taken
all nontaxable loans available under the Plan and all other
qualified plans maintained by any Affiliated Organization.
(3) All Pre-Tax Contributions under this Plan and all elective
deferrals and after-tax employee contributions by or on behalf
of the Participant under any other qualified or nonqualified
plan of deferred compensation maintained by any Affiliated
Organization are suspended for a period of 12 months following
the date of the distribution.
(4) For the Participant's taxable year following the taxable
year during which he or she receives the distribution, the
amount of elective deferrals under any qualified plan
maintained by any Affiliated Organization (including
Pre-Tax Contributions pursuant to the Plan) that may be
made on the Participant's behalf under Code section 402(g)
is or will be reduced by the sum of such elective deferrals
made on the Participant's behalf for the taxable year during
which he or she receives the distribution.
(D) The Administrator's determination of the existence of a
Participant's financial hardship and the amount that may be
withdrawn to satisfy the need created by such hardship will be
made in accordance with Treasury Regulations, and is final and
binding on the Participant. The Administrator may require the
Participant to make representations and certifications concerning
his or her entitlement to a withdrawal pursuant to this section
and is entitled to rely on such representations and
certifications unless the Administrator has actual knowledge to
the contrary. The Administrator is not obligated to supervise or
otherwise verify that amounts withdrawn are applied in the manner
specified in the Participant's withdrawal application.
6.2. Withdrawals After Attaining Age 59-1/2.
(A) Subject to the provisions of Section 6.4, a Participant who
is an Employee and has attained age 59 may withdraw all or any
portion of the vested balance of his or her Accounts.
(B) Withdrawals pursuant to this section will be charged first
to the Participant's Voluntary Account, then to the Rollover
Account, then to the Pre-Tax Account, then to the vested portion
of the Participant's Matching Account and then to the vested
portion of the Participant's Profit Sharing Account.
6.3. Other Withdrawals from Voluntary Account, Rollover Account
and Profit Sharing Account.
Subject to the provisions of Section 6.4, a Participant who
is an Employee may withdraw a portion of his or her
Voluntary Account, Rollover Account and Profit Sharing
Account, subject to the following:
(a) The Participant's Voluntary Account balance, if any,
will be charged with the total amount requested, to the
extent such amount does not exceed the amount then
credited to the Participant's Voluntary Account.
(b) If the requested withdrawal exceeds the amount that
can be charged against the Participant's Voluntary
Account, and the Participant has a balance in his or her
Rollover Account, the Participant's Rollover Account
will be charged with the amount by which the requested
withdrawal exceeds the Participant's Voluntary Account
balance, to the extent such excess does not exceed the
amount then credited to the Participant's Rollover
Account.
(c) If the requested withdrawal exceeds the amount that
can be charged against his or her Voluntary Account and
his or her Rollover Account, then the Participant's Profit
Sharing Account will be charged with the amount by which
the requested withdrawal exceeds his or her Voluntary
Account and Rollover Account balances. The amount that
may be withdrawn from the Participant's Profit Sharing
Account may not exceed the lesser of:
(i) the amount by which the lesser of the amount
set forth at (A) or (B), below, exceeds the aggregate
gross amount of all previous withdrawals made by
the Participant from his or her Profit Sharing
Account:
(A) fifty percent (50%) of the
vested percentage of his or
her Profit Sharing Account;
(B) twenty-five percent (25%) of
the Participant's Profit
Sharing Account plus the
aggregate gross amount of all
previous withdrawals made from
the Participant's Profit
Sharing Account.
(ii) If the Participant has been participating under
the Plan for less than five years, an amount such
that, after the withdrawal, the remaining balance in
the Participant's Profit Sharing Account is not less
than the aggregate amount of contributions credited
to his or her Profit Sharing Account during the two-
year period ending on the date on which the
withdrawal payment is made.
6.4. Rules for Withdrawals.
(A) An application for withdrawal must be made in accordance
with and is subject to Plan Rules.
(B) A withdrawal from a particular Account will be made on a pro
rata basis among all investment funds in which the Account is
invested.
(C) With respect to withdrawals under Section 6.3, only one
withdrawal may be made during any Plan Year.
(D) The minimum amount of any withdrawal is $200.
(E) Withdrawal distributions will be made by check drawn on the
Trust as soon as administratively practicable after the
Administrator's determination that a Participant is entitled to
receive the withdrawal distribution and will be based on the
balance of the Participant's Accounts as of the close of business
on the day before the day on which the distribution is made,
provided that on and after the date on which the Administrator
has announced to Participants that Fingerhut stock may be
distributed "in kind" and at the election of the Participant, a
withdrawal distribution from the Participant's Matching Account
will be made in full shares of Fingerhut Stock, with cash in lieu
of any fractional share.
(F) The provisions of Section 8.7(A) apply to any withdrawal
distribution that constitutes an eligible rollover distribution
within the meaning of Code section 402(c)(4).
(G) All Voluntary Contributions and all Fund earnings or losses
with respect thereto will be treated as a separate contract under
the Plan for purposes of Code section 72(d) and such
contributions and earnings or losses will be separately accounted
for in accordance with applicable Treasury Regulations. Insofar
as the Plan permitted Participants to effect in-service
withdrawals from their Voluntary Accounts on May 5, 1986,
notwithstanding Subsection (A) all withdrawals from such Accounts
pursuant to this Section 6.3 will be deemed to be made first from
the Participant's investment in the contract as of December 31,
1986, and second, from the above-referenced separate section
72(d) contract.
6.5. No Plan Loans.
Loans to Participants are not permitted under the Plan.
ARTICLE
7.
VESTING AND FORFEITURES
7.1. Vesting.
(A) Each Participant, at all times, has a fully vested
nonforfeitable interest in his or her Pre-Tax Account, Voluntary
Account and Rollover Account.
(B) A Participant will acquire a fully vested nonforfeitable
interest in his or her Matching Account and Profit Sharing
Account upon attaining his or her Normal Retirement Date while he
or she is an Employee.
(C) A Participant will acquire a fully vested nonforfeitable
interest in his or her Matching Account and Profit Sharing
Account if he or she dies or becomes Disabled while he or she is
an Employee.
(D) A Participant whose employment terminates prior to his or
her Normal Retirement Date other than by reason of his or her
death or becoming Disabled will acquire a vested nonforfeitable
interest in his or her Matching Account and Profit Sharing
Account to the extent provided in the following schedule:
Vested
Years of Vesting Interest
Service
Less Than One Year 0%
One Year 25%
Two Years 50%
Three Years 75%
Four or More Years 100%
7.2. Forfeiture Upon Distribution.
(A) If the entire vested balance of a Participant's Accounts is
distributed not later than the last day of the second Plan Year
following the Plan Year during which his or her employment
terminates, and if the amount of such distribution was not more
than $3500 or the distribution was made with the Participant's
consent, the nonvested portion of the Participant's Matching
Account and Profit Sharing Account will, at the time of such
distribution, be forfeited. A Participant who has no vested
interest in his or her Profit Sharing Account at termination of
employment will be deemed to have received a distribution of the
entire vested balance in such Account upon such termination.
(B) If a Participant described in Subsection (A) (1) received a
distribution of less than the entire balance of his or her
Accounts, (2) resumes employment with a Participating Employer as
a Qualified Employee, and (3) repays to the Trustee the full
amount distributed (excluding the portion of the distribution, if
any, attributable to his or her Voluntary Account) before the
earlier of (a) five years following the date of reemployment as a
Qualified Employee or (b) the date on which he or she incurs five
consecutive One-Year Breaks in Service following the
distribution, the amount of any forfeitures pursuant to
Subsection (A) will be restored to the Participant's Matching
Account and Profit Sharing Account, unadjusted for any changes in
Fund value occurring after the distribution. The restoration
will be made from forfeitures that arise for the Plan Year for
which the restoration is to be made. To the extent such
forfeitures are insufficient for such purpose, the Participating
Employer with whom the Participant was last employed as a
Qualified Employee prior to resumption of employment will
contribute the amount required to restore the Account. A
Participant described in the last sentence of Subsection (A) who
is reemployed prior to incurring five consecutive One Year Breaks
in Service following the distribution will be deemed to have
repaid his or her deemed distribution upon his or her
reemployment as a Qualified Employee.
7.3. Other Forfeitures.
(A) Except as provided in Section 7.2, the nonvested portion of
a Participant's Matching Account and Profit Sharing Account will
continue to be held in a subaccount until the Participant incurs
five consecutive One-Year Breaks in Service, at which time the
subaccount balance will be forfeited. If the Participant resumes
employment with an Affiliated Organization prior to incurring
five consecutive One-Year Breaks in Service, the subaccount will
be disregarded and its balance will be included in the
Participant's Matching Account and Profit Sharing Account
balances.
(B) A Participant's vested interest in his or her Profit Sharing
Account and Matching Account balances following a resumption of
employment in accordance with the last sentence of Subsection (A)
at any given time will not be less than the amount "X" determined
by the formula: X = P(AB + (R x D)) - (R x D), where P is the
Participant's vested percentage at the time of determination; AB
is the Account balance at the time of determination; D is the
amount of the distribution; and R is the ratio of the Account
balance at the time of determination, to the balance immediately
following the distribution.
7.4. Reallocation of Forfeitures.
All forfeitures occurring under this article in a Plan Year will
be allocated as of the last day of the Plan Year as follows:
(a) The forfeitures will first be applied to restore the
Matching Account and Profit Sharing Accounts of Participants
as provided in Section 7.2(B);
(b) Subject to Section 13.2 any remaining forfeitures will be
used by the Trustee to pay those Plan expenses designated
by the Administrator; and
(c) Any remaining forfeitures (including forfeitures of
Participants' Matching Accounts) will be allocated to the
Profit Sharing Accounts of those Participants (i) employed
with the Participating Employer with whom the Participant
whose Profit Sharing Account was forfeited was last
employed and (ii) eligible to share in the Participating
Employer's Profit Sharing Contribution for the Plan Year.
The allocations will be made in the same manner as the
Participating Employer's Profit Sharing Contribution for
the Plan Year is allocated or would have been allocated
had it been made.
ARTICLE
8.
DISTRIBUTIONS AFTER TERMINATION
8.1. Time and Form of Distribution.
(A) Following a Participant's termination of employment, the
Trustee will distribute to the Participant or, if the Participant
has died, to his or her Beneficiary, the aggregate vested balance
of the Participant's Accounts. The amount of any such
distribution made in the form of a lump sum payment will be equal
to the net proceeds from the liquidation of the vested balance of
the Accounts in connection with the distribution. Subject to the
remaining subsections of this section and Section 8.7,
distribution will be made in accordance with the following
provisions-
(1) If the aggregate vested balance of the Participant's
Accounts at the time of the distribution is not more than $3500,
distribution to the Participant, or the Participant's
Beneficiary in the case of his or her death, will be made in
the form of a lump sum payment as soon as administratively
practicable following the Participant's termination of
employment. This clause will not apply, however, if the
aggregate vested balance of the Participant's Accounts
exceeded $3500 at the time of any previous distribution to
the Participant.
(2) If clause (1) does not apply, distribution to the
Participant will be made in the form of a lump sum payment,
non-periodic payments or installment payments as elected by
the Participant in accordance with the provisions of this
Section 8.1 and Plan Rules. The distribution will be made
or commence, according to the Participant's election
(made in accordance with Plan Rules), on or as soon as
administratively practicable after such date as the
Participant specifies, but not later than the date specified
under Subsection (C) unless the Participant elects to defer
the distribution in the manner described in Subsection (B).
(3) Subject to clause (1) above, any distribution to the
Participant's Beneficiary will be made at such time or times
and in such manner as the Beneficiary elects in accordance
with Subsection (E).
(4) All distributions will be made by delivery of a check
drawn on the Trust; provided that at the election of the
Participant or Beneficiary, as the case may be, the number
of full shares of Fingerhut Stock credited to a
Participant's Matching Account immediately before the
distribution will be distributed in kind, with cash in
lieu of any fractional share
(B) Subject to the provisions of the other subsections of this
section, a Participant described in Subsection (A)(2) may elect
to defer commencement of his or her distribution under the Plan
by providing the Administrator a written, signed statement
indicating in which of the available forms the benefit will be
paid and specifying the date on which the payment is to be made
or commence, provided, such date may not be later than April 1 of
the calendar year following the calendar year in which the
Participant attains age 70. Such deferral election must be
provided not later than the thirtieth day (or such later date as
Plan Rules may allow) after the close of the Plan Year during
which there occurs the later of the Participant's termination of
employment or sixty-second birthday. Plan Rules may permit a
Participant to modify any such election in any manner determined
by the Administrator to be consistent with Code section
401(a)(14) and Treasury Regulations thereunder and the other
provisions of this section.
(C) Except in the case of a Participant who has elected to defer
his or her distribution pursuant to Subsection (B), distribution
to the Participant will be made, or commence, not later than the
sixtieth day following the close of the Plan Year during which
there occurs the later of -
(1) the date of his or her termination of employment, or
(2) his or her sixty-second birthday.
(D) If a Participant described in Subsection (A)(2) elects to
receive his or her distribution in the form of installment
payments, such installments will be substantially equal in amount
and will be made on a monthly, quarterly, semi-annual or annual
basis, for a period not extending beyond either the Participant's
life expectancy or the life expectancy of the Participant and his
or her Beneficiary; and, if the Participant's Beneficiary is not
his or her spouse, the period over which such payments are to be
made will be determined by reference to the applicable table of
joint life expectancies set forth in Treasury Regulation section
1.401(a)(9)-2. Notwithstanding the foregoing, a Participant who
is receiving installment payments may elect, in accordance with
Plan Rules, to increase or decrease the amount of the installment
payments or to receive a non-periodic payment of all or a portion
of the Participant's remaining Account balances. Prior to April
1 of the calendar year following the calendar year during which
he or she attains age 70, the Participant may elect, in writing
to the Administrator, whether the life expectancies for the
Participant and his or her spouse are to be recalculated on an
annual basis for purposes of determining the amount of each
installment payment hereunder. Any such election will become
irrevocable as of the date specified above. If no such election
is made, the life expectancies of the Participant and his or her
spouse will not be recalculated. Distribution in the form of
installment payments will be made on a pro rata basis among the
Accounts and investment funds in which the Accounts are invested.
(E) Subject to Subsection (A)(1), if a Participant dies before
receiving the full amount to which he or she is entitled, the
amount remaining will be distributed to the Participant's
Beneficiary at such time or times and in such manner as the
Beneficiary elects (subject to and in accordance with Plan
Rules), subject, however to the following rules:
(1) If the Participant dies after the April 1 of the calendar
year following the calendar year during which he or she has both
attained age 70 and terminated employment, distribution will be
made to the Beneficiary at a rate that would result in the
benefit being distributed at least as rapidly as if distribution
were made at the same rate as was in effect immediately prior to
the Participant's death. If the Participant is a "5-percent
owner" subject to the provisions of Subsection (F), then he or
she shall be treated as having terminated employment upon
attaining age 70.
(2) If the Participant dies before April 1 of the calendar year
following the calendar year during which he or she attains age
70, distribution will, at the Beneficiary's election, be made
either -
(a) in a lump sum payment no later than December 31 of the
calendar year which contains the fifth anniversary of
the date of the Participant's death, or
(b) in installments, commencing no later than December 31
of the calendar year immediately following the calendar
year in which the Participant died (unless the Beneficiary
is the Participant's spouse, in which case payments will
begin no later than such date specified above or
December 31 of the calendar year in which the Participant
would have attained age 70 if he or she had lived), and
being paid over a period not exceeding the Beneficiary's
remaining life expectancy, (as determined on the basis
of the Beneficiary's age as of the date on which payments
are required to commence under this clause (2) and, if
the Beneficiary is the Participant's surviving spouse, as
redetermined on an annual basis if so elected by such
surviving spouse).
A Beneficiary's election with respect to the time
and manner in which any amount remaining at the
Participant's death will be distributed must be made no
later than the earlier of the dates set forth in clause
2(a) and (b) above, and is irrevocable following such
date. If the Beneficiary fails to make an election
under clause (2), distribution will be made in the
manner set forth at clause (2)(a). If the
Participant's spouse is the Beneficiary and dies after
the Participant's death but before distributions to
such spouse have commenced, the foregoing rules will be
applied as if the surviving spouse were the
Participant, including the substitution of the
surviving spouse's date of death for the Participant's
date of death; provided, that the alternative
commencement date in clause (2)(b) relating to the date
on which the Participant would have attained age 70 had
he or she lived will not be available.
(F) Notwithstanding Subsection (C), distribution to a
Participant who is a "5-percent owner," within the meaning of
Code section 416, must be made or commenced not later than April
1 of the calendar year following the calendar year during which
he or she attains age 70, whether or not the Participant has
terminated employment, as if he or she had terminated employment.
Any contribution allocated to the account of a 5-percent owner
who has attained age 70 will be distributed (or distribution will
be commenced subject to Subsection (G)) not later than the last
day of the Plan Year following the Plan Year for which such
allocation was made.
(G) Notwithstanding any other provision of the Plan to the
contrary, distributions will be made in accordance with
regulations issued under Code section 401(a)(9), including
Treasury Regulation section 1.401(a)(9)-2, and any provisions of
the Plan reflecting Code section 401(a)(9) takes precedence over
any distribution options in the Plan that are inconsistent with
Code section 401(a)(9).
8.2. Beneficiary Designation.
(A) (1) Each Participant may designate, on a form provided
by the Administrator, one or more persons to be primary
Beneficiaries or alternative Beneficiaries for all or a
specified fractional part of his or her aggregate Accounts
and may change or revoke any such designation from time to
time. No such designation, change or revocation will be
effective unless executed by the Participant and received
by the Administrator during the Participant's lifetime.
Except as provided in Subsection (B), no such change or
revocation will require the consent of any person.
(2) If a Participant
(a) fails to designate a Beneficiary, or
(b) revokes a Beneficiary designation without
naming another Beneficiary, or
(c) designates as Beneficiaries one or more
persons none of whom survives the Participant,
for all or any portion of the Participant's
Accounts, such Accounts or portion will be
distributed to the first class of the following
classes of automatic Beneficiaries that includes a
member surviving the Participant:
Participant's spouse;
Participant's issue, per stirpes and not per capita;
Participant's parents;
Participant's brothers and sisters;
Representative of Participant's estate.
(3) When used in this section and,
unless the designation otherwise specifies, when
used in a Beneficiary designation: the term "per
stirpes" means in equal shares among living
children and the issue (taken collectively) of
each deceased child, with such issue taking by
right of representation; "children" means issue of
the first generation; and "issue" means all
persons who are descended from the person referred
to, either by legitimate birth or legal adoption.
The automatic Beneficiaries specified above and,
unless the designation otherwise specifies, the
Beneficiaries designated by the Participant, will
become fixed as of the Participant's death so
that, if a Beneficiary survives the Participant
but dies before the receipt of all payments due
such Beneficiary, any remaining payments will be
made to the representative of such Beneficiary's
estate. Any designation of a Beneficiary by name
that is accompanied by a description of
relationship or only by statement of relationship
to the Participant will be effective only to
designate the person or persons standing in such
relationship to the Participant at the
Participant's death.
(B) Notwithstanding Subsection (A), no designation of a
Beneficiary other than the Participant's spouse will be effective
unless such spouse consents to the designation. Any such consent
will be effective only with respect to the Beneficiary or class
of Beneficiaries so designated and only with respect to the
spouse who so consented.
8.3. Assignment, Alienation of Benefits.
(A) Except as required under a qualified domestic relations
order or by the terms of any loan from the Trust, no benefit
under the Plan may in any manner be anticipated, alienated, sold,
transferred, assigned, pledged, encumbered or charged, and any
attempt to do so will be void. No benefit under the Plan may in
any manner be liable for, or subject to, the debts, contracts,
liabilities, engagements or torts of the person entitled to such
benefit.
(B) To the extent provided in a qualified domestic relations
order, distribution of benefits assigned to an alternate payee by
such order may be distributed to the alternate payee prior to the
Participant's earliest retirement age in the form of a lump sum
payment. The terms "qualified domestic relations order,"
"alternat payee" and "earliest retirement age" have the meanings
given in Code section 414(p).
8.4. Payment in Event of Incapacity.
If any person entitled to receive any payment under the Plan is
physically, mentally or legally incapable of receiving or
acknowledging receipt of the payment, and no legal representative
has been appointed for such person, the Administrator in his or
her discretion may (but is not required to) cause any sum
otherwise payable to such person to be paid to any one or more as
may be chosen by the Administrator from the following: the
Beneficiaries, if any, designated by such person, the institution
maintaining such person, a custodian for such person under the
Uniform Transfers to Minors Act of any state or such person's
spouse, children, parents or other relatives by blood or
marriage. Any such payment completely discharges all liability
under the Plan to the extent of the payment.
8.5. Payment Satisfies Claims.
Any payment to or for the benefit of any Participant, legal
representative or Beneficiary in accordance with the provisions
of the Plan will, to the extent of such payment, be in full
satisfaction of all claims against the Trustee, the Administrator
and all Affiliated Organizations, any of whom may require the
payee to execute a receipted release as a condition precedent to
such payment.
8.6. Disposition if Distributee Cannot be Located.
If the Administrator is unable to locate a Participant or
Beneficiary to whom a distribution is due, the Participant's
Accounts will continue to be held in the Fund until such time as
the Administrator has located the Participant or Beneficiary or
the Participant or Beneficiary makes a proper claim for the
benefit, as the case may be; provided, that, any Accounts not
claimed within the period prescribed by applicable escheat laws
will be paid to such governmental authorities, in such manner, as
is specified in such laws.
8.7. Direct Rollovers and Transfers.
(A) To the extent a distribution is an "eligible rollover
distribution," within the meaning of Code section 402(c)(4), the
Administrator will, if so instructed by the distributee in
accordance with Plan Rules, direct the Trustee to make the
distribution to an "eligible retirement plan," within the meaning
of Code section 402(c)(8). The foregoing provision will not
apply (1) if the aggregate taxable distributions to be made to
the distributee during the calendar year are less than $200 or
(2) if less than the entire taxable amount of the distribution is
to be distributed to the eligible retirement plan, and the amount
to be distributed to the eligible retirement plan is less than
$500.
(B) The Company may direct the Trustee to transfer the balance
of any or all of the Accounts of a Participant to the trustee of
any other plan, provided
(1) the other plan is qualified under Code section 401(a),
(2) the other plan satisfies the requirements set forth in
Code sections 401(k) and 411(d)(6) with respect to the
transferred Accounts to which such requirements are
applicable, and
(3) the trustee is willing to accept such transfer.
ARTICLE
9.
CONTRIBUTION LIMITATIONS
9.1. Pre-Tax Contribution Dollar Limitation.
The aggregate amount of Pre-Tax Contributions and other "elective
deferrals" (within the meaning of the Code section 402(g)(3))
under any other qualified plan maintained by any Affiliated
Organization with respect to a Participant for any taxable year
of the Participant may not exceed $7000 (automatically adjusted
for increases in the cost of living in accordance with Treasury
Regulations). The limitation for any Participant who received a
hardship distribution under Section 6.1 will, for the year
following the year in which such distribution was made, be
reduced as provided in Section 6.1(C)(4). If the foregoing
limitation is exceeded for any taxable year of the Participant,
the Participant will be deemed to have notified the Administrator
of such excess and the amount of Pre-Tax Contributions in excess
of the limitation, increased by Fund earnings or decreased by
Fund losses attributable to the excess determined in accordance
with Section 9.5, will be distributed to the Participant. Such
distribution may be made at any time after the excess
contributions are received, but not later than April 15 of the
taxable year following the taxable year to which such limitation
relates. The amount distributed to a Participant who has made
elective deferrals for the taxable year other than pursuant to
Section 3.1 will, to the extent of such other elective deferrals,
be determined in accordance with written allocation instructions
received by the Administrator from the Participant not later than
March 1 of the taxable year following the taxable year with
respect to which the Pre-Tax Contributions were made.
9.2. Actual Deferral Percentage Limitations.
(A) Notwithstanding Section 3.1, for any Plan Year, Pre-Tax
Contributions may be made on behalf of Active Participants who
are Highly Compensated Employees only if the requirements of Code
section 401(k)(3), as set forth in Subsection (B) are satisfied.
To the extent deemed necessary by the Administrator in order to
comply with such requirements, the Administrator may, in
accordance with Plan Rules, prospectively decrease the rate at
which a Participant's Eligible Earnings will be reduced.
(B)
(1) The requirements of Code section 401(k)(3) will be
satisfied for any Plan Year if, for that Plan Year, the
Plan satisfies the requirements of Code section 410(b)(1)
with respect to "eligible employees" and either of the
following tests.
(a) The "actual deferral percentage" for eligible
employees who are Highly Compensated Employees is
not more than the product of the actual deferral
percentage for all other eligible employees, multiplied
by one and one-quarter.
(b) The excess of the actual deferral percentage for
eligible employees who are Highly Compensated Employees
over the actual deferral percentage for all other
eligible employees is not more than two percentage
points and the actual deferral percentage for eligible
employees who are Highly Compensated Employees is not
more than the product of the actual deferral percentage of
all other eligible employees, multiplied by two.
(2) For purposes of this section,
(a) "eligible employee" means an Active Participant who
is eligible to have Pre-Tax Contributions made on his or
her behalf for the Plan Year in question or would be so
eligible but for a suspension imposed under Section
6.1(C)(3); and
(b) "actual deferral percentage," with respect to the
group of eligible employees who are not Highly Compensated
Employees, is the average of the ratios, calculated
separately for each eligible employee in such group,
of the amount of Pre-Tax Contributions made on behalf
of the eligible employee for the preceding Plan Year,
to the eligible employee's Testing Wages for the preceding
Plan Year, or the portion of the Plan Year during
which he or she was an eligible employee, as specified in
Plan Rules. If the Company so elects, the actual deferral
percentage for the eligible employees who are not Highly
Compensated Employees may be determined on the basis of the
Plan Year's group of eligible employees and their Pre-Tax
Contributions and Testing Wages for the Plan Years.
Except for the 1998 Plan Year, the Company may not
convert to use of the prior Plan Year data without IRS
consent. The actual deferral percentage with respect
to the group of eligible employees who are Highly
Compensated Employees is the average of the ratios,
calculated separately for each eligible employee in
such group, of the amount of Pre-Tax Contributions
made on behalf of the eligible employee for the
Plan Year, to the eligible employee's Testing Wages
for the Plan Year. In computing the actual deferral
percentage, the following general rules apply.
(i) Any Pre-Tax Contributions made on behalf of
an eligible employee who is not a Highly Compensated
Employee that are in excess of the limitation of
Section 9.1 will be excluded.
(ii) Any Pre-Tax Contributions that are distributed
to the eligible Employee pursuant to Section 9.6(C)
will be excluded.
(iii) Except as otherwise provided in Treasury
Regulations, Pre-Tax Contributions taken into account
in determining the actual contribution percentage
under Section 9.3(B)(2) will be excluded.
(iv) To the extent determined by the Administrator,
all or any portion of the Matching Contribution for
the Plan Year on behalf of all or any similarly
situated group of eligible employees will be included.
(v) Elective contributions under any other plan that
is aggregated with this Plan to satisfy the
requirements of Code section 410(b) will be included.
(vi) To the extent required by Treasury Regulations,
elective contributions made under any other qualified
cash or deferred arrangement of a qualified plan of
any Affiliated Organization on behalf of any eligible
employee who is a Highly Compensated Employee will be
included.
(C) If, for any Plan Year, the requirements of Subsection (B)
are not satisfied, the Administrator will determine the amount by
which Pre-Tax Contributions made on behalf of each eligible
employee who is a Highly Compensated Employee for the Plan Year
exceeds the permissible amount as determined under Subsection
(B). The determination will be made by successively decreasing
the rate of Eligible Earnings reductions for Highly Compensated
Employees who, during the Plan Year, had the greatest percentage
of Eligible Earnings reductions made on their behalf, to the next
lower percentage, then again decreasing the percentage of such
Highly Compensated Employees' Eligible Earnings reductions,
together with the percentage of Eligible Earnings reductions of
such Highly Compensated Employees who were already at such lower
percentage, to the next lower percentage, and continuing such
procedure for as many percentage decreases as the Administrator
deems necessary. The Administrator may, in his or her
discretion, make such reductions in any amount, in lieu of one
percent increments.
(D) At such time as the Administrator specifies following the
last day of the Plan Year for which the determination described
in Subsection (B) is made, but in no case later than the last day
of the following Plan Year, the excess determined pursuant to
Subsection (C) will be corrected by taking either or both of the
following steps.
(1) The aggregate amount of excess Pre-Tax Contributions so
determined, increased by Fund earnings or decreased by Fund
losses attributable to such excess as determined under Section
9.5, will be returned to Highly Compensated Employees. The
amount to be returned to Highly Compensated Employees pursuant
to the foregoing sentence with respect to any Plan Year will
be reduced by the portion of the amount, if any, distributed
pursuant to Section 9.1 that is attributable to Pre-Tax
Contributions that relate to such Plan Year, determined by
assuming that Pre-Tax Contributions in excess of the limitation
described in Section 9.1 for a given taxable year are the first
contributions made for a Plan Year falling within such taxable
year. Additional amounts to be returned shall be determined by
successively decreasing the amount of the Pre-Tax Contributions
for the Highly Compensated Employees who, during the Plan Year,
had the largest amount of Pre-Tax Contributions made on their
behalf, down to the next lower amount, and continuing such
procedure until an amount equal to the aggregate amount of
excess Pre-Tax Contributions has been removed from the Pre-Tax
Contribution Accounts of Highly Compensated Employees.
(2) The Participating Employer will make an additional
contribution for the Plan Year pursuant to Section 3.7.
(E) To the extent required or permitted by Treasury Regulations,
the Administrator will or may, as the case may be, apply the
limitations described in this section separately to each group of
eligible employees who are included in a unit of employees
covered by a collective bargaining agreement and those who are
not included or are included in a different unit.
9.3. Actual Contribution Percentage Limitations.
(A) Notwithstanding Section 3.2, for any Plan Year, Matching
Contributions may be made on behalf of Active Participants who
are Highly Compensated Employees with respect to that Plan Year
only to the extent that either of the following tests is
satisfied.
(1) The "actual contribution percentage" for "eligible
employees" who are Highly Compensated Employees is not more
than the product of the actual contribution percentage for
all other eligible employees, multiplied by one and
one-quarter.
(2) The excess of the actual contribution percentage for
eligible employees who are Highly Compensated Employees over
the actual contribution percentage for all other eligible
employees is not more than two percentage points and the
actual contribution percentage for Highly Compensated
Employees is not more than the product of the actual
contribution percentage for all other eligible employees,
multiplied by two.
(B) For purposes of this section,
(1) "eligible employee" means an Active Participant who is
eligible to make Voluntary Contributions or to have Matching
Contributions made on his or her behalf for the Plan Year in
question or would have been so eligible if he or she had elected
to make Pre-Tax Contributions for such Plan Year, or but for a
suspension imposed pursuant to Section 3.1(B)(6) or 3.3(B)(4),
and
(2) the "actual contribution percentage" with respect to either
of the two groups of eligible employees referenced above, is the
average of the ratios, calculated separately for each eligible
employee in the particular group, of the aggregate amount of
Matching Contributions made on behalf of and Voluntary
Contributions made by the eligible employee for the Plan Year,
to the Employee's Testing Wages for the Plan Year, or the
portion of the Plan Year during which he or she was an
eligible employee, as specified in Plan Rules. In computing
the "actual contribution percentage" the following rules apply.
(a) Except as otherwise provided in Treasury Regulations,
Matching Contributions taken into account in
determining the actual deferral percentage under
Section 9.2(B)(2)(b) will be excluded.
(b) Matching Contributions taken into account for
purposes of the minimum contribution required by
Section 14.3(A) will be excluded.
(c) Any Matching Contributions forfeited pursuant to
Section 9.6(C) will be excluded.
(d) To the extent determined by the Administrator,
all or any portion of the Pre-Tax Contributions
for the Plan Year on behalf of eligible employees
will be included.
(e) Matching contributions (within the meaning of Code
section 401(m)(4)(A)) and after-tax Contributions
made under any other plan that is aggregated with
this Plan to satisfy the requirements of Code section
410(b) will be included.
(f) To the extent required by Treasury Regulations,
matching contributions (within the meaning of Code
section 401(m)(4)(A)) and after-tax contributions
made under any other qualified plan of any Affiliated
Organization on behalf of or by any eligible employee
who is a Highly Compensated Employee will be included.
(C) If, for any Plan Year, the requirements of Subsection (A)
are not satisfied, the Administrator will determine the amount by
which Voluntary Contributions made by each Highly Compensated
Employee for the Plan Year and, if necessary, Matching
Contributions made on behalf of each Highly Compensated Employee
for the Plan Year exceeds the permissible amount as determined
under Subsection (A), such determination being made in accordance
with the procedure described in Section 9.2(C) with respect to
reductions of Eligible Earnings.
(D) At such time as the Administrator specifies on or following
the last day of the Plan Year for which the determination
described in Subsection (B) is made, but in no case later than
the last day of the following Plan Year, the excess determined
pursuant to Subsection (C) will be corrected by taking one or
more of the following steps.
(1) The aggregate amount of excess Voluntary and Matching
Contributions so determined with respect to Highly Compensated
Employees, increased by Fund earnings or decreased by Fund
losses attributable to such excess as determined under Section
9.5, will be distributed to Highly Compensated Employees.
The amount to be distributed pursuant to the foregoing
sentence with respect to any Plan Year shall be determined
by successively decreasing the amount of Voluntary
Contributions and Matching Contributions for the Highly
Compensated Employees who, during the Plan Year, had
the largest amount of Voluntary Contributions and Matching
Contributions made on their behalf, down to the next lower
amount, and continuing such procedure until an amount equal to
the aggregate amount of excess Voluntary and Matching
Contributions has been removed from the Voluntary Contribution
and Matching Accounts of Highly Compensated Employees.
(2) The Participating Employer will make an additional
contribution for the Plan Year pursuant to Section 3.5.
(E) To the extent provided in Treasury Regulations, the
limitations described in this section do not apply to any group
of eligible employees who are included in a unit of Employees
covered by a collective bargaining agreement.
9.4. Multiple Use Limitation.
(A) This section applies for any Plan Year for which the sum of
the actual deferral percentage, as determined under Section
9.2(B)(2)(b), for eligible employees who are Highly Compensated
Employees plus the actual contribution percentage, as determined
under Section 9.3(B)(2), for eligible employees who are Highly
Compensated Employees, exceeds the "aggregate limit." For
purposes of this subsection, the aggregate limit is the greater
of:
(1) The sum of:
(a) the product of one and one-quarter, multiplied by the
greater of:
(i) the actual deferral percentage, as determined
under Section 9.2(B)(2)(b), for the Plan Year for
eligible employees who are not Highly Compensated
Employees, or
(ii) the actual contribution percentage, as
determined under Section 9.3(B)(2), for the Plan
Year for eligible employees who are not Highly
Compensated Employees;
plus
(b) the sum of two percentage points plus the lesser of
the actual deferral percentage determined under item
(i) of clause (a) above or the actual contribution
percentage determined under item (ii) of clause (a)
above, with such sum in no case exceeding twice the
lesser of such actual deferral percentage or actual
contribution percentage;
or
(2) The sum of:
(a) the product of one and one-quarter, multiplied by
the lesser of:
(i) the actual deferral percentage, as determined
under Section 9.2(B)(2)(b), for the Plan Year
for eligible employees who are not Highly
Compensated Employees, or
(ii) the actual contribution percentage, as
determined under Section 9.3(B)(2), for the
Plan Year for eligible employees who
are not Highly Compensated Employees;
plus
(b) the sum of two percentage points plus the greater
of the actual deferral percentage determined under
item (i) of clause (a) above or the actual
contribution percentage determined under item (ii)
of clause (a) above, with such sum in no case
exceeding twice the lesser of such actual deferral
percentage or actual contribution percentage.
(B) If, for any Plan Year, the calculations under Subsection (A)
require that this section be applied, the Administrator will
determine the amount by which Matching Contributions made on
behalf of each Highly Compensated Employee for the Plan Year
causes the excess amount determined under Subsection (A), such
determination being made in accordance with the provisions of
Section 9.3(C). At such time as the Administrator specifies on
or following the last day of the Plan Year for which such
determination is made, but in no case later than the last day of
the following Plan Year, the excess will be corrected by taking
any one or more of the steps described in Sections 9.2(D) and
9.3(D).
(C) To the extent provided in Treasury Regulations, the
limitations described in this section do not apply to any group
of eligible employees who are included in a unit of employees
covered by a collective bargaining agreement.
9.5. Earnings on Excess Contributions.
The amount of Fund earnings or losses with respect to
contributions returned to a Participant pursuant to the
provisions of this article is an amount equal to the product of
the total earnings or losses for the Participant's Account to
which the excess contributions were credited for the Plan Year,
multiplied by a fraction, the numerator of which is the excess
amount of contributions made on the Participant's behalf to such
Account for the Plan Year, and the denominator of which is the
closing balance of such Account for the Plan Year, decreased by
the amount of earnings credited to that Account, or increased by
the amount of losses debited to that Account, for the Plan Year.
9.6. Aggregate Defined Contribution Limitations.
(A) Notwithstanding any contrary provisions of this Plan, there
will not be allocated to any Participant's Accounts for a Plan
Year any amount that would cause the aggregate "annual additions"
with respect to the Participant for the Plan Year to exceed the
lesser of:
(1) $30,000 (or, if greater, one-fourth of the dollar
limitation in effect under Code section 415(b)(1)(A) for
the calendar year during which the Plan Year in question
begins); and
(2) 25 percent of the Participant's Section 415 Wages
for the Plan Year.
(B) For purposes of Subsection (A), the "annual additions" with
respect to a Participant for a Plan Year are the sum of -
(1) the aggregate amount of Pre-Tax, Matching, Voluntary and
Profit Sharing Contributions and forfeitures allocated for the
Plan Year to the Participant's Accounts under the Plan for the
Plan Year (including any Pre-Tax Contributions, Matching
Contributions and Voluntary Contributions that are distributed
pursuant to Section 9.2, 9.3 or 9.4, but excluding any Pre-Tax
Contributions in excess of the limitation of Section 9.1 that
are distributed to the Participant by the April 15 following
the Plan Year to which such contributions relate) and employer
contributions, employee contributions and forfeitures allocated
for the Plan Year to the Participant's accounts under the
Fingerhut Corporation's Fixed Contribution Retirement Plan and
any other qualified defined contribution plan maintained by any
Affiliated Organization; plus
(2) the amount, if any, attributable to post-retirement medical
benefits that is allocated to a separate account for the
Participant as a "key employee" (as defined in Section 14.3(C)),
to the extent required under Code section 419A(d)(1).
(C)
(1) If the Administrator determines that the limitation under
Subsection (A) may otherwise be exceeded for a Plan Year, to
the extent necessary to prevent such excess from occurring,
the amount of a Participant's Pre-Tax Contributions will be
prospectively reduced.
(2) If a further reduction of contributions is required, the
amount of the Matching Contribution that would otherwise be
allocated to the Participant's Matching Account will be reduced
and then the amount of the Profit Sharing Contribution that
would otherwise be allocated to the Participant's Profit
Sharing Account will be reduced and the aggregate amount of
the Matching Contribution and Profit Sharing Contribution for
the Plan Year will be reduce by the same amount.
(3) If, in spite of such reductions and as a result of
reasonable error in estimating the amount of the Participant's
Eligible Earnings or Section 415 Wages for the Plan Year, a
reasonable error in determining the amount of Pre-Tax
Contributions or other elective deferrals within the meaning of
Code section 402(g)(3) permitted under Code Section 415 or other
circumstances specified in Treasury Regulations, the limitation
would otherwise be exceeded, then, to the extent required to
prevent such excess, the amount of Voluntary Contributions made
by the Participant, together with earnings on such
contributions, will be returned to the Participant and then,
the amount of Pre-Tax Contributions made for the Participant,
together with earnings on such contributions, will be
distributed to the Participant and any Matching Contributions
attributable to the amount so distributed, together with
earnings on such contributions,will be forfeited and applied
as provided in Section 3.2(D).
9.7. Aggregate Defined Contribution/Defined Benefit Limitations.
(A) In no event will the amount of a Participant's annual
additions under the Plan for any Plan Year beginning before
January 1, 2000 exceed an amount that would cause the decimal
equivalent of the sum of the "defined benefit fraction" plus the
"defined contribution fraction" to exceed one.
(B) The "defined benefit fraction" is a fraction, the numerator
of which is the Participant's aggregate projected annual benefit
under all qualified defined benefit pension plans maintained by
any Affiliated Organization (determined as of the end of the Plan
Year), and the denominator of which is the lesser of:
(1) 125 percent of the maximum dollar benefit limitation in
effect under Code section 415(b)(1)(A) for the calendar year
during which the Plan Year in question begins; and
(2) 140 percent of the average Section 415 Wages of the
Participant during the three consecutive Plan Years during which
he or she was a Participant in any such defined benefit pension
plan that produce the highest average.
(C) The "defined contribution fraction" is a fraction, the
numerator of which is the sum of the annual additions with
respect to the Participant for the Plan Year under this Plan and
any other qualified defined contribution plans maintained by an
Affiliated Organization, determined in the manner described in
Section 9.6, and the denominator of which is the aggregate of the
lesser of:
(1) 125 percent of the maximum annual addition dollar limit in
effect under Code section 415(c)(1)(A) for the calendar year
during which the Plan Year in question begins; and
(2) 140 percent of 25 percent of the Participant's Section 415
Wages for the Plan Year,
applied for all years during which the Participant was an
Employee, without regard to whether there was a qualified
defined contribution plan in effect during all such years.
(D) If the annual additions that would otherwise be made with
respect to a Participant for a Plan Year would cause the
limitation of Subsection (A) to be exceeded, the Participant's
benefit under one or more qualified defined benefit pension plans
maintained by an Affiliated Organization will, to the extent
provided in such plans, be reduced to the extent necessary to
prevent such excess from occurring, and, if a sufficient
reduction cannot be made under such plans, the provisions of
Section 9.6(C) will be applied to reduce the amount of the annual
additions to the Participant's Accounts under this Plan for such
Plan Year to the extent necessary to prevent such excess.
9.8. Administrator's Discretion.
Notwithstanding the foregoing provisions of this article, the
Administrator may, in his or her discretion, apply the provisions
of Sections 9.1 through 9.7 in any manner permitted by Treasury
Regulations that will cause the Plan to satisfy the limitations
of the Code incorporated in such sections, and the
Administrator's good faith application of Treasury Regulations
will be binding on all Participants and Beneficiaries.
ARTICLE
10.
SERVICE RULES
10.1. Computation Period.
The "Computation Period" is -
(a) for the purpose of determining whether an
Employee has completed one year of Eligibility
Service, the 12-month period commencing with
the date on which he or she first completes an
Hour of Service of the type specified at
Section 10.4(A)(1) and, thereafter, Plan Years,
commencing with the Plan Year that includes
the first anniversary of such date; and
(b) for the purpose of determining the extent of
an Employee's Vesting Service, Plan Years.
If an Employee who terminates employment before completing at
least one year of Eligibility Service again becomes an Employee
after the end of the Computation Period of the type described in
clause (a) during which he or she terminated employment, his or
her previous service will be disregarded in determining his or
her new Computation Period pursuant to clause (a).
10.2. Eligibility Service.
The term "Eligibility Service" with respect to an Employee means
the aggregate number of Computation Periods of the type specified
at clause (a) of Section 10.1 during each of which the Employee
completes at least 1000 Hours of Service.
10.3. Vesting Service.
The term "Vesting Service" with respect to an Employee means,
except as otherwise provided in Section 10.6, the aggregate
number of Computation Periods of the type specified at clause (b)
of Section 10.1 during each of which the Employee completes at
least 500 Hours of Service. In addition, solely for the purpose
of determining the Vesting Service of a Participant who ceases to
be an Employee in connection with the disposition of an
Affiliated Organization or a substantial amount of the operating
assets of an Affiliated Organization, the former Affiliated
Organization or the entity that purchased the assets will be
deemed to be an Affiliated Organization until the Participant's
first termination of employment with the former Affiliated
Organization or entity that purchased the assets following the
disposition.
10.4. Hour of Service.
(A) Subject to the remaining subsections of this
section, the term "Hour of Service," with respect to an
Employee, includes and is limited to -
(1) each hour for which the Employee is paid, or
entitled to payment, for the performance of duties
for an Affiliated Organization;
(2) each hour for which the Employee is paid, or
entitled to payment, by an Affiliated Organization
on account of a period of time during which no duties
are performed (irrespective of whether the employment
relationship has terminated) due to vacation, holiday,
illness (including disability), layoff, jury duty, military
duty or leave of absence;
(3) each hour for which the Employee is not paid or
entitled to payment but which is required by federal
law to be credited to the Employee on account of his or
her military service or similar duties;
(4) each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by an Affiliated
Organization; provided, first, that Hours of Service taken into
account under clause (1) or (2) will not also be taken into
account under this clause (4); and second, that Hours of Service
taken into account under this clause (4) that relate to periods
specified in clause (2) will be subject to the rules under
Subsection (B); and
(5) each hour for which an Employee is not performing duties on
account of disability whether or not such Employee is actually
paid or entitled to payment for such period of time.
(B) The following rules will apply for purposes of determining
the Hours of Service completed by an Employee under Subsection
(A)(2) and (A)(5):
(1) No more than 501 hours will be credited to the Employee on
account of any single continuous period during which the
Employee performs no duties (whether or not such period
occurs in a single Computation Period).
(2) No more than the number of hours regularly scheduled for
the performance of duties for the period during which no duties
are performed will be credited to the Employee for such period.
(3) The Employee will not be credited with hours for which
payments are made solely to reimburse medical or medically
related expenses.
(4) A payment will be deemed to be made by or due from an
Affiliated Organization, regardless of whether such payment is
made by or due from the Affiliated Organization directly or
indirectly through a trust fund or insurer to which the
Affiliated Organization contributes or pays premiums.
(5) If the payment made or due is calculated on the basis of
units of time, the number of Hours of Service to be credited
will be the number of regularly scheduled working hours
included in the units of time on the basis of which the
payment is calculated; provided, that, if such a payment
is made to an Employee described in Subsection (D)(1),
the number of Hours of Service to be credited will be the
number of equivalent hours determined under Subsection (D)(1)
that are included in the units of time on the basis of which
the payment is calculated.
(6) If the payment made or due is not calculated on the basis
of units of time, the number of Hours of Service to be
credited will be equal to the amount of the payment, divided
by the Employee's most recent hourly rate of compensation
before the period during which no duties are performed.
(C) Hours of Service will be credited -
(1) in the case of Hours of Service described in Subsection
(A)(1), to the Computation Period in which the duties are
performed;
(2) in the case of Hours of Service described in Subsection
(A)(2) and (A)(5), to the Computation Period or Periods in which
the period during which no duties are performed occurs;
provided, that, if the payment is not calculated on the basis
of units of time, the Hours of Service will not be allocated
between more than the first two Computation Periods of such
period;
(3) in the case of Hours of Service described in Subsection
(A)(3), to the Computation Period or Periods determined by the
Administrator in accordance with the applicable federal law;
and
(4) in the case of Hours of Service described in Subsection
(A)(4), to the Computation Period or Periods to which the award
or agreement for back pay pertains.
(D) For purposes of determining the number of Hours of Service
completed by an Employee during a particular period of time -
(1) an Employee who is not subject to the overtime provisions
of the Fair Labor Standards Act of 1938, as from time to time
amended, will be credited with 45 Hours of Service for each week
during which he or she completes at least one Hour of Service;
(2) each other Employee will be credited with the number of
Hours of Service that he or she completes during such period.
(E) Notwithstanding the foregoing provisions of this section, an
individual will be credited with the number of Hours of Service
he or she completes, determined in the manner specified in
Subsections (A) through (E),
(1) while, although not an Employee, he or she is considered to
be a "leased employee" of an Affiliated Organization or of a
"related person" (within the meaning of Code sections 414(n)(2)
and 144(a)(3)), respectively, and
(2) with any other organization to the extent such Hours of
Service are required to be taken into account pursuant to
Treasury Regulations under Code section 414(o).
10.5. One-Year Break in Service.
An Employee will incur a "One-Year Break in Service" if the
Employee fails to complete at least 500 Hours of Service during a
Computation Period; provided, that, for purposes only of
determining whether an Employee has incurred such a One-Year
Break in Service, in addition to Hours of Service credited under
Section 10.4, there will be taken into account the number of
Hours of Service that otherwise would have been credited to the
Employee, or, if the number of such hours of service cannot be
determined, eight hours of service for each day on which the
Employee would have otherwise performed services for an
Affiliated Organization, during an authorized leave of absence,
while still employed with the Affiliated Organization, due to -
(a) the Employee's pregnancy,
(b) the birth of the Employee's child,
(c) the placement of a child with the Employee
in connection with the adoption of such child
by the Employee, or
(d) the Employee's caring for such child for a
period beginning immediately following such
birth or placement; provided, first, that the
total number of such additional Hours of
Service taken into account by reason of any
such absence will not exceed 501; second, that,
if the Employee would be prevented from incurring
a One-Year Break in Service for the Computation
Period in which such absence commenced solely
because the additional Hours of Service are so
credited, such Hours of Service will be credited
only to such Computation Period or, if a One-Year
Break in Service for such Computation Period would
not be so prevented, such additional Hours of
Service will be credited to the Computation
Period following the Computation Period during
which such absence commenced; and third, that,
notwithstanding the foregoing, no such
additional Hours of Service will be credited
unless the Employee furnishes to the
Administrator, on a timely basis, such
information as the Administrator reasonably
requires in order to establish the
number of days during which the Employee was
absent for one of the reasons set forth at
items (a) through (d). In addition, an
Employee will be credited with Hours of Service
for the purpose of determining whether he or she
has incurred a One-Year Break in Service to the
extent required by the Family and Medical Leave
Act of 1993.
10.6. Loss of Service.
If an Employee terminates employment and experiences at least
five consecutive One-Year Breaks in Service with respect to his
or her Vesting Service, then:
(a) if the Employee had a vested interest in any
Account prior to the Breaks in Service,
(i) Vesting Service completed prior to such Breaks
in Service will be taken into account in
determining his or her vested interest in his
or her Accounts attributable to contributions
made for periods after the Breaks in Service, and
(ii) the extent of the Employee's vested interest in
his or her Accounts as determined under Section
7.1 prior to the Breaks in Service will not be
increased by Vesting Service completed
following the Breaks in Service;
or
(b) if the Employee had no vested interest in any Account
prior to the Breaks in Service, the Employee's
Vesting Service completed prior to the Breaks in
Service will not be taken into account for any
purpose under the Plan.
10.7. Pre-Acquisition Service.
Service with an Affiliated Organization prior to the date on
which it became an Affiliated Organization (or, with another
entity prior to the acquisition of such entity's business or
assets by an Affiliated Organization) will be taken into account
under this Plan only if, to the extent and for the purposes,
provided in any agreement pursuant to which it became an
Affiliated Organization (or such business or assets were
acquired) or as provided by resolution of the Company's Board.
If such Hours of Service are to be taken into account, unless
otherwise specifically provided in such agreement or resolution,
such Hours of Service will be determined in accordance with the
provisions of this article. If less than the entire period of
employment with an Affiliated Organization prior to its becoming
such (or with another entity prior to the acquisition of its
business or assets) is to be taken into account, the extent to
which such period of employment is to be taken into account will
be specified in an exhibit to the Plan.
10.8. Transition from Elapsed Time.
(A) Eligibility Service. Employees who were employed by an
Affiliated Organization prior to July 1, 1997 will receive credit
for Eligibility Service as follows:
(1) Each Employee will be credited with a number of years of
Eligibility Service equal to the number of one year periods of
Recognized Service credited to the Employee under the Plan as
of July 1, 1997; and
(2) For the Computation Period which includes June 30, 1997,
each Employee employed on such date will receive credit for 1000
Hours of Service for the fractional period of service as of
July 1, 1997.
(B) Vesting Service. The amendment of the Plan converting from
the elapsed time method to the general method of counting Hours
of Service will be effective January 1, 1998, with the provisions
of the Plan regarding Recognized Service continuing through
January 1, 1998. Employees who are employed by an Affiliated
Organization on or prior to December 31, 1997 will receive credit
for Vesting Service as follows:
(1) Each Employee will be credited with a number of years of
Vesting Service equal to the number of one year periods of
Recognized Service credited to the Employee as of January 1,
1998.
(2) On and after January 1, 1998 each Employee will receive
credit for Vesting Service based on all Hours of Service
credited during a Computation Period.
ARTICLE
11.
ADOPTION, AMENDMENT AND TERMINATION
11.1. Adoption by Affiliated Organizations.
An Affiliated Organization may adopt this Plan and become a
Participating Employer with the prior approval of the
Administrator by furnishing to the Administrator a certified copy
of a resolution of its Board adopting the Plan. Any adoption of
the Plan by an Affiliated Organization, however, must either be
authorized by the Company's Board in advance or be ratified by
such Board prior to the end of the fiscal year of such Affiliated
Organization in which it adopts the Plan.
11.2. Authority to Amend and Procedure.
(A) The Company reserves the right to amend the Plan at any
time, to any extent that it may deem advisable. Each amendment
will be stated in a written instrument, approved in advance or
ratified by the Company's Board and executed in the name of the
Company by its President or Vice President and attested by the
Secretary or Assistant Secretary. On and after the effective
date of the amendment, all interested parties will be bound by
the amendment; provided, first, that no amendment will increase
the duties or liabilities of the Trustee without its written
consent; and, second, that no amendment will have any retroactive
effect so as to deprive any Participant, or any Beneficiary of a
deceased Participant, of any benefit already accrued or vested or
of any option with respect to the form of such benefit that is
protected by Code section 411(d)(6), except that any amendment
that is required to conform the Plan with government regulations
so as to qualify the Trust for income tax exemption may be made
retroactively to the Effective Date of the Plan or to any later
date.
(B) If the schedule for determining the extent to which benefits
under the Plan are vested is changed, each Participant with at
least three years of Vesting Service may elect to have his or her
vested benefits determined without regard to such change by
giving written notice of such election to the Administrator
within the period beginning on the date such change was adopted
(or the Plan's top heavy status changed) and ending 60 days after
the latest of (1) the date such change is adopted, (2) the date
such change becomes effective or (3) the date the Participant is
issued notice of such change by the Administrator or the Trustee.
Except as otherwise provided in an amendment permitted by
Treasury Regulations, if an optional form of benefit payment
protected under Code section 411(d)(6) is eliminated, each
Participant may elect to have that portion of the value of his or
her Accounts that was accrued as of the date of such elimination,
distributed in the optional form of benefit payment that was
eliminated.
(C) The provisions of the Plan in effect at the termination of a
Participant's employment will, except as specifically provided
otherwise by a subsequent amendment, continue to apply to such
Participant.
11.3. Authority to Terminate and Procedure.
The Company expects to continue the Plan indefinitely but
reserves the right to terminate the Plan in its entirety at any
time. Each Participating Employer expects to continue its
participation in the Plan indefinitely but reserves the right to
cease its participation in the Plan at any time. The Plan will
terminate in its entirety as of the date specified in a written
instrument adopted and executed in the manner of an amendment.
The Plan will terminate with respect to a particular
Participating Employer as of the date specified by the
Participating Employer in a written instrument approved in
advance or ratified by the Participating Employer's Board and
executed in the name of the Participating Employer by two duly
authorized officers.
11.4. Vesting Upon Termination, Partial Termination or
Discontinuance of Contributions.
Upon termination of the Plan or upon the complete discontinuance
of contributions by all Participating Employers, to the extent
required by Code section 411(d)(3) and Treasury Regulations
thereunder, the Accounts of each affected Participant will, to
the extent funded, vest in full. Upon a partial termination of
the Plan, the Accounts of each Participant as to whom the Plan
has been partially terminated will, to the extent funded, vest in
full.
11.5. Distribution Following Termination, Partial Termination
or Discontinuance of Contributions.
After termination or partial termination of the Plan or the
complete discontinuance of contributions under the Plan, the
Trustee will continue to hold and distribute the Fund at the
times and in the manner provided by Article 8 as if such event
had not occurred or, if the Administrator so directs in
accordance with Treasury Regulations, will distribute to each
Participant the entire balance of his or her Accounts.
ARTICLE
12.
DEFINITIONS, CONSTRUCTION AND INTERPRETATIONS
The definitions and the rules of construction and interpretations
set forth in this article will be applied in construing this
instrument unless the context otherwise indicates.
12.1. Account.
An "Account" with respect to a Participant is any or all of the
accounts maintained on his or her behalf pursuant to Section 4.1,
as the context requires.
12.2. Active Participant.
An "Active Participant" is a Participant who is a Qualified
Employee.
12.3. Administrator.
The "Administrator" of the Plan is the Company or the person to
whom administrative duties are delegated pursuant to Section
13.1, as the context requires.
12.4. Affiliated Organization.
An "Affiliated Organization" is the Company and:
(a) any corporation that is a member of a controlled
group of corporations (within the meaning of Section 1563(a) of
the Code without regard to Code sections 1563(a)(4) and
1563(e)(3)(C)) that includes the Company;
(b) any trade or business (whether or not
incorporated) that is controlled (within the meaning of Code
section 414(c)) by the Company;
(c) any member of an "affiliated service group"
(within the meaning of Code section 414(m)) of which the Company
is a member; or
(d) any other organization that, together with the
Company, is treated as a single employer pursuant to Code section
414(o) and Treasury Regulations;
provided, that, for purposes of applying the limitations set
forth at Sections 9.6 and 9.7 of the Plan, Code section 1563(a)
will be applied by substituting the phrase "more than 50 percent"
for the phrase "at least 80 percent" wherever it appears.
12.5. Board.
The "Board" is the board of directors of the Affiliated
Organization in question. When the Plan provides for an action
to be taken by the Board, the action may be taken by any
committee or individual authorized to take such action pursuant
to a proper delegation by the board of directors in question.
12.6. Beneficiary.
A "Beneficiary" is a person designated or otherwise determined
under the provisions of Section 8.2 as the distributee of
benefits payable after the death of a Participant. A person
designated as, or otherwise determined to be, a Beneficiary under
the terms of the Plan has no interest in or rights under the Plan
until the Participant in question has died. A Beneficiary will
cease to be such on the day on which all benefits to which he or
she is entitled under the Plan have been distributed.
12.7. Code.
The "Code" is the Internal Revenue Code of 1986, as amended. Any
reference to a specific provision of the Code includes a
reference to such provision as it may be amended from time to
time and to any successor provision.
12.8. Company.
The "Company" is Fingerhut Corporation, any successor which will
maintain this Plan and any predecessor that has maintained this
Plan.
12.9. Disabled.
A Participant will be considered to be "Disabled" only if the
Administrator determines that, by reason of illness, bodily
injury or disease, he or she is unable to perform any occupation
for remuneration or profit and the disability is likely to be of
long and indefinite duration or to result in death.
12.10. Effective Date.
The "Effective Date" of the Plan is January 15, 1960.
12.11. Eligible Earnings.
(A) The "Eligible Earnings" of a Participant from a
Participating Employer for any Plan Year is the sum of all
remuneration paid to the Participant by the Participating
Employer during the portion of a Plan Year in which he or she is
an Active Participant that is reportable in the "wages, tips,
other compensation" box of Internal Revenue Form W-2, excluding
(to the extent otherwise included) bonuses paid under a long-term
incentive compensation plan, severance payments, taxable fringe
benefits, taxable lump sum moving expenses and other items of an
unusual or nonrecurring nature specified in Plan Rules, increased
by amounts that are deferred under Section 3.1 as Pre-Tax
Contributions and amounts by which a Participant's wages or
salary is reduced under a Code section 125 cafeteria plan.
(B) Notwithstanding Subsection (A), in no event will a
Participant's Eligible Earnings for any Plan Year be taken into
account to the extent they exceed $150,000 (or such dollar
amount, adjusted to reflect increases in the cost of living, as
in effect under Code section 401(a)(17) for the calendar year
during which the Plan Year begins).
12.12. Employee.
An "Employee" is an individual who performs services for an
Affiliated Organization as a common-law employee of the
Affiliated Organization.
12.13. Fingerhut Stock.
"Fingerhut Stock" means common stock issued by Fingerhut
Companies, Inc.
12.14. Fund.
The "Fund" is the total of all of the assets of every kind and
nature, both principal and income, held in the Trust at any
particular time or, if the context so requires, one or more of
the investment funds described in Section 5.1.
12.15. Governing Law.
To the extent that state law is not preempted by provisions of
the Employee Retirement Income Security Act of 1974, as amended,
or any other laws of the United States, this Plan will be
administered, construed, and enforced according to the internal,
substantive laws of the State of Minnesota, without regard to its
conflict of laws rules.
12.16. Headings.
The headings of articles and sections are included solely for
convenience. If there is a conflict between the headings and the
text, the text will control.
12.17. Highly Compensated Employee.
(A) A "Highly Compensated Employee" for any Plan Year is any
employee who -
(1) at any time during such Plan Year or the preceding Plan
Year, owns or owned (or is considered as owning or having owned
within the meaning of Code section 318) more than five percent
of the outstanding stock of an Affiliated Organization or stock
possessing more than five percent of the total combined voting
power of all outstanding stock of an Affiliated Organization,
or
(2) during the preceding Plan Year -
(a) had compensation in excess of $80,000 (or such dollar
amount, adjusted to reflect increases in the cost of
living, as in effect under Code section 414(q)(1)(B)
for the calendar year during which the Plan Year in
question begins), and
(b) had compensation which exceeded the compensation of
at least 80 percent of all employees, excluding,
for purposes of determining the number of employees
in such group but not for purposes of determining
the specific employees comprising the group, all
employees who
(i) have completed less than six months of service
with the Affiliated Organizations,
(ii) normally work fewer than 17 hours per week for
the Affiliated Organizations,
(iii) normally work for the Affiliated
Organizations during not more than six months during
any calendar year, or
(iv) have not attained age 21.
(B) For purposes of this section,
(1) an "employee" is any individual who is not described in
clause (b) of Section 12.31 and who, during the Plan Year for
which the determination is being made, performs services for an
Affiliated Organization as
(a) a common law employee,
(b) an employee pursuant to Code section 401(c)(1), or
(c) a leased employee who is treated as an employee of an
Affiliated Organization pursuant to Code section
414(n)(2) or 414(o)(2), and
(2) "compensation" for any Plan Year means an employee's
Section 415 Wages for the Plan Year (increased for any Plan Year
beginning before January 1, 1998 by the amount of any reductions
to the employee's compensation for the period in connection with
an election by the employee made pursuant to a plan maintained
by an Affiliated Organization under Code section 125 or 401(k)).
12.18. Matching Account.
The "Matching Account" is the account established pursuant to
Section 4.1(b) to evidence Matching Contributions made on behalf
of a Participant.
12.19. Matching Contributions.
"Matching Contributions" means contributions made pursuant to
Section 3.2 or 3.6.
12.20. Normal Retirement Date.
The "Normal Retirement Date" of a Participant is the day on which
he or she attains age 60.
12.21. Number and Gender.
Wherever appropriate, the singular number may be read as the
plural, the plural may be read as the singular, and the masculine
gender may be read as the feminine gender.
12.22. Participant.
A "Participant" is a current or former Qualified Employee who has
entered the Plan pursuant to the provisions of Article 2 and has
not ceased to be a Participant pursuant to Section 2.6.
12.23. Participating Employer.
A "Participating Employer" is the Company and any other
Affiliated Organization that has adopted the Plan, or all of them
collectively, as the context requires, and their respective
successors. An Affiliated Organization will cease to be a
Participating Employer upon a termination of the Plan as to its
Employees or upon its ceasing to be an Affiliated Organization.
12.24. Plan.
The "Plan" is the Fingerhut Corporation Profit Sharing Plan
established and maintained by this instrument, as from time to
time amended.
12.25. Plan Rule.
A "Plan Rule" is a rule, policy, practice or procedure adopted by
the Administrator.
12.26. Plan Year.
A "Plan Year" is the calendar year.
12.27. Pre-Tax Contribution Account.
The "Pre-Tax Contribution Account" is the account established
pursuant to clause (a) of Section 4.1 to evidence Pre-Tax
Contributions made on behalf of a Participant.
12.28. Pre-Tax Contributions.
"Pre-Tax Contributions" means contributions made pursuant to
Section 3.1.
12.29. Profit Sharing Account.
The "Profit Sharing Account" is the Account established pursuant
to Section 4.1(c) to evidence Profit Sharing Contributions made
on behalf of a Participant.
12.30. Profit Sharing Contributions.
"Profit Sharing Contributions" means contributions made pursuant
to Section 3.3 or 3.5.
12.31. Qualified Employee.
A "Qualified Employee" is an Employee who is a common-law
employee of a Participating Employer (as classified by the
Participating Employer at the time the services are performed
without regard to any subsequent reclassification), excluding,
however, any such person who -
(a) is covered by a collective bargaining agreement, for
whom retirement benefits were the subject of good
faith bargaining between such person's representative
and the Participating Employer, and who is not, as a
result of such bargaining, specifically covered by
this Plan; or
(b) is a nonresident alien who receives no earned income
(within the meaning of Code section 911(d)(2)) from a
Participating Employer that constitutes income from
sources within the United States (within the meaning
of Code section 861(a)(3)); or
(c) performs services for the participating Employer
outside the continental United States (including
Alaska) or Hawaii, or has his or her principal base
of operations to which he or she frequently returns
outside the continental United States (including
Alaska) or Hawaii, other than while on a temporary
assignment for the Participating Employer.
For purposes of this section only, a collective
bargaining agreement will be deemed to continue
after its formal expiration during collective
bargaining negotiations pending the execution
of a new agreement.
12.32. Rollover Account.
The "Rollover Account" is the account established pursuant to
clause (e) of Section 4.1 to evidence the amounts, if any, rolled
over from an individual retirement arrangement or another
qualified plan, or transferred directly from another qualified
plan with respect to a Participant, pursuant to Section 3.4.
12.33. Section 415 Wages.
(A) An individual's "Section 415 Wages" for any period is the
sum of his or her remuneration for the period from all Affiliated
Organizations that constitutes "compensation" within the meaning
of Code section 415(c)(3) and Treasury Regulations thereunder.
(B) Notwithstanding Subsection (A), the Administrator may, in
his or her discretion, for any Plan Year, determine the items of
remuneration that, in accordance with Treasury Regulations, will
be included in Section 415 Wages for such Plan Year; provided
that for each purpose under this Plan, the Administrator's
determination will be uniform throughout any Plan Year.
(C) For any Plan Year beginning before January 1, 1998, Section
415 Wages will not include the amount by which a Participant's
compensation is reduced under Code section 125 or 401(k).
12.34. Spousal Consent.
Whenever the consent of a Participant's spouse is required with
respect to any act of the Participant, such consent will be
deemed to have been obtained only if
(a) the Participant's spouse executes a written consent
to such act, which consent acknowledges the effect
of such act and is witnessed by a Plan representative
or a notary public; or
(b) the Administrator determines that no such consent can
be obtained because the Participant has no spouse,
because the Participant's spouse cannot be located,
or because of such other circumstances as may, under
Treasury Regulations, justify the lack of such consent.
Any such consent by the Participant's spouse or such
determination by the Administrator that such spouse's consent is
not required is effective only with respect to the particular
spouse of the Participant who so consented or with respect to
whom such determination was made. Any such consent by the
Participant's spouse to an act of the Participant under the Plan
is irrevocable with respect to that act.
12.35. Termination of Employment.
(A) For purposes of determining entitlement to a distribution
under this Plan, a Participant will be deemed to have terminated
employment only if he or she has completely severed his or her
employment relationship with all Affiliated Organizations or
become Disabled. Neither transfer of employment among Affiliated
Organizations nor absence from active service by reason of
disability leave, other than in connection with a Participant
becoming disabled, or any other leave of absence will constitute
a termination of employment.
(B) A Participant will be deemed to have terminated employment
in conjunction with the disposition of all or any portion of the
business operation of an Affiliated Organization which is a
disposition of a subsidiary or of substantially all of the assets
used in a trade or business of an Affiliated Organization within
the meaning of Code section 401(k)(10)(A) with respect to which
the requirements of Code section 401(k)(10)(B) and (C) are
satisfied.
(C) A Participant who, in conjunction with the disposition of
all or any portion of a business operation of an Affiliated
Organization which is not described in Subsection (B), transfers
employment to the acquirer of such business operation or to any
affiliate of such acquirer will not be considered to have
terminated employment. If a Participant is deemed to have
continued employment by reason of the preceding sentence, such
sentence will continue to apply to such Participant in the event
of any subsequent transfer of employment in conjunction with the
disposition of all or any portion of a business operation of the
initial acquirer or any subsequent acquirers which is not a
disposition of a subsidiary of such acquirer or of substantially
all of the assets used in a trade or business of such acquirer
within the meaning of Code section 401(k)(10)(A) with respect to
which the requirements of Code section 401(k)(10)(B) and (C) are
satisfied. Except in conjunction with such a disposition of a
subsidiary or substantially all of the assets used in a trade or
business of the seller, such a Participant will be considered to
have terminated employment only when he or she has severed the
employment relationship with all such acquirers and their
affiliates.
12.36. Testing Wages.
(A) An individual's "Testing Wages" for any period is his or her
Section 415 Wages for the period (increased for any Plan Year
beginning before January 1, 1998 by the amount by which a
Participant's compensation for the period is reduced in
connection with an election by the individual under a plan
maintained by an Affiliated Organization pursuant to Code section
125 or Code section 401(k)).
(B) In no event will an individual's Testing Wages for any Plan
Year be taken into account to the extent it exceeds $150,000 (or
such dollar amount, adjusted to reflect increases in the cost of
living, as in effect under Code section 401(a)(17) for the
calendar year during which the Plan Year begins).
(C) The Administrator may, in his or her discretion, for any
Plan Year, adopt any alternative definition of Testing Wages that
complies with Code section 414(s) and Treasury regulations
thereunder; provided, that for each purpose under this Plan, the
Administrator's determination will be uniform throughout any Plan
Year.
12.37. Treasury Regulations.
"Treasury Regulations" mean regulations, rulings, notices and
other promulgations issued under the authority of the Secretary
of the Treasury that apply to, or may be relied upon in the
administration of, this Plan.
12.38. Trust.
The "Trust" that is created by the Company for purposes of
implementing benefits under the Plan, and may, as from time to
time amended, be referred to as the "Fingerhut Plans Master
Trust."
12.39. Trustee.
The "Trustee" is the corporation and/or individual or individuals
who from time to time is or are the duly appointed and acting
trustee or trustees of the Trust.
12.40. Voluntary Contributions.
"Voluntary Contributions" means contributions made pursuant to
the provisions of the Plan in effect prior to July 1, 1997.
12.41. Voluntary Account.
"Voluntary Account" is the account established and maintained
under Section 4.1(d) to evidence the amount of a Participant's
Voluntary Contributions, if any, made to the Plan.
ARTICLE
13.
ADMINISTRATION OF PLAN
13.1. Administrator, Named Fiduciary.
The general administration of the Plan and the duty to carry out
its provisions will be vested in the Company, which will be the
"named fiduciary" of the Plan for purposes of the Employee
Retirement Income Security Act of 1974. Except in cases where
the Plan expressly requires action on behalf of the Company to be
taken by its Board of Directors, action on behalf of the Company
may be taken by any of the following:
(1) Board of Directors of the Company;
(2) the President and Chief Operating Officer of the Company;
(3) any person or persons, natural or otherwise, or committee,
to whom responsibilities for the operation and administration
of the Plan are allocated by the Company, by resolution of its
Board of Directors, but action of such person or persons, or
committee shall be within the scope of said allocation;
(4) any person or persons, natural or otherwise, or committee,
to whom responsibilities for the operation and administration of
the Plan are allocated by the Company, by written instrument
executed by the President and Chief Operating Officer of the
Company, but action of such person or persons or committee shall
be within the scope of said allocation. A copy of each such
written instrument shall be delivered to the secretary of the
Company and filed with its permanent records.
13.2. Compensation and Expenses.
An Employee performing administrative duties in connection with
the Plan will receive no compensation from the Fund for such
services, but may be reimbursed from the Fund for all sums
reasonably and necessarily expended in the performance of such
duties. The Administrator may retain such independent
accounting, legal, clerical and other services as may reasonably
be required in the administration of the Plan and may pay
reasonable compensation from the Fund for such services. Any
such reimbursement or compensation and all other costs of
administering the Plan will, to the extent not paid by the
Participating Employers, be paid by the Trustee from the Fund
upon statements issued by the Administrator.
13.3. Plan Rules.
The Administrator has the discretionary power to make, amend and
rescind such Plan Rules as he or she deems to be necessary or
advisable. Plan Rules will be uniform and nondiscriminatory with
respect to persons determined by the Administrator to be
similarly situated.
13.4. Administrator's Discretion.
The Administrator has the discretionary power and authority to
make all determinations necessary for administration of the Plan,
except those determinations that the Plan requires others to
make, and to construe, interpret, apply and enforce the
provisions of the Plan and Plan Rules, including the
discretionary power and authority to remedy ambiguities,
inconsistencies, omissions and erroneous Account balances. In
the exercise of discretionary powers, the Administrator will
treat all persons determined by the Administrator to be similarly
situated in a uniform and nondiscriminatory manner.
13.5. Indemnification.
The Participating Employers jointly and severally agree to
indemnify and hold harmless, to the extent permitted by law, each
director, officer, and employee of any Affiliated Organization
against any and all liabilities, losses, costs and expenses
(including legal fees) of every kind and nature that may be
imposed on, incurred by, or asserted against such person at any
time by reason of such person's services in connection with the
Plan, but only if such person did not act dishonestly or in bad
faith or in willful violation of the law or regulations under
which such liability, loss, cost or expense arises. The
Participating Employers have the right, but not the obligation,
to select counsel and control the defense and settlement of any
action for which a person may be entitled to indemnification
under this provision.
13.6. Benefit Claim Procedure.
If a request for a benefit by a Participant or Beneficiary of a
deceased Participant is denied in whole or in part, he or she
may, within 30 days after receipt of notice of the denial, file
with the Administrator a written claim objecting to the denial.
(Such a claim must be made to the Administrator prior to filing
any sort of lawsuit.) Not later than 90 days after receipt of
such claim, the Administrator will render a written decision on
the claim to the claimant. If the claim is denied in whole or in
part, such decision will include: the reasons for the denial; a
reference to the Plan provision that is the basis for the denial;
a description of any additional material or information necessary
for the claimant to perfect the claim; an explanation as to why
such information or material is necessary; and an explanation of
the Plan's claim procedure. Not later than 60 days after
receiving the Administrator's written decision, the claimant may
file with the Administrator a written request for review of the
Administrator's decision, and the claimant or the representative
may thereafter review Plan documents that relate to the claim and
submit written comments to the Administrator. Not later than 60
days after the Administrator's receipt of the request for review,
the Administrator will render a written decision on the claim,
which decision will include the specific reasons for the
decision, including reference to specific Plan provisions where
appropriate. The 90- and 60-day periods during which the
Administrator must respond to the claimant may be extended by up
to an additional 90 or 60 days, respectively, if circumstances
beyond the Administrator's control so require and if notice of
such extension is given to the claimant. A claimant must exhaust
the procedure described in this section before making any claim
of entitlement to benefits or objecting to any claim denial in
any court or other proceeding.
13.7. Correction of Errors.
If the Administrator determines that, by reason of administrative
error or other cause attributable to a Participating Employer,
the Account of any Participant has incurred a loss, the
Administrator may enter into an agreement with such Participating
Employer under which the Account is fully restored and may, upon
such restoration, release the Participating Employer from further
responsibility.
ARTICLE
14.
MISCELLANEOUS
14.1. Merger, Consolidation, Transfer of Assets.
If this Plan is merged or consolidated with, or its assets or
liabilities are transferred to, any other plan, each Participant
will be entitled to receive a benefit immediately after such
merger, consolidation or transfer (if such other plan were then
terminated) that is equal to or greater than the benefit he or
she would have been entitled to receive immediately before such
merger, consolidation or transfer (if this Plan had then
terminated).
14.2. Limited Reversion of Fund.
(A) Except as provided in Subsection (B), no corpus or income of
the Trust will at any time revert to Participating Employer or be
used other than for the exclusive benefit of Eligible Employees,
Participants and Beneficiaries by paying benefits and, if
applicable, administrative expenses of the Plan.
(B) Notwithstanding any contrary provision in the Plan,
(1) All contributions made by a Participating Employer to the
Trustee prior to the initial determination of the Internal
Revenue Service as to qualification of the Plan under Section
401(a) of the Code and the tax exempt status of the Trust under
Code section 501(a) will be repaid by the Trustee to such
Participating Employer, upon the Participating Employer's
written request, if the Internal Revenue Service rules that
the Plan, as adopted by that Participating Employer, is not
qualified or the Trust is not tax exempt; provided, that the
Participating Employer requests such determination within a
reasonable time after adoption of the Plan, and the repayment
by the Trustee to such Participating Employer is made within
one year after the date of denial of qualification of the Plan;
and
(2) To the extent a contribution is made by a Participating
Employer by a mistake of fact or a deduction is disallowed a
Participating Employer under Code section 404, the Trustee will
repay the contribution to such Participating Employer upon the
Participating Employer's written request; provided, that such
repayment is made within one year after the mistaken payment is
made or the deduction is disallowed, as the case may be. The
amount returned to the Participating Employer will not include
any investment gains or earnings but will be reduced by any
investment losses. Each contribution to the Plan by a
Participating Employer is expressly conditioned on such
contribution's being fully deductible by the Participating
Employer under Code section 404.
14.3. Top-Heavy Provisions.
(A)
(1) Notwithstanding the provisions of Sections 3.1, 3.2 and
3.3, for any Plan Year during which the Plan is a top-heavy
plan, the amount of contributions (excluding Pre-Tax
Contributions) made and allocated for such Plan Year on
behalf of each Active Participant who is not a key employee
and who is employed with an Affiliated Organization on the last
day of the Plan Year, expressed as a percentage of the
Participant's Testing Wages for the Plan Year, must be at
least equal to the lesser of
(a) three percent, or
(b) the largest percentage of such Testing Wages at which
contributions (including Pre-Tax Contributions) are
made and allocated on behalf of any key employee for
such Plan Year.
(2) If, in addition to this Plan, an Affiliated Organization
maintains another qualified defined contribution plan or one or
more qualified defined benefit pension plans during a Plan Year,
the provisions of clause (1) will be applied for such Plan Year
(a) by taking into account the employer contributions
(other than elective deferrals for a non-key
employee) on behalf of the Participant under all
such defined contribution plans;
(b) without regard to any Participant who is not a key
employee and whose accrued benefit, expressed as a
single life annuity, under a defined benefit pension
plan maintained by the Affiliated Organization for
such Plan Year is not less than the product of -
(i) the Participant's average Testing Wages for the
period of consecutive years not exceeding the
period of consecutive years (not exceeding five)
when the Participant had the highest aggregate
Testing Wages, disregarding years in which the
Participant completed less than 1000 Hours of
Service, multiplied by
(ii) the lesser of (A) two percent per year of service,
disregarding years of service beginning after the
close of the last Plan Year in which such defined
benefit plan was a top heavy plan, or (B) 20
percent.
(B) For purposes of Subsection (A),
(1)
(a) The Plan will be a "top-heavy plan" for a particular
Plan Year if, as of the last day of the initial Plan
Year or, with respect to any other Plan Year, as of
the last day of the preceding Plan Year, the
aggregate of the Account balances of key employees
is greater than 60 percent of the aggregate of the
Account balances of all Participants.
(b) For purposes of calculating the aggregate Account
balances for both key employees and employees who
are not key employees:
(i) Any distributions made within the five-year
period preceding the Plan Year for which the
determination is being made, other than a
distribution transferred or rolled over to a
plan maintained by an Affiliated Organization,
will be included;
(ii) Amounts transferred or rolled over from a plan
not maintained by an Affiliated Organization at
the initiation of the Participant will be
excluded;
(iii) The Account balances of any key employee and any
employee who is not a key employee who has not
performed an Hour of Service of the type
specified in Section 10.4(A)(1) at any time
during the five-year period ending on the date
as of which the determination is being made
will be excluded; and
(iv) The terms "key employee" and "employee" will
include the Beneficiaries of such persons who
have died.
(2)
(a) Notwithstanding the provisions of clause (1), this
Plan will not be a top-heavy plan if it is part of
either a "required aggregation group" or a
"permissive aggregation group" and such aggregation
group is not top-heavy. An aggregation group will
be top-heavy if the sum of the present value of
accrued benefits and account balances of key
employees is more than 60 percent of the sum of
the present value of accrued benefits and account
balances for all Participants, such accrued
benefits and account balances being calculated
in each case in the same manner as set forth in
clause (1).
(b) Each plan in a required aggregation group will be
top-heavy if the group is top-heavy. No plan in a
required aggregation group will be top-heavy if the
group is not top-heavy.
(c) If a permissive aggregation group is top-heavy, only
those plans that are part of an underlying top-heavy,
required aggregation group will be top-heavy. No plan
in a permissive aggregation group will be top-heavy
if the group is not top-heavy.
(3) The "required aggregation group" consists of (i) each plan
of an Affiliated Organization in which a key employee
participates, and (ii) each other plan of an Affiliated
Organization that enables a plan in which a key employee
participates to meet the nondiscrimination requirements of Code
sections 401(a)(4) and 410.
(4) A "permissive aggregation group" consists of those plans
that are required to be aggregated and one or more plans
(providing comparable benefits or contributions) that are not
required to be aggregated, which, when taken together, satisfy
the requirements of Code sections 401(a)(4) and 410.
(5) For purposes of applying clauses (2), (3) and (4) of this
Subsection (B), any qualified defined contribution plan
maintained by an Affiliated Organization at any time within the
five-year period preceding the Plan Year for which the
determination being made which, as of the date of such
determination, has been formally terminated, has ceased
crediting service for benefit accruals and vesting and has
been or is distributing all plan assets to participants or their
beneficiaries, will be taken into account to the extent required
or permitted under such clauses and under Code section 416.
(C) A "key employee" is any individual who is or was employed
with an Affiliated Organization and who, at any time during the
Plan Year in question or any of the preceding four Plan Years is
or was:
(1) An officer of the Affiliated Organization (an
administrative executive in regular and continued service
with the Affiliated Organization) whose compensation for such
Plan Year exceeds 50 percent of the amount in effect under
Code section 415(b)(1)(A) for such Plan Year, but in no case
will there be taken into account more than the lesser of (a)
50 individuals or (b) the greater of (i) three individuals or
(ii) ten percent of the number of the Affiliated Organization
employees, excluding for purposes of determining the number of
such officers, any employees that are excluded pursuant to
Section 12.17(A)(2)(b);
(2) The owner of an interest in the Affiliated Organization,
that is not less than the interest owned by at least ten other
individuals employed with the Affiliated Organization; provided,
that, such owner will not be a key employee solely by reason of
such ownership for a Plan Year if he or she does not own more
than one-half of one percent of the value of the outstanding
interests of the Affiliated Organization or if the amount of his
or her compensation for such Plan Year is less than the amount
in effect under Code section 415(c)(1)(A) for such Plan Year;
(3) The owner of more than five percent of the Affiliated
Organization's outstanding stock or more than five percent of
the total combined voting power of the Affiliated Organization
stock; or
(4) The owner of more than one percent of the Affiliated
Organization's outstanding stock or more than one percent of the
total combined voting power of the Affiliated Organization's
stock, whose compensation for such Plan Year exceed $150,000.
For purposes of this Subsection (C), the term
"compensation" has the same meaning as in Section 12.17(B)
(2) and ownership of an Affiliated Organization stock will
be determined in accordance with Code section 318;
provided, that subparagraph 318(a)(2)(C) will be applied by
substituting the phrase "5 percent" for the phrase "50 percent"
wherever it appears in such Code section.
(D) If an Affiliated Organization maintains a qualified defined
contribution plan and a qualified defined pension plan, the
limitation on combined contributions and accrued benefits will be
adjusted by substituting "100 percent" for "125 percent" in the
definitions of the defined benefit fraction and the defined
contribution fraction in Section 9.7; provided, first, that this
Subsection (D) will be applied prospectively only to prohibit
additional contributions allocated, and forfeitures reallocated,
to and defined benefit accruals for, a Participant and will not
reduce any allocations or reallocations made to, or benefits
accrued for, such Participant prior to the Plan Year for which it
first becomes effective; and, second, that if the Plan would not
be a top heavy plan if "90 percent" were substituted for "60
percent" in clause (1)(a) of Subsection (B), this Subsection (D)
will not apply if -
(1) the aggregate employer contribution (other than elective
contributions) under all such qualified defined contribution
plans on behalf of each Participant who is not a key employee
and who is employed with an Affiliated Organization on the last
day of the Plan Year is not less than seven and one-half
percent of his or her Testing Wages for the Plan Year, or
(2) the accrued benefit for each Participant under the
qualified defined benefit pension plan is not less than the
benefit described in Subsection (A)(2)(b), applied by
substituting "3 percent" for "2 percent" in item (A) of clause
(ii) and "30 percent" for "20 percent" in item (B) of clause
(ii).
14.4. No Employment Rights Created.
The establishment and maintenance of the Plan neither give any
Employee a right to continuing employment nor limit the right of
an Affiliated Organization to discharge or otherwise deal with
the Employee without regard to the effect such action might have
on his or her initial or continued participation in the Plan.
14.5. Special Provisions.
Special provisions of the Plan applicable only to certain
Participants will be set forth on an exhibit to the Plan. In the
event of a conflict between the terms of the exhibit and the
terms of the Plan, the exhibit controls.
14.6. USERRA.
(A) The provisions of this Section 14.6 apply only to a
Qualified Employee whose reemployment rights are protected under
the Uniformed Services Employment and Reemployment Rights Act of
1994 ("USERRA") and are intended to comply with the requirements
of Code section 414(u).
(B) Notwithstanding any other provisions of this Plan to the
contrary, any Qualified Employee who leaves the employ of a
Participating Employer for qualified military service and returns
to employment with a Participating Employer will be entitled to
the restoration of benefits under this Plan which would have
accrued but for the Qualified Employee's absence due to qualified
military service.
(C) The Qualified Employee shall be entitled to make Voluntary
Contributions to the Plan subject only to the limitations of the
Plan with respect to Voluntary Contributions applicable for the
Plan Year to which the contribution relates and not those
applicable to the Plan Year in which the contribution is made.
(D) The Participating Employer shall make Pre-Tax Contributions
to the Plan on behalf of the Qualified Employee for the Plan
Years during which the Qualified Employee has qualified military
service in the amount by which the Participant's Eligible
Earnings have been reduced in accordance with Section 3.1 and the
following additional rules:
(1) the Qualified Employee may elect to make additional
reductions of his Eligible Earnings subject to the maximum
amount the Employee may have reduced his or her Eligible
Earnings during the period of qualified military service;
(2) the Employee may elect to reduce his Eligible Earnings
under this Section 14.6(D) at any time during the period
which begins on his or her date of reemployment and has
the same length as the lesser of five years or the period
of the Employee's qualified military service multiplied by
three;
(3) the additional Pre-Tax Contributions under this Section
14.6(D) are not subject to the Actual Deferral Percentage
Limitation of Section 9.2.
(E) The Participating Employer will make any additional Matching
Contributions with respect to the Qualified Employee's Pre-Tax
Contributions under Section 3.2 which would have been required if
such Pre-Tax Contributions had actually been made during the
Qualified Employee's period of qualified military service. These
additional Matching Contributions are not subject to the Actual
Contribution Percentage Limitations of Section 9.3.
(F) The Participating Employer's obligation to contribute
restored benefits to the Plan on behalf of a reemployed Qualified
Employee is subject to the following rules and conditions:
(1) the Qualified Employee shall not be treated as having
incurred a One-Year Break in Service within the meaning of
Section 10.5 by reason of his or her qualified military service;
(2) any period of qualified military service shall be treated
as Vesting Service under Section 10.3 with respect to the
Participating Employer;
(3) for purposes of Section 3.4(B)(1), a Qualified Employee
shall be treated as employed by the Participating Employer and
accruing service during any period of qualified military
service;
(4) for purposes of determining the Qualified Employee's
Eligible Earnings and Section 415 Wages, the Qualified Employee
shall be treated as receiving compensation from the
Participating Employer during the period of qualified
military service in an amount equal to the compensation
he or she would have received during such period if he or
she were not in qualified military service determined
based on the rate of pay the Qualified Employee would
have received from the Participating Employer but
for the absence due to qualified military service; provided,
however, if the compensation the Qualified Employee would have
received from the Participating Employer is not reasonably
certain, then the Qualified Employee's rate of compensation will
be equal to his or her average compensation for the 12-month
period preceding the qualified military service (or, if shorter,
the period of employment immediately preceding the qualified
military service);
(5) contributions to the Trust on behalf of the Qualified
Employee will be subject to the limitations of Article IX only
with respect to the Plan Years to which such contribution
relates;
(6) the Qualified Employee will not be entitled to any
crediting of earnings on contributions for any period prior
to actual payment to the Trust; and
(7) the Qualified Employee will not be entitled to restoration
of any forfeitures which were not allocated to his or her
Account as a result of his or her qualified military service.
(G) For purposes of this Section 14.6, "qualified military
service" means any service in the uniformed services as defined
in USERRA by a Qualified Employee who is entitled to reemployment
rights with a Participating Employer under USERRA.
EXHIBIT A
Special Rules applicable to Employees of Customer
Communications Center, Inc.
This Exhibit A sets forth special rules applicable to
Employees of Customer Communications Center, Inc. ("CCCI") in
connection with the adoption of the Plan by CCCI.
1. For purposes of the definition of "Qualified Employee"
under Section 12.28, a Qualified Employee shall be any Employee
of CCCI who has transferred from the employment of an Affiliated
Organization and immediately prior to such transfer was an Active
Participant under the Plan.
Exhibit 10.k
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
1997 KEY MANAGEMENT INCENTIVE BONUS PLAN
JANUARY 1997
Participation in this Plan is limited to officers, directors and
managers of Fingerhut Companies, Inc., and subsidiaries
recommended by the Senior Vice President of the functional area,
and approved by the Director of Compensation, Benefits and HRIS,
the Senior Vice President Human Resources and the Chief Executive
Officer. The intent of the Plan is to pay bonus amounts at the
par goal based on: (1) bonus percentages specified on an
Individual Opportunity Statement, (2) Company financial
performance, (which includes performance of the overall Company
and the performance of designated business unit(s)), and (3)
achievement of individual objectives.
For the Chief Executive Officer, 100% of the bonus amount will be
determined by overall Company financial performance. For all
others, the Individual Opportunity Statement specifies the
weighting of Company financial performance allocated between
overall Company performance and performance of designated
business unit(s).
This Plan will be effective for the fiscal year commencing
January 1, 1997, but the Company may change, modify or terminate
the Plan at any time, including adding or deleting business
units.
Eligibility
1. Participation in the Plan is limited to officers, directors
and managers of Fingerhut Companies, Inc. and subsidiaries
who are recommended and approved.
2. Each participant will receive an Individual Opportunity
Statement specifying the par goal percentage payment
opportunity. Maximum performance achievement will pay out
two times this par opportunity, while threshold performance
earns one-half of this par opportunity.
3. No bonus award will be made if a participant leaves the
employ of the Company prior to the last day of the
measurement period. The only exceptions to this will be for
death, retirement, disability, or transfer to an affiliate
company and in these situations a prorated bonus award will
be made.
In the event of a prorated award the participant may be paid
a bonus for the time during the bonus period that he or she
was a participant. In the event of an involuntary
termination, the company will have complete discretion to
pay or not pay a bonus and to adjust the bonus amount in
whatever way the Company deems appropriate.
4. A new participant who becomes eligible to participate in the
Plan during a bonus period may be paid a bonus in proportion
to the time during the bonus period that he or she was a
participant. A participant whose position and bonus
percentage opportunities change during the year shall
receive an adjusted bonus based on performance in each
position held and proportional in amount to the period each
position was held. This adjustment will apply to both
Company and individual performance objectives.
Definition of Salary and Benefits
1. Salary shall be defined as paid base salary earnings during
the fiscal year exclusive of any benefits and other
payments.
2. Bonus amounts paid under the Plan shall be included for
purposes of determining benefits from the Fingerhut
Corporation Pension and Profit Sharing Plans.
Payment Examples
The algorithm yielding the individual bonus payment for all
participants will be as follows:
Paid Base Par Overall Business Individual Bonus
Earnings X Bonus X Company + Unit(s) + Performance = Amount
Percent Performance Performance Factor
Factor
Example - At Par Performance
- - A participant earns $100,000 salary
- - Par bonus percentage is 50% of paid base salary earnings
- - Company performance factor is allocated 10% to overall
Company financial performance and 55% to designated business
unit objectives
- - Individual objectives factor weight is 35%
- - Overall Company performance factor, business unit and
individual objectives are achieved at par goal
Salary X 50% X (10% + 55% + 35%) = Bonus Amount
$100,000 X 50% X 100% = $ 50,000
Example - Above Par Goal Performance at 75th percentile
- - A participant earns $100,000 salary
- - Par bonus percentage is 50% of paid base salary earnings
- - Company performance factor is allocated 10% to overall
Company financial performance and 55% to business unit
objectives
- - Individual objectives factor weight is 35%
- - Overall Company performance factor, business unit and
individual objectives are achieved at 150% of goal.
Salary X 50% X (15% + 82.5%+52.5%) = Bonus Amount
$100,000 X 50% X 150% = $ 75,000
Example - At Threshold Goal Performance
- - A participant earns $100,000 salary
- - Par bonus percentage is 50% of paid base salary earnings
- - Company performance factor is allocated 10% to overall
Company financial performance and 55% to team objectives
- - Individual objectives factor weight is 35%
- - Overall Company performance factor, business unit and
individual objectives achieved below goal at 50%
Salary X 50% X (5% + 27.5% + 17.5) = Bonus Amount
$100,000 X 50% X 50% = $ 25,000
Other Plan Provisions
1. In the event the minimum Plan threshold for payout for the
Retail performance factor is not attained, no payout will be
made for the Retail factor or the individual MBO.
2. For individual factor awards to earn over 100%, the Retail
Business must meet or exceed its par level financial target.
To earn individual payouts above par level, the performance
level of the objective must be high, and the supervisor must
indicate on the MBO if payment should be made at threshold,
par, 75th percentile or maximum level. This allows for
additional reward incentive on some or all of the individual
MBO's.
3. Payment of bonus awards will be made in cash and will
include required payroll deductions after the actual results
have been reviewed by the Chief Financial Officer and
approved by the Chief Executive Officer. The bonus payments
will occur as soon as practical after the approval date.
4. The Plan is self-funding. Thus, the financial objectives of
the Retail Business must be met after the effect of any
bonus payments.
5. The Chief Executive Officer may make discretionary bonus
payments to participants over and above the defined formula
for (i) extraordinary performance or (ii) in other
cases, upon the recommendation of the Executive Compensation
Committee where determined by the Committee to be warranted.
6. If significant unforeseen results affect the Company's
business positively or negatively during the year, that were
not included in the Company performance goal and/or business
unit(s) goal for the year, the financial performance goal may
be adjusted to reflect the effects of such unplanned events.
Such unplanned situations shall include but are not limited to:
A. Unplanned acquisitions/new business ventures
B. Unplanned divestitures
C. The inclusion or exclusion of new participants under
the Plan as mentioned in items A and B.
The Chief Executive Officer will make a recommendation on
the appropriate adjustment of such an unplanned situation on
this Plan, and the Board Compensation Committee will decide
upon any such adjustment.
Approvals
1. The head of each Department will recommend individual
objectives and the weighting between overall Company
performance and business unit(s) performance at the start of
the measurement period. Each such officer will recommend
and justify the weighting of the company performance factor,
objectives, and performance factors for participating
officers. The decision of the Chief Executive Officer will
be final and conclusive with respect to the establishment of
Company performance factor weightings, objectives, and
performance of the participants.
2. Achievement of objectives ratings of the participants will
be reviewed, recommended and submitted by the appropriate
officer to the next two levels of management for approval.
Final determination and approval of satisfaction of Plan
objectives and bonus amounts will be by the Chief Executive
Officer.
3. The administration of the Key Management Incentive Bonus
Plan is the responsibility of the Compensation, Benefits and
HRIS Department.
FINGERHUT COMPANIES, INC.
AND SUBSIDIARIES
GUIDELINES FOR ESTABLISHING INDIVIDUAL
PERFORMANCE OBJECTIVES
1. Key Management Incentive Bonus Plan (KMIBP) participants
will meet with the appropriate Officer prior to the beginning of
the measurement period to discuss specific results to be achieved
during the year.
2. The participant will then draft and submit to the Officer
goals to be accomplished during the year. These objectives must
be written on the KMIBP MBO form. The participant and Officer will
then recommend achievement rating points to each
objective. Points assigned should reflect the priority of
the objective; i.e. higher priority objectives should carry more
points.
3. Characteristics of Well Developed Objectives - To be
meaningful, individual performance objectives (MBO's) should
be:
Challenging - The objective should present a challenge to
the participant.
Attainable - The objective should be both realistic and
achievable.
Measurable - The objective should be as specific and
quantitative as possible. It should be expressed in
tangible and measurable terms. If it is not quantifiable,
the results of the achievement should be verifiable.
Relevant - There should be a clear and direct relationship
between the objective and the Company's goals.
4. Performance objectives require the approval of the next
level of management. The Chief Executive Officer reserves
the right to add, delete, or change recommended objectives.
5. At the end of each quarter, and at fiscal year end, the
participant and the appropriate Officer will review results
against objectives. The final rating at the end of the
measurement period will determine the bonus amount paid.
Exhibit 10.o
FINGERHUT CORPORATION
DEFERRED COMPENSATION PLAN
Effective January 1, 1998
Purpose
The purpose of this Plan is to provide specified benefits to
a select group of management and highly compensated Employees who
contribute materially to the continued growth, development and
future business success of Fingerhut Corporation, a Minnesota
corporation, and its subsidiaries, if any, that sponsor this Plan.
This Plan shall be unfunded for tax purposes and for purposes of
Title I of ERISA.
ARTICLE 1
Definitions
For purposes of this Plan, unless otherwise clearly apparent
from the context, the following phrases or terms shall have the
following indicated meanings:
1.1 "Account Balance" shall mean, with respect to a Participant,
a credit on the records of the Employer equal to the sum of
(i) the Deferral Account balance, (ii) the vested Company
Contribution Account balance and (iii) the vested Company
Restoration Account balance. The Account Balance, and each
other specified account balance, shall be a bookkeeping entry
only and shall be utilized solely as a device for the
measurement and determination of the amounts to be paid to a
Participant, or his or her designated Beneficiary, pursuant
to this Plan.
1.2 "Annual Bonus" shall mean any compensation, in addition to
Base Annual Salary relating to services performed during any
calendar year, whether or not paid in such calendar year or
included on the Federal Income Tax Form W-2 for such calendar
year, payable to a Participant as an Employee under any
Employer's annual bonus and cash incentive plans, excluding
stock options and severance pay or other payments made on
account of an Employee's Termination of Employment.
1.3 "Annual Company Contribution Amount" shall mean, for any one
Plan Year, the amount determined in accordance with Section
3.5.
1.4 "Annual Company Restoration Amount" for any one Plan Year
shall be the amount determined in accordance with Section
3.6.
1.5 "Annual Deferral Amount" shall mean that portion of a
Participant's Base Annual Salary and Annual Bonus that a
Participant elects to have, and is deferred, in accordance
with Article 3, for any one Plan Year. In the event of a
Participant's Termination of Employment prior to the end of a
Plan Year, such year's Annual Deferral Amount shall be the
actual amount withheld prior to such event.
1.6 "Annual Installment Method" shall be an annual installment
payment over the number of years selected by the Participant
in accordance with this Plan, calculated as follows: The
Account Balance of the Participant shall be calculated as of
the close of business on the last business day of the year.
The annual installment shall be calculated by multiplying
this balance by a fraction, the numerator of which is one,
and the denominator of which is the remaining number of
annual payments due the Participant. By way of example, if
the Participant elects a 10 year Annual Installment Method,
the first payment shall be 1/10 of the Account Balance,
calculated as described in this definition. The following
year, the payment shall be 1/9 of the Account Balance,
calculated as described in this definition. Each annual
installment shall be paid on or as soon as practicable after
the last business day of the applicable year.
1.7 "Base Annual Salary" shall mean the annual cash compensation
relating to services performed during any calendar year,
whether or not paid in such calendar year or included on the
Federal Income Tax Form W-2 for such calendar year, excluding
bonuses, commissions, overtime, fringe benefits, stock
options, relocation expenses, incentive payments, non-
monetary awards, directors fees and other fees, automobile
and other allowances paid to a Participant for employment
services rendered (whether or not such allowances are
included in the Employee's gross income), and severance pay
or other payments an account of the Employee's Termination of
Employment. Base Annual Salary shall be calculated before
reduction for compensation voluntarily deferred or
contributed by the Participant pursuant to all qualified or
non-qualified plans of any Employer and shall be calculated
to include amounts not otherwise included in the
Participant's gross income under Code Sections 125,
402(e)(3), 402(h), or 403(b) pursuant to plans established by
any Employer; provided, however, that all such amounts will
be included in compensation only to the extent that, had
there been no such plan, the amount would have been payable
in cash to the Employee.
1.8 "Beneficiary" shall mean one or more persons, trusts, estates
or other entities, designated in accordance with Article 7,
that are entitled to receive benefits under this Plan upon
the death of a Participant.
1.9 "Beneficiary Designation Form" shall mean the form
established from time to time by the Committee that a
Participant completes, signs and returns to the Committee to
designate one or more Beneficiaries.
1.10 "Board" shall mean the board of directors of the Company.
1.11 "Change in Control" shall mean the first to occur of any of
the following events:
(a) Any "person" (as that term is used in Section 13 and
14(d)(2) of the Securities Exchange Act of 1934
("Exchange Act")) becomes the beneficial owner (as that
term is used in Section 13(d) of the Exchange Act),
directly or indirectly, of 50% or more of the Parent's
capital stock entitled to vote in the election of
directors;
(b) During any period of not more than two consecutive
years, not including any period prior to the adoption of
this Plan, individuals who at the beginning of such
period constitute the board of directors of the Parent,
and any new director (other than a director designated
by a person who has entered into an agreement with the
Parent to effect a transaction described in clause (a),
(c), (d) or (e) of this Section 1.11) whose election by
the board of directors or nomination for election by the
Parent's stockholders was approved by a vote of at least
three-fourths (3/4ths) of the directors then still in
office who either were directors at the beginning of the
period or whose election or nomination for election was
previously so approved, cease for any reason to
constitute at least a majority thereof;
(c) The shareholders of the Parent approve any consolidation
or merger of the Parent, other than a consolidation or
merger of the Parent in which the holders of the common
stock of the Parent immediately prior to the
consolidation or merger hold more than 50% of the common
stock of the surviving corporation immediately after the
consolidation or merger;
(d) The shareholders of the Parent approve any plan or
proposal for the liquidation or dissolution of the
Parent; or
(e) The shareholders of the Parent approve the sale or
transfer of all or substantially all of the assets of
the Parent to parties that are not within a "controlled
group of corporations" (as defined in Code Section 1563)
in which the Parent is a member.
1.12 "Claimant" shall have the meaning set forth in Section 12.1.
1.13 "Code" shall mean the Internal Revenue Code of 1986, as it
may be amended from time to time.
1.14 "Committee" shall mean the committee described in Article 10.
1.15 "Company" shall mean Fingerhut Corporation, a Minnesota
corporation, and any successor to all or substantially all of
the Company's assets or business.
1.16 "Company Contribution Account" shall mean (i) the sum of the
Participant's Annual Company Contribution Amounts, plus (ii)
amounts credited in accordance with all the applicable
crediting provisions of this Plan that relate to the
Participant's Company Contribution Account, less (iii) all
distributions made to the Participant or his or her
Beneficiary pursuant to this Plan that relate to the
Participant's Company Contribution Account.
1.17 "Company Restoration Account" shall mean (i) the sum of all
of a Participant's Annual Company Restoration Amounts, plus
(ii) amounts credited in accordance with all the applicable
crediting provisions of this Plan that relate to the
Participant's Company Restoration Account, less (iii) all
distributions made to the Participant or his or her
Beneficiary pursuant to this Plan that relate to the
Participant's Company Restoration Account.
1.18 "Deduction Limitation" shall mean the following described
limitation on a benefit that may otherwise be distributable
pursuant to the provisions of this Plan. Except as otherwise
provided, this limitation shall be applied to all
distributions that are "subject to the Deduction Limitation"
under this Plan. If an Employer determines in good faith
prior to a Change in Control that there is a reasonable
likelihood that any compensation paid to a Participant for a
taxable year of the Employer would not be deductible by the
Employer solely by reason of the limitation under Code
Section 162(m), then to the extent deemed necessary by the
Employer to ensure that the entire amount of any distribution
to the Participant pursuant to this Plan prior to the Change
in Control is deductible, the Employer may defer all or any
portion of a distribution under this Plan. Any amounts
deferred pursuant to this limitation shall continue to be
credited/debited with additional amounts in accordance with
Section 3.9 below, even if such amount is being paid out in
installments. The amounts so deferred and amounts credited
thereon shall be distributed to the Participant or his or her
Beneficiary (in the event of the Participant's death) at the
earliest possible date, as determined by the Employer in good
faith, on which the deductibility of compensation paid or
payable to the Participant for the taxable year of the
Employer during which the distribution is made will not be
limited by Section 162(m), or if earlier, the effective date
of a Change in Control. Notwithstanding anything to the
contrary in this Plan, the Deduction Limitation shall not
apply to any distributions made after a Change in Control.
1.19 "Deferral Account" shall mean (i) the sum of all of a
Participant's Annual Deferral Amounts, plus (ii) amounts
credited in accordance with all the applicable crediting
provisions of this Plan that relate to the Participant's
Deferral Account, less (iii) all distributions made to the
Participant or his or her Beneficiary pursuant to this Plan
that relate to his or her Deferral Account.
1.20 "Disability" shall mean a period of disability during which a
Participant qualifies for permanent disability benefits under
the Participant's Employer's long-term disability plan, or,
if a Participant does not participate in such a plan, a
period of disability during which the Participant would have
qualified for permanent disability benefits under such a plan
had the Participant been a participant in such a plan, as
determined in the sole discretion of the Committee. If the
Participant's Employer does not sponsor such a plan, or
discontinues to sponsor such a plan, Disability shall be
determined by the Committee in its sole discretion.
1.21 "Election Form" shall mean the form established from time to
time by the Committee that a Participant completes, signs and
returns to the Committee to make an election under the Plan.
1.22 "Employee" shall mean a person who is an employee of any
Employer.
1.23 "Employer(s)" shall mean the Company and/or any of its
subsidiaries (now in existence or hereafter formed or
acquired) that have been selected by the Board to participate
in the Plan and have adopted the Plan as a sponsor.
1.24 "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as it may be amended from time to time.
1.25 "Parent" shall mean Fingerhut Companies, Inc., a Minnesota
corporation, and any successor to all or substantially all of
the Parent's assets or business.
1.26 "Participant" shall mean any Employee (i) who is selected by
the Committee to participate in the Plan, (ii) who elects to
participate in the Plan, (iii) who signs a Plan Agreement, an
Election Form and a Beneficiary Designation Form, (iv) whose
signed Plan Agreement, Election Form and Beneficiary
Designation Form are accepted by the Committee, (v) who
commences participation in the Plan, and (vi) whose Plan
Agreement has not terminated. A spouse or former spouse of a
Participant shall not be treated as a Participant in the Plan
or have an account balance under the Plan, even if he or she
has an interest in the Participant's benefits under the Plan
as a result of applicable law or property settlements
resulting from legal separation, divorce, or otherwise.
1.27 "Plan" shall mean the Company's Deferred Compensation Plan,
which shall be evidenced by this instrument and by each Plan
Agreement, as they may be amended from time to time.
1.28 "Plan Agreement" shall mean a written agreement, as may be
amended from time to time, which is entered into by and
between an Employer and a Participant. Each Plan Agreement
executed by a Participant and the Participant's Employer
shall provide for the entire benefit to which such
Participant is entitled under the Plan; should there be more
than one Plan Agreement, the Plan Agreement bearing the
latest date of acceptance by the Employer shall supersede all
previous Plan Agreements in their entirety and shall govern
such entitlement. The terms of any Plan Agreement may be
different for any Participant, and any Plan Agreement may
provide additional benefits not set forth in the Plan or
limit the benefits otherwise provided under the Plan;
provided, however, that any such additional benefits or
benefit limitations must be agreed to by both the Employer
and the Participant.
1.29 "Plan Year" shall mean a period beginning on January 1 of
each calendar year and continuing through December 31 of such
calendar year.
1.30 "Qualified Plans" shall mean the Fingerhut Corporation Profit
Sharing and 401(k) Savings Plan, dated March 28, 1969,
amended and restated July 1, 1997 (the "401(k) Plan"), the
Fingerhut Corporation Fixed Contribution Retirement Plan,
effective July 1, 1997 (the "Fixed Contribution Plan"), the
Fingerhut Corporation Pension Plan, dated June 30, 1966,
amended and restated March 26, 1990 (the "Pension Plan"), the
Figi's Inc. Profit Sharing and 401(k) Savings Plan, effective
July 5, 1981, amended and restated October 1, 1997 (the
"Figi's 401(k) Plan") and the Figi's Inc. Employees Pension
Plan, effective July 5, 1981 (the "Figi's Pension Plan"), as
they may be further amended from time to time.
1.31 "Short-Term Payout" shall mean the payout set forth in
Section 4.1.
1.32 "Termination Benefit" shall mean the benefit set forth in
Article 5.
1.33 "Termination of Employment" shall mean the severance from
employment with all Employers, voluntarily or involuntarily,
for any reason (including death, Disability or retirement)
other than an authorized leave of absence.
1.34 "Trust" shall mean one or more trusts established pursuant to
that certain Fingerhut Corporation Deferred Compensation Plan
Trust, dated as of January 1, 1998 between the Company and
the trustee named therein, as amended from time to time.
ARTICLE 2
Selection, Enrollment, Eligibility
2.1 Selection by Committee. Participation in the Plan shall be
limited to a select group of management and highly compensated
Employees of the Employers, as determined by the Committee in its
sole discretion. From that group, the Committee shall select, in
its sole discretion, Employees who are eligible to participate in
the Plan.
2.2 Enrollment Requirements. As a condition to participation,
each selected Employee shall complete, execute and return to the
Committee a Plan Agreement, an Election Form and a Beneficiary
Designation Form, all within 30 days after he or she is selected
to participate in the Plan. In addition, the Committee shall
establish from time to time such other enrollment requirements as
it determines in its sole discretion are necessary or desirable.
2.3 Eligibility; Commencement of Participation. Provided an
Employee selected to participate in the Plan has met all
enrollment requirements set forth in this Plan and required by the
Committee, including returning all required documents to the
Committee within the specified time period, that Employee shall
commence participation in the Plan as soon as practical, generally
two weeks after the Employee completes all enrollment
requirements. If an Employee fails to meet all such requirements
within the period required, in accordance with Section 2.2, that
Employee shall not be eligible to participate in the Plan until
the first day of the Plan Year following the delivery to and
acceptance by the Committee of the required documents.
2.4 Termination of Participation and/or Deferrals. If the
Committee determines in good faith that a Participant no longer
qualifies as a member of a select group of management or highly
compensated employees, as membership in such group is determined
in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of
ERISA, the Committee shall have the right, in its sole discretion,
to (i) terminate any deferral election the Participant has made
for the remainder of the Plan Year in which the Participant's
membership status changes, (ii) prevent the Participant from
making future deferral elections and/or (iii) immediately
distribute the Participant's then Account Balance in the same
manner as a Termination Benefit and terminate the Participant's
participation in the Plan.
ARTICLE 3
Deferral Commitments/Crediting/Taxes
3.1 Minimum Deferrals.
(a) Base Annual Salary and Annual Bonus. For each Plan
Year, a Participant may elect to defer, as his or her
Annual Deferral Amount, Base Annual Salary and/or Annual
Bonus in the following combined minimum amount:
Deferral Minimum Amount
Base Annual Salary $ 0
Annual Bonus $ 0
Combined Total $2,500
If an election is made for less than the stated combined
minimum amount, or if no election is made, the amount
deferred shall be zero.
(b) Short Plan Year. Notwithstanding the foregoing, if a
Participant first becomes a Participant after the first day of a
Plan Year, or in the case of the first Plan Year of the Plan
itself, the minimum deferral shall be an amount equal to the
minimum set forth above, multiplied by a fraction, the numerator
of which is the number of complete months remaining in the Plan
Year and the denominator of which is 12.
3.2 Maximum Deferral.
(a) Base Annual Salary and/or Annual Bonus. For each Plan
Year, a Participant may elect to defer, as his or her
Annual Deferral Amount, Base Annual Salary and/or Annual
Bonus up to the following maximum percentages for each
deferral elected:
Deferral Maximum
Percentage
Base Annual Salary 25%
Annual Bonus 100%
(b) Short Plan Year. Notwithstanding the foregoing, if a
Participant first becomes a Participant after the first day of a
Plan Year, or in the case of the first Plan Year of the Plan
itself, the maximum Annual Deferral Amount, with respect to Base
Annual Salary and Annual Bonus shall be limited to the amount of
compensation not yet earned by the Participant as of the date the
Participant submits a Plan Agreement and Election Form to the
Committee for acceptance.
3.3 Election to Defer; Effect of Election Form
(a) First Plan Year. In connection with a Participant's
commencement of participation in the Plan, the
Participant shall make an irrevocable deferral election
for the Plan Year in which the Participant commences
participation in the Plan, along with such other
elections as the Committee deems necessary or desirable
under the Plan. For these elections to be valid, the
Election Form must be completed and signed by the
Participant, timely delivered to the Committee (in
accordance with Section 2.2 above) and accepted by the
Committee.
(b) Subsequent Plan Years. For each succeeding Plan Year,
an irrevocable deferral election for that Plan Year, and
such other elections as the Committee deems necessary or
desirable under the Plan, shall be made by timely
delivering to the Committee, in accordance with its
rules and procedures, before the end of the Plan Year
preceding the Plan Year for which the election is made,
a new Election Form. If no such Election Form is timely
delivered for a Plan Year, the Annual Deferral Amount
shall be zero for that Plan Year.
3.4 Withholding of Annual Deferral Amounts. For each Plan Year,
the Base Annual Salary portion of the Annual Deferral Amount
shall be withheld from each regularly scheduled Base Annual
Salary payroll in equal amounts, as adjusted from time to
time for increases and decreases in Base Annual Salary. The
Annual Bonus portion of the Annual Deferral Amount shall be
withheld at the time the Annual Bonus is or otherwise would
be paid to the Participant, whether or not this occurs during
the Plan Year itself.
3.5 Annual Company Contribution Amount. For each Plan Year, an
Employer, in its sole discretion, may, but is not required
to, credit any amount it desires to any Participant's Company
Contribution Account under this Plan, which amount shall be
for that Participant the Annual Company Contribution Amount
for that Plan Year. The amount so credited to a Participant
may be smaller or larger than the amount credited to any
other Participant, and the amount credited to any Participant
for a Plan Year may be zero, even though one or more other
Participants receive an Annual Company Contribution Amount
for that Plan Year. The Annual Company Contribution Amount,
if any, shall be credited as of the last day of the Plan
Year. If a Participant is not employed by an Employer as of
the last day of a Plan Year, the Annual Company Contribution
Amount for that Plan Year shall be zero.
3.6 Annual Company Restoration Amount. A Participant's Annual
Company Restoration Amount for any Plan Year shall be equal
to the actuarial equivalent present value of the benefits, as
determined by the Committee in its reasonable discretion,
that the Participant would have accrued during the Plan Year
under the Qualified Plans, but for the Participant's
participation in this Plan.
3.7 Investment of Trust Assets. The Trustee of the Trust shall
be authorized, upon written instructions received from the
Committee or investment manager appointed by the Committee,
to invest and reinvest the assets of the Trust in accordance
with the applicable Trust Agreement, including the
disposition of stock and reinvestment of the proceeds in one
or more investment vehicles designated by the Committee.
3.8 Vesting.
(a) A Participant shall at all times be 100% vested in his or her
Deferral Account.
(b) A Participant shall be vested in his or her Company
Contribution Account in accordance with the schedule, if any,
contained in his or her Plan Agreement.
(c) A Participant shall be vested in his or her Company
Restoration Account as follows: (i) the Participant shall at all
times be 100% vested in the portion of his or her Company
Restoration Account related to the 401(k) Plan, the Fixed
Contribution Plan and the Figi's 401(k) Plan; (ii) the
Participant shall be vested in the portion of his or her Company
Restoration Account related to the Pension Plan in accordance with
the Pension Plan's vesting schedule, as determined by the
Committee in its reasonable discretion; and (iii) the Participant
shall be vested in the portion of his or her Company Restoration
Account related to the Figi's Pension Plan in accordance with the
Figi's Pension Plan's vesting schedule, as determined by the
Committee in its reasonable discretion .
(d) Notwithstanding anything to the contrary contained in this
Section 3.8, in the event of a Change in Control, or a
Participant's death or Disability, the Participant's Company
Contribution Account and Company Restoration Account shall
immediately become 100% vested (if it is not already vested in
accordance with the above vesting schedules).
(e) Notwithstanding subsection (d), the vesting schedule for a
Participant's Company Contribution Account and Company Restoration
Account shall not be accelerated to the extent that the Committee
determines that such acceleration would cause the deduction
limitations of Section 280G of the Code to become effective. In
the event that all of a Participant's Company Contribution Account
and/or Company Restoration Account is not vested pursuant to such
a determination, the Participant may request independent
verification of the Committee's calculations with respect to the
application of Section 280G. In such case, the Committee must
provide to the Participant within 15 business days of such a
request an opinion from a nationally recognized accounting firm
selected by the Participant (the "Accounting Firm"). The opinion
shall state the Accounting Firm's opinion that any limitation in
the vested percentage hereunder is necessary to avoid the limits
of Section 280G and contain supporting calculations. The cost of
such opinion shall be paid for by the Company.
3.9 Crediting/Debiting of Account Balances. In accordance with,
and subject to, the rules and procedures that are established
from time to time by the Committee, in its sole discretion,
amounts shall be credited or debited to a Participant's
Account Balance in accordance with the following rules:
(a) Election of Measurement Funds. A Participant, in
connection with his or her initial deferral election in
accordance with Section 3.3(a) above, shall elect, on
the Election Form, one or more Measurement Fund(s) (as
described in Section 3.9(c) below) to be used to
determine the additional amounts to be credited to his
or her Account Balance for the first day in which the
Participant commences participation in the Plan and
continuing thereafter for each subsequent day in which
the Participant participates in the Plan, unless changed
in accordance with the next sentence. Commencing with
the first day that follows the Participant's
commencement of participation in the Plan and continuing
thereafter for each subsequent day in which the
Participant participates in the Plan, the Participant
may (but is not required to) elect, in accordance with
the rules adopted by the Committee, to add or delete one
or more Measurement Fund(s) to be used to determine the
additional amounts to be credited to his or her Account
Balance, or to change the portion of his or her Account
Balance allocated to each previously or newly elected
Measurement Fund. If an election is made in accordance
with the previous sentence, it shall apply to the next
business day and continue thereafter for each subsequent
day in which the Participant participates in the Plan,
unless changed in accordance with the previous sentence.
(b) Proportionate Allocation. In making any election
described in Section 3.9(a) above, the Participant shall
specify, in accordance with the rules adopted by the
Committee, in increments of five percentage points (5%),
the percentage of his or her Account Balance to be
allocated to a Measurement Fund (as if the Participant
was making an investment in that Measurement Fund with
that portion of his or her Account Balance).
(c) Measurement Funds. The Participant may elect one or
more of the following measurement funds, based on
certain mutual funds (the "Measurement Funds"), for the
purpose of crediting additional amounts to his or her
Account Balance:
(1) Putnam Money Market Fund;
(2) Dodge & Cox Balanced Fund;
(3) The Putnam Fund for Growth and Income;
(4) Putnam Vista Fund;
(5) UAM ICM Small Company Portfolio; and
(6) Ivy International Fund.
As necessary, the Committee may, in its sole discretion,
discontinue, substitute or add a Measurement Fund. Each
such action will take effect no sooner than thirty (30)
days after the day on which the Committee gives
Participants advance written notice of such change.
(d) Crediting or Debiting Method. The performance of each
elected Measurement Fund (either positive or negative)
will be determined by the Committee, in its reasonable
discretion, based on the performance of the Measurement
Funds themselves. A Participant's Account Balance shall
be credited or debited on a daily basis based on the
performance of each Measurement Fund selected by the
Participant, as determined by the Committee in its sole
discretion, as though (i) a Participant's Account
Balance were invested in the Measurement Fund(s)
selected by the Participant, in the percentages
applicable to such day, at the closing price on such
date; (ii) the portion of the Annual Deferral Amount
that was actually deferred during any day were invested
in the Measurement Fund(s) selected by the Participant,
in the percentages applicable to such day, no later than
the close of business on the fifteenth business day
after the day on which such amounts are actually
deferred from the Participant's Base Annual Salary
through reductions in his or her payroll, at the closing
price on such date; and (iii) any distribution made to a
Participant that decreases such Participant's Account
Balance ceased being invested in the Measurement
Fund(s), in the percentages applicable to such day, no
earlier than fifteen business days prior to the
distribution, at the closing price on such date. The
Participant's Annual Company Contribution Amount and
Annual Company Restoration Amount shall be credited to
his or her Annual Company Contribution Account and
Company Restoration Account, respectively, for purposes
of this Section 3.9(d) no later than the close of
business on the last business day in March of the Plan
Year following the Plan Year to which they relate.
(e) No Actual Investment. Notwithstanding any other
provision of this Plan that may be interpreted to the
contrary, the Measurement Funds are to be used for
measurement purposes only, and a Participant's election
of any such Measurement Fund, the allocation to his or
her Account Balance thereto, the calculation of
additional amounts and the crediting or debiting of such
amounts to a Participant's Account Balance shall not be
considered or construed in any manner as an actual
investment of his or her Account Balance in any such
Measurement Fund. In the event that the Company or the
Trustee (as that term is defined in the Trust), in its
own discretion, decides to invest funds in any or all of
the Measurement Funds, no Participant shall have any
rights in or to such investments themselves. Without
limiting the foregoing, a Participant's Account Balance
shall at all times be a bookkeeping entry only and shall
not represent any investment made on his or her behalf
by the Company or the Trust; the Participant shall at
all times remain an unsecured creditor of the Company.
3.10 FICA and Other Taxes.
(a) Annual Deferral Amounts. For each Plan Year in which an
Annual Deferral Amount is being withheld from a
Participant, the Participant's Employer(s) shall
withhold from that portion of the Participant's Base
Annual Salary and Bonus that is not being deferred, in a
manner determined by the Employer(s), the Participant's
share of FICA and other employment taxes on such Annual
Deferral Amount. If necessary, the Committee may reduce
the Annual Deferral Amount in order to comply with this
Section 3.10.
(b) Company Contribution Account and Company Restoration
Account. For each Plan Year in which a Participant
becomes vested in a portion of his or her Company
Contribution Account or Company Restoration Account, the
Participant's Employer(s) shall withhold from the
Participant's Base Annual Salary and/or Bonus that is
not deferred, in a manner determined by the Employer(s),
the Participant's share of FICA and other employment
taxes. If necessary, the Committee may reduce the
vested portion of the Participant's Company Contribution
Account and Company Restoration Account in order to
comply with this Section 3.10.
3.11 Distributions. The Participant's Employer(s), or the trustee
of the Trust, shall withhold from any payments made to a
Participant under this Plan all federal, state and local
income, employment and other taxes required to be withheld by
the Employer(s), or the trustee of the Trust, in connection
with such payments, in amounts and in a manner to be
determined in the sole discretion of the Employer(s) and the
trustee of the Trust.
ARTICLE 4
Short-Term Payout; Withdrawal Election
4.1 Short-Term Payout. In connection with each election to defer
an Annual Deferral Amount, a Participant may irrevocably elect to
receive a future "Short-Term Payout" from the Plan with respect to
any portion of such Annual Deferral Amount. Subject to the
Deduction Limitation, the Short-Term Payout shall be a lump sum
payment in an amount that is equal to the Annual Deferral Amount,
or elected portion thereof, plus amounts credited or debited in
the manner provided in Section 3.8 above on that portion or
amount, determined at the time that the Short-Term Payout becomes
payable (rather than the date of a Termination of Employment).
Subject to the Deduction Limitation and the other terms and
conditions of this Plan, each Short-Term Payout elected shall be
paid out during a 30 day period commencing on January 1, 2005 or
any subsequent fifth anniversary of such January 1 (i.e, January
1, 2010, 2015, 2020, etc.); provided, however, the January 1 must
be more than five (5) years and must be ten (10) years or less
from the January 1 of the Plan Year in which the Annual Deferral
Amount is initially deferred. By way of examples, if a five
Short-Term Payout is elected for Annual Deferral Amounts that are
deferred in the Plan Year commencing January 1, 1998, the date for
distribution of the Short-Term Payout must be January 1, 2005. If
a Short-Term Payout is elected for Annual Deferral Amounts that
are deferred in the Plan Year commencing January 1, 2000, the date
for distribution of the Short-Term Payout must be January 1, 2010.
4.2 Other Benefits Take Precedence Over Short-Term. Should an
event occur that triggers payment of a Termination Benefit under
Article 5, any Annual Deferral Amount, plus amounts credited or
debited thereon, that is subject to a Short-Term Payout election
under Section 4.1 shall not be paid in accordance with Section 4.1
but shall be paid in accordance with Article 5.
4.3 Withdrawal Election. A Participant (or, after a
Participant's death, his or her Beneficiary) may elect, at any
time, to withdraw all of his or her Account Balance, calculated as
if there had occurred a Termination of Employment as of the day of
the election, less a withdrawal penalty equal to 10% of such
amount (the net amount shall be referred to as the "Withdrawal
Amount"). This election can be made at any time, before or after
Termination of Employment, and whether or not the Participant (or
Beneficiary) is in the process of being paid pursuant to an
installment payment schedule. If made before Termination of
Employment, a Participant's Withdrawal Amount shall be his or her
Account Balance calculated as if there had occurred a Termination
of Employment as of the day of the election. No partial
withdrawals of the Withdrawal Amount shall be allowed. The
Participant (or his or her Beneficiary) shall make this election
by giving the Committee advance written notice of the election in
a form determined from time to time by the Committee. The
Participant (or his or her Beneficiary) shall be paid the
Withdrawal Amount within 60 days of his or her election. Once the
Withdrawal Amount is paid, the Participant's participation in the
Plan shall terminate and the Participant shall not be eligible to
participate in the Plan during the remainder of that Plan Year and
the next three (3) Plan Years. The payment of this Withdrawal
Amount shall not be subject to the Deduction Limitation.
ARTICLE 5
Termination Benefit
5.1 Termination Benefit. Subject to the Deduction Limitation and
the provisions of Section 5.2, a Participant who experiences a
Termination of Employment shall receive, as a Termination Benefit,
his or her Account Balance.
5.2 Payment of Termination Benefit. A Participant, in connection
with his or her commencement of participation in the Plan, shall
elect on an Election Form to receive the Termination Benefit in a
lump sum or pursuant to an Annual Installment Method over 2, 3, 4,
5, 6, 7, 8, 9 or 10 years. The Participant may change his or her
election to another allowable alternative payout period by
submitting a new Election Form to the Committee, provided that any
such Election Form is submitted at least 18 months prior to the
Participant's Termination of Employment and is accepted by the
Committee in its sole discretion. The Election Form most recently
accepted by the Committee and submitted at least 18 months prior
to Termination of Employment shall govern the payout of the
Termination Benefit. If a Participant does not make any election
with respect to the payment of the Termination Benefit, then such
benefit shall be payable in a lump sum. The lump sum payment
shall be made, or installment payments shall commence, no later
than 30 days after the last day of the Plan Year in which the
Participant experiences the Termination of Employment. Any
payment made shall be subject to the Deduction Limitation.
5.3 Termination of Employment due to Death. If a Participant
experiences a Termination of Employment due to death, the
Participant's Termination Benefit payments shall be paid to the
Participant's Beneficiary (a) over the same number of years and in
the same amounts as that benefit would have been paid to the
Participant had the Participant survived, or (b) in a lump sum, if
requested by the Beneficiary and allowed in the sole discretion of
the Committee, that is equal to the Participant's Account Balance.
5.4 Death after Termination of Employment. If a Participant dies
after Termination of Employment but before the Termination Benefit
is paid in full, the Participant's unpaid Termination Benefit
payments shall continue and shall be paid to the Participant's
Beneficiary (a) over the remaining number of years and in the same
amounts as that benefit would have been paid to the Participant
had the Participant survived, or (b) in a lump sum, if requested
by the Beneficiary and allowed in the sole discretion of the
Committee, that is equal to the Participant's Account Balance.
ARTICLE 6
Disability Waiver and Benefit
6.1 Disability Waiver.
(a) Waiver of Deferral. A Participant who is determined by
the Committee to be suffering from a Disability shall be
excused from fulfilling that portion of the Annual
Deferral Amount commitment that would otherwise have
been withheld from a Participant's Base Annual Salary
and/or Annual Bonus for the Plan Year during which the
Participant first suffers a Disability. During the
period of Disability, the Participant shall not be
allowed to make any additional deferral elections, but
will continue to be considered a Participant for all
other purposes of this Plan.
(b) Return to Work. If a Participant returns to employment
with an Employer, after a Disability ceases, the
Participant may elect to defer an Annual Deferral Amount
for the Plan Year following his or her return to
employment or service and for every Plan Year thereafter
while a Participant in the Plan; provided such deferral
elections are otherwise allowed and an Election Form is
delivered to and accepted by the Committee for each such
election in accordance with Section 3.3 above.
6.2 Continued Eligibility; Benefit . A Participant suffering a
Disability shall, for benefit purposes under this Plan,
continue to be considered to be employed and shall be
eligible for the benefits provided for in Articles 4 or 5 in
accordance with the provisions of those Articles.
Notwithstanding the above, the Committee shall have the right
to, in its sole and absolute discretion and for purposes of
this Plan only deem the Participant to have experienced a
Termination of Employment at any time after such Participant
is determined to be suffering a Disability, in which case the
Participant shall receive a Termination Benefit equal to his
or her Account Balance at the time of the Committee's
determination. The Termination Benefit shall be paid in
accordance with the payment method selected by the
Participant under Section 5.2 above. Any payment made shall
be subject to the Deduction Limitation.
ARTICLE 7
Beneficiary Designation
7.1 Beneficiary. Each Participant shall have the right, at any
time, to designate his or her Beneficiary(ies) (both primary
as well as contingent) to receive any benefits payable under
the Plan to a Beneficiary upon the death of a Participant.
The Beneficiary designated under this Plan may be the same as
or different from the Beneficiary designation under any other
plan of an Employer in which the Participant participates.
7.2 Beneficiary Designation; Change; Spousal Consent. A
Participant shall designate his or her Beneficiary by
completing and signing the Beneficiary Designation Form, and
returning it to the Committee or its designated agent. A
Participant shall have the right to change a Beneficiary by
completing, signing and otherwise complying with the terms of
the Beneficiary Designation Form and the Committee's rules
and procedures, as in effect from time to time. If the
Participant names someone other than his or her spouse as a
Beneficiary, a spousal consent, in the form designated by the
Committee, must be signed by that Participant's spouse and
returned to the Committee. Upon the acceptance by the
Committee of a new Beneficiary Designation Form, all
Beneficiary designations previously filed shall be canceled.
The Committee shall be entitled to rely on the last
Beneficiary Designation Form filed by the Participant and
accepted by the Committee prior to his or her death.
7.3 Acknowledgment. No designation or change in designation of a
Beneficiary shall be effective until received and
acknowledged in writing by the Committee or its designated
agent.
7.4 No Beneficiary Designation. If a Participant fails to
designate a Beneficiary as provided in Sections 7.1, 7.2 and
7.3 above or, if all designated Beneficiaries predecease the
Participant or die prior to complete distribution of the
Participant's benefits, then the Participant's designated
Beneficiary shall be deemed to be his or her surviving
spouse. If the Participant has no surviving spouse, the
benefits remaining under the Plan to be paid to a Beneficiary
shall be payable to the executor or personal representative
of the Participant's estate.
7.5 Doubt as to Beneficiary. If the Committee has any doubt as
to the proper Beneficiary to receive payments pursuant to
this Plan, the Committee shall have the right, exercisable in
its discretion, to cause the Participant's Employer to
withhold such payments until this matter is resolved to the
Committee's satisfaction.
7.6 Discharge of Obligations. The payment of benefits under the
Plan to a Beneficiary shall fully and completely discharge
all Employers and the Committee from all further obligations
under this Plan with respect to the Participant, and that
Participant's Plan Agreement shall terminate upon such full
payment of benefits.
ARTICLE 8
Leave of Absence
8.1 Paid Leave of Absence. If a Participant is authorized by the
Participant's Employer for any reason to take a paid leave of
absence from the employment of the Employer, the Participant
shall continue to be considered employed by the Employer and
the Annual Deferral Amount shall continue to be withheld
during such paid leave of absence in accordance with
Section 3.3.
8.2 Unpaid Leave of Absence. If a Participant is authorized by
the Participant's Employer for any reason to take an unpaid
leave of absence from the employment of the Employer, the
Participant shall continue to be considered employed by the
Employer and the Participant shall be excused from making
deferrals until the earlier of the date the leave of absence
expires or the Participant returns to a paid employment
status. Upon such expiration or return, deferrals shall
resume for the remaining portion of the Plan Year in which
the expiration or return occurs, based on the deferral
election, if any, made for that Plan Year. If no election
was made for that Plan Year, no deferral shall be withheld.
ARTICLE 9
Termination, Amendment or Modification
9.1 Termination. Although each Employer anticipates that it will
continue the Plan for an indefinite period of time, there is
no guarantee that any Employer will continue the Plan or will
not terminate the Plan at any time in the future.
Accordingly, each Employer reserves the right to discontinue
its sponsorship of the Plan and/or to terminate the Plan at
any time with respect to any or all of its participating
Employees, by action of its board of directors. Upon the
termination of the Plan with respect to any Employer, the
Plan Agreements of the affected Participants who are employed
by that Employer shall terminate and their Account Balances,
determined as if they had experienced a Termination of
Employment on the date of Plan termination, shall be paid to
the Participants as follows: Prior to a Change in Control,
if the Plan is terminated with respect to all of its
Participants, an Employer shall have the right, in its sole
discretion, and notwithstanding any elections made by the
Participant, to pay such benefits in a lump sum or pursuant
to an Annual Installment Method of up to 10 years, with
amounts credited and debited during the installment period as
provided herein. If the Plan is terminated with respect to
less than all of its Participants, an Employer shall be
required to pay such benefits in a lump sum. For a Plan
Termination arising after a Change in Control, the Employer
shall be required to pay such benefits in a lump sum. The
termination of the Plan shall not adversely affect any
Participant or Beneficiary who has become entitled to the
payment of any benefits under the Plan as of the date of
termination; provided however, that the Employer shall have
the right in its sole discretion to accelerate installment
payments without a premium or prepayment penalty by paying
the Account Balance in a lump sum or pursuant to an Annual
Installment Method using fewer years.
9.2 Amendment. Any Employer may, at any time, amend or modify
the Plan in whole or in part with respect to that Employer by
the action of its board of directors; provided, however,
that: (i) no amendment or modification shall be effective to
decrease or restrict the value of a Participant's Account
Balance in existence at the time the amendment or
modification is made, calculated as if the Participant had
experienced a Termination of Employment as of the effective
date of the amendment or modification, and (ii) no amendment
or modification of this Section 9.2 or Section 10.2 of the
Plan shall be effective. The amendment or modification of
the Plan shall not affect any Participant or Beneficiary who
has become entitled to the payment of benefits under the Plan
as of the date of the amendment or modification; provided,
however, that the Employer shall have the right in its sole
discretion to accelerate installment payments by paying the
Account Balance in a lump sum or pursuant to an Annual
Installment Method using fewer years (provided that the
present value of all payments that will have been received by
a Participant at any given point of time under the different
payment schedule shall equal or exceed the present value of
all payments that would have been received at that point in
time under the original payment schedule).
9.3 Plan Agreement. Despite the provisions of Sections 9.1 and
9.2 above, if a Participant's Plan Agreement contains
benefits or limitations that are not in this Plan document,
the Employer may only amend or terminate such provisions with
the consent of the Participant.
9.4 Effect of Payment. The full payment of the applicable
benefit under Articles 4, 5, or 6 of the Plan shall
completely discharge all obligations of the Employer(s) to a
Participant and his or her designated Beneficiaries under
this Plan and the Participant's Plan Agreement shall
terminate.
ARTICLE 10
Administration
10.1 Committee Duties. Except as otherwise provided in this
Article 10, the Administrator shall delegate administration
of this Plan to a Committee which shall consist of the Board,
or such committee as the Board shall appoint. Members of the
Committee may be Participants under this Plan. Except as
limited by the Administrator, the Committee shall also have
the discretion and authority to (i) make, amend, interpret,
and enforce all appropriate rules and regulations for the
administration of this Plan and (ii) decide or resolve any
and all questions including interpretations of this Plan, as
may arise in connection with the Plan. Any individual
serving on the Committee who is a Participant shall not vote
or act on any matter relating solely to himself or herself.
When making a determination or calculation, the Committee
shall be entitled to rely on information furnished by a
Participant or the Company.
10.2 Administration Upon Change In Control. For purposes of this
Plan, the Company shall be the "Administrator" at all times
prior to the occurrence of a Change in Control. Upon and
after the occurrence of a Change in Control, the
"Administrator" shall be an independent third party selected
by the trustee of the Trust and approved by the individual
who, immediately prior to such event, was the Company's Chief
Executive Officer or, if not so identified, the Company's
highest ranking officer (the "Ex-CEO"). The Administrator
shall have the discretionary power to determine all questions
arising in connection with the administration of the Plan and
the interpretation of the Plan and Trust including, but not
limited to benefit entitlement determinations; provided,
however, upon and after the occurrence of a Change in
Control, the Administrator shall have no power to direct the
investment of Trust assets or select any investment manager
or custodial firm for the Trust. Upon and after the
occurrence of a Change in Control, the Company must: (1) pay
all reasonable administrative expenses and fees of the
Administrator; (2) indemnify the Administrator against any
costs, expenses and liabilities including, without
limitation, attorney's fees and expenses arising in
connection with the performance of the Administrator
hereunder, except with respect to matters resulting from the
gross negligence or willful misconduct of the Administrator
or its employees or agents; and (3) supply full and timely
information to the Administrator or all matters relating to
the Plan, the Trust, the Participants and their
Beneficiaries, the Account Balances of the Participants, the
date of circumstances of the Termination of Employment of the
Participants, and such other pertinent information as the
Administrator may reasonably require. Upon and after a
Change in Control, the Administrator may be terminated (and a
replacement appointed) by the trustee of the Trust only with
the approval of the Ex-CEO. Upon and after a Change in
Control, the Administrator may not be terminated by the
Company.
10.3 Agents. In the administration of this Plan, the Committee
may, from time to time, employ agents and delegate to them
such administrative duties as it sees fit (including acting
through a duly appointed representative) and may from time to
time consult with counsel who may be counsel to any Employer.
10.4 Binding Effect of Decisions. The decision or action of the
Administrator with respect to any question arising out of or
in connection with the administration, interpretation and
application of the Plan and the rules and regulations
promulgated hereunder shall be final and conclusive and
binding upon all persons having any interest in the Plan.
10.5 Indemnity of Committee. All Employers shall indemnify and
hold harmless the members of the Committee, any Employee to
whom the duties of the Committee may be delegated, and the
Administrator against any and all claims, losses, damages,
expenses or liabilities arising from any action or failure to
act with respect to this Plan, except in the case of willful
misconduct by the Committee, any of its members, any such
Employee or the Administrator.
10.6 Employer Information. To enable the Committee and/or
Administrator to perform its functions, the Company and each
Employer shall supply full and timely information to the
Committee and/or Administrator, as the case may be, on all
matters relating to the compensation of its Participants, the
date and circumstances of the Disability or Termination of
Employment of its Participants, and such other pertinent
information as the Committee or Administrator may reasonably
require.
ARTICLE 11
Other Benefits and Agreements
11.1 Coordination with Other Benefits. The benefits provided for
a Participant and Participant's Beneficiary under the Plan
are in addition to any other benefits available to such
Participant under any other plan or program for employees of
the Participant's Employer. The Plan shall supplement and
shall not supersede, modify or amend any other such plan or
program except as may otherwise be expressly provided.
ARTICLE 12
Claims Procedures
12.1 Presentation of Claim. Any Participant or Beneficiary of a
deceased Participant (such Participant or Beneficiary being
referred to below as a "Claimant") may deliver to the
Committee a written claim for a determination with respect to
the amounts distributable to such Claimant from the Plan. If
such a claim relates to the contents of a notice received by
the Claimant, the claim must be made within 60 days after
such notice was received by the Claimant. All other claims
must be made within 180 days of the date on which the event
that caused the claim to arise occurred. The claim must
state with particularity the determination desired by the
Claimant.
12.2 Notification of Decision. The Committee shall consider a
Claimant's claim within a reasonable time after filing the
claim, and, not later than 90 days after filing shall notify
the Claimant in writing:
(a) that the Claimant's requested determination has been
made, and that the claim has been allowed in full; or
(b) that the Committee has reached a conclusion contrary, in
whole or in part, to the Claimant's requested
determination, and such notice must set forth in a
manner calculated to be understood by the Claimant:
(i) the specific reason(s) for the denial of the claim,
or any part of it;
(ii) specific reference(s) to pertinent provisions of
the Plan upon which such denial was based;
(iii) a description of any additional material or
information necessary for the Claimant to perfect
the claim, and an explanation of why such material
or information is necessary; and
(iv) an explanation of the claim review procedure set
forth in Section 12.3 below.
12.3 Review of a Denied Claim. Within 60 days after receiving a
notice from the Committee that a claim has been denied, in
whole or in part, a Claimant (or the Claimant's duly
authorized representative) may file with the Committee a
written request for a review of the denial of the claim.
Thereafter, but not later than 30 days after the review
procedure began, the Claimant (or the Claimant's duly
authorized representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant.
12.4 Decision on Review. The Committee shall render its decision
on review promptly, and not later than 60 days after the
filing of a written request for review of the denial, unless
a hearing is held or other special circumstances require
additional time, in which case the Committee's decision must
be rendered within 120 days after such date. Such decision
must be written in a manner calculated to be understood by
the Claimant, and it must contain:
(a) specific reasons for the decision;
(b) specific reference(s) to the pertinent Plan provisions
upon which the decision was based; and
(c) such other matters as the Committee deems relevant.
12.5 Legal Action. A Claimant's compliance with the foregoing
provisions of this Article 14 is a mandatory prerequisite to
a Claimant's right to commence any legal action with respect
to any claim for benefits under this Plan.
ARTICLE 13
Trust
13.1 Establishment of the Trust. The Company shall establish the
Trust, and each Employer shall at least annually transfer
over to the Trust such assets as the Employer determines, in
its sole discretion, are necessary to provide, on a present
value basis, for its respective future liabilities created
with respect to the Annual Deferral Amounts, Annual Company
Contribution Amounts and Annual Company Restoration Amounts
for such Employer's Participants for all periods prior to the
transfer, as well as any debits and credits to the
Participants' Account Balances for all periods prior to the
transfer, taking into consideration the value of the assets
in the trust at the time of the transfer.
13.2 Interrelationship of the Plan and the Trust. The provisions
of the Plan and the Plan Agreement shall govern the rights of
a Participant to receive distributions pursuant to the Plan.
The provisions of the Trust shall govern the rights of the
Employers, Participants and the creditors of the Employers to
the assets transferred to the Trust. Each Employer shall at
all times remain liable to carry out its obligations under
the Plan.
13.3 Distributions From the Trust. Each Employer's obligations
under the Plan may be satisfied with Trust assets distributed
pursuant to the terms of the Trust, and any such distribution
shall reduce the Employer's obligations under this Plan.
ARTICLE 14
Miscellaneous
14.1 Status of Plan. The Plan is intended to be a plan that is
not qualified within the meaning of Code Section 401(a) and
that "is unfunded and is maintained by an employer primarily
for the purpose of providing deferred compensation for a
select group of management or highly compensated employee"
within the meaning of ERISA Sections 201(2), 301(a)(3) and
401(a)(1). The Plan shall be administered and interpreted to
the extent possible in a manner consistent with that intent.
14.2 Unsecured General Creditor. Participants and their Bene
ficiaries, heirs, successors and assigns shall have no legal
or equitable rights, interests or claims in any property or
assets of an Employer. For purposes of the payment of
benefits under this Plan, any and all of an Employer's assets
shall be, and remain, the general, unpledged unrestricted
assets of the Employer. An Employer's obligation under the
Plan shall be merely that of an unfunded and unsecured
promise to pay money in the future.
14.3 Employer's Liability. An Employer's liability for the
payment of benefits shall be defined only by the Plan and the
Plan Agreement, as entered into between the Employer and a
Participant. An Employer shall have no obligation to a
Participant under the Plan except as expressly provided in
the Plan and his or her Plan Agreement.
14.4 Nonassignability. Neither a Participant nor any other person
shall have any right to commute, sell, assign, transfer,
pledge, anticipate, mortgage or otherwise encumber, transfer,
hypothecate, alienate or convey in advance of actual receipt,
the amounts, if any, payable hereunder, or any part thereof,
which are, and all rights to which are expressly declared to
be, unassignable and non-transferable. No part of the
amounts payable shall, prior to actual payment, be subject to
seizure, attachment, garnishment or sequestration for the
payment of any debts, judgments, alimony or separate
maintenance owed by a Participant or any other person, be
transferable by operation of law in the event of a
Participant's or any other person's bankruptcy or insolvency
or be transferable to a spouse as a result of a property
settlement or otherwise.
14.5 Not a Contract of Employment. The terms and conditions of
this Plan shall not be deemed to constitute a contract of
employment between any Employer and the Participant. Such
employment is hereby acknowledged to be an "at will"
employment relationship that can be terminated at any time
for any reason, or no reason, with or without cause, and with
or without notice, unless expressly provided in a written
employment agreement. Nothing in this Plan shall be deemed
to give a Participant the right to be retained in the service
of any Employer as an Employee, or to interfere with the
right of any Employer to discipline or discharge the
Participant at any time.
14.6 Furnishing Information. A Participant or his or her
Beneficiary will cooperate with the Committee by furnishing
any and all information requested by the Committee and take
such other actions as may be requested in order to facilitate
the administration of the Plan and the payments of benefits
hereunder, including but not limited to taking such physical
examinations as the Committee may deem necessary.
14.7 Terms. Whenever any words are used herein in the masculine,
they shall be construed as though they were in the feminine
in all cases where they would so apply; and whenever any
words are used herein in the singular or in the plural, they
shall be construed as though they were used in the plural or
the singular, as the case may be, in all cases where they
would so apply.
14.8 Captions. The captions of the articles, sections and
paragraphs of this Plan are for convenience only and shall
not control or affect the meaning or construction of any of
its provisions.
14.9 Governing Law. Subject to ERISA, the provisions of this Plan
shall be construed and interpreted according to the internal
laws of the State of Minnesota without regard to its
conflicts of laws principles.
14.10 Notice. Any notice or filing required or permitted to
be given to the Committee under this Plan shall be sufficient
if in writing and hand-delivered, or sent by registered or
certified mail, to the address below:
Fingerhut Corporation
Benefits Department - Tom Segal
4400 Baker Road
Minnetonka, Minnesota 55422
Such notice shall be deemed given as of the date of delivery
or, if delivery is made by mail, as of the date shown on the
postmark on the receipt for registration or certification.
Any notice or filing required or permitted to be given to a
Participant under this Plan shall be sufficient if in writing
and hand-delivered, or sent by mail, to the last known
address of the Participant.
14.11 Successors. The provisions of this Plan shall bind and
inure to the benefit of the Participant's Employer and its
successors and assigns and the Participant and the
Participant's designated Beneficiaries.
14.12 Spouse's Interest. The interest in the benefits
hereunder of a spouse of a Participant who has predeceased
the Participant shall automatically pass to the Participant
and shall not be transferable by such spouse in any manner,
including but not limited to such spouse's will, nor shall
such interest pass under the laws of intestate succession.
14.13 Validity. In case any provision of this Plan shall be
illegal or invalid for any reason, said illegality or
invalidity shall not affect the remaining parts hereof, but
this Plan shall be construed and enforced as if such illegal
or invalid provision had never been inserted herein.
14.14 Incompetent. If the Committee determines in its
discretion that a benefit under this Plan is to be paid to a
minor, a person declared incompetent or to a person incapable
of handling the disposition of that person's property, the
Committee may direct payment of such benefit to the guardian,
legal representative or person having the care and custody of
such minor, incompetent or incapable person. The Committee
may require proof of minority, incompetence, incapacity or
guardianship, as it may deem appropriate prior to
distribution of the benefit. Any payment of a benefit shall
be a payment for the account of the Participant and the
Participant's Beneficiary, as the case may be, and shall be a
complete discharge of any liability under the Plan for such
payment amount.
14.15 Court Order. The Committee is authorized to make any
payments directed by court order in any action in which the
Plan or the Committee has been named as a party. In
addition, if a court determines that a spouse or former
spouse of a Participant has an interest in the Participant's
benefits under the Plan in connection with a property
settlement or otherwise, the Committee, in its sole
discretion, shall have the right, notwithstanding any
election made by a Participant, to immediately distribute the
spouse's or former spouse's interest in the Participant's
benefits under the Plan to that spouse or former spouse.
14.16 Distribution in the Event of Taxation.
(a) In General. If, for any reason, all or any portion of a
Participant's benefits under this Plan becomes taxable
to the Participant prior to receipt, a Participant may
petition the Committee before a Change in Control, or
the trustee of the Trust after a Change in Control, for
a distribution of that portion of his or her benefit
that has become taxable. Upon the grant of such a
petition, which grant shall not be unreasonably withheld
(and, after a Change in Control, shall be granted), a
Participant's Employer shall distribute to the
Participant immediately available funds in an amount
equal to the taxable portion of his or her benefit
(which amount shall not exceed a Participant's unpaid
Account Balance under the Plan). If the petition is
granted, the tax liability distribution shall be made
within 90 days of the date when the Participant's
petition is granted. Such a distribution shall affect
and reduce the benefits to be paid under this Plan.
(b) Trust. If the Trust terminates in accordance with
Section 3.6(e) of the Trust and benefits are distributed
from the Trust to a Participant in accordance with that
Section, the Participant's benefits under this Plan
shall be reduced to the extent of such distributions.
14.17 Insurance. The Employers, on their own behalf or on
behalf of the trustee of the Trust, and, in their sole
discretion, may apply for and procure insurance on the life
of the Participant, in such amounts and in such forms as the
Trust may choose. The Employers or the trustee of the Trust,
as the case may be, shall be the sole owner and beneficiary
of any such insurance. The Participant shall have no
interest whatsoever in any such policy or policies, and at
the request of the Employers shall submit to medical
examinations and supply such information and execute such
documents as may be required by the insurance company or
companies to whom the Employers have applied for insurance.
14.18 Legal Fees To Enforce Rights After Change in Control.
The Company and each Employer is aware that upon the
occurrence of a Change in Control, the Board or the board of
directors of a Participant's Employer (which might then be
composed of new members) or a shareholder of the Company or
the Participant's Employer, or of any successor corporation
might then cause or attempt to cause the Company, the
Participant's Employer or such successor to refuse to comply
with its obligations under the Plan and might cause or
attempt to cause the Company or the Participant's Employer to
institute, or may institute, litigation seeking to deny
Participants the benefits intended under the Plan. In these
circumstances, the purpose of the Plan could be frustrated.
Accordingly, if, following a Change in Control, it should
appear to any Participant that the Company, the Participant's
Employer or any successor corporation has failed to comply
with any of its obligations under the Plan or any agreement
thereunder or, if the Company, such Employer or any other
person takes any action to declare the Plan void or
unenforceable or institutes any litigation or other legal
action designed to deny, diminish or to recover from any
Participant the benefits intended to be provided, then the
Company and the Participant's Employer irrevocably authorize
such Participant to retain counsel of his or her choice at
the expense of the Company and the Participant's Employer
(who shall be jointly and severally liable) to represent such
Participant in connection with the initiation or defense of
any litigation or other legal action, whether by or against
the Company, the Participant's Employer or any director,
officer, shareholder or other person affiliated with the
Company, the Participant's Employer or any successor thereto
in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan document
as of __________, 199_.
"Company"
Fingerhut Corporation,
a Minnesota corporation
By: ______________________________
Title:
______________________________
Exhibit 10.w(i)
FIRST AMENDMENT
OF THE
FINGERHUT COMPANIES, INC.
NONQUALIFIED SUPPLEMENTAL
EXECUTIVE RETIREMENT PLAN
The Fingerhut Companies, Inc. Nonqualified Supplemental
Executive Retirement Plan, heretofore adopted by the Board of
Directors of Fingerhut Companies, Inc., a Delaware corporation,
on February 14, 1996, is hereby amended in the following
respects.
I. PRINCIPAL SPONSOR CHANGED. Effective as of January 1,
1996, Section 1.1 is amended to read in full as follows:
1.1. Preamble ERISA authorizes the establishment of an unfunded,
nonqualified plan maintained primarily for the purpose of
providing deferred compensation for a select group of management
or highly compensated employees and to coordinate the benefits
provided to them under other qualified and nonqualified
retirement programs available to them as a result of their
employment. FINGERHUT CORPORATION, a Minnesota corporation
(hereinafter "Principal Sponsor") and certain affiliates of the
Principal Sponsor (collectively the "Employers") have determined
that it is in their best interest to establish and maintain such
an unfunded, nonqualified deferred compensation plan for those
purposes. Therefore, the Principal Sponsor, for itself and the
other Employers, does hereby establish this SERP, the terms and
conditions of which are as follows.
1. OFFSET ELIMINATED. Effective with respect to each
Participant who is actively employed by an Employer at some time
on or after the date of the adoption of this First Amendment,
Section 1.2.5 is amended to read in full as follows:
1.2.5. Benefit Offset _ a dollar amount determined as of
a Participant's Termination of Employment and expressed as an
annual single life annuity payable for the life of the
Participant commencing as of the first of the Plan Year following
the later of the date of the Participant's Termination of
Employment or the date the Participant would attain age sixty-
five (65) years and which is equal to the sum of:
(a) the Participant's Social Security Benefit
determined as of such Termination of Employment when
expressed as an annual single life annuity commencing
as of the first of the Plan Year following the later of
the date of the Participant's Termination of Employment
or the date the Participant would attain age sixty-five
(65) years; and
(b) the Participant's accrued benefit under the
Pension Plan and the Pension Excess Plan determined as
of such Termination of Employment when expressed as an
annual single life annuity commencing as of the first
of the Plan Year following the later of the date of the
Participant's Termination of Employment or the date the
Participant would attain age sixty-five (65) years; and
(c) seventy-five percent (75%) of the Participant's
account balance under the Profit Sharing Plan
attributable to employer contributions (including both
the elective contributions and the non-elective
contributions) determined as of such Termination of
Employment and determined as if no withdrawals or
distributions had been made from the Profit Sharing
Plan and as if all elective contributions which could
have been contributed to the Profit Sharing Plan had
been contributed to the Profit Sharing Plan:
(i) together with interest at
eight and one-half percent (8.5%) compounded
annually from the Termination of Employment to the
later of the date of the Participant's Termination
of Employment or the date the Participant would
attain age sixty-five (65) years, and
(ii) then converted to and
expressed as an Actuarial Equivalent annual single
life annuity commencing as of the first of the
Plan Year following the later of the date of the
Participant's Termination of Employment or the
date the Participant would attain age sixty-five
(65) years; and
(d) an amount equal to the dollars credited or paid to
the Participant under the Profit Sharing Excess Plan:
(i) together with interest at
eight and one-half percent (8.5%) compounded
annually from the date so credited or paid to the
Termination of Employment, and
(ii) then converted to and
expressed as an Actuarial Equivalent annual single
life annuity commencing as of the first of the
Plan Year following the later of the date of the
Participant's Termination of Employment or the
date the Participant would attain age sixty-five
(65) years.
The Benefit Offset may increase or decrease from time to time
before a Termination of Employment.
1. OFFSET ELIMINATED. Effective with respect to each
Participant who is actively employed by an Employer at some time
on or after the date of the adoption of this First Amendment,
Section 1.2.10 is deleted without replacement.
1. PRINCIPAL SPONSOR CHANGED. Effective as of January 1,
1996, Section 1.2.17 is amended to read in full as follows:
1.2.17. Plan Statement _ this document entitled "FINGERHUT
NONQUALIFIED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN," as adopted
by the Principal Sponsor effective as of January 1, 1996, as the
same may be amended from time to time thereafter.
1. PRINCIPAL SPONSOR CHANGED. Effective as of January 1,
1996, Section 1.2.19 is amended to read in full as follows:
1.2.19. Principal Sponsor _ FINGERHUT CORPORATION, a
Minnesota corporation.
1. PRINCIPAL SPONSOR CHANGED. Effective as of January 1,
1996, Section 1.2.22 is amended to read in full as follows (and
each other reference to the name of the SERP is conformed to this
name as amended):
1.2.22. SERP _ the nonqualified deferred compensation plan
of the Employers established for the benefit of employees
eligible to participate therein, as first set forth in this Plan
Statement. (As used herein, "SERP" refers to the legal entity
established by an Principal Sponsor and not to the document
pursuant to which the SERP is maintained. That document is
referred to herein as the "Plan Statement.") The SERP shall be
referred to as the "FINGERHUT NONQUALIFIED SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN."
1. AUTOMATIC PARTICIPATION. Effective for initial
determinations of who is a Participant which are made as of a
date on or after the date of the adoption of this First
Amendment, Section 2.1 is amended to read in full as follows:
2.1. General Participation Rule. An individual shall be a
Participant in this SERP if that individual, on or after
January 1, 1996, satisfies all of the following criteria:
(i) he or she is a Vice
President or more senior officer (including,
without limiting the generality of the foregoing,
the President, Chief Operating Officer, Chief
Executive Officer, a Senior Vice President, an
Executive Vice President or a Vice President of
the Principal Sponsor), and
(ii) he or she is
actively employed by the Principal Sponsor.
Any individual who has become a Participant in the SERP shall
continue as a Participant until all benefits which are due under
this SERP have been received without regard to whether he or she
continues as an officer or a participant in the Pension Plan or
an active employee. The Compensation Committee may, in its
discretion, impose restrictions or limitations upon the benefits
payable under the SERP as a condition of participation.
Notwithstanding any thing apparently to the contrary contained in
this Plan Statement, it shall be construed to prevent the
duplication of benefits provided under any other plan or
arrangement, whether qualified or nonqualified, funded or
unfunded, to the extent that such other benefits are provided
directly or indirectly by an Employer.
1. CROSS REFERENCE. Effective with respect to each
Participant who is actively employed by an Employer at some time
on or after the date of the adoption of this First Amendment, the
Appendix A to the Plan Statement is amended by replacing it with
the Appendix A attached to this Amendment.
1. CONDITIONAL ADOPTION OF AMENDMENT. This First
Amendment shall be effective as of the dates hereinabove recited
for every individual who becomes a Participant on or after the
date that this Amendment is adopted. This Amendment shall be
effective as of the dates herein above recited for every
individual who was a Participant before the adoption of this
Amendment only if such individual affirmatively consents in
writing to the adoption of this Amendment and delivers such
consent to the Secretary of the Compensation Committee (or his
delegee) not later than thirty (30) days after such individual is
notified in writing of the adoption of this Amendment.
1. SAVINGS CLAUSE. Save and except as herein expressly
amended the Plan Statement shall continue in full force and
effect.
APPENDIX A
ACTUARIALLY EQUIVALENT BENEFITS
When converting benefits to a single lump sum for payment
to a Participant, the benefit to be converted is the single life
annuity form payable at age sixty-five (65) years or the date as
of which it is determined, if later. When converting benefits to
a single lump sum for any other purpose, the benefit to be
converted shall be the benefit payable at the latest date such
benefit may commence. The factors to be used to convert any form
to a lump sum benefit (or to make the conversions into single
life annuities required by Section 1.2.5(c) or (d)) shall be:
Interest Assumption: The compounded average yield
on 30-year Treasury securities for the five (5)
calendar years preceding the calendar year
including the year of the Participant's
Termination of Employment or death (reduced,
for the purpose of making the conversions into
single life annuities required by Section
1.2.5(d) but not for the purpose of making the
conversions into single life annuities required
by Section 1.2.5(c), to reflect the highest
federal marginal income tax rate in effect as
of such Termination of Employment or death).
Mortality Assumption: The mortality rate determined from the
table prescribed by the Secretary of the
Treasury under section 417(e)(3)(A)(ii)(I) of
the Code based on the prevailing commissioners'
standard table used to determine reserves for
group annuity contracts.
Exhibit 11
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands of dollars, except per share data)
Unaudited
Thirteen Weeks Ended Fifty-Two Weeks Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
Basic
Net earnings (a) $ 43,866 $ 31,500 $ 69,329 $ 40,159
Weighted average shares
of common stock
outstanding (b) 46,277,014 46,165,698 46,166,842 46,210,151
Basic earnings per share
of common stock (a/b) $ .95 $ .68 $ 1.50 $ .87
Diluted
Net earnings (c) $ 43,866 $ 31,500 $ 69,329 $ 40,159
Weighted average shares
of common stock
outstanding 46,277,014 46,165,698 46,166,842 46,210,151
Common stock
equivalents 3,851,682 2,307,098 3,210,853 2,418,157
Weighted average shares of
common stock and common
stock equivalents (d) 50,128,696 48,472,796 49,377,695 48,628,308
Fully diluted earnings per
share of common stock and
common stock equivalents
(c/d) $ .88 $ .65 $ 1.40 $ .83
Common stock equivalents for earnings per share are computed by
the treasury stock method using the average market price.
Exhibit 13
<TABLE>
FINGERHUT COMPANIES, INC.
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
For the Fiscal Year Ended December 26, December 27, December 29, December 30, December 31,
(In thousands, except 1997 1996 1995 1994 1993(e)
per share data)
Earnings data:
<S> <C> <C> <C> <C> <C>
Revenues (a) $1,798,617 $1,762,865 $1,814,853 $1,699,772 $1,652,244
Earnings before income
taxes and minority 120,871 64,991 76,306 70,926 111,879
interest (b)
Net earnings 69,329 40,159 50,858 45,925 75,328
Net earnings as a 3.9% 2.3% 2.8% 2.7% 4.6%
percent of revenues
Per Share:
Earnings:
Basic (c) $ 1.50 $ .87 $ 1.11 $ .99 $1.64
Diluted (d) $ 1.40 $ .83 $ 1.05 $ .91 $1.50
Dividends declared $ .16 $ .16 $ .16 $ .16 $ .16
At Fiscal Year-End
(In thousands)
Financial position data:
Total assets $1,751,756 $1,389,698 $1,281,077 $1,097,933 $988,302
Total current debt $144,084 $73,084 $215,099 $ 336 $ 313
Long-term debt and
capitalized leases,
less current portion $345,187 $271,481 $146,564 $246,516 $246,852
Total stockholders' equity $669,985 $605,401 $547,490 $500,950 $472,389
</TABLE>
(a)Prior year revenues were restated to reflect the
reclassification of "Discount on sale of accounts
receivable," the "Provision for uncollectible accounts," and
"Administrative and selling expenses" (collection costs)
associated with the receivables sold to "Finance income and
other securitization income, net." These amounts totaled
$264.5 million, $262.5 million, $214.7 million, and $140.4
million for the fiscal years ended December 27, 1996;
December 29, 1995; December 30, 1994; and December 31, 1993,
respectively.
(b)1994 earnings before income taxes and minority interest
included a $29.9 million charge ($19.4 million after tax)
relating to unusual items. 1995 earnings before income taxes
and minority interest included an $8.0 million adjustment
($5.3 million after tax) to these unusual items.
(c)Based on a weighted average of 46,166,842; 46,210,151;
45,834,575; 46,237,706; and 46,019,158 shares of common stock
for the fiscal years ended December 26, 1997; December 27,
1996; December 29, 1995; December 30, 1994; and December 31,
1993, respectively.
(d)Based on a weighted average of 49,377,695; 48,628,308;
48,478,971; 50,270,419; and 50,101,739 shares of common stock
and common stock equivalents for the fiscal years ended
December 26, 1997; December 27, 1996; December 29, 1995;
December 30, 1994; and December 31, 1993, respectively.
(e)In 1993, the Company sold certain assets of COMB Corporation
and FDC, Inc., a subsidiary of Figi's, Inc.
Fingerhut Companies, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
RESULTS OF OPERATIONS
Fingerhut Companies, Inc. (the "Company") experiences variances
in quarterly results from year to year that result from changes
in the timing of its promotions, the types of customers and
products promoted and, to some extent, variations in dates of
holidays and the timing of the fiscal quarter ends. In addition,
the individual cost components (product cost, administrative and
selling expenses, and provision for uncollectible accounts) and
gross margin as a percent of net sales may vary from period to
period due to the different types of products, mail programs and
customers promoted.
1997 COMPARED WITH 1996
The Company reported revenues of $1.799 billion in 1997 compared
to $1.763 billion in 1996. 1997 revenues were positively
impacted by a significant increase in finance income and other
securitization income, net, due to the continued strong
performance of Metris Companies Inc. ("Metris"). Revenues also
reflected a decrease in net sales in the Retail Segment as a
result of the Company's strategy to reduce credit risk and
optimize long term customer profitability.
<TABLE>
RETAIL SEGMENT
Highlights of Operations -- For the Fiscal Year Ended
Managed Basis (a):
(In thousands) 1997 1996
<S> <C> <C>
Net sales $1,530,228 $1,638,363
Finance income and other revenue 232,181 241,130
Product cost 738,740 827,086
Administrative and selling 610,022 633,448
expenses
Provision for uncollectible 259,981 283,762
accounts
Discount on sale of accounts 66,732 77,447
receivable
Interest expense, net 27,946 25,305
Provision for income taxes 21,267 11,322
Net earnings $37,721 $21,123
</TABLE>
(a) Presented in a format consistent with prior periods.
<TABLE>
Highlights of Operations -- Owned For the Fiscal Year Ended
Basis (b):
(In thousands) 1997 1996
<S> <C> <C>
Net sales $1,530,228 $1,638,363
Finance income and other (10,877) (23,361)
securitization expense, net
Product cost 738,740 827,086
Administrative and selling 596,084 618,082
expenses
Provision for uncollectible 97,593 112,084
accounts
Interest expense, net 27,946 25,305
Provision for income taxes 21,267 11,322
Net earnings $37,721 $21,123
</TABLE>
(b)During 1997, the "Discount on sale of accounts receivable,"
the "Provision for uncollectible accounts" and
"Administrative and selling expenses" (collection costs)
associated with the receivables sold were reclassified to
"Finance income and other securitization expense, net." This
reclassification results in the financial statements being
presented on an "owned" versus "managed" basis. All prior
period financial information was restated to conform with the
current period's presentation. The reclassifications had no
effect on net earnings.
Net sales in 1997 were $1.530 billion compared to net sales of
$1.638 billion in 1996, a decrease of 7 percent. Fingerhut
Corporation ("Fingerhut"), the Company's core business in this
segment, generated net sales of $1.420 billion in 1997 compared
to $1.538 billion in 1996, a decrease of 8 percent. Net sales
from Fingerhut's new customer acquisition programs decreased 13
percent in 1997 to $231 million, due to a 20 percent reduction in
mailings, partially offset by a 10 percent improvement in sales
per mailing. New customer acquisition mailings were lower due to
segmentation actions designed to optimize long term customer
profitability and reduce cost per new customer. Net sales from
Fingerhut's existing customer list declined 7 percent to $1.190
billion, due to a 7 percent reduction in sales per mailing.
Credit actions taken to reduce the number of orders from high
risk customer segments, the UPS strike in August 1997, and
subsequent postal service delays throughout the fourth quarter,
were the primary reasons for the lower sales per mailing. Net
sales from Figi's Inc. ("Figi's") increased 5 percent in 1997 to
$98 million compared to $93 million in 1996 primarily due to an
increase in mailings. Net sales from Infochoice USA, Inc.
("Infochoice") were $2 million in 1997, compared with $2 million
in 1996.
Finance income and other securitization expense, net, was an
expense of $10.9 million for the year compared to an expense of
$23.4 million in 1996. The reduction in expense was primarily
due to a lower provision for uncollectible accounts relating to
receivables sold.
Product cost for the year was $738.7 million, or 48.3 percent of
net sales, compared to $827.1 million, or 50.5 percent of net
sales, during the prior year. The decrease as a percent of net
sales was the result of negotiated cost reductions, partially
driven by favorable currency changes, a change in the sales mix
to more high-margin products, lower product obsolescence expense
and favorable refurbishing costs.
Administrative and selling expenses in 1997 were $596.1 million,
or 39.0 percent of net sales, compared to $618.1 million, or 37.7
percent of net sales, in the prior year. Lower paper prices,
reduced mailings and tighter cost controls resulted in expense
levels below the prior year. The increase as a percent of net
sales was due to lower sales per mailing.
The provision for uncollectible accounts on a managed basis in
1997 was $260.0 million, or 17.0 percent of net sales, compared
with $283.8 million, or 17.3 percent of net sales, for the prior
year. Balances 29 days or more delinquent as a percent of
managed receivables were 22.2 percent, down from 22.9 percent at
the end of 1996.
The effective consolidated tax rate, which includes both the
Retail Segment and Metris, was 37.3 percent in 1997 compared with
36.7 percent in the prior year. The increase in the effective
tax rate was due primarily to additional state income taxes.
The Retail Segment generated net earnings of $37.7 million, or
$.76 per share, compared with $21.1 million, or $.44 per share,
for 1996, an increase of 79 percent.
<TABLE>
FINANCIAL SERVICES SEGMENT (METRIS)
Highlights of Operations -- For the Year Ended Dec. 31,
Managed Basis:
(In thousands) 1997 1996
<S> <C> <C>
Net interest income $306,361 $143,491
Provision for loan losses 319,299 136,305
Other operating income 212,869 126,647
Other operating expense 138,048 101,287
Provision for income taxes 23,825 12,530
Minority interest 6,450 980
Net earnings $31,608 $19,036
Total accounts 2,293 1,418
Average managed loans $2,294,893 $1,018,856
Net charge-off ratio 8.3 % 6.2 %
Delinquency ratio 6.6 % 5.5 %
</TABLE>
Metris contributed net earnings for the year ended December 31,
1997, of $31.6 million, or $.64 per share, up from $19.0 million,
or $.39 per share for 1996. The 66 percent increase in net
earnings 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 125 percent growth in
average managed loans from $1.0 billion at December 31, 1996 to
$2.3 billion at December 31, 1997.
The provision for loan losses on a managed basis was $319.3
million in 1997, compared to $136.3 million in 1996. The
increase primarily reflects higher credit card loan balances as
well as an increase in net charge-offs. The managed net charge-
off rate was 8.3 percent for 1997, compared to 6.2 percent in
1996.
Other operating income on a managed basis increased $86.2 million
to $212.9 million, primarily due to credit card fees, interchange
and other credit card income, which increased to $153.6 million
for 1997, up 74 percent over $88.3 million for 1996. In
addition, fee-based product revenues increased 86 percent to
$55.5 million for 1997, up from $29.9 million for 1996. 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 $138.0 million in 1997,
compared to $101.3 million in 1996. The increase in operating
expenses is primarily due to expansion in infrastructure to
support future growth. Metris' managed operating efficiency
ratio improved to 26.6 percent in 1997 from 37.5 percent in 1996.
1996 COMPARED WITH 1995
The Company reported revenues of $1.763 billion in 1996. Revenues
reflected a decrease in net sales as a result of the Company's
strategy to reduce mailings and improve advertising productivity.
As a result of this initiative, sales per mailing with respect to
Fingerhut Corporation's existing customer list increased 14
percent over 1995. 1996 revenues were positively impacted by a
significant increase in finance income and other revenues due to
the continued strong performance of Metris.
<TABLE>
RETAIL SEGMENT
Highlights of Operations -- For the Fiscal Year Ended
Managed Basis (a):
(In thousands) 1996 1995
<S> <C> <C>
Net sales $1,638,363 $1,782,282
Finance income and other revenue 241,130 245,001
Product cost 827,086 890,737
Administrative and selling 633,448 687,789
expenses
Provision for uncollectible 283,762 272,295
accounts
Discount on sale of accounts 77,447 82,392
receivable
Interest expense, net 25,305 25,213
Provision for income taxes 11,322 22,580
Net earnings $21,123 $46,277
</TABLE>
(a) Presented in a format consistent with prior periods.
<TABLE>
Highlights of Operations -- Owned For the Fiscal Year Ended
Basis (b):
(In thousands) 1996 1995
<S> <C> <C>
Net sales $1,638,363 $1,782,282
Finance income and other (23,361) (17,490)
securitization expense, net
Product cost 827,086 890,737
Administrative and selling 618,082 673,456
expenses
Provision for uncollectible 112,084 106,529
accounts
Interest expense, net 25,305 25,213
Provision for income taxes 11,322 22,580
Net earnings $21,123 $46,277
</TABLE>
(b)During 1997, the "Discount on sale of accounts receivable,"
the "Provision for uncollectible accounts" and
"Administrative and selling expenses" (collection costs)
associated with the receivables sold, were reclassified to
"Finance income and other securitization expense, net." This
reclassification results in the financial statements being
presented on an "owned" versus "managed" basis. All prior
period financial information was restated to conform with the
current period's presentation. The reclassifications had no
effect on net earnings.
Net sales in 1996 were $1.638 billion compared to net sales of
$1.782 billion in 1995, a decrease of 8 percent. Fingerhut
generated net sales of $1.538 billion in 1996 compared to $1.639
billion in 1995, a decrease of 6 percent. Net sales from
Fingerhut's new customer acquisition programs decreased 5 percent
in 1996 to $264 million. Net sales from Fingerhut's existing
customer list declined 6 percent to $1.274 billion. Both
decreases were primarily due to planned reductions in mailings,
partially offset by higher average order sizes and higher sales
per mailing. Net sales from Figi's Inc. increased 13 percent in
1996 to $93 million compared to $82 million in 1995 due to an
increase in mailings coupled with a higher average order size.
Net sales from Infochoice USA, Inc. were $2 million in 1996
compared to $57 million for 1995. Infochoice owns 50 percent of
USA Direct/Guthy Renker, Inc. ("USA Direct"), which had 1996 net
sales of $10 million. Montgomery Ward Direct L.P. ("MWD"), a
former 50 percent owned affiliate, had net sales of $31 million
for 1996 compared to $165 million for 1995. Because USA Direct
and MWD are both accounted for under the equity method, their
sales are not included as revenues in the Company's consolidated
financial statements. In June 1996, the Company reached an
agreement with Montgomery Ward & Co., Incorporated to withdraw as
a partner in the MWD joint venture. This transaction did not
have a material impact on the Company's consolidated financial
statements.
Finance income and other securitization expense, net, for the
year was an expense of $23.4 million compared to $17.5 million in
1995. The increase in expense was primarily due to a higher
provision for uncollectible accounts relating to receivables
sold, partially offset by the favorable effect of lengthened
payment plans.
Product cost for the year was $827.1 million, or 50.5 percent of
net sales, compared to $890.7 million, or 50.0 percent of net
sales, during the prior year. The increase as a percent of net
sales was primarily due to margin reductions in the core catalog
business as a result of the full year impact of the price value
strategy implemented in mid-1995.
Administrative and selling expenses in 1996 were $618.1 million,
or 37.7 percent of net sales, compared to $673.5 million, or 37.8
percent of net sales, in the prior year. Higher sales per
mailing, coupled with Fingerhut's cost-reduction programs, offset
the impact of higher paper and depreciation costs as well as the
start-up of two phone centers in Tampa, Florida.
The provision for uncollectible accounts in 1996 on a managed
basis was $283.8 million, or 17.3 percent of net sales, compared
with $272.3 million, or 15.3 percent of net sales, for the prior
year. Fingerhut experienced a 1996 deterioration in credit
performance relating to sales booked in the fourth quarter of
1995. This deterioration was driven by a significant increase in
bankruptcies. The increase as a percent of net sales was also
due to the higher ongoing delinquency levels Fingerhut
experienced as a result of a systems error reported in the third
quarter. Fingerhut implemented corrective measures to mitigate
the risk of credit losses, including tighter credit screens as
well as accelerated collection programs.
The effective consolidated tax rate, which includes both the
Retail Segment and Metris, was 36.7 percent in 1996 compared with
33.3 percent in the prior year. The increase in the effective
tax rate was due primarily to a decrease in merchandise donations
as well as additional state income taxes. In addition, the 1995
effective tax rate included a benefit for prior years' net
favorable resolution of an Internal Revenue Service examination.
As a result of the items discussed above, the Retail Segment
generated net earnings of $21.1 million, or $.44 per share,
compared with $46.3 million, or $.96 per share, for 1995.
<TABLE>
FINANCIAL SERVICES SEGMENT (METRIS)
Highlights of Operations -- For the Year Ended Dec. 31,
Managed Basis:
(In thousands) 1996 1995
<S> <C> <C>
Net interest income $143,491 $26,354
Provision for loan losses 136,305 26,234
Other operating income 126,647 52,969
Other operating expense 101,287 45,640
Provision for income taxes 12,530 2,868
Minority interest 980 -
Net earnings $19,036 $ 4,581
Total accounts 1,418 703
Average managed loans $1,018,856 $183,274
Net charge-off ratio 6.2% 2.2%
Delinquency ratio 5.5% 4.0%
</TABLE>
Metris reported net earnings for the year ended December 31,
1996, of $19.0 million, or $.39 per share, up from $4.6 million,
or $.09 per share for 1995. The 316 percent increase in net
earnings was the result of an increase in net interest income and
other operating income partially offset by increases in the
provision for loan losses and other operating expenses. These
increases are largely attributable to the growth in average
managed loans from $183 million at December 31, 1995 to $1
billion at December 31, 1996, an increase of 456 percent.
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 6.2 percent for 1996, compared to 2.2 percent
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 percent over $22.2 million for 1995. In addition,
fee-based product revenues increased 348 percent 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. However, Metris' managed
operating efficiency ratio improved to 37.5 percent in 1996 from
57.5 percent in 1995. The increase in operating expenses is
primarily due to expansion in the infrastructure to support the
growth of all three Metris businesses: consumer credit products,
extended service plans, and fee-based products and services.
LIQUIDITY AND CAPITAL RESOURCES (CONSOLIDATED)
The Company funds its operations through internally generated
funds, the sale of accounts receivable pursuant to the Fingerhut
Master Trust and the Metris Master Trust, third party bank
conduits, borrowings under the Company's Amended and Restated
Revolving Credit Facility and Metris' Revolving Credit Facility
(the "Revolving Credit Facilities") and the issuance of long-term
debt and common stock.
The proceeds from the sale of Fingerhut accounts receivable were
$1.205 billion and $1.280 billion at December 26, 1997 and
December 27, 1996, respectively. Net proceeds received from the
sale of Metris credit card receivables were $3.057 billion at
December 31, 1997 and $1.397 billion at December 31, 1996, of
which $29.3 million and $17.0 million, respectively, was
deposited in investor reserve accounts held by the trustee of the
Metris Master Trust for the benefit of the Metris Master Trust's
certificateholders.
In December 1996, the Fingerhut Master Trust Series 1994-1
certificates commenced controlled amortization, whereby
collections on the securitized receivables were used to pay down
the principal portion of the underlying certificates. In January
1997, the Company issued Series 1997-1 variable funding
certificates to refinance $790.0 million of the amortizing
certificates. The monthly proceeds generated from Series 1997-1,
combined with the proceeds of the issuance of additional
commercial paper under the Company's asset-backed commercial
paper program, was sufficient to cover the monthly pay-down of
the amortizing 1994-1 certificates. The Company plans to support
future receivables growth through the sale and issuance of
additional certificates by the Master Trusts and through
borrowings under the Revolving Credit Facilities. During 1998,
the Company plans to refinance Series 1997-1 with the proceeds
from the issuance of approximately $900 million of asset-backed
term certificates.
In December 1997, the Company entered into an agreement which
allows the Company to sell, to a third party conduit on a
continuous basis, an undivided interest in a pool of revolving
receivables arising out of private label credit card accounts
originated by Fingerhut National Bank. Per the agreement,
amortization begins in May 1998, whereby collections on the
securitized receivables will be used to pay down the balance of
the pool. Management expects to amend the Fingerhut Master Trust
in 1998 to include the revolving receivables.
In May 1997, the Metris Master Trust issued Series 1997-1
certificates to third parties with a principal amount of $794.8
million, generating net proceeds of $792.2 million of which
$667.7 million was used to reduce the Class A Variable Funding
Certificate issued under Series 1995-1. The Series 1997-1
certificates are scheduled to begin accumulating principal
collections in March 2001.
In September 1997, Metris acquired a $317.0 million credit card
portfolio from Key Bank USA, National Association. In October
1997, Metris acquired a $405.0 million credit card portfolio from
Mercantile Bank, National Association. These credit card
receivables were securitized and sold to investors through a bank
sponsored, multi-seller conduit.
In November 1997, the Metris Master Trust issued Series 1997-2
certificates to third parties with a principal amount of $654.5
million, generating net proceeds of $652.0 million of which
$478.0 million was used to reduce the Class A Variable Funding
Certificate issued under Series 1995-1. The Series 1997-2
certificates are scheduled to begin accumulating principal
collections in October 2001.
The Revolving Credit Facilities provide for aggregate
commitments of up to $500.0 million, of which $200.0 million
represents Fingerhut's credit facility and $300.0 million
represents Metris' credit facility. The expiration date for both
facilities is September 2001. Under the Revolving Credit
Facilities, outstanding revolving credit balances totaled $144.0
million and outstanding letters of credit totaled $6.0 million,
as of year-end 1997. As of year-end 1996, the Company had
outstanding revolving credit balances of $73.0 million and
outstanding letters of credit of $5.9 million. Additional
outstanding letters of credit under a separate agreement
aggregated $28.4 million and $23.2 million at December 26, 1997
and December 27, 1996, respectively.
In February 1997, the Company completed an exchange offer whereby
substantially all of the $125.0 million unregistered notes issued
in September 1996, were exchanged for registered notes with
substantially identical terms. In November 1997, Metris sold
$100.0 million of seven-year notes via a private placement. In
December 1997, the Company paid $25.0 million on its privately
placed senior notes. Thus, the Company had fixed rate notes
outstanding of $345.0 million as of December 26, 1997, compared
to fixed rate notes outstanding of $270.0 million as of December
27, 1996.
The Company generated $16.9 million of cash from operations in
1997 compared with $26.9 million generated from operations in
1996. This $10.0 million decrease in cash generated from
operations resulted from increased working capital requirements,
partially offset by the increase in earnings. The most
significant items affecting working capital were increases in
Metris' customer accounts receivable, other payables due to
credit card securitizations, net, and deferred income taxes. The
change in customer accounts receivable from a $157.0 million use
of cash in 1996 to a $227.2 million use of cash in 1997 resulted
primarily from the increase in the growth of retained receivables
associated with Metris credit card accounts issued or purchased
by Direct Merchants Bank, partially offset by the increase in
payables due to credit card securitizations, net. Deferred
income taxes increased primarily as a result of an increase in
Metris' reserve provisions for uncollectible accounts.
Net cash used by investing activities was $70.7 million in 1997
compared with $51.9 million in 1996. The increase was due to
goodwill recorded in the current year through Metris' portfolio
acquisitions. This increase was partially offset by a lower
level of capital spending in 1997. Higher capital expenditures
in 1996 included spending relating to the western distribution
center in Spanish Fork, Utah. In addition, the owner of certain
office and warehouse facilities leased to the Company exercised
its right to require the Company to repurchase those facilities
for approximately $14.1 million, which was completed in January
1996.
Net cash provided by financing activities was $138.2 million in
1997 compared with $19.9 million in 1996. This net $118.3
million increase was due primarily to the increase in borrowings
under the Revolving Credit Facilities and reduced repayments of
long-term debt.
During 1994, the Company's Board of Directors authorized the
repurchase of up to 2.5 million shares of the Company's common
stock that may be made from time to time at prevailing prices in
the open market or by block purchase and may be discontinued at
any time. The purchases are made within certain restrictions
relating to volume, price and timing in order to minimize the
impact of the purchase on the market for the Company's common
stock. During 1997, the Company repurchased at prevailing market
prices 231,900 shares of its common stock for an aggregate of
$3.4 million. Total purchases through December 26, 1997 were
1,612,200 shares for an aggregate of $24.9 million.
On October 9, 1997, the Company announced that its board of
directors had approved the filing of an application with the
Internal Revenue Service (IRS) for a ruling on a tax free
distribution of its stock in Metris. The Company filed the
ruling request with the IRS on October 23, 1997. The proposed
spin off of Metris is subject to receipt of a favorable ruling
from the IRS, to approval by Fingerhut's Board of Directors, and
to market conditions. If approved, the spin off is expected to
be completed during 1998. Should the spin off not occur, other
actions such as the Company's sale of Metris shares in the open
market and/or Metris' issuance of additional shares via a public
offering will be considered.
On January 22, 1998, the Company declared a cash dividend of $.04
per share, or an aggregate of $1.9 million, payable on February
19, 1998 to shareholders of record as of the close of business on
February 5, 1998.
The Company believes it will have sufficient funds available to
meet current and future commitments. For further discussion of
the above financing arrangements, see the Notes to Consolidated
Financial Statements.
MARKET RISK
The Company's principal market risk relates to interest rate
sensitivity, which is the risk that future changes in interest
rates will reduce net earnings or the net assets of the Company.
To manage the Company's direct risk to changes in market interest
rates, management actively monitors the interest sensitive
components of the Company's owned and managed balance sheet as
well as market interest rates in order to minimize the impact of
changes in interest rates on the fair market value of assets, net
earnings and cash flow.
The Company's primary owned and managed assets are installment
customer accounts receivable, which are at a fixed rate, and
revolving customer accounts receivable, which are virtually all
priced at rates indexed to the variable prime rate. On balance
sheet owned receivables are funded through a combination of the
Company's $500.0 million Revolving Credit Facilities, which are
indexed to the variable London Interbank Offered Rate (LIBOR),
$345.0 million in fixed rate long-term debt, and stockholders'
equity. The Company's off balance sheet managed accounts
receivables indexed to variable commercial paper rates, as well
as term certificates which are indexed to LIBOR or at fixed
rates.
Certificates issued from the trusts are either fixed or floating
rate. In the cases where fixed rate series are issued and backed
by floating rate assets, the Company has entered into interest
rate swap contracts with several bank counterparties in a hedged
(notional) amount equal to the total amount of the fixed rate
funding. This hedging activity offsets the impact of the fixed
rate funding of the Company's residual cash flow and income by
paying a floating LIBOR rate to the counterparties in exchange
for a fixed rate comparable to the rate of the trust's term
funding. Conversely, where floating rate series are issued and
backed by fixed rate assets, the Company has entered into
interest rate swap contracts with several bank counterparties.
This hedging activity minimizes the impact of the floating rate
trust funding of the Company's residual cash flow and income by
paying a fixed rate to the counterparties in exchange for a
floating rate which is comparable to the rate of the trust's term
funding.
The primary measure of interest rate risk is the simulation of
net income under different interest rate environments. An
approach used by management to quantify interest rate risk is a
sensitivity analysis. This approach calculates the impact on net
earnings, relative to a base case scenario, of rates increasing
or decreasing gradually over the next 12 months by 200 basis
points for Metris credit card receivables and by 300 basis points
for the Retail Segment. The aforementioned changes in interest
rates affecting the Company's financial instruments, including
both debt obligations and receivables, would result in
approximately a $2.0 million impact to net earnings. As interest
rates increase, net earnings increase; as interest rates
decrease, net earnings decrease.
YEAR 2000 ISSUE
The "Year 2000" issue developed because most computer systems and
programs were designed to record years (e.g. `1998') as two-digit
fields (e.g. `98'). When the year 2000 begins, these systems may
interpret "00" as the year 1900 and either stop processing date-
related computations or process them incorrectly. To prevent
this, companies need to examine their computer systems and
programs, fix the problem and test the results. Year 2000
compliance must be achieved on or before December 31, 1999.
Also, certain systems currently refer to dates beyond December
31, 1999 and, therefore, have required earlier compliance.
The Company, as with all database marketing companies, is heavily
dependent upon computer systems for all phases of its operations.
For this reason, it is aggressively addressing the Year 2000
issue to mitigate the effect on software performance. The
Company is also working with its significant suppliers and
service providers to assure that potential failures in these
organizations will have minimal impacts on the Company.
In early 1996, a comprehensive effort to identify and correct the
Year 2000 programming issues began. By mid-1996 the most
critical mainframe processing system was converted to be Year
2000 compliant and the Company initiated a large project to
address all remaining systems. This project consists of many sub-
projects which will span the remainder of 1998 and part of 1999.
In late 1997, a Year 2000 Project Office was created to oversee
the project, to address all related business issues and to
facilitate communication with significant suppliers and service
providers. As of December 26, 1997, the Company had spent
approximately $5 million on the project with an estimated expense
ranging from $11 to $13 million remaining. The Company believes
that it has allocated adequate resources to achieve Year 2000
compliance and believes that the cost of this effort will not
have a material effect on its financial position or liquidity.
EFFECTS OF INFLATION AND FOREIGN EXCHANGE
Since the Company's inventory turns approximately four times a
year, the product cost reported in the financial statements, on a
first-in, first-out basis, would not have been materially
different from the product cost at current prices. Also, since
the Company does not rely on any particular product group or
brand, management believes that the Company can adjust its
product mix to reduce the effects of price changes on its overall
merchandise base.
Due to the timing of the Company's promotions, the Company is
generally able to reflect cost increases and decreases resulting
from the effects of inflation and foreign currency fluctuations
in its selling prices. The Company imports certain products from
foreign countries. It is estimated that a 10 percent change in
exchange rates would cause less than a 1 percent change in
product cost.
Fingerhut Companies, Inc.
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.
Shareholders 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,
including: general economic conditions affecting disposable
consumer income such as employment, business conditions, interest
rates and taxation; risks associated with unsecured credit
transactions; interest rate risks; seasonal variations in
consumer purchasing activities; increases in postal and paper
costs; competition in the retail and direct marketing industry;
dependence on the securitization of accounts receivable and
credit card loans to fund operations; state and federal laws and
regulations related to advertising, offering and extending
credit, charging and collecting state sales/use taxes; product
safety; adverse litigation costs; and risks of doing business
with foreign suppliers. Each of these factors is more fully
discussed in Exhibit 99 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 26, 1997.
<TABLE>
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the fiscal year ended December 26, December 27, December 19,
(In thousands, except share and 1997 1996 1995
per share data)
Revenues:
<S> <C> <C> <C>
Net sales $1,534,967 $1,652,869 $1,793,727
Finance income and other 263,650 109,996 21,126
securitization income, net
1,798,617 1,762,865 1,814,853
Costs and expenses:
Product cost 738,830 830,423 892,736
Administrative and selling 759,687 708,477 708,946
expenses
Provision for uncollectible 141,582 130,561 110,922
accounts
Interest expense, net 37,647 28,413 25,943
1,677,746 1,697,874 1,738,547
Earnings before income taxes and 120,871 64,991 76,306
minority interest
Provision for income taxes 45,092 23,852 25,448
Net earnings before minority 75,779 41,139 50,858
interest
Minority interest (6,450) (980) -
Net earnings $69,329 $ 40,159 $50,858
Earnings per share:
Basic $ 1.50 $ .87 $ 1.11
Diluted $ 1.40 $ .83 $ 1.05
Weighted average shares 49,377,695 48,628,308 48,478,971
outstanding
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 26, December 27,
(In thousands) 1997 1996
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $145,418 $ 61,003
Accounts receivable 607,874 453,867
Retained interest in 406,650 329,926
securitized receivables
Less: reserve for
uncollectible accounts and
unearned finance income (190,777) (187,233)
Accounts receivable 823,747 596,560
Inventories 124,424 127,735
Promotional material 64,440 60,871
Deferred income taxes 197,355 166,879
Other 13,708 12,815
Total current assets 1,369,092 1,025,863
Property and equipment 272,190 285,182
Excess of cost over fair value of 77,161 42,601
net assets acquired
Customer lists 8,401 9,801
Other assets 24,912 26,251
$1,751,756 $ 1,389,698
LIABILITIES
Current liabilities:
Accounts payable $177,021 $ 164,557
Accrued payroll and employee 57,860 46,723
benefits
Other accrued liabilities 93,037 78,239
Revolving credit facility 144,000 73,000
Payables due to credit card 134,562 36,619
securitizations, net
Current portion of long-term 84 84
debt
Current income taxes payable 71,659 60,721
Total current liabilities 678,223 459,943
Long-term debt, less current 345,187 271,481
portion
Deferred income taxes 20,441 21,744
Other non-current liabilities 8,130 7,692
1,051,981 760,860
Minority interest 29,790 23,437
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 463 462
Additional paid-in capital 292,407 288,793
Unearned compensation (738) (1,856)
Earnings reinvested 377,853 318,002
Total stockholders' equity 669,985 605,401
$1,751,756 $ 1,389,698
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal year ended December 26, December 27, December 29,
(In thousands) 1997 1996 1995
Cash flows from operating
activities:
<S> <C> <C> <C>
Net earnings $69,329 $40,159 $50,858
Adjustments to reconcile net
earnings to net cash
provided (used) by operating
activities:
Depreciation and 55,554 52,464 47,103
amortization
Amortization of unearned 1,118 2,922 -
compensation
Minority interest in 6,353 980 -
earnings
Change in assets and
liabilities:
Accounts receivable (227,187) (156,956) (87,999)
Inventories 3,311 28,617 2,696
Promotional material and (4,462) 30,213 (21,777)
other current assets
Accounts payable 12,464 (20,918) 29,354
Payables due to credit
card securitizations, net 97,943 61,191 (24,572)
Accrued payroll and 11,137 6,851 (19)
employee benefits
Accrued liabilities 14,798 4,902 (6,921)
Current income taxes 11,735 18,634 1,407
payable
Deferred and other income (31,779) (37,196) (12,946)
taxes
Other (3,448) (5,010) (6,267)
Net cash provided (used) by 16,866 26,853 (29,083)
operating activities:
Cash flows from investing
activities:
Additions to property and (32,327) (51,855) (94,442)
equipment
Excess of cost over fair
value of credit card (38,330) - -
portfolio acquisitions
Net cash used by investing (70,657) (51,855) (94,442)
activities
Cash flows from financing activities:
Proceeds from long-term debt 100,000 125,000 -
Repayments of long-term debt (26,294) (100,098) (381)
Revolving credit facility 71,000 (42,000) 115,000
Repurchase of common stock (3,385) (4,877) (7,862)
Issuance of common stock 4,272 1,881 4,829
Sale of minority interest in - 47,384 -
subsidiary
Cash dividends paid (7,387) (7,394) (7,334)
Net cash provided by financing 138,206 19,896 104,252
activities
Net increase (decrease) in 84,415 (5,106) (19,273)
cash and cash equivalents
Cash and cash equivalents at 61,003 66,109 85,382
beginning of year
Cash and cash equivalents at $145,418 $61,003 $66,109
end of year
Supplemental noncash investing and
financing activities:
Net tax benefit from exercise
of non-qualified stock
options, disqualified
dispositions of ESPP shares,
and vesting of restricted
stock $ 797 $ 293 $1,354
Issuance of restricted stock 204 $4,778 $ -
</TABLE>
The Company included in cash and cash equivalents liquid
investments with maturities of 15 days or less.
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common stock
Additional
Number of Par paid-in Earnings Unearned
(In thousands, shares value capital reinvested compensation Total
except share data)
<S> <C> <C> <C> <C> <C> <C> <S> <C>
Balance, December 30, 1994 45,572,655 $456 $253,926 $246,568 $ - $ 500,950
Stock repurchase (214,100) (2) (1,192) (1,974) - (3,168)
Exercise of stock options 471,599 4 4,718 - - 4,722
Employee stock purchase plan 119,568 1 1,465 (4) - 1,462
Cash dividends paid - - - (7,334) - (7,334)
Net earnings - - - 50,858 - 50,858
Balance, December 29, 1995 45,949,722 459 258,917 288,114 - 547,490
Stock repurchase (358,800) (3) (1,997) (2,877) - (4,877)
Exercise of stock options 109,900 1 1,012 - - 1,013
Employee stock purchase plan 100,141 1 1,160 - - 1,161
Issuance of restricted stock,
net of forefeitures 353,917 4 4,774 - (4,778) -
Compensation expense - - - - 2,922 2,922
Excess of market value over
book value of minority
interest sold - - 24,927 - - 24,927
Cash dividends paid - - - (7,394) - (7,394)
Net earnings - - - 40,159 - 40,159
Balance, December 27, 1996 46,154,880 462 288,793 318,002 (1,856) 605,401
Stock repurchase (231,900) (2) (1,292) (2,091) - (3,385)
Exercise of stock options 300,740 3 4,007 - - 4,010
Employee stock purchase plan 55,159 - 695 - - 695
Issuance of restricted stock,
net of forfeitures 13,582 - 204 - (204) -
Compensation expense - - - - 1,322 1,322
Cash dividends paid - - - (7,387) - (7,387)
Net earnings - - - 69,329 - 69,329
Balance, December 26, 1997 46,292,461 $463 $292,407 $377,853 $(738) $669,985
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Fingerhut Companies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Fingerhut Companies, Inc. (the "Company") is a database
marketing company selling a broad range of products and
services to moderate to middle income consumers via catalogs,
telemarketing, television and other media.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of
the Company and its wholly owned and majority owned
subsidiaries, after elimination of all material intercompany
transactions and balances. Minority interest represents
minority stockholders' approximate 17 percent share of the
equity in Metris Companies Inc. ("Metris") (see Note 16). At
December 26, 1997 and December 27, 1996, the Company's
principal subsidiaries were Fingerhut Corporation
("Fingerhut"), Metris, Figi's Inc. ("Figi's") and Infochoice
USA, Inc. ("Infochoice").
Reclassifications have been made to prior years' Consolidated
Financial Statements whenever necessary to conform to the
current year's presentation.
Fiscal Year
The Company's fiscal year ends on the last Friday in December.
The fiscal years ended December 26, 1997, December 27, 1996
and December 29, 1995 included 52 weeks. The accounts of
Metris are on a calendar year basis.
Revenue Recognition
Substantially all of Fingerhut's sales are made on the
installment contract basis. Finance income on installment
contracts (net of estimated returns and exchanges, allowances,
uncollectible amounts and collection costs) is recognized using
an effective interest method over the weighted average of the
contract periods (which approximates eighteen months) or when
collected, whichever is faster. When accounts receivable are
sold (see Note 3), finance income, net, is recognized.
Sales are recorded at the time of shipment and a provision for
anticipated merchandise returns and allowances, net of
exchanges, is recorded based upon historical experience. The
provision charged against sales for 1997, 1996 and 1995
amounted to $216.0 million, $249.9 million and $295.9 million,
respectively.
Amounts billed to customers for shipping and handling of orders
are netted against the associated costs.
Interest income on credit card receivables is accrued and
earned based on the principal amount of the receivables
outstanding using the effective yield method. Accrued interest
is classified on the balance sheet with the related credit card
receivables. Interest income is generally recognized until a
loan is charged off.
Beginning in 1997, the sale of receivables has been recorded in
accordance with Statement of Financial Accounting Standards No.
125 (FAS 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Upon
sale, the sold receivables are removed from the balance sheet
and the related financial and servicing assets controlled and
liabilities incurred are initially measured at fair value, if
practicable. FAS 125 also requires that servicing assets and
other retained interests in the transferred assets be measured
by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their
relative fair values at the date of the transfer. The adoption
of FAS 125 did not have a material effect on the Company's
financial statements.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No.
128 (FAS 128), "Earnings Per Share." The Company adopted the
provisions of FAS 128 in fiscal 1997. FAS 128 requires
disclosure of earnings per share in both Basic and Diluted
format. Basic earnings per share is computed by dividing net
earnings by the weighted average shares of common stock
outstanding during the year. Diluted earnings per share is
computed by dividing net earnings by the weighted average
shares of common stock and common stock equivalents outstanding
during the year. The dilutive effect of the potential exercise
of outstanding options to purchase shares of common stock is
calculated using the treasury stock method. A reconciliation
of the calculation is as follows:
<TABLE>
In thousands, except per For the Year Ended
share data December 26, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
<S> <C> <C> <C>
Income available to common $69,329 46,167 $ 1.50
stockholders
Effect of Dilutive Securities:
Options - 3,211
Diluted EPS:
Income available to common
stockholders and assumed
conversion $69,329 49,378 $ 1.40
</TABLE>
<TABLE>
In thousands, except per For the Year Ended
share data December 27, 1996
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
<S> <C> <C> <C> <C>
Income available to common $40,159 46,210 $ .87
stockholders
Effect of Dilutive Securities:
Options - 2,418
Diluted EPS:
Income available to common
stockholders and assumed
conversion $40,159 48,628 $ .83
</TABLE>
<TABLE>
In thousands, except per For the Year Ended
share data December 29, 1995
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
<S> <C> <C> <C>
Income available to common $50,858 45,835 $ 1.11
stockholders
Effect of Dilutive Securities:
Options - 2,644
Diluted EPS:
Income available to common
stockholders and assumed
conversion $50,858 48,479 $ 1.05
</TABLE>
Inventories
Inventories, principally merchandise, are stated at the lower
of cost (as determined on a first-in, first-out basis) or
market. The Company has established a reserve for excess and
obsolete inventory, which is based on management's best
estimates of the amount of inventory that is slow moving or
subject to obsolescence. The estimates are subject to change
in the near term, depending on changes in economic conditions
and other factors.
Promotional Material
Promotional material primarily includes free gifts and items in
inventory associated with direct response advertising (paper,
printing and postage). The cost of direct response advertising
is deferred and expensed over the period during which the
orders are expected, generally one to four months. The amount
of direct response advertising included in the Consolidated
Statements of Financial Position is not material. The cost of
non-direct response advertising is expensed as incurred.
Credit Card Origination Costs
Metris 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 fees, if any, and amortized on a
straight-line basis over the cardholder's privilege period,
generally 12 months, as an adjustment to "Finance income and
other securitization income, net."
Property and Equipment
Property and equipment are stated at cost and depreciated or
amortized on a straight-line basis over their estimated
economic useful lives (30 years for buildings; five years for
software; three to 10 years for machinery and equipment,
furniture and fixtures; and over the estimated useful life of
the property or the life of the lease, whichever is shorter,
for leasehold improvements). The Company capitalizes software
developed for internal use that represents major enhancements
and replacements of operating and management information
systems.
Intangible Assets
The excess of cost over fair value of net assets acquired is
amortized on a straight-line basis over 40 years.
The ongoing cost of developing and maintaining customer lists
is charged to operations as incurred. Customer lists obtained
by the acquisition of a business are capitalized at fair market
value and amortized over their estimated useful lives,
approximately 15 years.
At each balance sheet date, management assesses whether there
has been an impairment in the carrying value of intangible
assets, primarily by comparing current and projected sales,
operating income and annual cash flows with the related annual
amortization expense. Based on this assessment, management has
concluded that intangible assets are fully realizable.
Income Taxes
The Company provides for deferred taxes on the temporary
differences between the financial statement carrying amounts
and the tax bases of assets and liabilities that will result in
future taxable or deductible amounts. The Company provides for
deferred taxes at the enacted tax rate that is expected to
apply when the temporary differences reverse.
Pervasiveness of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based Employee Compensation
Statement of Financial Accounting Standards No. 123 (FAS 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. Compensation cost for restricted stock is
recorded over the vesting period of the awards based on the
fair market value of the Company's stock on the date of grant.
See Note 14.
Reclassifications
"Discount on sale of accounts receivable," the "Provision for
uncollectible accounts" and "Administrative and selling
expenses" (collection costs) associated with the receivables
sold, were reclassified to "Finance income and other
securitization income, net." All prior-period financial
information was restated to conform with the current period's
presentation, and the reclassifications had no effect on net
earnings.
Newly Issued Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 (FAS 130), " Reporting Comprehensive Income."
This statement is effective for fiscal years beginning after
December 15, 1997, and amends several FASB Statements. The
Company does not believe implementation will have a material
impact on the consolidated financial statements and the Company
intends to adopt this statement prospectively, in the first
quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (FAS 131), " Disclosures about Segments of an
Enterprise and Related Information." This statement is
effective for fiscal years beginning after December 15, 1997,
and supersedes and amends several FASB Statements, including
Statement of Financial Accounting Standards No. 14 (FAS 14), "
Financial Reporting for Segments of a Business Enterprise."
The Company does not believe implementation will have a
material impact on the consolidated financial statements and
the Company intends to adopt this statement prospectively, in
the first quarter of 1998.
3. SALE OF ACCOUNTS RECEIVABLE
Fingerhut Master Trust and Third Party Conduits
The Fingerhut Master Trust allows Fingerhut to sell, on a
continuous basis, an undivided interest in a pool of customer
accounts receivables, subject to meeting certain eligibility
requirements. In June 1994, the Fingerhut Master Trust issued
the Series 1994-1 certificates which raised $900.0 million of
proceeds. The Series 1994-1 certificates commenced controlled
amortization in December 1996. In November 1994, the Fingerhut
Master Trust issued the Series 1994-2 variable funding
certificates with maximum proceeds of $490.4 million. The
Series 1994-2 amortization period is currently scheduled to
begin in May 1999. In January 1997, the Fingerhut Master Trust
issued the Series 1997-1 variable funding certificates to
refinance $790.0 million of the amortizing certificates.
During 1998, the Company plans to refinance Series 1997-1 with
the proceeds from the issuance of approximately $900.0 million
of asset-backed term certificates.
In December 1997, the Company entered into an agreement that
allows the Company to sell, to a third party conduit on a
continuous basis, an undivided interest in a pool of revolving
receivables arising out of private label credit card accounts
originated by Fingerhut National Bank. Per the agreement,
amortization begins in May 1998, whereby collections on the
securitized receivables will be used to pay down the balance of
the pool. Management expects to amend the Fingerhut Master
Trust in 1998 to include the revolving receivables.
The proceeds from the sale of accounts receivable were $1.205
billion and $1.280 billion at December 26, 1997 and December
27, 1996, respectively. The acceleration of financing income
on sold receivables resulted in a 1997 gain on sale of $2.3
million.
Included in "Finance income and other securitization income,
net" is the discount on sale of accounts receivable which is
comprised of the interest, discount and administrative and
other fees paid or accrued to the purchasers of the accounts
receivables sold. The discount, determined under the Fingerhut
Master Trust, approximates the prevailing short-term London
InterBank Offered Rate (LIBOR) and commercial paper rates for
high grade unsecured notes plus a credit spread and
administrative fees. The rates (including administrative fees)
applicable to receivables sold as of December 26, 1997 and
December 27, 1996 were 6.5 percent and 6.4 percent,
respectively.
Prior to implementation of FAS 125, the Company had included in
"Other accrued liabilities" the estimated expenses related to
the subsequent collections of the receivables sold, which
amounted to $18.1 million for 1996. Under FAS 125, no
servicing asset or liability is recorded as fees charged are
expected to cover related expenses.
Metris Master Trust
In May 1995, the Company established the Metris Master Trust.
The Metris Master Trust allows Metris to sell, on a continuous
basis, an undivided interest in a pool of credit card
receivables generated or acquired by Direct Merchants Credit
Card Bank, a subsidiary of Metris. In May 1995, the Metris
Master Trust issued the Series 1995-1 variable funding
certificates with maximum proceeds of $512.6 million and an
amortization period scheduled to begin in May 1999. In
September 1996, the Company amended Series 1995-1 to increase
the maximum proceeds to $1.025 billion. In April 1996, the
Metris Master Trust issued the Series 1996-1 certificates with
a principal amount of $655.5 million, generating proceeds of
$653.9 million, of which $400.0 million was used to pay down
asset-backed commercial paper supported by the Class A Variable
Funding Certificate issued under Series 1995-1. The Series
1996-1 certificates begin to amortize in August 1998.
In May 1997, the Metris Master Trust issued Series 1997-1
certificates with a principal amount of $794.8 million,
generating proceeds of $792.2 million of which $667.7 million
was used to reduce the Class A Variable Funding Certificate
issued under Series 1995-1. The Series 1997-1 certificates are
scheduled to begin accumulating principal collections in March
2001, however, the accumulation period could potentially begin
at a later date. The expected final payment date for these
certificates is in April 2002.
In September 1997, Metris acquired a $317 million credit card
portfolio from Key Bank USA, National Association. In October
1997, Metris acquired a $405 million credit card portfolio from
Mercantile Bank, National Association. These credit card
receivables were securitized and sold to investors with a
portion retained, which is included in "Retained interest in
securitized receivables."
In November 1997, the Metris Master Trust issued Series 1997-2
certificates to third parties with a principal amount of $654.5
million, generating net proceeds of $652.0 million of which
$478.0 million was used to reduce the Class A Variable Funding
Certificate issued under Series 1995-1. The Series 1997-2
certificates are scheduled to begin accumulating principal
collections in October 2001, however, the accumulation period
could potentially begin at a later date. The expected final
payment date for these certificates is in November 2002.
Net proceeds generated from the sale of credit card receivables
to the Metris Master Trust were $3.057 billion at December 31,
1997 and $1.397 billion at December 31, 1996, of which $29.3
million and $17.0 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 certificate-
holders.
A credit risk exists for losses on receivables in which the
certificate purchasers have an undivided interest, up to the
amount of the Company's retained interest in the Fingerhut
Master Trust, the Metris Master Trust, and the third party
conduits. Any losses beyond that level are the responsibility
of the certificate purchasers.
4. ACCOUNTS RECEIVABLE
Substantially all of the Company's accounts receivable
were generated by Fingerhut National Bank, Direct Merchants
Credit Card Bank and Figi's. Fingerhut uses fixed-term, fixed-
payment installment plans with terms up to 36 months (excluding
deferred billing periods of up to five months) and finance
charge rates of 24.9 percent. Beginning in 1996, Fingerhut
began converting its customers from existing fixed payment
installment plans to revolving credit plans with finance charge
rates of prime plus 16.4 percent (24.9 percent at December 26,
1997). Direct Merchants Bank grants credit card revolving
lines of credit which typically include an annual fee and
floating rates of interest ranging from 14.9 percent to 26.5
percent, excluding current year portfolio acquisitions. Figi's
uses fixed-term, fixed-payment plans with terms up to three
months (excluding deferred billing periods of up to
approximately three months) with no finance charge.
Accounts receivable are classified as current assets and
include some which are due after one year, consistent with
industry practice. Accounts receivable, net of
amounts sold, consists of the following:
<TABLE>
For the fiscal year ended
(In thousands) 1997 1996
<S> <C> <C>
Customer receivables (Retail) $339,553 $389,394
Retained interest in 178,652 171,537
securitized receivables
Reserve for uncollectible
accounts, net
of anticipated recoveries (100,901) (117,296)
Reserve for returns and (12,322) (13,319)
exchanges
Other reserves (22,765) (19,820)
Net collectible amount 382,217 410,496
Unearned finance income (22,750) (23,969)
Accounts receivable 359,467 386,527
Credit card and other 268,321 64,473
receivables (Metris)
Retained interest in 227,998 158,389
securitized receivables
Reserve for uncollectible
accounts, net of anticipated
recoveries (32,039) (12,829)
Credit card and other 464,280 210,033
receivables
Accounts receivable $823,747 $596,560
</TABLE>
Other reserves for customer receivables consist primarily of
allowances for anticipated adjustments of finance charges
billed to customers (due to earlier than scheduled payment) and
anticipated costs required to collect customer accounts.
Credit card and other receivables, net consist primarily of
credit card loans held for securitization, unbilled interest
and fees, and other amounts due from or to the trust as a
result of securitizations. These amounts include interest-
bearing deposits, which constitute amounts subject to liens by
the certificate-holders of the individual securitizations under
the Metris Master Trust and amounts deposited in investor
reserve accounts held by the trustee for the benefit of the
Metris Master Trust's certificate-holders.
Reserves for credit card receivables consist primarily of
allowances for anticipated adjustments of finance charges
billed to certain customers (due to unemployment and
disability) and adjustments to principal and finance charges
billed to certain customers (due to death) under a debt waiver
plan offered by Direct Merchants Bank. These reserves are
treated as a reduction of receivables in the Consolidated
Statements of Financial Position as payments under the plan are
generally used to reduce outstanding receivables.
The above reserves represent management's best estimates of the
amounts not expected to be collected. A change in economic
conditions could have a significant impact on the Company's
target market, which consists of moderate to middle income
consumers. As such, the reserve estimates are subject to
change in the near term.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
For the fiscal year ended
(In thousands) 1997 1996
<S> <C> <C>
Land and improvements $ 7,449 $ 7,444
Buildings and leasehold 117,676 112,173
improvements
Construction in progress 66,845 74,828
Machinery and equipment 139,539 130,029
Software 132,541 115,700
Other, principally furniture 26,233 19,988
and fixtures
490,283 460,162
Less: Accumulated (136,382) (111,219)
depreciation
Accumulated amortization
of software (81,711) (63,761)
Property and equipment $272,190 $285,182
</TABLE>
Software amortization expense recorded in 1997, 1996 and 1995
was $18.0 million, $19.3 million, and $16.8 million,
respectively.
6.REVOLVING CREDIT FACILITY
In September 1996, the Company restructured its bank credit
facilities. The Company's existing revolving credit facility
was amended and restated to, among other things, reduce the
aggregate commitments for revolving borrowings and letters of
credit from $400 million to $200 million (the "Amended
Revolving Credit Facility"). The Amended Revolving Credit
Facility will continue to be guaranteed by certain subsidiaries
of the Company and expires in September 2001. The proceeds
from borrowings under the Amended Revolving Credit Facility are
to be used by the Company to provide for working capital and
other general corporate purposes. At December 26, 1997, the
Company had no outstanding balance. At December 27, 1996, the
Company had an outstanding revolving credit balance of $23.0
million. The weighted-average interest rate on borrowings was
5.9 percent at December 27, 1996. The outstanding portion of
open letters of credit, primarily established to facilitate
international merchandise purchases, was not reflected in the
accompanying financial statements and aggregated $32.8 million
at December 26, 1997 and $29.1 million at December 27, 1996.
In September 1996, Metris entered into a revolving credit
facility with the same group of lenders as in the Amended
Revolving Credit Facility. Metris' facility (the "Metris
Revolving Credit Facility") provides for aggregate commitments
of $300 million and is used by Metris for working capital and
other general corporate purposes. Metris' obligations under
the Metris Revolving Credit Facility are secured by a pledge of
the capital stock of all of Metris' subsidiaries except Direct
Merchants Bank. In addition, the Metris Revolving Credit
Facility is guaranteed by Fingerhut Companies, Inc., Fingerhut
Corporation, and all other subsidiaries that guarantee the
Amended Revolving Credit Facility. The Metris Revolving Credit
Facility expires in September 2001. At December 31, 1997,
Metris had an outstanding revolving credit balance of $144.0
million and the weighted-average interest rate on borrowings
was 6.5 percent. At December 31, 1996, Metris had an
outstanding revolving credit balance of $50.0 million and the
weighted-average interest rate on borrowings was 5.9 percent.
The outstanding portion of open letters of credit was not
reflected in the accompanying financial statements and
aggregated $1.5 million at December 26, 1997.
7.LONG-TERM DEBT
In September 1996, the Company closed the private placement of
$125.0 million of three-year senior notes. In February 1997,
the Company completed an exchange offer whereby substantially
all of the $125.0 million of unregistered notes were exchanged
for registered notes with substantially identical terms.
In November 1997, Metris privately issued and sold $100.0
million of seven-year senior notes (the "Metris Senior Notes")
pursuant to an exemption under the Securities Act of 1933, as
amended. In January 1998, Metris commenced an exchange offer
of the Metris Senior Notes pursuant to a registration
statement. The terms of the new Metris Senior Notes are identical
in all material respects to the original private issue. The
Metris Senior Notes are unconditionally guaranteed on a senior
basis, jointly and severely, by Metris Direct, Inc. (the
"Guarantor"), and all future subsidiaries of Metris that
guarantee any of Metris' indebtedness, including the Metris
Revolving Credit Facility.
Long-term debt and related maturity dates are as follows:
<TABLE>
(In thousands) Maturity Interest 1997 1996
date rate
Privately Placed Senior
Notes
<S> <C> <C> <C> <C> <S> <C>
Series B Dec. 1997 10.12% $ - $25,000
Series A Unsecured June 2002 8.92% 60,500 60,500
Series B Unsecured June 2004 8.92% 14,500 14,500
Series C Unsecured Aug. 2000 6.83% 45,000 45,000
Senior Notes Sept. 1999 7.38% 125,000 125,000
Metris Senior Notes Nov. 2004 10.00% 100,000 -
Other indebtedness (due in various
installments through November 2010;
interest at varying rates ranging
from 7.5% to 8.0% at December 26, 1997) 271 1,565
345,271 271,565
Current portion of long-term debt (84) (84)
Long-term debt, less current portion $345,187 $271,481
</TABLE>
Scheduled annual maturities due on long-term debt at December
26, 1997 were as follows:
(In thousands)
1998 $ 84
1999 125,067
2000 45,057
2001 14
2002 60,503
Thereafter 114,546
$345,271
The Privately Placed Senior Notes contain covenants restricting
the payment of dividends. The maximum amount of dividends the
Company was permitted to pay at December 26, 1997 was $137.5
million.
8. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
This footnote discloses the fair value of all financial
instruments, both assets and liabilities, recognized and not
recognized, in the Consolidated Statements of Financial
Position for which it is practicable to estimate fair value.
Quoted market prices generally are not available for all of the
Company's financial instruments. Accordingly, fair values are
based on judgments regarding current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates involve uncertainties and matters of
judgment, and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the
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, accounts payable, accrued payroll
and employee benefits, and other accrued liabilities
The carrying amounts approximate fair value due to the short
maturity of these instruments.
Accounts receivable
Customer installment receivables:
Since the average collection period exceeds 90 days, the
discounted present value of expected future cash flows from the
collection of the receivables and related deferred finance
income was calculated and it was determined that the carrying
amount approximates fair value.
Credit card receivables and revolving credit receivables:
Currently, credit card and revolving credit receivables are
originated with variable rates of interest, with interest rate
spreads that differ based on the related risk of such
receivables. Thus, the carrying value approximates market
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 and revolving credit receivables does not represent
the underlying value of the established cardholder
relationships.
Retained interest in securitized receivables:
When the Company securitizes receivables, it exchanges its
receivables for certificates representing undivided interests
in such receivables. Due to the short-term revolving nature of
the portfolio, the carrying amount of the Company's "Retained
interest in securitized receivables" in the Fingerhut Master
Trust, the Metris Master Trust, and third party conduits
approximates fair value.
Long-term debt
The fair value of the Company's long-term debt was estimated
based on the amount of future cash flows associated with each
instrument discounted using the current rates offered to the
Company for similar debt instruments of comparable maturity.
The fair value of Metris' long-term debt was obtained from an
independent third party.
Interest rate cap and swap agreements
The fair values of interest rate cap and swap agreements were
obtained from dealer quoted prices. These values represent the
estimated amount the Company would pay to terminate the
agreements, 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>
December 26, 1997 December 27, 1996
Carrying Estimate Carrying Estimate
(In thousands) amount fair value amount fair value value
<S> <C> <C> <C> <C>
Cash and cash equivalents $145,418 $145,418 $61,003 $61,003
equivalents
Accounts receivable $823,747 $823,747 $596,560 $596,560
Long-term debt $345,271 $353,925 $271,565 $278,218
Interest rate swap agreements
in a net receivable
(payable) position $ - $21,894 $ - $2,683
Interest rate cap $ 6,053 $ 249 $ 7,291 $2,899
agreements
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES
OTHER THAN TRADING
The Company enters into interest rate cap and swap agreements
to hedge its economic exposure to fluctuating interest rates
currently associated with the floating rate certificates issued
by the Fingerhut Master Trust and the fixed rate certificates
issued by the Metris Master Trust. Any premiums paid for these
agreements are amortized to "Finance income and other
securitization income, net" where the economic exposure to
fluctuating interest rates exists.
The Fingerhut Master Trust Series 1994-2 certificates,
initially issued in November 1994, required a six-year
agreement which effectively capped LIBOR exposure at 11.2
percent on a hedged (notional) amount varying up to $490.4
million over the life of the agreement. In connection with an
amendment of Series 1994-2 in May 1995, an additional two and
one-half year, 11.2 percent interest rate cap was required for
up to a notional amount of $209.7 million.
As a result of 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 effectively capping short-
term LIBOR exposure at 11.2 percent for the floating notional
amount of the certificates. In connection with the amendment
of Series 1995-1 in September 1996, two additional six and two-
thirds year, 11.2 percent interest rate caps were required for
up to a notional amount of $513.0 million.
In June and July 1995, the Company entered into several
interest rate corridor swap agreements with total notional
amounts of $900.0 million. These agreements exchange an
obligation to pay floating LIBOR of up to 11.2 percent for an
obligation to pay fixed interest rates. The fixed interest
rate obligation is approximately 5.8 percent on a $400.0
million notional amount and approximately 5.7 percent on the
remaining $500.0 million notional amount. These agreements
expire in July 1998.
In connection with the issuance of the $655.5 million Metris
Master Trust Series 1996-1 certificates in April 1996, the
Company entered into two interest rate corridor swap agreements
with total notional amounts of $605.5 million. These
agreements exchange an obligation to pay fixed interest rates
of approximately 6.3 percent for an obligation to pay floating
LIBOR rates. These agreements expire in February 2000.
In connection with the issuance of the $850.0 million Metris
Master Trust Series 1997-1 certificates in May 1997, Metris
entered into three interest rate corridor swap agreements with
total notional amounts of $722.5 million. These agreements
exchange an obligation to pay fixed interest rates of
approximately 6.7 percent for an obligation to pay floating
LIBOR rates. These agreements expire in April 2002.
In connection with the planned issuance of the $450.0 million
Fingerhut Master Trust Series 1998-1 certificates and the
$450.0 million Fingerhut Master Trust Series 1998-2
certificates in April 1998, the Company entered into an
interest rate swap agreement in October 1997 with an initial
notional amount of $415.0 million. This agreement has a
forward start date of April 1998 and amortizes down to $0 in
October 1999. This agreement exchanges an obligation to pay
floating LIBOR rates for an obligation to pay fixed interest
rates of approximately 5.95 percent. The Company also cash
settled (at fair market value) the final three payments of an
interest rate swap corridor agreement with a notional amount of
$400.0 million set to expire in July 1998.
For interest rate cap and swap transactions, the contract or
notional amounts do not represent exposure to credit loss.
Entering into interest rate cap and swap agreements involves
the risk of dealing with counterparties and their ability to
meet the terms of the contracts. Notional principal amounts
often are used to express the volume of these transactions, but
the amounts potentially subject to credit risk are much
smaller.
9. INTEREST EXPENSE
Net interest expense was as follows:
<TABLE>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Interest expense $40,156 $30,073 $27,120
Interest income (2,509) (1,660) (1,177)
Net interest expense $37,647 $28,413 $25,943
</TABLE>
The Company paid interest of $38.5 million in 1997, $35.0
million in 1996 and $24.2 million in 1995.
10.OPERATING LEASES
Rental expense for both cancelable and non-cancelable operating
leases, (principally for office and warehouse facilities and
computer equipment) for fiscal years 1997, 1996 and 1995 was
$32.9 million, $35.9 million, and $38.6 million, respectively.
Future minimum annual rentals and payments under non-cancelable
operating leases at December 26, 1997 are as follows:
(In thousands)
1998 $29,081
1999 $19,415
2000 $6,734
2001 $2,279
2002 $1,138
Thereafter $4,536
The Company leased certain office and warehouse facilities (the
"properties") from a former affiliated company. Annual rental
expense for the properties in 1995 was $1.7 million. The lessor
exercised its right to require the Company to purchase the
properties for approximately $14.1 million. The Company
completed the purchase in January 1996.
The Company also leased office space for one of its
telemarketing centers and warehouse space from a partnership
owned by various members of the immediate family of one of the
Company's Directors. Rental expense for 1996 and 1995 was $.6
million and $1.9 million, respectively.
11.EMPLOYEE BENEFIT PLANS
The Company maintains four non-contributory, defined benefit
pension plans which together cover substantially all full-time
non-union employees. The plans provide monthly retirement
benefits to eligible participants based upon years of service
and level of compensation. The Company's funding policy is to
make an annual contribution equal to, or exceeding, the minimum
required by the Employee Retirement Income Security Act of
1974. The actuarial present value of the benefit obligation
and the funded status of the plans were as follows:
<TABLE>
(In thousands) 1997 1996
Actuarial present value of benefit
obligations:
<S> <C> <C>
Vested benefits $24,199 $18,932
Non-vested benefits 4,616 2,097
Accumulated benefit obligation 28,815 21,029
Effect of future compensation 10,615 9,437
increases
Projected benefit obligation 39,430 30,466
Plan assets at fair value 31,187 24,770
Unfunded projected benefit 8,243 5,696
obligation
Unrecognized prior service cost (2,436) (1,345)
Unrecognized net gain 6,670 6,170
Additional liability 2,305 327
Accrued pension cost $14,782 $10,848
</TABLE>
Plan assets at December 26, 1997 and December 27, 1996 were
primarily invested in an equity fund.
The actuarial present value of the projected benefit
obligations represents the present value of benefits to be paid
in the future under current provisions of the plan based on
accumulated service to date and assuming future annual pay
increases of 6.0 percent and 5.5 percent in 1997 and 1996,
respectively. Projected benefits have been discounted using
rates of 7.25 percent and 7.75 percent for 1997 and 1996,
respectively. In determining pension expense, the assumed long-
term rate of return on plan assets was 10.5 percent for 1997
and 9.5 percent for 1996 and 1995. The Company's non-union
pension plans have vesting periods of five years.
The components of pension expense for non-union employees were
as follows:
<TABLE>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Benefit earned during $2,436 $2,942 $1,990
the period
Interest accrued on
projected benefit
obligation 2,627 2,366 1,828
Actual return on assets (6,525) (4,291) (4,360)
Deferred gain 4,230 2,519 2,875
Amortization of prior 140 76 7
service cost
Amortization of net (72) 1 (85)
(gain) loss
Pension expense for $2,836 $3,613 $2,255
the period
</TABLE>
Additionally, the Company participates in a multi-employer
pension plan for all union employees. The plan provides
monthly retirement benefits to eligible participants based upon
years of service. The plan is funded with contributions made
in accordance with negotiated labor contracts. The pension
expense related to this plan for 1997, 1996 and 1995 was $1.0
million, $.9 million, and $1.5 million, respectively.
The Company maintains four defined contribution plans, which
together cover substantially all non-union employees. Three of
the plans have a 401(k) provision, including one which provides
for an employer matching contribution only; another which
provides for an employer matching contribution as well as a
profit sharing contribution; and the third which provides for
an employer profit sharing contribution only. Each of the
profit sharing contributions are discretionary and are
determined by the board of directors for each of the individual
companies. The maximum profit sharing contribution is 11
percent of each participant's eligible compensation. The
fourth defined contribution plan is a money purchase plan and
provides for a non-discretionary employer contribution of 4
percent of each participant's eligible compensation. The cost
to the Company of these plans was $12.2 million, $10.8 million,
and $11.7 million for 1997, 1996 and 1995, respectively.
Additionally, the Company maintains one defined contribution
plan (with a 401(k) provision and employer matching
contribution) and participates in another multi-employer
defined contribution plan (with a 401(k) provision only) for
all union employees. The cost to the Company of these plans
was not material for each of the years presented.
In January 1997, Metris adopted a defined contribution profit
sharing plan (the "Metris Retirement Plan") that provides
retirement benefits for eligible employees. During 1997,
Metris' employees participated in the Metris Retirement Plan,
which provides savings and investment opportunities. The
Metris Retirement Plan stipulates that eligible employees with
at least one year of service may elect to contribute to the
Metris Retirement Plan. Metris matches a portion of employee
contributions and makes discretionary contributions based upon
Metris' financial performance. For the year ended December 31,
1997, Metris contributed $.9 million to the Metris Retirement
Plan.
12.INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
(In thousands) 1997 1996 1995
Currently payable:
<S> <C> <C> <C>
Federal $69,651 $65,682 $36,072
State 6,903 2,537 1,750
Deferred (31,462) (44,367) (12,374)
Provision for income $45,092 $23,852 $25,448
taxes
</TABLE>
The Company's effective income tax rate differed from the U.S.
federal statutory rate as follows:
<TABLE>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
U.S. federal statutory 35.0% 35.0% 35.0%
rate
State income taxes, net of
federal tax benefit 3.0 2.0 1.4
Merchandise donations (1.6) (1.5) (3.1)
Other, net .9 1.2 -
Effective income tax rate 37.3% 36.7% 33.3%
</TABLE>
The "Other, net" tax rate in 1997, 1996 and 1995 was composed
of miscellaneous items, none of which were individually
significant.
The current and long-term deferred income tax assets and
liabilities included in the Consolidated Statements of
Financial Position as of December 26, 1997 and December 27,
1996 were composed of the following:
<TABLE>
(In thousands) 1997 1996
Current and long-term deferred
income tax assets resulting
from future deductible temporary
differences are:
<S> <C> <C>
Accounts receivable reserves $258,939 $234,566
Yield reserve 14,702 14,557
Unearned income 15,341 -
Inventory obsolescence reserves 6,368 6,635
Other 27,003 18,366
Total deferred income tax $322,353 $274,124
assets
Current and long-term deferred
income tax liabilities resulting
from future taxable temporary
differences are:
Accelerated depreciation and $(27,786) $(24,125)
amortization
Finance income deferred (105,688) (97,284)
Deferred advertising (9,782) (6,140)
Other (2,183) (1,440)
Total deferred income tax $(145,439) $(128,989)
liabilities
</TABLE>
Management believes the Company's prior operating earnings, on
a tax basis, will allow for full utilization of the deferred
tax assets included in its consolidated financial statements.
The Company paid income taxes (net of refunds) of $65.4
million, $42.7 million, and $37.1 million, during 1997, 1996
and 1995, respectively.
13.RELATED PARTY TRANSACTIONS
Related party transactions, detailed by subject and Note
reference are as follows:
Operating leases Note 10
Stockholders' equity Note 14
14.STOCKHOLDERS' EQUITY
The Company currently has 100,000,000 authorized shares of
$.01 par value common stock of which 46,292,461 and 46,154,880
were issued and outstanding as of December 26, 1997 and
December 27, 1996, respectively. The Company is authorized to
issue 5,000,000 shares of $.01 par value preferred stock, none
of which have been issued.
During 1994, the Company's Board of Directors authorized the
repurchase of up to 2.5 million shares of the Company's common
stock that may be made from time to time at prevailing prices
in the open market or by block purchase and may be
discontinued at any time. The purchases will be made within
certain restrictions relating to volume, price and timing in
order to minimize the impact of the purchase on the market for
the Company's stock. To date, the Company has repurchased
1,612,200 shares of its common stock at prevailing market
prices for an aggregate of $24.9 million.
Fingerhut 1994 Employee Stock Purchase Plan
Effective July 1, 1994, the Company made available to certain
employees the Fingerhut 1994 Employee Stock Purchase Plan
under which eligible employees have the opportunity to
purchase Company common stock at a discounted market value
determined on the first or last business day of the calendar
quarter, whichever is lower. A maximum of 750,000 shares are
authorized, of which 200,000 shares are subject to shareholder
approval. During 1997, 55,159 shares were issued at an
average price of $12.60. During 1996, 100,141 shares were
issued at an average price of $11.59 per share. During 1995,
119,568 shares were issued at an average price of $12.19 per
share.
Fingerhut Companies, Inc. Stock Option Plan
The Fingerhut Companies, Inc. Stock Option Plan provides
certain management of the Company with options to purchase up
to 7,768,000 shares of common stock of which 3,625 were
available for grant at December 26, 1997. The options are
granted at the fair market value on the date of grant. The
options become exercisable in five equal annual installments
beginning on the first anniversary of the date of grant.
Unexercised options will be canceled 10 years and one month
after the date of grant.
Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock
Option Plan
The Fingerhut Companies, Inc. 1995 Long-Term Incentive and
Stock Option Plan provides for the granting of 4,250,000 stock
options (either incentive stock options or non-qualified stock
options), stock appreciation rights or restricted stock to
officers and other employees. At December 26, 1997, 1,272,546
shares were available for grant. The Compensation Committee
of the Board has the authority to determine the exercise
prices, vesting dates, expiration dates and other material
conditions upon which options or awards may be exercised,
except that the option price of incentive stock options may
not be less than 100 percent of the fair market value of the
common stock on the date of grant, and not less than 110
percent of the fair market value in the case of an incentive
stock option granted to any employee owning more than 10
percent of the Company's common stock (a "Ten Percent
Employee"), and the term of non-qualified stock options may
not exceed 15 years from the date of grant (not more than 10
years for incentive stock options and five years for incentive
stock options granted to a Ten Percent Employee). During 1997
and 1996, the Compensation Committee granted a total of
985,445 and 687,973 options, respectively. In 1997 and 1996,
15,000 and 353,917 shares of restricted stock were issued,
respectively. The grant date fair value of each of these
awards was $14.88 and $13.50. For restricted shares granted
in 1997, 5,000 shares vested May 12, 1997 and, subject to
continued employment, 5,000 shares vest on May 12, 1998 with
the remaining 5,000 shares vesting on May 12, 1999. For
restricted shares granted in 1996, 25 percent of the shares
vested on March 31, 1996, 25 percent vested on March 31, 1997
and, subject to continued employment, the remaining 50 percent
will vest on August 31, 1998. The unearned portion of the
awards is being amortized as compensation expense on a
straight-line basis over the related vesting period.
Compensation expense related to the restricted stock awards
totaled $1.1 million and $3.6 million for the years ended
December 26, 1997 and December 27, 1996, respectively, which
included tax assistance payments made by the Company with
respect to the first 25 percent of the awards that vested.
Fingerhut Companies, Inc. Nonemployee Director Stock Option
Plan
The Fingerhut Companies, Inc. Nonemployee Director Stock
Option Plan provides for the granting of 100,000 stock options
to directors of the Company who are not officers or employees.
At December 26, 1997, 40,000 shares were available for grant.
A committee of members of the Board of Directors who are
officers or employees of the Company has the authority to
determine the exercise prices, vesting dates, expiration dates
and other conditions upon which options may be exercised,
except that the term of such options may not exceed 15 years from
the date of the grant.
Fingerhut Companies, Inc. Performance Enhancement Investment
Plan
The Fingerhut Companies, Inc. Performance Enhancement
Investment Plan ("PEIP Plan") provided certain management of
the Company with the right to purchase options to acquire up
to 3,000,000 shares of common stock. Under the PEIP Plan,
management was offered the opportunity to purchase option
units, each consisting of four options to purchase common
stock, with exercise prices of 110 percent, 120 percent, 130
percent and 140 percent, respectively, of the fair market
value at the time of grant. The options were offered at
prices determined by the Company on the grant date. During
1995, the Company discontinued the PEIP Plan and canceled the
remaining ungranted shares. No shares were repurchased during
1997. During 1996 and 1995, the Company repurchased 251,000
and 1,724,956 options, respectively, granted under the PEIP
Plan at or below the original purchase price paid by the
option holders, and the repurchase had no impact on the
Company's net earnings. As of December 26, 1997, 91,244
options remained outstanding and will be repurchased, if
unexercised, at an amount equal to or less than the purchase
price on the earlier of the optionee's termination of
employment or the seventh anniversary of the grant date. The
remaining obligation to repurchase outstanding options has
been accrued and is included in "Accrued payroll and employee
benefits" in the Consolidated Statements of Financial
Position.
Fingerhut Companies, Inc. 1992 Stock Option and Long-Term
Incentive Plan
The Fingerhut Companies, Inc. 1992 Stock Option and Long-Term
Incentive Plan provides certain management of the Company with
options to purchase up to 523,382 shares of common stock. In
1992, the Company granted the Chairman and Chief Executive
Officer non-qualified options to purchase 523,382 shares of
common stock with an option price of $15.00, the fair market
value at the date of grant. In November 1993, 50 percent of
these options became exercisable, 50 percent became
exercisable in November 1994 and all expire in December 1999.
The Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (FAS 123),
"Accounting for Stock- Based Compensation." Accordingly, no
compensation cost has been recognized with respect to the
Company's stock option grants or the Employee Stock Purchase
Plan. Had compensation cost for these plans been determined
based on the fair value methodology prescribed by FAS 123, the
Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
(In thousands, except per share 1997 1996
data)
<S> <C> <C>
Net earnings - as reported $69,329 $40,159
Net earnings - pro forma $66,376 $37,549
Earnings per share diluted - as $ 1.40 $ .83
reported
Earnings per share diluted - pro $ 1.34 $ .77
forma
</TABLE>
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 with the
following weighted-average assumptions used for grants in 1997
and 1996.
<TABLE>
1997 1996
<S> <C> <C>
Dividend yield 1.1% 1.1%
Expected volatility 44.72% 44.32%
Risk-free interest rate 6.38% 6.65%
Expected lives 7.32 years 7.38 years
</TABLE>
Information regarding the Company's stock option plans for
1997, 1996 and 1995 is as follows:
<TABLE>
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options
outstanding,
beginning
<S> <C> <C> <C> <C> <C> <C>
of year 7,024,885 $9.57 6,833,547 $9.88 7,943,878 $13.08
Options
exercised (300,740) $11.36 (109,900) $6.55 (471,599) $7.16
Options
granted 1,155,445 $19.58 968,973 $13.44 1,474,800 $15.13
Options
canceled/
forfeited (84,868) $14.16 (667,735) $18.86 (2,113,532) $26.20
Options
outstanding,
end of
year 7,794,722 $10.93 7,024,885 $9.57 6,833,547 $9.88
Weighted-average
fair value of
options, granted
during the year $10.10 $7.28 $8.09
Weighted-average
exercise price of
options, exercisable
at end of year $8.65 $7.98 $7.87
</TABLE>
The following table summarizes information about stock options
outstanding at December 26, 1997:
<TABLE>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractural Exercise Exercisable Exercise
Exercise Prices at 12/26/97 Life Price at 12/26/97 Price
<C> <C> <C> <S> <C> <C> <C>
$5.455 3,735,820 1.9 Years $ 5.455 3,735,820 $ 5.455
$6.750 to 175,500 2.4 Years $ 8.734 175,500 $ 8.540
$10.875
$11.250 to 1,252,380 8.1 Years $13.640 457,855 $13.520
$14.875
$15.000 1,445,427 6.6 Years $15.000 1,142,821 $15.000
$15.063 to 1,052,497 9.3 Years $20.223 81,184 $18.610
$20.438
$21.140 to 133,098 5.8 Years $24.647 97,699 $25.170
$35.690
$5.455 to 7,794,722 5,690,879
$35.690
</TABLE>
15.OTHER DISCLOSURES
Administrative and selling expenses included promotional
material and advertising expenses of $375.6 million, $413.1
million, and $488.6 million for 1997, 1996 and 1995,
respectively.
Amortization expense relating to the excess of cost over fair
value of net assets acquired was $1.3 million for 1997, $1.4
million for 1996 and $1.3 million for 1995. Accumulated
amortization was $11.8 million and $10.5 million at December
26, 1997 and December 27, 1996, respectively.
Amortization expense relating to customer lists was $1.4
million for 1997, 1996 and 1995. Accumulated amortization was
$12.6 million and $11.2 million at December 26, 1997 and
December 27, 1996, respectively.
16.SALE OF STOCK BY SUBSIDIARY
In October 1996, Metris, a then wholly owned subsidiary,
completed an initial public offering of 3,258,333 of its
common shares at $16 a share. The transaction reduced the
Company's ownership interest to approximately 83 percent.
Metris realized net cash proceeds of approximately $47.4
million from the sale of shares, after underwriting discounts
and commissions and expenses of the offering. The sale
resulted in an increase of approximately $24.9 million in the
Company's proportionate share of Metris' equity, which is
included in "Additional paid-in capital" in the Company's
Consolidated Statements of Financial Position.
17.CONTINGENCIES
The Company is a party to various claims, legal actions, sales
tax disputes and other complaints arising in the ordinary
course of business. In the opinion of management, any losses
which may occur are adequately covered by insurance, are
provided for in the consolidated financial statements, or are
without merit and the ultimate outcome of these matters will
not have a material effect on the consolidated financial
position or operations of the Company.
At December 26, 1997, the Company had unused credit line
commitments on its Credit Advantage Card(SM) accounts of $75.8
million. At December 31, 1997, Metris had unused credit line
commitments on open credit card accounts of $1.2 billion. The
Company does not anticipate that all of its customers will
exercise this entire available credit at any one time.
Commitments on credit card lines are cancelable at any time.
18.SEGMENT OF BUSINESS REPORTING
The operations of the Company are divided into the following
business segments for financial reporting purposes:
Retail: Sells a broad range of products and services directly
to consumers via catalogs, television and other media. The
segment's primary subsidiaries consist of Fingerhut, Figi's
and Fingerhut National Bank (FNB). Fingerhut has been in the
direct mail marketing business for 50 years and sells general
merchandise using catalogs and other direct marketing
solicitations. Figi's markets specialty foods and other
gifts, primarily through catalogs. FNB provides credit for
customers' purchases from Fingerhut, in the form of closed-end
and revolving credit card loans.
Financial Services (Metris): Metris is an information-based
direct marketer of consumer credit products, extended service
plans and fee-based products and services to moderate income
consumers. Currently, the segment operates two core business
lines: (1) consumer credit products, which presently consist
of credit card lending through various credit card products
issued by Direct Merchants Bank and (2) sales of extended
service plans to the Company's customers and fee-based
products and services, which presently include debt waiver
programs, card registration, third-party insurance and
membership clubs.
Revenues, earnings before income taxes and minority interest,
identifiable assets, capital expenditures and depreciation and
amortization pertaining to the business segments in which the
Company operates are presented below:
<TABLE>
(In thousands) 1997 1996 1995
Revenues
<S> <C> <C> <C>
Retail $1,519,351 $1,615,002 $1,764,792
Metris 284,064 155,434 58,212
Intercompany (4,798) (7,571) (8,151)
$1,798,617 $1,762,865 $1,814,853
Earnings before income taxes
and minority interest
Retail $58,988 $32,445 $68,857
Metris 61,883 32,546 7,449
$120,871 $64,991 $76,306
Identifiable assets
Retail $1,229,501 $1,224,181 $1,115,035
Metris 673,221 286,616 174,606
Intercompany (150,966) (121,099) (8,564)
$1,751,756 $1,389,698 $1,281,077
Capital expenditures
Retail $20,622 $47,742 $93,089
Metris 11,705 4,113 1,353
$32,327 $51,855 $94,442
Depreciation and
amortization
Retail $51,392 $54,960 $46,976
Metris 5,280 426 127
$56,672 $55,386 $47,103
</TABLE>
19.SUBSEQUENT EVENTS
On January 22, 1998, the Company declared a cash dividend of
$.04 per share, or an aggregate of $1.9 million, payable on
February 19, 1998 to shareholders of record as of the close of
business on February 5, 1998.
Fingerhut Companies, Inc.
REPORT OF MANAGEMENT
To the Shareholders of Fingerhut Companies, Inc.:
The Company is responsible for the information presented in this
annual report. The consolidated financial statements contained
herein were prepared in accordance with generally accepted
accounting principles and were based on informed judgments and
management's best estimates where appropriate. Financial
information elsewhere in this annual report is consistent with
that contained in the consolidated financial statements.
The Company maintains a system of internal controls designed to
provide reasonable assurance, at suitable costs, that assets are
safeguarded and transactions are executed in accordance with
established procedures. The system of internal controls includes
Standards of Ethical Business Conduct, widely communicated to
employees, which are designed to require them to maintain high
ethical standards in their conduct of Company affairs, written
procedures that provide for appropriate evidence of authority and
a program of internal audit with management follow-up.
The Company's consolidated financial statements have been audited
by KPMG Peat Marwick LLP, independent certified public
accountants. Their audit was conducted in accordance with
generally accepted auditing standards. As part of their audit of
the Company's 1997 consolidated financial statements, our
independent accountants considered the Company's internal
controls to the extent they deemed necessary to determine the
nature, timing and extent of their audit tests.
The Audit Committee of the Board of Directors is composed
entirely of independent directors. This Committee supervises and
reviews the Company's accounting practices; recommends to the
Board the independent auditors; reviews the audit plans, scope,
findings, reports and recommendations; and reviews the Company's
financial controls, procedures and practices. The independent
public accountants and the internal auditors have free access to
the Audit Committee without management present.
Theodore Deikel
Chairman of the Board,
Chief Executive Officer and President
Peter G. Michielutti
Executive Vice President and
Chief Operating Officer
Gerald T. Knight
Senior Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Fingerhut
Companies, Inc.:
We have audited the accompanying consolidated statements of
financial position of Fingerhut Companies, Inc. and subsidiaries
(the "Company") as of December 26, 1997 and December 27, 1996
and the related consolidated statements of earnings, changes
in stockholders' equity and cash flows for each of the fiscal
years in the three-year period ended December 26, 1997. 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 consolidated
financial position of Fingerhut Companies, Inc. and subsidiaries
as of December 26, 1997 and December 27, 1996, and the results of
their operations and their cash flows for each of the fiscal years
in the three-year period ended December 26, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 21, 1998
<TABLE>
Fingerhut Companies, Inc.
Quarterly Financial and Stock Data (unaudited)
Quarterly Financial -
Fiscal Year 1997
Summaries
(In thousands, except
per share data) First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $350,014 $396,215 $403,041 $649,347 $1,798,617
Gross Margin $143,243 $163,288 $164,993 $324,613 $796,137
Net earnings $2,561 $9,909 $12,993 $43,866 $69,329
Earnings per share:
Basic $ .06 $ .22 $ .28 $ .95 $ 1.50
Diluted $ .05 $ .20 $ .26 $ .88 $ 1.40
</TABLE>
<TABLE>
1996
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $358,092 $385,961 $383,891 $634,921 $1,762,865
Gross Margin $160,192 $168,364 $170,769 $323,121 $822,446
Net (loss) earnings $ (2,051) $2,145 $8,565 $31,500 $40,159
(Loss) earnings per
share:
Basic $(.04) $ .05 $ .19 $ .68 $ .87
Diluted $(.04) $ .04 $ .18 $ .65 $ .83
</TABLE>
The Company's common stock is traded under the symbol "FHT" on
the New York Stock Exchange. As of February 28, 1998, there were
568 holders of record of the Company's common stock.
<TABLE>
1997
First Second Third Fourth Total
Common stock price:
<S> <C> <C> <C> <C> <C>
High $15-7/8 $18-1/8 $23 $23-1/2 $23-1/2
Low $11-3/4 $13-1/4 $17-1/8 $18-13/16 $11-3/4
Dividends paid $ .04 $ .04 $ .04 $ .04 $ .16
</TABLE>
<TABLE>
1996
First Second Third Fourth Total
Common stock price:
<S> <C> <C> <C> <C> <C>
High $15-1/8 $ 17-1/8 $16 $14-7/8 $17-1/8
Low $12-1/8 $ 12-3/8 $12-3/4 $11-1/4 $11-1/4
Dividends paid $ .04 $ .04 $ .04 $ .04 $.16
</TABLE>
Dividend Policy The Company intends to pay regular quarterly
cash dividends and expects to retain a substantial portion 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, and there can be no assurance that any dividends will
be paid in the future. In determining whether to pay dividends
(as well as the amount and timing thereof), the Board of
Directors will consider a number of factors including the
Company's results of operations, financial condition, future
capital requirements and any applicable restrictive provisions in
any financing agreements. See Note 7 for dividend restrictions.
SCHEDULE II
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 26,1997; DECEMBER 27, 1996;
AND DECEMBER 25, 1995
(In thousands of dollars)
Balance Additions
at charged Balance
Description beginning to cost, Deductions at end of
of period expenses, period
revenues
Accounts
receivable
reserves:
1997 $166,449 $810,286 $806,961(a) $169,775
1996 $144,680 $845,595 $823,826(a) $166,449
1995 $113,383 $851,229 $819,932(a) $144,680
Inventory
reserves:
1997 $ 18,620 $ 24,664 $ 27,034(b) $ 16,258
1996 $ 12,303 $ 28,175 $ 21,858(b) $ 18,620
1995 $ 18,102 $ 22,756 $ 28,555(b) $ 12,303
(a) Primarily represents reductions in the reserves for
actual returns and exchanges, allowances, uncollectible
amounts (net of recoveries) and collection costs. And
also, includes the reserves related to the accounts
receivable sold under the Fingerhut Master Trust, the Metris
Master Trust, third party conduits, and the Receivables
Transfer Agreement.
(b) Primarily represents inventory sold to liquidators and
returned to vendors.
Independent Auditors' Report
The Board of Directors and Stockholders
Fingerhut Companies, Inc.
Under date of January 21, 1998, we reported on the
consolidated statements of financial position of Fingerhut
Companies, Inc. and subsidiaries as of December 26, 1997 and
December 27, 1996, and the related consolidated statements
of earnings, changes in stockholders' equity and cash flows
for each of the years in the three-year period ended
December 26, 1997, as contained in the 1997 annual report to
stockholders. These consolidated financial statements and
our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1997. In connection
with our audits of the aforementioned consolidated financial
statements, we have also audited the related financial
statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statements schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 21, 1998
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
Andy's Garage Sale, Inc. Minnesota
Customer Communications Center, Inc. Minnesota
Figi's Inc. Wisconsin
Fingerhut Corporation Minnesota
Distribution Specialists, Inc. Minnesota
FFS Holdings, Inc. Minnesota
Fingerhut Funding Co. Delaware
Metris Companies Inc.(83%) Delaware
Direct Merchants Credit Card Bank,
National Association National Banking Association
Metris Direct, Inc. Minnesota
Metris Receivables, Inc. Delaware
Fingerhut Company Store, Inc. Minnesota
Wiman Corporation Minnesota
Fingerhut National Bank National Banking Association
Fingerhut Receivables, Inc. Delaware
Infochoice USA, Inc. Minnesota
USA Direct/Guthy-Renker, Inc.(50%) Minnesota
Minnesota Telemarketing, Inc. Minnesota
Tennessee Distribution, Inc. Minnesota
Tennessee Telemarketing, Inc. Minnesota
Western Distribution, Inc. Minnesota
The above list omits the names of certain subsidiaries that,
considered in the aggregate as a single subsidiary, would
not constitute a significant subsidiary as of December 26, 1997.
Exhibit 23
Consent of Independent Certified Public Accountants
The Board of Directors
Fingerhut Companies, Inc.:
We consent to incorporation by reference in the registration
statements (No. 33-38988, 333-03005, 333-28501, 333-45781,
333-43013 and 333-42947) on Form S-8 of Fingerhut Companies,
Inc. and subsidiaries of our reports dated January 21, 1998
relating to the consolidated statements of financial
position of Fingerhut Companies, Inc. as of December 26,
1997 and December 27, 1996 and the related consolidated
statements of earnings, changes in stockholders' equity and
cash flows and the related financial statement schedule for
each of the years in the three-year period ended December
26, 1997, which reports appear in or are incorporated by
reference in the December 26, 1997 annual report on Form 10-
K of Fingerhut Companies, Inc.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Fingerhut Companies, Inc. for the fiscal
year ended December 26, 1997 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-26-1997
<PERIOD-END> DEC-26-1997
<CASH> 145,418
<SECURITIES> 0
<RECEIVABLES> 1,014,524
<ALLOWANCES> 190,777
<INVENTORY> 124,424
<CURRENT-ASSETS> 1,369,092
<PP&E> 490,283
<DEPRECIATION> 218,093
<TOTAL-ASSETS> 1,751,756
<CURRENT-LIABILITIES> 678,223
<BONDS> 345,187
0
0
<COMMON> 463
<OTHER-SE> 669,522
<TOTAL-LIABILITY-AND-EQUITY> 1,751,756
<SALES> 1,534,967
<TOTAL-REVENUES> 1,798,617
<CGS> 738,830
<TOTAL-COSTS> 1,640,099
<OTHER-EXPENSES> 6,450
<LOSS-PROVISION> 141,582
<INTEREST-EXPENSE> 37,647
<INCOME-PRETAX> 114,421
<INCOME-TAX> 45,092
<INCOME-CONTINUING> 69,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,329
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.40
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Fingerhut Companies, Inc. for the fiscal
years ended December 29, 1995 and December 27, 1996 and the fiscal quarters
ended March 29, 1996, June 28, 1996 and September 27, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-29-1995 DEC-27-1996 DEC-27-1996 DEC-27-1996 DEC-27-1996
<PERIOD-END> DEC-29-1995 DEC-27-1996 MAR-29-1996 JUN-28-1996 SEP-27-1996
<CASH> 66,109 61,003 38,035 44,125 42,580
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 633,741 783,793 655,273 588,123 557,111
<ALLOWANCES> 169,565 187,233 163,376 161,532 158,138
<INVENTORY> 156,352 127,735 153,401 143,730 210,017
<CURRENT-ASSETS> 921,571 1,025,863 906,130 829,936 899,844
<PP&E> 409,526 460,162 433,057 440,643 449,833
<DEPRECIATION> 130,071 174,980 141,410 152,387 163,507
<TOTAL-ASSETS> 1,281,077 1,389,698 1,275,261 1,198,173 1,269,827
<CURRENT-LIABILITIES> 556,163 459,943 550,315 477,873 418,383
<BONDS> 146,564 271,481 146,556 146,511 271,518
0 0 0 0 0
0 0 0 0 0
<COMMON> 459 462 464 462 462
<OTHER-SE> 547,031 604,939 545,546 543,386 549,905
<TOTAL-LIABILITY-AND-EQUITY> 1,281,077 1,389,698 1,275,261 1,198,173 1,269,827
<SALES> 1,793,727 1,652,869 329,554 688,388 1,034,832
<TOTAL-REVENUES> 1,814,853 1,762,865 358,092 744,053 1,127,944
<CGS> 892,736 830,423 169,362 359,832 535,507
<TOTAL-COSTS> 1,712,604 1,669,461 353,971 729,320 1,092,647
<OTHER-EXPENSES> 0 980 0 0 0
<LOSS-PROVISION> 110,922 130,561 27,772 54,656 83,074
<INTEREST-EXPENSE> 25,943 28,413 7,337 14,585 21,719
<INCOME-PRETAX> 76,306 64,011 (3,216) 148 13,578
<INCOME-TAX> 25,448 23,852 (1,165) 548 4,919
<INCOME-CONTINUING> 50,858 40,159 (2,051) 94 8,659
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 50,858 40,159 (2,051) 94 8,659
<EPS-PRIMARY> 1.11 .87 (.04) .00 .19
<EPS-DILUTED> 1.05 .83 (.04) .00 .18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Fingerhut Companies, Inc. for the fiscal
quarters ended March 28, 1997, June 27, 1997 and September 26, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-26-1997 DEC-26-1997 DEC-26-1997
<PERIOD-END> MAR-28-1997 JUN-27-1997 SEP-26-1997
<CASH> 86,672 83,392 77,943
<SECURITIES> 0 0 0
<RECEIVABLES> 780,451 727,592 823,284
<ALLOWANCES> 166,333 162,493 160,397
<INVENTORY> 131,916 129,458 173,179
<CURRENT-ASSETS> 1,075,642 1,018,621 1,179,954
<PP&E> 464,832 469,438 481,290
<DEPRECIATION> 186,227 197,304 208,980
<TOTAL-ASSETS> 1,425,168 1,361,708 1,560,175
<CURRENT-LIABILITIES> 519,130 446,536 628,233
<BONDS> 246,473 246,435 246,435
0 0 0
0 0 0
<COMMON> 462 460 462
<OTHER-SE> 605,559 612,446 626,420
<TOTAL-LIABILITY-AND-EQUITY> 1,425,168 1,361,708 1,560,175
<SALES> 289,537 630,263 954,037
<TOTAL-REVENUES> 350,014 746,229 1,149,270
<CGS> 146,294 323,732 482,513
<TOTAL-COSTS> 335,377 703,940 1,074,270
<OTHER-EXPENSES> 1,427 3,071 4,857
<LOSS-PROVISION> 32,046 58,628 90,691
<INTEREST-EXPENSE> 8,281 17,084 25,842
<INCOME-PRETAX> 4,929 22,134 44,301
<INCOME-TAX> 2,368 9,664 18,838
<INCOME-CONTINUING> 2,561 12,740 25,463
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,561 12,470 25,463
<EPS-PRIMARY> .06 .27 .55
<EPS-DILUTED> .05 .25 .52
</TABLE>
Exhibit 99
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
Fingerhut Companies, Inc. (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
that 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 and
financial condition. 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.
Importance of Fourth Quarter; Fluctuations in Quarterly Operating
Results
The Company's business is subject to seasonal variations in
demand that the Company believes are generally associated with
the direct marketing and retail industries. Historically, the
Company has realized a significant portion of its sales and net
earnings during the fourth quarter. Over the past several years,
the Company has observed that customers waited until later in the
fourth quarter to order merchandise from the Company's catalogs,
following a trend that has affected the retail industry as a
whole. The Company's annual results could be adversely affected
if the Company's sales were to be substantially below seasonal
norms during the fourth quarter of any year. In addition to
seasonal variations, the Company experiences variances in
quarterly results from year to year that result from changes in
the timing of its promotions and the types of customers and
products promoted and, to some extent, variations in dates of
holidays and the timing of quarter ends.
Holding Company Structure; Effective Subordination
The Company is a holding company and substantially all of
its consolidated assets are held by its subsidiaries.
Accordingly, the cash flow of the Company and the consequent
ability to service its debt, are dependent upon the earnings of
such subsidiaries. Furthermore, the Company's rights, and the
rights of its creditors, to participate in the assets of any
subsidiary upon the subsidiary's liquidation or reorganization
will be subject to the prior claims of such subsidiary's
creditors, except to the extent that the Company may itself be a
creditor with recognized claims against the subsidiary, in which
case the claims of the Company would still be effectively
subordinate to any security interest in, or mortgages or other
liens on, the assets of such subsidiary and would be subordinate
to any indebtedness of such subsidiary senior to that held by the
Company. The Company may borrow up to $200 million under its
existing amended credit facility. All of the available $200 million
under this credit facility is guaranteed by Fingerhut Corporation
("Fingerhut"). At the present time, Metris Companies Inc. ("Metris"),
an 83% owned subsidiary of the Company, may borrow up to $300 million
under its revolving credit facility. Should the Spin Off occur, it is
expected that this guarantee will be released on or before the Spin Off.
All of the available $300 million under this facility is also guaranteed
by Fingerhut. In addition, as of December 26, 1997, the Company had
outstanding $245 million aggregate principal amount of outstanding senior
notes, which are also guaranteed by Fingerhut and Metris had outstanding
$100 million aggregate principal amount of outstanding senior notes,
which are guaranteed by a subsidiary of Metris.
The Company announced in October 1997 that its Board of Directors
had approved the filing of an application with the Internal Revenue
Service (the "IRS") for a ruling on a tax-free distribution to shareholders
of the Company of all of the Company's ownership in Metris (the "Spin-Off").
The Company filed the ruling request with the IRS on October 23, 1997.
The proposed Spin Off, anticipated in 1998, is subject to approval of the
Company's Board of Directors and the receipt of a ruling from the IRS, and
is subject to market conditions. There can be no assurance that the
Spin Off will be consummated. Should the Spin Off not occur, other
actions such as the Company's sale of Metris shares in the open market
and/or Metris' issuance of additional shares via a public offering
will be considered.
Increases in Postal, Paper and Freight Costs
The Company mails its catalogs and ships most of its
merchandise through the United States Postal Service.
The Company anticipates that postage costs will
increase in 1998, however, the amount of such increase and
the implementation date is currently unknown. Additional
increases in postal rates or paper costs may have a material
adverse impact on the Company's results of operations to the
extent that the Company is unable to offset such increase by
raising selling prices or by implementing more efficient mailing,
delivery and order fulfillment systems. Increases in fuel costs
could also adversely affect the Company's costs of incoming and
outgoing freight.
Funding and Securitization Considerations
The Company depends heavily upon the securitization of its
subsidiaries' accounts receivable and 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
the assets of its subsidiaries 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 securitized assets of the
Company's subsidiaries, including increased delinquencies and
losses, could result in a downgrade or withdrawal of the ratings
on the outstanding certificates under these securitization
transactions or cause early amortization of such certificates.
This could jeopardize the ability of the Company's subsidiaries
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's financial statements reflect the treatment of
securitization transactions as sales for accounting purposes under
FAS125. Any change in such accounting treatment could have a
material effect on the Company's financial statements.
Consumer Spending
The Company is not immune to the cyclical nature of consumer
spending and payments. The success of the Company's operations
depends upon a number of economic conditions affecting disposable
consumer income such as employment, business conditions, interest
rates and taxation. Adverse changes in these economic conditions
may restrict consumer spending. There can be no assurance that
weak economic conditions or changes in the retail environment or
other economic factors that have an impact on the level of
consumer spending would not have a material adverse impact on the
Company. In addition, the Company's business depends on customer
response to its solicitations and marketing programs. A material
decrease in response levels would have a significant impact on
profitability.
Credit Risks
The Company is subject to all of the risks associated with
unsecured credit transactions, including (1) the risk of
increasing delinquencies and credit losses during economic
downturns, (2) the risk that 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, (3) the risk of fraud and (4) in
the case of revolving credit accounts, the risk that increases in
discretionary repayment of account balances by customers will
result in diminished finance charges or other income. Also,
general economic factors, such as the rate of inflation,
unemployment levels and interest rates may affect the Company's
target market customers (moderate income consumers) more severely
than other market segments. In addition, approximately 42% of
Metris' credit card portfolio, as of the date hereof, consists
of accounts that have been generated in the last 18 months and
over 19% were originated within the last 6 months. As a result,
there can be no assurance as to the levels of delinquencies and
losses that can be expected over time with respect to such
portfolio. Until the accounts become seasoned, it is likely
that the levels of delinquencies and losses will increase as
the average age of Metris' 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.
Interest Rate Risk
Fingerhut National Bank's closed-end credit card loans and
Fingerhut's remaining closed-end installment sales contracts are
fixed-priced, fixed-term contracts. Fingerhut National Bank's
revolving credit card accounts currently have finance charge rates
of prime plus 16.4 percent. The Company intends to manage interest
rate risk through asset and liability management. Fluctuations in
interest rates may adversely affect the Company's cost of funds.
Regulatory Matters
The Company's business is subject to regulation by a variety
of state and federal laws and regulations related to advertising,
offering and extending credit, charging and collecting state
sales/use taxes and product safety. The Company's practices in
certain of these areas are subject to periodic inquiries and
proceedings by various regulatory agencies. None of these actions
has had a material adverse effect upon the Company. While the
Company believes it is in material compliance with all such laws
and regulations, if the Company is found not to be in compliance
with any such laws and regulations, it could become subject to
cease and desist orders, injunctive proceedings, obligations to
collect additional sales and use taxes, obligations for prior
uncollected sales and use taxes, civil fines and other penalties.
The occurrence of any of the foregoing could adversely affect the
Company's results of operations and financial condition.
Until January 1997, Fingerhut extended credit for its
customers purchases. Fingerhut relied on the Minnesota "time-price"
doctrine in establishing and collecting installment payments on
products sold in many states. Under this doctrine, the difference
between the time price and cash price for the same goods is not
treated as interest subject to regulation under laws governing the
extension of credit. Certain individuals who purchased goods from
Fingerhut filed suit challenging the applicability of the
time-price doctrine to Fingerhut's business.
Direct Merchants Credit Card Bank, National Association
("Direct Merchants Bank") and Fingerhut National Bank are subject
to numerous federal and state consumer protection laws that
impose requirements related to offering and extending credit. The
United States Congress and the states may enact laws and
amendments to existing laws to regulate further the credit card
industry or to reduce finance charges or other fees or charges
applicable to credit card and other consumer revolving loan
accounts. Such laws, as well as any new laws or rulings that may
be adopted, may adversely affect the ability of Direct Merchants
Bank and Fingerhut National Bank 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. Fingerhut National Bank and Direct Merchants
Bank are also subject to regulation by the Federal Reserve Board,
the Federal Deposit Insurance Corporation and the Office of the
Comptroller of the Currency. Such regulations include limitations
on the extent to which Fingerhut National Bank or Direct
Merchants Bank can finance or otherwise supply funds to their
respective affiliates through dividends, loans or otherwise.
Changes in federal and state bankruptcy and debtor relief
laws also could adversely affect the Company if such changes
result in, among other things, additional administrative expenses
and accounts being written off as uncollectible.
Foreign Suppliers
Fingerhut purchases, directly or indirectly, a significant
portion (approximately 46% in fiscal 1997) of its merchandise
from foreign suppliers. Although substantially all of the
Company's foreign purchases are denominated in U.S. dollars, the
Company is subject to the risks of doing business abroad,
including increases in import duties, decreases in quotas,
adverse fluctuations in currency exchange rates, increased
customs regulations and political turmoil. The occurrence of any
of the foregoing could adversely affect the Company's earnings.
Competition
The direct marketing industry includes a wide variety of
specialty and general merchandise retailers and is both highly
fragmented and highly competitive. The Company's Direct-to-the
Consumer Marketing segment sells its products to customers in all
states of the United States and competes in the purchase and sale
of merchandise with all retailers, including general and
specialty catalog marketers, television shopping marketers,
retail department stores, discount department stores and variety
stores, many of which are national chains. The loss of any
significant portion of the Company's market share to other
retailers could adversely affect the Company's earnings.
As a marketer of consumer credit products, Metris faces
increasing competition from numerous providers of financial
services, many of which have greater resources than Metris. In
particular, Metris' credit card business competes with national,
regional and local bank card issuers as well as issuers of other
general purpose credit cards, such as American Express, Discover
Card and Diners Club. Many of these issuers are substantially
larger and have more seasoned credit card portfolios than the
Company and often compete for customers by offering lower
interest rates or fee levels. In general, customers are attracted
to credit card issuers largely on the basis of price, credit
limit and other product features and customer loyalty is often
limited.
