-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K69Xhqm+7F7ZWvmp3bym3Orf5HNgKO3npuINUcyIjBIkr498uIvKVo2utv3/26Gi JR1hQ9yEeZEpBX1IsvFhkg== 0000740126-97-000001.txt : 19970328 0000740126-97-000001.hdr.sgml : 19970328 ACCESSION NUMBER: 0000740126-97-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19961227 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINGERHUT COMPANIES INC CENTRAL INDEX KEY: 0000740126 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 411396490 STATE OF INCORPORATION: MN FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08668 FILM NUMBER: 97564403 BUSINESS ADDRESS: STREET 1: 4400 BAKER RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129323100 MAIL ADDRESS: STREET 2: 4400 BAKER ROAD CITY: MINNETONKA STATE: MN ZIP: 55343 10-K405 1 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 27, 1996 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. [X] As of March 21, 1997, 46,188,013 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 $646,012,236 based upon the New York Stock Exchange closing price on March 21, 1997. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Annual Report to Shareholders for the fiscal year ended December 27, 1996, 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 13, 1997, which will be filed with the Securities and Exchange Commission within 120 days after December 27, 1996, are incorporated by reference in Part III. TABLE OF CONTENTS PART I Page Item 1. Business 3 Item 2. Properties 17 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III Item 10. Directors and Executive Officers of the Registrant 19 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 19 Item 13. Certain Relationships and Related Transactions 19 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20 Signatures 21 Exhibit Index 23 PART I Item 1. Business General Fingerhut Companies, Inc. (the "Company") is a database marketing company that sells products and services directly to consumers via catalogs, telemarketing, television and other media. The Company had 1996 revenues of $2.027 billion. Its principal subsidiaries are Fingerhut Corporation ("Fingerhut"), Metris Companies Inc. ("Metris") and Figi's Inc. ("Figi's"). The Company's Direct-to-the-Consumer Marketing segment is conducted by Fingerhut, Figi's and Infochoice USA, Inc. ("Infochoice"). Fingerhut has been in the direct mail marketing business for over 45 years and sells general merchandise using catalogs and other direct marketing solicitations. Fingerhut's 1996 net sales were $1.538 billion. Figi's markets specialty foods and other gifts, primarily through catalogs, and had net sales of approximately $93 million in 1996. The Company's Financial Services segment business is conducted through Metris (an 83% owned subsidiary), an information-based direct marketer of consumer credit products, extended service plans, and fee-based products and services 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 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. Direct-to-the-Consumer Marketing Segment The Company's Direct-to-the-Consumer Marketing segment businesses are conducted by Fingerhut, Figi's and Infochoice. 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. Fingerhut offers extended payment terms on all purchases under fixed term, fixed payment installment contracts and makes substantially all of its sales on credit utilizing proprietary closed-end credit. 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 80% of its net sales. Marketing Marketing activities are divided into three primary programs: new customer acquisition, a transitional program and existing customer programs. During 1996, Fingerhut mailed approximately 502 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 20% 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. 27, Dec. 29, Dec. 30, Dec. 31, Dec. 25, For the Fiscal Year Ended: 1996 1995 1994 1993 1992 ------------------------------------------------ Cost per new customer $13.92 $15.36 $8.52 $11.50 $14.27 New customer mailings (in 000's) 162,493 193,646 155,050 149,737 141,389
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 1996, Fingerhut mailed 132 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. In addition, Fingerhut has a home page on the Internet (www.fingerhut.com) through which customers can contact Fingerhut customer service or order catalogs. Dec. 27, Dec. 29, Dec. 30, Dec. 31, Dec. 25, For the Fiscal Year Ended: 1996 1995 1994 1993 1992 --------------------------------------------------- Sales per mailing -- existing customer list $3.43 $3.02 $2.91 $3.41 $3.23 Existing customer mailings (in 000's) 339,377 404,894 402,476 326,473 283,219 Active customer list (in 000's)* 4,706 5,174 5,104 4,756 4,465 Contribution margin per existing customer $ 90 $ 77 $ 78 $ 75 $ 70 - ------------------------
*Includes existing customers who have made a purchase from Fingerhut in the last 12 months. The Company 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 customer return rates for each segment of its customer list. Fingerhut promotes customer satisfaction and loyalty by extending credit, by using a number of marketing devices (including targeted promotions, deferred payments, 30-day free 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 9 million customers who have made a purchase from Fingerhut within the past 24 months. Included within the database are up to 1,400 potential data items in a customer record, including names, addresses, behavioral characteristics, general demographic information and information provided by the customer. Fingerhut 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 approximately 8 million individuals about whom the Company 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. Fingerhut does not report its credit information to the credit bureaus, which means this information is not publicly available. Credit Management Fingerhut generally does not require its customers to provide traditional credit information in order to approve purchases on credit. Instead of using traditional credit applications, Fingerhut has developed 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 more than 45 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 Fingerhut 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 profitability. Consequently, Fingerhut's planned credit losses typically are higher than other direct mail and retail companies. Once a consumer places an order, Fingerhut 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. Fingerhut has a flexible policy of working with certain delinquent customers, including adjusting their payment schedules, which Fingerhut believes reduces default rates and maintains customer loyalty. Substantially all of Fingerhut's sales are made using a proprietary closed-end credit program, which uses fixed term, fixed payment installment plans. 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. 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. Many customers pay their accounts in full before the end of the scheduled payment term. In late 1996, the Company received approval from the Office of the Comptroller of the Currency to charter a limited purpose national bank. Fingerhut National Bank, a wholly owned subsidiary of the Company, is a special purpose credit card bank. Commencing in January 1997, Fingerhut National Bank began extending private label credit card loans for Fingerhut purchases. Fingerhut National Bank offers closed-end credit card loans but is also testing revolving credit. 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 1996, Fingerhut offered approximately 16,000 different products. Fingerhut's sales mix by product category for 1996 is shown in the following table: Fingerhut Corporation 1996 Product Mix Percent of Gross Retail Sales ------------------- Electronics 22% Home Textiles 18% Housewares 18% Furniture/Home Accessories 10% Leisure 9% Jewelry 8% Apparel 7% Tools/Automotive/Lawn & Garden 6% Other 2% ---- 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. Fingerhut's general merchandise catalogs feature a wide array of products; they are updated and published throughout the year, including a 496-page holiday big book. 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 2,100 different suppliers and maintains strong relations with its vendors. In 1996, the top ten vendors accounted for approximately 19% of the Company's total merchandise purchases, with Thomson Consumer Electric Inc. accounting for approximately 4% of the total merchandise purchases and Pioneer Electronics (USA) Inc. and Springs Industries, Inc. each accounting for approximately 3% of the total merchandise purchases. The Company maintains close relations with overseas representatives in Hong Kong, Taiwan, Korea, China, the Philippines, Thailand and Europe. In 1996, approximately 15% of the Company's merchandise was imported directly from foreign vendors and an additional 27% 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, Metris, Figi's and Infochoice and support all areas of the Company, including marketing, credit, order fulfillment, 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. In early 1996, Fingerhut started an aggressive conversion effort to address the Year 2000 programming issues. By mid-1996, the most critical mainframe processing system was converted to be Year 2000 compliant and Fingerhut initiated a large project to address the remaining systems. This project consists of 20 sub- projects that will span the remainder of 1997 and 1998 and use a combination of Fingerhut and off-shore programmers. The Company anticipates the majority of the conversion will be completed by late 1998. 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 47% 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 Fingerhut provides order processing and fulfillment services for Infochoice and its affiliate, USA Direct (defined below). Although most of Fingerhut's customer orders are received by mail, telephone ordering has become a more important part of Fingerhut's business. In 1996, Fingerhut processed approximately 20 million Fingerhut and USA Direct orders and approximately 52 million Fingerhut customer payments. In 1996, Fingerhut shipped approximately 25 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 systems for delivery to the customer. In addition, Fingerhut offers optional express delivery in selected promotions. 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 1996 net sales of approximately $93 million, which was up 13% over 1995 net sales of $82 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 85% of its net sales in 1996. 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 80% of its net sales in the fourth quarter. Figi's seeks to develop repeat business from customers by offering a satisfaction pledge. During 1996, Figi's sales mix by product category was as follows: Figi's Inc. 1996 Product Mix Percent of Gross Retail Sales ------------------ Cheese/Meat Selections 44% Other Food Gifts 15% Non-Food Gifts 14% Baked Goods 12% Candy 8% Nuts/Snack Foods 7% --- 100% ==== 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. Infochoice USA, Inc. Infochoice reported lower net earnings in 1996 than in 1995 as a result of fewer successful infomercials and a substantial reduction in residual royalties from prior infomercials. To mitigate the downside risk of exposure from television marketing, Infochoice 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. As amended, the agreement currently provides for the production of six more infomercials. Infochoice and Guthy-Renker conduct the business under the agreement through USA Direct/Guthy-Renker, Inc. ("USA Direct"), a corporation in which Infochoice and Guthy Renker Corporation each have a 50% interest. In 1996, USA Direct tested several shows and had more extensive media placement of the Denise Austin(TM) Complete Ten and the Pilates(R) Performer infomercials. USA Direct generated $10 million in net sales, which consisted almost entirely of fitness/leisure products. The Company accounts for USA Direct using the equity method of accounting; accordingly, 50% of USA Direct's profits or losses are recorded in administrative expenses included in "Administrative and selling expenses" in the Company's Consolidated Statements of Earnings. Costs of Mailing In 1996, the Company spent an aggregate of $257 million on postage for the Direct-to-the-Consumer Marketing segment businesses (including the cost of parcel shipments that were passed on to customers) of which 48% was attributable to the mailing of promotional materials, 44% was attributable to parcel shipments and 8% was attributable to various correspondence with customers. 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 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 Andy's Garage Sale, Inc. is a wholly owned subsidiary that allows the Company to market excess inventory on the Internet. Andy's Garage Sale(R) (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. Wiman Corporation manufactures plastic products. Taken together, such activities accounted for less than 3% of the Company's 1996 net sales. Direct-to-the-Consumer Marketing Segment Statements of Operations For the Fiscal Year Ended (In thousands of dollars, except Dec. 27, 1996 Dec. 29, 1995 per share data) Revenues: Net sales $1,638,363 $1,782,282 Finance income and other revenues 241,130 245,001 ---------- ---------- 1,879,493 2,027,283 ---------- ---------- Costs and expenses: Product cost 827,086 890,737 Administrative and selling expenses 633,448 687,789 Provision for uncollectible accounts 283,762 272,295 Discount on sale of accounts receivable 77,447 82,392 Interest expense, net 25,305 25,213 ---------- ---------- 1,847,048 1,958,426 ---------- ---------- Earnings before income taxes 32,445 68,857 Provision for income taxes 11,322 22,580 ---------- ---------- Net earnings $ 21,123 $ 46,277 ========== ========== Earnings per share $ .44 $ .96 ========== ========== Dec. 27, Dec. 29, Dec. 30, Dec. 31, Dec. 25, For the Fiscal Year Ended: 1996 1995 1994 1993 1992 ------------------------------------------------------- Capital expenditures (in 000's) $47,742 $93,089 $69,339 $51,722 $50,900 Depreciation (in 000's) $45,069 $41,031 $33,543 $25,969 $13,983 Net Earnings (in millions) Catalog Operations $ 19.5 $ 37.4 $ 69.9 $ 68.1 $ 57.9 Television 1.6 8.9 (26.2) 6.0 1.9 ------- ------- -------- ------- ------- Total Segment Earnings $ 21.1 $ 46.3 $ 43.7 $ 74.1 $ 59.8 ======= ======= ======= ======= =======
Financial Services Segment The Company's Financial Services segment businesses are conducted by Metris Companies Inc. ("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 a third party credit card issuer. 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. Metris' principal subsidiaries are Direct Merchants Bank, Metris Direct, Inc. and Metris Receivables, Inc. Metris currently operates three businesses: (i) consumer credit products, (ii) extended service plans, and (iii) fee-based products and services. Consumer Credit Products Products. Consumer credit products currently are unsecured and secured credit cards, including the Fingerhut co-branded MasterCard(R) and the Direct Merchants Bank MasterCard. 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, 1996, Direct Merchants Bank had over 1.4 million credit card accounts with over $1.6 billion in managed credit card loans. Fingerhut Customers represented approximately 50% of the accounts and approximately 51% of the managed loans. At December 31, 1996, according to the Nilson Report, Direct Merchants Bank was the 19th largest MasterCard issuer in the United States based on the number of cards issued and the 32nd largest credit card issuer in the United States based on managed credit card loan balances. 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 43 different pricing structures on its credit card products, with annual fees ranging from $0 to $48 ($60 for some secured cards) and annual percentage rates ranging from prime plus 6.45% to prime plus 16.65%. After credit card accounts are opened, 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: 1996 1995 - ------------------ --------------------------- Managed net charge-off ratio 6.2% 2.2% Period-end managed loans (in 000's) $1,615,940 $543,619 Total accounts 1,418,062 702,891 Managed loan loss reserves (in 000's) $ 95,669 $ 22,219 Managed delinquency ratio 5.5% 4.0% Period-end managed allowance for loan losses ratio 5.9% 4.1% Extended Service Plans 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 or replaced 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. For consumer electronics, Fingerhut Customers may purchase extended service plans that give them the right to have their purchases repaired or replaced in the event of electrical or mechanical failure or defects in materials and workmanship. Quality Jewelry Care(R) 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 contracts with Fingerhut to perform such services. Metris' extended service plan program for furniture is called Quality Furniture Care(SM) and the services include stain cleaning, structural defect or damage repair, or replacement if the merchandise cannot be fixed. 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 consumer electronics, approximately 30% of Metris' extended service plans are purchased with the product; 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. Operations. Through the end of 1996, claims risk and claims processing for electronics 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 operations related to extended service plans for consumer electronics, and will incur the resulting claims risk. Fee-based Products and Services Metris currently sells a variety of fee-based products and services to its credit card customers, Fingerhut Customers and credit card customers of a third party, including (i) debt waiver protection for unemployment, disability, and death, (ii) programs such as card registration and shopping and dining clubs, 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. Metris Companies Inc. Statements of Operations For the Year Ended Dec. 31, (In thousands of dollars, except 1996 1995 per share data) Revenues: Net sales $ 22,077 $ 19,596 Finance income and other revenues 133,357 38,616 ---------- ---------- 155,434 58,212 ---------- ---------- Costs and expenses: Product cost 6,463 5,855 Administrative and selling expenses 94,840 39,785 Provision for uncollectible accounts 18,477 4,393 Discount on sale of accounts receivable - - Interest expense, net 3,108 730 ---------- ---------- 122,888 50,763 Earnings before income taxes 32,546 7,449 Provision for income taxes 12,530 2,868 ----------- ---------- Net earnings $ 20,016 $ 4,581 =========== ========== Earnings per share $ .41 $ .09 =========== ========== 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, Discover Card and Diners Club. In general, customers are attracted to credit card issuers largely on the basis of price, credit limit and other product features, and customer loyalty is often limited. However, 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 1996, approximately 37% of the Company's net sales and approximately 78% 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 27, 1996, the Company had approximately 9,500 employees, of whom approximately 2300 were represented by the Midwest Regional Joint Board or the Tennessee/Kentucky District -- Southern Regional Joint Board of the Amalgamated Clothing and Textile Workers Union. 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. Withdrawal from Montgomery Ward Direct In June 1996, the Company withdrew as a partner in the Montgomery Ward Direct L.P. joint venture. The Company had accounted for Montgomery Ward Direct using the equity method of accounting. The withdrawal did not have a material impact on the Company's consolidated financial statements. Governmental Matters The Company's Direct-to-the-Consumer Marketing 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 actions 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 are in compliance with applicable state requirements. In late 1996, Fingerhut National Bank began offering credit card loans to finance purchase of products and services from Fingerhut. Commencing in January 1997, Fingerhut National Bank began extending all credit for Fingerhut purchases. Direct Merchants Bank and Fingerhut National Bank 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 of the FDIC. Direct Merchants Bank and Fingerhut National Bank 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 Fingerhut National Bank is a "bank" as defined under the Bank Holding Company Act of 1956, as amended (the "BHCA") because it (i) engages only in credit card operations, (ii) does not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others, (iii) does not accept any savings or time deposit of less than $100,000, (iv) maintains only one office that accepts deposits and (v) does not engage in the business of making commercial loans. As a result, the Company is not a bank holding company under the BHCA. If Direct Merchants Bank or Fingerhut National Bank 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 pursue future opportunities. Under current judicial interpretations of Federal law, national banks such as Direct Merchants Bank and Fingerhut National Bank may charge interest at the rate allowed by the laws of the state where the bank is located, and may "export" interest rates by charging the interest rate allowed by the laws of the state where the bank is located on loans to borrowers in all states, without regard to the laws of such other states. The Supreme Court of the United States recently held that national banks may also impose late-payment fees allowed by the laws of the state where the national bank is located on borrowers in other states, without regard to the laws of such other states. The Supreme Court based its opinion largely on its deference to a regulation adopted by the Comptroller of the Currency that includes certain fees, including late fees, overlimit fees, annual fees, cash advance fees and membership fees, within the term "interest" under the provision of the National Bank Act that has been interpreted to permit national banks to export interest rates. As a result, national banks such as Direct Merchants Bank and Fingerhut National Bank may impose such fees. Direct Merchants Bank's and Fingerhut National Bank'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 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. Cardholders may also bring actions for certain alleged violations of such regulations. Federal and state bankruptcy and debtor relief laws also affect Direct Merchants Bank's and Fingerhut National Bank'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 Fingerhut National Bank. Executive Officers of the Registrant Name Age Present Office Theodore Deikel 61 Chairman of the Board, Chief Executive Officer and President Thomas J. Bozlinski 49 Senior Vice President, Information Services John D. Buck 46 Senior Vice President, Human Resources Andrew V Johnson 41 Senior Vice President, Marketing Peter G. Michielutti 40 Senior Vice President, Chief Financial Officer James B. Moran 60 Senior Vice President, Operations Michael P. Sherman 44 Senior Vice President, Business Development, General Counsel and Secretary Richard L. Tate 51 Senior Vice President, Merchandising Ronald N. Zebeck 42 Chief Executive Officer Metris Companies Inc. Thomas C. Vogt 50 Corporate Controller James M. Wehmann 31 Treasurer 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. ("CVN"), 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. Thomas J. Bozlinski has been Senior Vice President, Information Systems since January 1996. 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, Human Resources since March, 1996. 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, Marketing of the Company since January 1993. Prior to that time, he was Vice President, Marketing of the Company from November 1989 to January 1993. Peter G. Michielutti has been Senior Vice President, Chief Financial Officer of the Company since July 1995. 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. James B. Moran has been Senior Vice President, Operations since January 1992 and was Senior Vice President, Subsidiaries from September 1991 to January 1992. 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. Prior to that time he was Vice President, Merchandising of the Company from December 1989 to October 1993. 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 1996. He is also a Senior Vice President of the Company. He was Managing Director, GM Card Operations of General Motors Corporation from 1991 to 1993. 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. 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 6.3 million square feet, of which approximately 6.1 million square feet, located in Minnesota, Tennessee, Wisconsin, Utah, Florida and South Dakota, are used for the Direct-to-the- Consumer Marketing 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 193,000 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 2.0 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. 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 March 4, 1997, the court heard oral arguments on the Company's motion to dismiss and has taken the matter under advisement. On January 11, 1996 and February 13, 1996, Fingerhut was served with legal actions commenced in Minnesota District Court, Fourth Judicial District on behalf of certain Fingerhut customers. The complaints were substantially similar and (i) alleged violations of the consumer credit sales act, usury and related claims and (ii) requested certification as a class action, declaratory and injunctive relief, money damages with interest, including the principal and interest paid on plaintiffs' credit purchases, and class damages and equitable relief, attorneys' fees and costs. On March 5, 1997, the Court granted Fingerhut's motion for summary judgment on all counts and entered judgment in favor of Fingerhut on March 12, 1997. 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 27, 1996. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this item is set forth in "Quarterly Financial and Stock Data" on page 42 of the Company's Annual Report to Shareholders for the fiscal year ended December 27, 1996 (the "1996 Annual Report") and is incorporated herein by reference. Item 6. Selected Financial Data The information required by this item is set forth under the caption "Five Year Summary of Selected Consolidated Financial Data" on page 15 of the 1996 Annual Report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Forward Looking Statements" on pages 16 to 21 of the 1996 Annual Report and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The audited Consolidated Financial Statements of the Registrant and independent auditors' report thereon and the unaudited Quarterly Financial and Stock Data set forth on pages 22 to 42 of the 1996 Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item with respect to directors is set forth under "Proposal 1: Election of Directors" in the Company's proxy statement for the annual meeting of shareholders to be held on May 13, 1997, which will be filed within 120 days of December 27, 1996 (the "Proxy Statement") and is incorporated herein by reference. The information required by this item with respect to executive officers is, pursuant to instruction 3 of Item 401(b) of Regulation S-K, set forth in Part I of this Form 10-K under "Business--Executive Officers of the Registrant." The information required by this item with respect to reports required to be filed under Section 16(a) of the Securities Exchange Act of 1934 is set forth under "Security Ownership of Certain Beneficial Owners and Management_Compliance with Section 16" in the Proxy Statement and is incorporated 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 1996 Annual Report as part of this report at Item 8 hereof: Independent Auditors' Report dated January 22, 1997. Consolidated Statements of Earnings for each of the three fiscal years ended December 27, 1996. Consolidated Statements of Financial Position at December 27, 1996 and December 29, 1995. Consolidated Statements of Changes in Stockholders' Equity for each of the three fiscal years ended December 27, 1996. Consolidated Statements of Cash Flows for each of the three fiscal years ended December 27, 1996. Notes to Consolidated Financial Statements. With the exception of the foregoing information and the information incorporated by reference in Items 5-8 of this Part II, the 1996 Annual Report is not to be deemed filed as part of this Form 10-K. 2. Financial Statement Schedule: The following schedule for each of the three years ended December 27, 1996 is included in this Form 10-K: Independent Auditors' Report on consolidated financial statement schedule dated January 22, 1997. 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 23 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 26th day of March, 1997. 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 26, 1997 officer and director: Chief Executive Officer and President /s/Theodore Deikel - --------------------- Theodore Deikel Principal financial officer: Senior Vice President, March 26, 1997 Chief Financial Officer /s/Peter G. Michielutti - ------------------------ Peter G. Michielutti Principal accounting officer: Corporate Controller March 26, 1997 /s/Thomas C. Vogt - ------------------- Thomas C. Vogt Directors: /s/Wendell R. Anderson Director March 26, 1997 - ----------------------- Wendell R. Anderson /s/Edwin C. Gage Director March 26, 1997 - ------------------------ Edwin C. Gage /s/Stanley S. Hubbard Director March 26, 1997 - ------------------------- Stanley S. Hubbard /s/Kenneth A. Macke Director March 26, 1997 - ------------------------- Kenneth A. Macke /s/Dudley C. Mecum Director March 26, 1997 - -------------------------- Dudley C. Mecum /s/John M. Morrison Director March 26, 1997 - -------------------------- John M. Morrison 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 1994-1 Supplement dated as of June 29, 1994 (Incorporated by reference to Exhibit 10.b(i) to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended July 1, 1994). (ii) 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). (iii) Series 1997-1 Supplement dated as of January 21, 1997. 10.b Purchase Agreement dated as of June 29, 1994 between Fingerhut Receivables, Inc., as Buyer, and Fingerhut Corporation, as Seller (Incorporated by reference to Exhibit 10.a. to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended July 1, 1994). 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)). 10.d* Fingerhut Corporation Profit Sharing Plan 1989 Revision (Incorporated by reference to Exhibit 10(d) to Registrant's Registration Statement on Form S-1 (No. 33-33923)). 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. 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. (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. 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. 10.k* Fingerhut Companies, Inc. and Subsidiaries Annual Incentive Bonus Plan for Designated Corporate Officers (Incorporated by reference to Exhibit 10.k to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 31, 1993). 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 Form of Purchase Agreement dated as of January 14, 1991, relating to $25,000,000 of 10.12% Senior Notes, Series B, due December 30, 1997 (Incorporated by reference to Exhibit 10(o) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 28, 1990). (i) First Amendment Agreement dated as of March 1, 1992. (Incorporated by reference to Exhibit 10(o)(i) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 27, 1991). (ii) Second Amendment Agreement dated as of June 17, 1994 (Incorporated by reference to Exhibit 10.o(ii) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 31, 1994). (iii) Third Amendment Agreement dated as of October 30, 1995 (Incorporated by reference to Exhibit 10.o(iii) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 29, 1995). (iv) Fifth Amendment Agreement dated as of August 14, 1996 (Incorporated by reference to Exhibit 10.o(iv) to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended September 27, 1996). 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. 10.v* Fingerhut Corporation Profit Sharing Excess Plan -- 1996 Revision. 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). 10.x* Fingerhut Companies, Inc. Non-employee Directors 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). Other Exhibits 11 Computation of Earnings per Share 13 Pages 15 to 42 of the 1996 Annual Report to Shareholders. The 1996 Annual Report shall not be deemed to be filed with the Commission except to the extent that information is specifically incorporated herein by reference. Exhibit 13 also includes a financial statement schedule, and independent auditors' report thereon, that was not part of the 1996 Annual Report. 21 Subsidiaries of the Registrant 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule 99 Cautionary Statement Regarding Forward Looking Statements ______ * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. EX-10 2 EXHIBIT 10.A FINGERHUT RECEIVABLES, INC. Transferor FINGERHUT NATIONAL BANK Servicer and THE BANK OF NEW YORK (DELAWARE) Trustee on behalf of Certificateholders of the Fingerhut Master Trust AMENDED AND RESTATED POOLING AND SERVICING AGREEMENT Dated as of January 12, 1997 TABLE OF CONTENTS ARTICLE I DEFINITIONS 2 Section 1.1 Definitions. . . . . . . . . . . . . . . . 2 Section 1.2 Other Definitional Provisions . . . . . . . 22 ARTICLE II CONVEYANCE OF RECEIVABLES; ISSUANCE OF CERTIFICATES 24 Section 2.1 Conveyance of Receivables . . . . . . . . . 24 Section 2.2 Acceptance by Trustee . . . . . . . . . . . 25 Section 2.3 Representations and Warranties of the Transferor . . . . . . . . . . . . . . . . 26 Section 2.4 Representations and Warranties of the Transferor Relating to the Agreement and the Receivables . . . . . . . . . . . . . . 29 Section 2.5 Covenants of the Transferor . . . . . . . . 35 Section 2.6 Addition of Receivables . . . . . . . . . . 38 Section 2.7 Defaulted Receivables . . . . . . . . . . . 38 Section 2.8 Covenants of the Transferor with Respect to the Purchase Agreements . . . . . . . . 40 ARTICLE III ADMINISTRATION AND SERVICING OF RECEIVABLES 41 Section 3.1 Acceptance of Appointment and Other Matters Relating to the Servicer . . . . . 41 Section 3.2 Servicing Compensation . . . . . . . . . . 42 Section 3.3 Representations and Warranties of the Servicer . . . . . . . . . . . . . . . . . 44 Section 3.4 Reports and Records for the Trustee . . . . 46 Section 3.5 Annual Servicer's Certificate . . . . . . . 49 Section 3.6 Annual Independent Accountants' Servicing Report . . . . . . . . . . . . . . . . . . 49 Section 3.7 Tax Treatment . . . . . . . . . . . . . . . 50 Section 3.8 Adjustments . . . . . . . . . . . . . . . . 51 Section 3.9 Notices to Fingerhut . . . . . . . . . . . 52 ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS 53 Section 4.1 Rights of Certificateholders . . . . . . . 53 Section 4.2 Establishment of Accounts . . . . . . . . . 53 Section 4.3 Collections and Allocations . . . . . . . . 57 ARTICLE V [ARTICLE V IS RESERVED AND SHALL BE SPECIFIED IN ANY SUPPLEMENT WITH RESPECT TO ANY SERIES] 61 ARTICLE VI THE CERTIFICATES 62 Section 6.1 The Certificates . . . . . . . . . . . . . 62 Section 6.2 Authentication of Certificates . . . . . . 63 Section 6.3 Registration of Transfer and Exchange of Certificates . . . . . . . . . . . . . . . 63 Section 6.4 Mutilated, Destroyed, Lost or Stolen Certificates . . . . . . . . . . . . . . . 68 Section 6.5 Persons Deemed Owners . . . . . . . . . . . 68 Section 6.6 Appointment of Paying Agent . . . . . . . . 69 Section 6.7 Access to List of Certificate-holders' Names and Addresses . . . . . . . . . . . . 71 Section 6.8 Authenticating Agent . . . . . . . . . . . 71 Section 6.9 Tender of Exchangeable Transferor Certificate . . . . . . . . . . . . . . . . 73 Section 6.10 Book-Entry Certificates . . . . . . . . . . 77 Section 6.11 Notices to Clearing Agency . . . . . . . . 79 Section 6.12 Definitive Certificates . . . . . . . . . . 79 Section 6.13 Global Certificate; Euro-Certificate Exchange Date . . . . . . . . . . . . . . . 80 Section 6.14 Meetings of Certificateholders . . . . . . 80 ARTICLE VII OTHER MATTERS RELATING TO THE TRANSFEROR 81 Section 7.1 Liability of the Transferor . . . . . . . . 81 Section 7.2 Merger or Consolidation of, or Assumption of the Obligations of, the Transferor . . . 81 Section 7.3 Limitation on Liability . . . . . . . . . . 82 Section 7.4 Liabilities . . . . . . . . . . . . . . . . 83 ARTICLE VIII OTHER MATTERS RELATING TO THE SERVICER 85 Section 8.1 Liability of the Servicer . . . . . . . . . 85 Section 8.2 Merger or Consolidation of, or Assumption of the Obligations of, the Servicer . . . . 85 Section 8.3 Limitation on Liability of the Servicer and Others . . . . . . . . . . . . . . . . 86 Section 8.4 Servicer Indemnification of the Transferor, the Trust and the Trustee . . . 87 Section 8.5 The Servicer Not to Resign . . . . . . . . 88 Section 8.6 Access to Certain Documentation and Information Regarding the Receivables . . . 89 Section 8.7 Delegation of Duties . . . . . . . . . . . 89 ARTICLE IX PAY OUT EVENTS 91 Section 9.1 Pay Out Events . . . . . . . . . . . . . . 91 Section 9.2 Additional Rights Upon the Occurrence of Certain Events . . . . . . . . . . . . . . 92 ARTICLE X SERVICER DEFAULTS 95 Section 10.1 Servicer Defaults . . . . . . . . . . . . . 95 Section 10.2 Trustee to Act; Appointment of Successor . 98 Section 10.3 Notification to Certificateholders . . . . 101 Section 10.4 Waiver of Past Defaults . . . . . . . . . . 101 ARTICLE XI THE TRUSTEE 102 Section 11.1 Duties of Trustee . . . . . . . . . . . . . 102 Section 11.2 Certain Matters Affecting the Trustee . . . 104 Section 11.3 Trustee Not Liable for Recitals in Certificates . . . . . . . . . . . . . . . 106 Section 11.4 Trustee May Own Certificates . . . . . . . 107 Section 11.5 The Servicer to Pay Trustee's Fees and Expenses. . . . . . . . . . . . . . . . . . 107 Section 11.6 Eligibility Requirements for Trustee . . . 108 Section 11.7 Resignation or Removal of Trustee. . . . . 108 Section 11.8 Successor Trustee . . . . . . . . . . . . . 110 Section 11.9 Merger or Consolidation of Trustee . . . . 110 Section 11.10 Appointment of Co-Trustee or Separate Trustee . . . . . . . . . . . . . . . . . . 111 Section 11.11 Tax Returns . . . . . . . . . . . . . . . . 112 Section 11.12 Trustee May Enforce Claims Without Possession of Certificates . . . . . . . . 113 Section 11.13 Suits for Enforcement . . . . . . . . . . . 113 Section 11.14 Rights of Certificateholders to Direct Trustee . . . . . . . . . . . . . . . . . . 114 Section 11.15 Representations and Warranties of Trustee . 114 Section 11.16 Maintenance of Office or Agency . . . . . . 115 ARTICLE XII TERMINATION 116 Section 12.1 Termination of Trust . . . . . . . . . . . 116 Section 12.2 Optional Termination . . . . . . . . . . . 118 Section 12.3 Final Payment with Respect to any Series. . 119 Section 12.4 Termination Rights of Holder of Exchangeable Transferor Certificate . . . . 121 ARTICLE XIII MISCELLANEOUS PROVISIONS 122 Section 13.1 Amendment . . . . . . . . . . . . . . . . . 122 Section 13.2 Protection of Right, Title and Interest to Trust . . . . . . . . . . . . . . . . . . . 125 Section 13.3 Limitation on Rights of Certificateholders 126 Section 13.4 Governing Law . . . . . . . . . . . . . . . 127 Section 13.5 Notices . . . . . . . . . . . . . . . . . . 127 Section 13.6 Severability of Provisions . . . . . . . . 128 Section 13.7 Assignment . . . . . . . . . . . . . . . . 128 Section 13.8 Certificates Non-Assessable and Fully Paid 128 Section 13.9 Further Assurances . . . . . . . . . . . . 129 Section 13.10 No Waiver; Cumulative Remedies . . . . . . 129 Section 13.11 Counterparts . . . . . . . . . . . . . . . 129 Section 13.12 Third-Party Beneficiaries . . . . . . . . . 129 Section 13.13 Actions by Certificateholders . . . . . . . 130 Section 13.14 Rule 144A Information . . . . . . . . . . . 130 Section 13.15 Merger and Integration . . . . . . . . . . 131 Section 13.16 Heading . . . . . . . . . . . . . . . . . . 131 Schedule 1 Tax Returns and Payments Exhibit A Form of Exchangeable Transferor Certificate Exhibit B Form of Daily Report Exhibit C Form of Settlement Statement Exhibit D Form of Annual Servicer's Certificate Exhibit E Form of Annual Opinion of Counsel Exhibit F Form of Reconveyance of Receivables Exhibit G Form of Agreed-Upon Procedures AMENDED AND RESTATED POOLING AND SERVICING AGREEMENT, dated as of January 12, 1997 by and among FINGERHUT RECEIVABLES INC., a corporation organized and existing under the laws of the State of Delaware, as Transferor, FINGERHUT NATIONAL BANK, a national banking association organized and existing under the laws of the United States, as Servicer, and THE BANK OF NEW YORK (DELAWARE), a banking corporation organized and existing under the laws of the State of Delaware, as Trustee. WHEREAS, Fingerhut Receivables, Inc., as Transferor, Fingerhut Corporation, as Servicer, and The Bank of New York (Delaware), as Trustee, are parties to a Pooling and Servicing Agreement, dated as of June 29, 1994 (the "Original Pooling and Servicing Agreement") as amended by the First Amendment to the Original Pooling and Servicing Agreement, dated as of November 15, 1994 (the "First Amendment") and the Second Amendment to the Original Pooling and Servicing Agreement, dated as of September 27, 1996 (the "Second Amendment," and together with the Original Pooling and Servicing Agreement and the First Amendment thereto, the "Amended Pooling and Servicing Agreement"), in each case by and among the parties to the Original Pooling and Servicing Agreement; WHEREAS, in accordance with the provisions of subsection 3.1(a) of the Amended Pooling and Servicing Agreement, and pursuant to an assumption agreement among Fingerhut Corporation, as predecessor Servicer, Fingerhut Receivables, Inc., as Transferor, The Bank of New York (Delaware), as Trustee, and Fingerhut National Bank, as successor Servicer, dated as of January 12, 1997 (the "Servicing Assumption Agreement"), Fingerhut Corporation has appointed its Affiliate, Fingerhut National Bank, to act as Servicer in full substitution for Fingerhut Corporation and Fingerhut National Bank has expressly assumed the performance of every covenant and obligation of the Servicer hereunder and Fingerhut Corporation has agreed to remain jointly and severally liable with Fingerhut National Bank with respect to the performance of Fingerhut National Bank as Servicer; and WHEREAS, Fingerhut Receivables, Inc., as Transferor, Fingerhut National Bank, as Servicer and The Bank of New York (Delaware), as Trustee desire to amend and restate the Amended Pooling and Servicing Agreement to read in its entirety as set forth below; NOW, THEREFORE, pursuant to the second paragraph of Section 13.1(a) of the Amended Pooling and Servicing Agreement, including the third proviso thereto, the parties hereto hereby agree that effective on and as of the date hereof, the Amended Pooling and Servicing Agreement is hereby amended to read in its entirety as follows: In consideration of the mutual agreements herein contained, each party agrees as follows for the benefit of the other parties and the Certificateholders: ARTICLE I DEFINITIONS Section 1.1 Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Adjustment Payment" shall have the meaning specified in subsection 3.8(a). "Affiliate" means, with respect to a particular Person, any Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. "Aggregate Invested Amount" shall mean, as of any date of determination, the sum of the Invested Amounts of all Series of Certificates issued and outstanding on such date of determination. "Aggregate Investor Percentage" with respect to Principal Collections, Imputed Yield Collections and Defaulted Receivables, as the case may be, shall mean, as of any date of determination, the sum of such Investor Percentages of all Series of Certificates issued and outstanding on such date of determination; provided, however, that the Aggregate Investor Percentage shall not exceed 100%. "Aggregate Principal Receivables" shall mean, for any day, the aggregate amount of Principal Receivables at the end of such day. "Agreement" shall mean this Amended and Restated Pooling and Servicing Agreement and all amendments hereof and supplements hereto, including any Supplement. "Amended Pooling and Servicing Agreement" shall have the meaning assigned in the Preamble hereto. "Amortization Period" shall mean, with respect to any Series, the period following the Revolving Period for such Series, which shall be the Amortization Period, the Early Amortization Period, or other amortization or accumulation period, in each case as defined with respect to such Series in the related Supplement. "Amortization Period Commencement Date" shall mean with respect to any Series, the date on which the Amortization Period with respect thereto commences. "Applicants" shall have the meaning specified in Section 6.7. "Appointment Day" shall have the meaning specified in subsection 9.2(a). "Authentication Agent" shall have the meaning specified in Section 6.8. "Authorized Newspaper" shall mean a newspaper of general circulation in the Borough of Manhattan, The City of New York printed in the English language and customarily published on each Business Day, whether or not published on Saturdays, Sundays and holidays. "Back End Customer" means with respect to any date of determination a customer who has purchased at least one previous product from Fingerhut and has either paid for or on such date of determination is current on payments for the initial purchase or the related installment loan. "Bank Receivables Purchase Agreement" shall mean the receivables purchase agreement dated as of January 12, 1997 between FCI, as purchaser of such Receivables, and FNB, as seller of Receivables, as amended from time to time and any other receivables purchase agreement between FCI, as purchaser of Receivables, and an Originator, as seller of such Receivables. "Bearer Certificates" shall have the meaning specified in Section 6.1. "Bearer Rules" shall mean the provisions of the Internal Revenue Code, in effect from time to time, governing the treatment of bearer obligations, including sections 163(f), 871, 881, 1441, 1442 and 4701, and any regulations thereunder including, to the extent applicable to any Series, proposed or temporary regulations of the Internal Revenue Service. "Book-Entry Certificates" shall mean certificates evidencing a beneficial interest in the Investor Certificates, ownership and transfers of which shall be made through book entries by a Clearing Agency as described in Section 6.10; provided, that after the occurrence of a condition whereupon book-entry registration and transfer are no longer authorized and Definitive Certificates are to be issued to the Certificate Owners, such certificates shall no longer be "Book-Entry Certificates". "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York or Delaware (or, with respect to any Series, any additional city specified in the related Supplement) are authorized or obligated by law or executive order to be closed, and such other days in each year designated by the Servicer in writing to the Trustee by the first day of December in the preceding year. "Cash Equivalents" shall mean, unless otherwise provided in the Supplement with respect to any Series, (a) negotiable instruments or securities represented by instruments in bearer or registered form which evidence (i) obligations of or fully guaranteed by the United States of America; (ii) time deposits, promissory notes, or certificates of deposit of any depositary institution or trust company; provided, however, that at the time of the Trust's investment or contractual commitment to invest therein, the certificates of deposit or short-term deposits of such depositary institution or trust company shall have a credit rating from Standard & Poor's of A-1+ and from Moody's of P-1; (iii) commercial paper having, at the time of the Trust's investment or contractual commitment to invest therein, a rating from Standard & Poor's of A-1+ and from Moody's of P-1; (iv) bankers acceptances issued by any depositary institution or trust company described in clause (a)(ii) above; and (v) investments in money market funds rated AAA-m or AAA-mg by Standard & Poor's and Aaa by Moody's or otherwise approved in writing by Moody's and Standard & Poor's; (b) time deposits and demand deposits in the name of the Trust or the Trustee in any depositary institution or trust company referred to in clause (a)(ii) above; (c) securities not represented by an instrument that are registered in the name of the Trustee or its nominee (which may not be Fingerhut or an Affiliate) upon books maintained for that purpose by or on behalf of the issuer thereof and identified on books maintained for that purpose by the Trustee as held for the benefit of the Trust or the Certificateholders, and consisting of (x) shares of an open end diversified investment company which is registered under the Investment Company Act which (i) invests its assets exclusively in obligations of or guaranteed by the United States of America or any instrumentality or agency thereof having in each instance a final maturity date of less than one year from their date of purchase or other Cash Equivalents, (ii) seeks to maintain a constant net asset value per share, (iii) has aggregate net assets of not less than $100,000,000 on the date of purchase of such shares and (iv) which the Rating Agency designates in writing will not result in a withdrawal or downgrading of its then current rating of any Series rated by it or (y) Eurodollar time deposits of a depository institution or trust company that are rated A-1+ by Standard & Poor's and P-1 by Moody's; provided, however, that at the time of the Trust's investment or contractual commitment to invest therein, the Eurodollar deposits of such depositary institution or trust company shall have a credit rating from Standard & Poor's of A-1+ and P-1 by Moody's; and (d) any other investment if the Rating Agency confirms in writing that such investment will not adversely affect its then current rating of the Investor Certificates. "CEDEL" shall mean Cedel S.A. "Certificate" shall mean any one of the Investor Certificates of any Series or the Exchangeable Transferor Certificate. "Certificateholder" or "Holder" shall mean the Person in whose name a Certificate is registered in the Certificate Register and, if applicable, the holder of any Bearer Certificate or Coupon, as the case may be. "Certificate Interest" shall mean interest payable in respect of the Investor Certificates of any Series pursuant to Article IV of the Agreement as supplemented by the Supplement for such Series. "Certificate Owner" shall mean, with respect to a Book-Entry Certificate, the Person who is the beneficial owner of such Book-Entry Certificate, as may be reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing Agency (directly or as an indirect participant, in accordance with the rules of such Clearing Agency). "Certificate Principal" shall mean principal payable in respect of the Investor Certificates of any Series pursuant to Article IV of this Agreement. "Certificate Rate" shall mean, with respect to any Series of Certificates (or, for any Series with more than one Class, for each Class of such Series), the percentage (or formula on the basis of which such rate shall be determined) stated in the related Supplement. "Certificate Register" shall mean the register maintained pursuant to Section 6.3, providing for the registration of the Certificates and transfers and exchanges thereof. "Class" shall mean, with respect to any Series, any one of the classes of Certificates of that Series as specified in the related Supplement. "Clearing Agency" shall mean an organization registered as a "clearing agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. "Clearing Agency Participant" shall mean a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency or Foreign Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency or Foreign Clearing Agency. "Closing Date" shall mean, with respect to any Series, the date of issuance of such Series of Certificates, as specified in the related Supplement. "Collection Account" shall have the meaning specified in subsection 4.2(a). "Collections" shall mean all payments received by the Servicer in respect of the Eligible Receivables in the form of cash, checks or any other form of payment in accordance with the Contract in effect from time to time on any Eligible Receivables, other than pre-paid insurance premiums. "Contract" means an agreement between an Originator and another person for the extension of closed-end credit, including pursuant to a credit card, in the form of a written contract, invoice or closed-end agreement, in each case pursuant to or under which such other person shall be obligated to either pay for, or to pay a loan made to finance the purchase of, merchandise, financial service products or services or return any such merchandise to Fingerhut. "Corporate Trust Office" shall mean the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of the execution of this Agreement is located at White Clay Center, Route 273, Newark, Delaware 19711, Attention: Corporate Trust Specialized Agency Services. "Coupon" shall have the meaning specified in Section 6.1. "Credit and Collection Policy" means those credit, collection, customer relations and service policies and practices in effect on the date hereof relating to the Contracts and the Receivables as such may be modified from time to time. "Daily Report" shall mean a report in the form specified in subsection 1.2(e) as may be supplemented pursuant to any Supplement. "Date of Processing" shall mean, with respect to any transaction, the date on which such transaction is first recorded on the Servicer's computer master file of installment sale contracts (without regard to the effective date of such recordation). "Default Amount" shall mean, on any Business Day, the product of (i) the aggregate Outstanding Balances of Defaulted Receivables on such Business Day and (ii) one minus the Discount Factor. "Defaulted Receivable" shall mean each Eligible Receivable which, in accordance with the Credit and Collection Policy or the Servicer's customary and usual servicing procedures, the Servicer has charged off as uncollectible; a Receivable shall become a Defaulted Receivable on the day on which such Receivable is recorded as charged off as uncollectible on the Servicer's computer master file of installment sale contracts. Notwithstanding any other provision hereof, any Defaulted Receivables that are Ineligible Receivables shall be treated as Ineligible Receivables rather than Defaulted Receivables. "Defeasance Account" shall have the meaning specified in the applicable Supplement. "Definitive Certificate" shall have the meaning specified in Section 6.10. "Depositary" shall have the meaning specified in Section 6.10. "Depositary Agreement" shall mean, with respect to each Series, the agreement among the Transferor, the Trustee and the Clearing Agency, or as otherwise provided in the related Supplement. "Determination Date" shall mean the second Business Day prior to each Distribution Date. "Discount Factor" shall mean 25%; provided, however, that such percentage may be changed from time to time by the Transferor if such change will not cause a Pay Out Event to occur and the Rating Agencies will have confirmed that the change will not result in any of the Rating Agencies reducing or withdrawing its original rating on any then outstanding Series rated by it. "Disposition" shall have the meaning specified in Section 9.2(a). "Distribution Account" shall have the meaning specified in subsection 4.2(c). "Distribution Date" shall mean, unless otherwise specified in any Supplement for the related Series, the twentieth day of each month or, if such twentieth day is not a Business Day, the next succeeding Business Day. "Dollars", "$" or "U.S. $" shall mean United States dollars. "Eligible Receivable" shall mean each Receivable that satisfies each of the following criteria: (a) it is payable in United States dollars, (b) it has not been sold or pledged to any other party, (c) it constitutes an "account" or a "general intangible" as defined in Article 9 of the UCC as then in effect in the Relevant UCC State, (d) it is at the time of its transfer to the Trust the legal, valid, and binding obligation of, or is guaranteed by, a person who is competent to enter into a contract and incur debt, and is enforceable against such person in accordance with its terms, (e) it and the related Contract do not contravene in any material respect, and the Originator with respect to such Receivable is not in violation of, any material laws, rules, or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to truth in lending, usury, fair credit billing, time price plan billing, fair credit reporting, equal credit opportunity and fair debt collection practices) that could reasonably be expected to have an adverse impact on the amount of collections thereunder, (f) all material consents, licenses, or authorizations of, or registrations with, any governmental authority required to be obtained or given in connection with the creation of such Receivable or the execution, delivery, creation, and performance of the related Contract have been duly obtained or given and are in full force and effect as of the date of the creation of such Receivables, (g) at the time of its transfer to the Trust, the Transferor or the Trust will have good and marketable title free and clear of all liens and security interests arising under or through the Transferor (other than Permitted Liens), and (h) it is not a Receivable which, during the period specified in subsection 2.6(b), is in excess of the percentage test specified in subsection 2.6(b). "Enhancement" shall mean, with respect to any Series, any cash collateral account, cash collateral guaranty, collateral invested amount, letter of credit, guaranteed rate agreement, maturity guaranty facility, tax protection agreement, interest rate cap, interest rate swap, subordination of the rights of one class to another, or any other contract, agreement or arrangement for the benefit of the Certificateholders of such Series (or Certificateholders of a Class within such Series) as designated in the applicable Supplement. "Enhancement Provider" shall mean, with respect to any Series, the Person, if any, designated as such in the related Supplement. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Euroclear Operator" shall mean Morgan Guaranty Trust Company of New York, Brussels, Belgium office, as operator of the Euroclear System. "Excess Funding Account" shall have the meaning specified in subsection 4.2(d). "Exchange" shall mean either of the procedures described in Section 6.9(b). "Exchangeable Transferor Certificate" shall mean the certificate executed by the Transferor and authenticated by the Trustee, substantially in the form of Exhibit A and exchangeable as provided in Section 6.9; provided, that at any time there shall be only one Exchangeable Transferor Certificate. "Exchange Date" shall have the meaning, with respect to any Series issued pursuant to an Exchange, specified in subsection 6.9(b). "Exchange Notice" shall have the meaning, with respect to any Series issued pursuant to an Exchange, specified in subsection 6.9(b). "Extended Trust Termination Date" shall have the meaning specified in subsection 12.1(a). "FCI" shall mean Fingerhut Companies, Inc., a corporation organized and existing under the laws of the State of Minnesota. "FDIC" shall mean the Federal Deposit Insurance Corporation, or any successor thereto. "Fingerhut" shall mean Fingerhut Corporation, a corporation organized and existing under the laws of the State of Minnesota. "Fixed/Floating Allocation Percentage" shall mean for a Series for any Business Day or Distribution Date, as applicable, the percentage equivalent of a fraction, the numerator of which is the Invested Amount of such Series at the end of the Revolving Period of such Series and the denominator of which is the greater of (a) the total amount of Principal Receivables in the Trust and amounts on deposit in the Excess Funding Account as of the end of the preceding Business Day and (b) the sum of the numerators used to calculate the allocation percentages with respect to Principal Collections for all Series. "Floating Allocation Percentage" shall mean for a Series on any Business Day the sum of the percentage equivalents of fractions, the numerator of each of which is the Invested Amount (or adjusted Invested Amount as specified in the applicable Supplement) for each Class of such Series as of the end of the preceding Business Day and the denominator of which is the greater of (a) the sum of the amount of Principal Receivables in the Trust and the amount on deposit in the Excess Funding Account as of the end of the preceding Business Day and (b) with respect to Principal Collections only, the sum of the numerators for all classes of all Series then outstanding used to calculate the applicable allocation percentage. "FNB" shall mean Fingerhut National Bank, a national banking association. "Foreign Clearing Agency" shall mean CEDEL and the Euroclear Operator. "FRI" shall mean Fingerhut Receivables, Inc., a Delaware corporation. "Global Certificate" shall have the meaning specified in Section 6.13. "Governmental Authority" shall mean the United States of America, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Holder" or "Certificateholder" shall mean the Person in whose name a Certificate is registered in the Certificate Register, and if applicable, the holder of any Bearer Certificate or Coupon, as the case may be. "Imputed Yield Collections" shall mean the sum of (A) the product of (x) the aggregate amount of Collections (other than Recoveries) and (y) the Discount Factor, (B) investment earnings on amounts on deposit in the Excess Funding Account on such business day, (C) Recoveries and (D) collections on Receivables which are not Eligible Receivables. "Imputed Yield Receivables" shall mean the product of the aggregate unpaid balance of the Eligible Receivables and the Discount Factor. "Ineligible Receivable" means any Receivable that does not satisfy the definition of Eligible Receivable. "Initial Closing Date" shall mean June 29, 1994. "Initial Invested Amount" shall mean, with respect to any Series of Certificates, the amount stated in the related Supplement. "Insolvency Event" shall have the meaning specified in subsection 9.2(a). "Interest Funding Account" shall have the meaning specified in subsection 4.2(b). "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Invested Amount" shall have, with respect to any Series of Certificates, the meaning stated in the related Supplement. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended from time to time. "Investor Account" shall mean each of the Interest Funding Account, any Principal Account, the Excess Funding Account, any Distribution Account and any Series Account. "Investor Certificate" shall mean any one of the certificates (including, without limitation, the Bearer Certificates or the Registered Certificates) executed by the Transferor and authenticated by the Trustee substantially in the form (or forms in the case of a Series with multiple classes) of the investor certificate or variable funding certificate attached to the related Supplement. "Investor Certificateholder" shall mean the Holder of an Investor Certificate. "Investor Charge Off" shall have, with respect to each Series, the meaning specified in the applicable Supplement. "Investor Default Amount" shall have, with respect to any Series of Certificates, the meaning stated in the related Supplement. "Investor Exchange" shall have the meaning specified in subsection 6.9(b). "Investor Percentage" shall mean, with respect to Principal Collections, Imputed Yield Collections and Defaulted Receivables, and any Series of Certificates, the Floating Allocation Percentage or the Fixed/Floating Allocation Percentage, as applicable. "Lien" shall mean any lien, security interest or other encumbrance; provided, however, that any assignment pursuant to Section 7.2 shall not be deemed to constitute a Lien. "Minimum Aggregate Principal Receivables" shall mean, as of any date of determination, an amount equal to the sum of (a) the Initial Invested Amounts for all outstanding Series on such date except a Series created pursuant to a Variable Funding Supplement at any time and (b) with respect to a Series created pursuant to a Variable Funding Supplement, during the Revolving Period for such Series, the Invested Amount of such Series on such date of determination or, during the Amortization Period for such Series, the Invested Amount of such Series on the last day of the Revolving Period for such Series. "Minimum Retained Interest" shall mean the product of the weighted average Minimum Retained Percentages for all Series and the sum of the outstanding principal amounts of all classes of all Series. "Minimum Retained Percentage" shall mean the highest Minimum Retained Percentage specified in any Supplement. "Minimum Transferor Interest" shall mean, as of any date of determination, the product of (i) the sum of (a) the aggregate Principal Receivables and (b) the amounts on deposit in the Excess Funding Account and (ii) the highest Minimum Transferor Percentage for any Series. "Minimum Transferor Percentage" shall mean the highest Minimum Transferor Percentage specified in any Supplement for an outstanding Series. "Monthly Investor Servicing Fee" shall mean the Servicing Fee payable to the Servicer with respect to a Monthly Period. "Monthly Period" shall mean, unless otherwise defined with respect to a Series in the related Supplement, the period from and including the first day of each fiscal month of the Transferor to and including the last day of such fiscal month. "Moody's" shall mean Moody's Investors Service, Inc. or its successor. "Obligor" shall mean a Person obligated to make payments with respect to a Receivable pursuant to a Contract. "Officer's Certificate" shall mean a certificate signed by any Vice President, Treasurer, Assistant Treasurer or more senior officer of the Transferor or Servicer and delivered to the Trustee. "Opinion of Counsel" shall mean a written opinion of counsel, who may be counsel for or an employee of the Person providing the opinion, and who shall be reasonably acceptable to the Trustee. "Originator" shall mean (i) each of Fingerhut and FNB and any of their respective successors or assigns, (ii) any of their Affiliates, or (iii) any other originator of Receivables that is a party to a Purchase Agreement so long as the Transferor shall have received prior written notice from each Rating Agency that the addition of such Originator will not result in the reduction or withdrawal of its then existing rating of any Class of Investor Certificates then issued and outstanding and shall have delivered such notice to the Trustee. "Outstanding Balance" shall mean, with respect to a Receivable on any day, the aggregate amount owed by the Obligor thereunder as of the close of business on the prior Business Day (net of returns and adjustments) assuming that the related Obligor has selected the installment credit terms with respect to such Receivable. "Paying Agent" shall mean any paying agent appointed pursuant to Section 6.6 and shall initially be The Bank of New York. "Pay Out Commencement Date" shall mean, with respect to each Series, the date on which (a) a Trust Pay Out Event is deemed to occur pursuant to Section 9.1 or (b) a Series Pay Out Event is deemed to occur pursuant to the Supplement for such Series. "Pay Out Event" shall mean, with respect to each Series, a Trust Pay Out Event or a Series Pay Out Event. "Permitted Lien" shall mean with respect to the Receivables: (i) Liens in favor of the Transferor created pursuant to the Purchase Agreement assigned to the Trustee pursuant to this Agreement; (ii) Liens in favor of the Trustee pursuant to this Agreement; and (iii) Liens which secure the payment of taxes, assessments and governmental charges or levies, if such taxes are either (a) not delinquent or (b) being contested in good faith by appropriate legal or administrative proceedings and as to which adequate reserves in accordance with generally accepted accounting principles shall have been established. "Person" shall mean any legal person, including any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, governmental entity or other entity of similar nature. "Pool Factor" shall mean, as of any Record Date, a number carried out to seven decimals representing the ratio of the applicable Invested Amount as of such Record Date (determined after taking into account any reduction in the Invested Amount which will occur on the following Distribution Date) to the applicable Initial Invested Amount unless otherwise specified with respect to a Series in the related Supplement. "Principal Account" shall have the meaning specified in subsection 4.2(b). "Principal Collections" shall mean, with respect to any Business Day, the Collections received with respect to Principal Receivables on such Business Day. "Principal Receivables" shall mean amounts shown on the Servicer's records as amounts payable by Obligors with respect to Eligible Receivables other than such amounts that are Imputed Yield Receivables or Defaulted Receivables. "Principal Shortfalls" shall mean, with respect to any Business Day and any outstanding Series, the amount which the related Supplement specifies as the "Principal Shortfall" for such Business Day. "Principal Terms" shall have the meaning, with respect to any Series issued pursuant to an Exchange, specified in subsection 6.9(c). "Prospective Pay Out Event" shall have the meaning specified in subsection 2.3(m). "Publication Date" shall have the meaning specified in subsection 9.2(a). "Purchase Agreement" shall mean (i) the receivables purchase agreement dated as of June 29, 1994 between the Transferor, as purchaser of such Receivables, and Fingerhut, as seller of such Receivables, as amended from time to time, (ii) the receivables purchase agreement to be dated as of January 12, 1997 between the Transferor, as purchaser of such Receivables and FCI, as seller of such Receivables, as amended from time to time, and (iii) any receivables purchase agreement between a seller of Receivables and the Transferor, substantially in the form of the receivables purchase agreement referred to in clause (i) above. "Qualified Institution" shall have the meaning specified in subsection 4.2(a). "Rating Agency" shall mean, with respect to each Series, the rating agency or agencies, if any, specified in the related Supplement. "Reassignment Date" shall have the meaning specified in subsection 2.4(e). "Receivable" shall mean with respect to any Obligor, any right to payment of amounts owed by that Obligor created at a time that such Obligor was a Back End Customer under a closed end installment sale, or closed end installment loan, Contract relating to the sale, or financing of the sale, of merchandise, financial service products or services, including, without limitation, all rights of each Originator and obligations of the Obligor under the applicable Contract, other than insurance premiums. "Record Date" shall mean, with respect to any Distribution Date, unless otherwise specified in the applicable Supplement, the Business Day preceding such Distribution Date, except that, with respect to any Definitive Certificates, Record Date shall mean the fifth day of the then current Monthly Period. "Recoveries" shall mean any amounts received by the Servicer with respect to Receivables that previously were charged off as uncollectible in accordance with the Servicer's customary and usual servicing procedures. "Registered Certificates" shall have the meaning specified in Section 6.1. "Related Person" shall mean a Person that is an Affiliate of Fingerhut, any Investor Certificateholder, any Enhancement Provider, or any Person whose status would violate the conditions for a trustee contained in Section (4)(i) of Rule 3a-7 under the Investment Company Act of 1940, as amended. "Relevant UCC State" shall mean each jurisdictions in which the filing of a UCC financing statement is necessary to perfect the ownership interest and security interest of the Transferor pursuant to the Purchase Agreement or the ownership or security interest of the Trustee established under this Agreement. "Requirements of Law" for any Person shall mean the certificate of incorporation or articles of association and by-laws or other organizational or governing documents of such Person, and any material law, treaty, rule or regulation, or determination of an arbitrator or Governmental Authority, in each case applicable to or binding upon such Person or to which such Person is subject. "Responsible Officer" shall mean any officer within the Corporate Trust Office (or any successor group of the Trustee), including the President, any Vice President or any other officer of the Trustee customarily performing functions similar to those performed by any person who at the time shall be an above-designated officer and who shall have direct responsibility for the administration of this Agreement. "Retained Interest" shall mean, on any date of determination, the sum of the Transferor Interest and the Invested Amount represented by any Transferor Retained Certificate. "Retained Percentage" shall mean, on any date of determination, the percentage equivalent of a fraction the numerator of which is the Retained Interest and the denominator of which is the aggregate amount of Principal Receivables at the end of the day immediately prior to such date of determination plus all amounts on deposit in the Excess Funding Account (but not including investment earnings on such amounts). "Revolving Period" shall have, with respect to each Series, the meaning specified in the related Supplement. "Secured Obligations" shall have the meaning specified in Section 2.1. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Series" shall mean any series of Investor Certificates, which may include within any such Series a Class or Classes of Investor Certificates subordinate to another such Class or Classes of Investor Certificates. "Series Account" shall mean any account or accounts established pursuant to a Supplement for the benefit of the related Series. "Series Allocation Percentage" shall mean with respect to any Series, on any date of determination, the percentage equivalent of a fraction the numerator of which is the Invested Amount of such Series and the denominator of which is the sum of the Invested Amounts of all Series then outstanding. "Series Pay Out Event" shall have, with respect to any Series, the meaning specified in the related Supplement. "Series Servicing Fee Percentage" shall mean, with respect to any Series, the amount specified as such in the related Supplement. "Series Termination Date" shall mean, with respect to any Series of Certificates, the date stated as such in the related Supplement. "Servicer" shall mean Fingerhut National Bank or any Person appointed as successor as herein provided to service the Receivables. "Servicer Default" shall have the meaning specified in Section 10.1. "Servicing Fee" shall have the meaning specified in the related Supplements. "Settlement Statement" shall mean a report in the form specified in subsection 1.2(e) as may be supplemented pursuant to any Supplement. "Shared Principal Collections" shall mean, with respect to any Business Day, for all outstanding Series the aggregate amount of Principal Collections which the related Supplements specify are to be treated as "Shared Principal Collections" available to be allocated to other Series for such Business Day. "Standard & Poor's" shall mean Standard & Poor's Ratings Group or its successor. "Successor Servicer" shall have the meaning specified in subsection 10.2(a). "Supplement" shall mean, with respect to any Series, a supplement to this Agreement complying with the terms of Section 6.9 of this Agreement, executed in conjunction with any issuance of Certificates of such Series (or, in the case of the issuance of Certificates on the Initial Closing Date, the supplements executed in connection with the issuance of such Certificates). "Termination Notice" shall have, with respect to any Series, the meaning specified in Section 10.1. "Transfer" shall mean transfer, sell, exchange, pledge, hypothecate, participate, or otherwise assign, in whole or in part. "Transfer Agent and Registrar" shall have the meaning specified in Section 6.3 and shall initially be The Bank of New York. "Transfer Date" shall mean, with respect to any Series, the Business Day immediately prior to each Distribution Date. "Transferor" shall mean Fingerhut Receivables, Inc., a corporation organized and existing under the laws of the State of Delaware, and any successor thereto. "Transferor Exchange" shall have the meaning specified in subsection 6.9(b). "Transferor Interest" shall mean, on any date of determination, the aggregate amount of Principal Receivables at the end of the day immediately prior to such date of determination plus all amounts on deposit in the Excess Funding Account (but not including investment earnings on such amounts) at the end of such immediately preceding day, minus the Aggregate Invested Amount at the end of such immediately preceding day. "Transferor Percentage" shall mean, on any date of determination, when used with respect to Principal Collections, Imputed Yield Collections and Defaulted Receivables, a percentage equal to 100% minus the Aggregate Investor Percentage with respect to such categories of Receivables. "Transferor Retained Certificates" shall mean Investor Certificates of any Series which the Transferor is required to retain pursuant to the terms of any Supplement. "Transferor Retained Class" shall mean any Class of Investor Certificates of any Series which the Transferor retained pursuant to the terms of any Supplement. "Trigger Event" shall have the meaning specified in subsection 9.2(a). "Trust" shall mean the trust created by this Agreement, the corpus of which shall consist of the Trust Property. "Trust Extension" shall have the meaning specified in subsection 12.1(a). "Trust Pay Out Event" shall have, with respect to each Series, the meaning specified in Section 9.1. "Trust Property" shall have the meaning assigned in Section 2.1. "Trust Termination Date" shall mean the earliest to occur of (i) unless a Trust Extension shall have occurred, the day after the Distribution Date with respect to any Series following the date on which funds shall have been deposited in the Distribution Account or the applicable Series Account for the payment of Investor Certificateholders of each Series then issued and outstanding sufficient to pay in full the Aggregate Invested Amount plus interest accrued at the applicable Certificate Rate through the end of the day prior to the Distribution Date with respect to each such Series and certain other amounts as may be specified in any Series Supplement, (ii) if a Trust Extension shall have occurred, the Extended Trust Termination Date, and (iii) the date specified in Section 12.1. "Trustee" shall mean The Bank of New York (Delaware), a Delaware banking corporation, and its successors and any Person resulting from or surviving any consolidation or merger to which it or its successors may be a party and any successor trustee appointed as herein provided. "UCC" shall mean the Uniform Commercial Code, as amended from time to time, as in effect in the applicable jurisdiction. "Undivided Interest" shall mean the undivided interest in the Trust evidenced by an Investor Certificate. "Variable Funding Certificates" shall mean a Series of Investor Certificates, in one or more Classes, issued pursuant to Section 6.9 and a Variable Funding Supplement. "Variable Funding Supplement" shall mean a Supplement executed in connection with the issuance of Variable Funding Certificates. Section 1.2 Other Definitional Provisions. (a) All terms defined in any Supplement or this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (b) As used herein and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1, and accounting terms partially defined in Section 1.1 to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms herein are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained herein shall control. (c) The agreements, representations and warranties of FNB in this Agreement and in any Supplement in its capacity as Servicer and of FRI in its capacity as Transferor shall be deemed to be the agreements, representations and warranties of FNB and FRI solely in each such capacity for so long as either of them acts in each such capacity under this Agreement. (d) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to any Supplement or this Agreement as a whole and not to any particular provision of this Agreement or any Supplement; and Section, subsection, Schedule and Exhibit references contained in this Agreement or any Supplement are references to Sections, subsections, Schedules and Exhibits in or to this Agreement or any Supplement unless otherwise specified. (e) The Daily Report and Settlement Statement shall be in substantially the forms of Exhibits B and C, with such changes as the Servicer may determine to be necessary or desirable; provided, however, that no such change shall serve to exclude information required by this Agreement or any Supplement and each such change shall be reasonably acceptable to the Trustee. The Servicer shall, upon making such determination and receiving the consent of the Trustee to such change, deliver to the Trustee and each Rating Agency an Officer's Certificate to which shall be annexed the form of the related Exhibit, as so changed. Upon the delivery of such Officer's Certificate to the Trustee, the related Exhibit, as so changed, shall for all purposes of this Agreement constitute such Exhibit. The Trustee may conclusively rely upon such Officer's Certificate in determining whether the related Exhibit, as changed, conforms to the requirements of this Agreement. [End of Article I] ARTICLE II CONVEYANCE OF RECEIVABLES; ISSUANCE OF CERTIFICATES Section 2.1 Conveyance of Receivables. The Transferor does hereby transfer, assign, set-over, and otherwise convey to the Trust for the benefit of the Certificateholders, without recourse, all of its right, title and interest in, to and under (i) the Receivables now existing and hereafter created, in each case, immediately upon the Seller's acquisition of rights therein, and all monies due or to become due with respect thereto, (ii) the Purchase Agreement and the Bank Receivables Purchase Agreement (with respect to closed- end installment loan contract receivables of Back-End Customers), (iii) Recoveries and (iv) all proceeds of the foregoing. Such property, together with all monies as are from time to time deposited in the Collection Account, any Interest Funding Account, any Principal Account, any Distribution Account, any Series Account and the Excess Funding Account and all amounts on deposit in or credited to such accounts (excluding any investment earnings on any such deposited amount except for such amounts as are on deposit in the Excess Funding Account) and any other account and all monies as are from time to time available under any Enhancement for any Series for payment to Certificateholders shall constitute the property of the Trust (the "Trust Property"). The foregoing transfer, assignment, set-over and conveyance does not constitute and is not intended to result in a creation or an assumption by the Trust, the Trustee or any Investor Certificateholder of any obligation of the Transferor, the Servicer or any other Person in connection with the Receivables or any agreement or instrument relating thereto, including, without limitation, any obligation to any Obligors or insurers, or in connection with the Purchase Agreement or the Bank Receivables Purchase Agreement. In connection with such transfer, assignment, set-over and conveyance, the Transferor agrees to record and file, at its own expense, one or more financing statements (including any continuation statements with respect to such financing statements when applicable) with respect to the Receivables now existing and hereafter created for the transfer of "accounts" and "general intangibles" (each as defined in Section 9-106 of the UCC as in effect in the Relevant UCC State) meeting the requirements of applicable state law in such manner and in such jurisdictions as are necessary to perfect the assignment of the Receivables to the Trust, and to deliver file-stamped copies of such financing statements or continuation statements or other evidence of such filing (which may, for purposes of this Section 2.1, consist of facsimile confirmation of such filing) to the Trustee on or prior to the date of issuance of the Certificates, and in the case of any continuation statements filed pursuant to this Section 2.1, as soon as practicable after receipt thereof by the Transferor. The foregoing transfer, assignment, set-over and conveyance to the Trust shall be made to the Trustee, on behalf of the Trust, and each reference in this Agreement to such transfer, assignment, set-over and conveyance shall be construed accordingly. To the extent that the transfer of the Receivables from the Transferor to the Trust hereunder may be characterized as a pledge rather than as a sale, the Transferor hereby grants and transfers to the Trustee for the benefit of the Certificateholders a first priority perfected security interest in all of the Transferor's right, title and interest in, to and under the Trust Property to secure a loan in an amount equal to the unpaid principal amount of the Investor Certificates issued hereunder or to be issued pursuant to this Agreement and the interest accrued thereon at the related Certificate Rate and to secure all of the Transferor's and Servicer's obligations hereunder, including, without limitation, the Transferor's obligation to transfer Receivables hereafter created to the Trust (the "Secured Obligations"), and agrees that this Agreement shall constitute a security agreement under applicable law. Section 2.2 Acceptance by Trustee. (a) The Trustee hereby acknowledges its acceptance, on behalf of the Trust, of all right, title and interest previously held by the Transferor in, to and under the Trust Property and declares that it shall maintain such right, title and interest, upon the Trust herein set forth, for the benefit of all Certificateholders. (b) The Trustee shall have no power to create, assume or incur indebtedness or other liabilities in the name of the Trust other than as contemplated in this Agreement. Section 2.3 Representations and Warranties of the Transferor. The Transferor hereby represents and warrants to the Trustee, on behalf of the Trust, as of the Initial Closing Date and, with respect to any Series of Certificates, as of the date of the related Supplement and the related Closing Date for such Series: (a) Organization and Good Standing. The Transferor is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware and has the corporate power and authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement and the Purchase Agreement and to execute and deliver to the Trustee the Certificates pursuant hereto. (b) Due Qualification. The Transferor is duly qualified to do business and is in good standing (or is exempt from such requirements) as a foreign corporation in any state required in order to conduct business, and has obtained all necessary licenses and approvals with respect to the Transferor required under federal and Delaware law. (c) Due Authorization. The execution and delivery of this Agreement and the Purchase Agreement and the consummation of the transactions provided for herein and therein, have been duly authorized by the Transferor by all necessary corporate action on its part. (d) Binding Obligation. Each of this Agreement and the Purchase Agreement, and the consummation of the transactions provided for herein and therein, constitutes a legal, valid, and binding obligation of the Transferor, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereinafter in effect, affecting the enforcement of creditors' rights in general and as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity). (e) No Conflicts. The execution and delivery of this Agreement and the Purchase Agreement and the performance of the transactions contemplated hereby and thereby, do not (i) contravene the Transferor's charter or by-Laws, (ii) violate any material provision of law applicable to it or require any filing (except for the filings under the UCC), registration, consent or approval under, any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Transferor, except for such filings, registrations, consents or approvals as have already been obtained and are in full force and effect. (f) Taxes. Except as specified on Schedule 1, the Transferor and each prior owner of the Receivables has filed all tax returns required to be filed and has paid or made adequate provision for the payment of all taxes, assessments and other governmental charges due from the Transferor or such prior owner or is contesting any such tax, assessment or other governmental charge in good faith through appropriate proceedings. (g) No Violation. The execution and delivery of this Agreement and the Purchase Agreement and the execution and delivery to the Trustee of the Certificates, the performance of the transactions contemplated by this Agreement and the Purchase Agreement and the fulfillment of the terms hereof and thereof will not violate any Requirements of Law applicable to the Transferor, will not violate, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under any Requirement of Law applicable to the Transferor or any material indenture, contract, agreement, mortgage, deed of trust or other material instrument to which the Transferor is a party or by which it or its properties are bound. (h) No Proceedings. There are no proceedings or investigations pending or, to the best knowledge of the Transferor, threatened against the Transferor, before any Governmental Authority (i) asserting the invalidity of this Agreement and the Purchase Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated hereby or thereby, (iii) seeking any determination or ruling that would materially and adversely affect the performance by the Transferor of its obligations thereunder, (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability thereof or (v) seeking to affect adversely the tax attributes of the Trust. (i) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Governmental Authority required in connection with the execution and delivery of this Agreement, the Purchase Agreement and the Certificates, the performance of the transactions contemplated by this Agreement and the Purchase Agreement and the fulfillment of the terms hereof and thereof, have been obtained. (j) Bona Fide Receivables. Each Receivable is or will be an account receivable arising out of the performance by the applicable Originator in accordance with the terms of the Contract giving rise to such Receivables. The Transferor has no knowledge of any fact which should have led it to expect at the time of the classification of any Receivable as an Eligible Receivable that such Receivable would not be paid in full when due, and each Receivable classified as an Eligible Receivable by the Transferor in any document or report delivered under this Agreement satisfies the requirements of eligibility contained in the definition of Eligible Receivable set forth in this Agreement. (k) Place of Business. The principal executive offices of the Transferor are in Minnetonka, Minnesota, and the offices where the Transferor keeps its records concerning the Receivables and related Contracts are in Minnetonka, Minnesota, St. Cloud, Minnesota and Hennepin County, Minnesota. (l) Use of Proceeds. No proceeds of the issuance of any Certificate will be used by the Transferor to purchase or carry any margin security. (m) Pay Out Event. As of the Initial Closing Date, no Pay Out Event and no condition that with the giving of notice and/or the passage of time would constitute a Pay Out Event (a "Prospective Pay Out Event"), has occurred and is continuing. (n) Not an Investment Company. The Transferor is not an "investment company" within the meaning of the Investment Company Act, or is exempt from all provisions of such Act. For the purposes of the representations and warranties contained in this Section 2.3 and made by the Transferor on the Initial Closing Date, "Certificates" shall mean the Certificates issued on the Initial Closing Date. The representations and warranties set forth in this Section 2.3 shall survive the transfer and assignment of the respective Receivables to the Trust, and termination of the rights and obligations of the Servicer pursuant to Section 10.1. The Transferor hereby represents and warrants to the Trust, with respect to any Series of Certificates, as of its Closing Date, unless otherwise stated in the related Supplement, that the representations and warranties of the Transferor set forth in Section 2.3, are true and correct as of such date (and for the purposes of such representations and warranties, "Certificates" shall mean the Certificates issued on the related Closing Date) and that each representation and warranty set forth in this Section 2.3 and in Section 2.4(a)(i) with respect to the Agreement shall be made at such time with respect to the applicable Supplement. Upon discovery by the Transferor, the Servicer or a Responsible Officer of the Trustee of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice to the others. Section 2.4 Representations and Warranties of the Transferor Relating to the Agreement and the Receivables. (a) Binding Obligation; Valid Transfer and Assignment. The Transferor hereby represents and warrants to the Trustee, on behalf of the Trust, that, as of the Initial Closing Date and with respect to any Series of Certificates, as of the date of its related Supplement and Closing Date: (i) The Purchase Agreement and this Agreement each constitutes the legal, valid and binding obligation of the Transferor, enforceable against the Transferor in accordance with its terms, except (A) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect, affecting the enforcement of creditors' rights in general, and (B) as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity). (ii) The transfer of Receivables by the Transferor to the Trust under this Agreement constitutes either (A) a valid transfer, assignment, set-over and conveyance to the Trust of all right, title and interest of the Transferor in and to the Trust Property, and such Trust Property will be held by the Trust free and clear of any Lien of any Person claiming through or under the Transferor or any of its Affiliates except for (x) Permitted Liens, (y) the interest of the Transferor as Holder of the Exchangeable Transferor Certificate and any other Class of Certificates held by the Transferor from time to time and (z) the Transferor's right, if any, to interest accruing on, and investment earnings, if any, in respect of any Interest Funding Account, any Principal Account, the Excess Funding Account, or any Series Account, as provided in this Agreement or the related Supplement, or (B) a grant of a first priority security interest (as defined in the UCC as in effect in the Relevant UCC State) in, to and under the Trust Property, which grant is enforceable with respect to the existing Receivables and the proceeds thereof upon execution and delivery of this Agreement, and which will be enforceable with respect to such Receivables hereafter created and the proceeds thereof, upon such creation. If this Agreement constitutes the grant of a security interest to the Trust in such property, upon the filing of the financing statement described in Section 2.1 and in the case of the Receivables hereafter created and proceeds thereof, upon such creation, the Trust shall have a first priority perfected security interest in such property, except for Permitted Liens. Except as contemplated in this Agreement or any Supplement, neither the Transferor nor any Person claiming through or under the Transferor shall have any claim to or interest in the Collection Account, any Principal Account, any Interest Funding Account, the Distribution Account, the Excess Funding Account, any principal funding account for any Series or any other Series Account, except for the Transferor's rights to receive interest accruing on, and investment earnings in respect of, any such account as provided in this Agreement (or, if applicable, any Series Account as provided in any Supplement) and, if this Agreement constitutes the grant of a security interest in such property, except for the interest of the Transferor in such property as a debtor for purposes of the UCC as in effect in the Relevant UCC State. The Purchase Agreement constitutes a valid transfer, assignment, set-over and conveyance to the Transferor of all right, title and interest of the seller which is a party thereto in and to the Receivables purported to be sold thereunder, whether then existing or thereafter created in the applicable Accounts and the proceeds thereof. (iii) The Transferor is not insolvent and will not be rendered insolvent upon the transfer of the Receivables to the Trust. (iv) The Transferor is (or, with respect to Receivables arising after the date hereof, will be) the legal and beneficial owner of all right, title and interest in and to each Receivable and each Receivable has been or will be transferred to the Trust free and clear of any Lien other than Permitted Liens. (v) All consents, licenses, approvals or authorizations of or registrations or declarations with any Governmental Authority required in connection with the transfer of Trust Property to the Trust have been obtained. (vi) Each Receivable classified as an "Eligible Receivable" by the Transferor in any document or report delivered hereunder will satisfy the requirements contained in the definition of Eligible Receivable as of the time of such document or report. (vii) Each Receivable then existing has been conveyed to the Trust free and clear of any Lien of any Person claiming through or under the Transferor or any of its Affiliates (other than Permitted Liens) and in compliance, in all material respects, with all Requirements of Law applicable to the Transferor. (b) Daily Representations and Warranties. On each day on which any new Receivable is purchased by the Transferor, the Transferor shall be deemed to represent and warrant to the Trust that (A) each Receivable purchased by the Transferor on such day has been conveyed to the Trust in compliance, in all material respects, with all Requirements of Law applicable to the Transferor and free and clear of any Lien of any Person claiming through or under the Transferor or any of its Affiliates (other than Permitted Liens) and (B) with respect to each such Receivable, all consents, licenses, approvals or authorizations of or registrations or declarations with, any Governmental Authority required to be obtained, effected or given by the Transferor in connection with the conveyance of such Receivable to the Trust have been duly obtained, effected or given and are in full force and effect. (c) Notice of Breach. The representations and warranties set forth in this Section 2.4 shall survive the transfer and assignment of the respective Receivables to the Trust. Upon discovery by the Transferor, the Servicer or a Responsible Officer of the Trustee of a breach of any of the representations and warranties set forth in this Section 2.4, the party discovering such breach shall give prompt written notice to the other parties mentioned above. The Transferor agrees to cooperate with the Servicer and the Trustee in attempting to cure any such breach. (d) Designation of Ineligible Receivables. In the event of a breach with respect to a Receivable of any representations and warranties set forth in subsection 2.3(j) or subsections 2.4(a)(iii) through (vii) or subsection 2.4(b), or in the event that a Receivable is not an Eligible Receivable on the date of its transfer to the Trust as a result of the failure to satisfy the conditions set forth in the definition of Eligible Receivable, such Receivable shall be designated an "Ineligible Receivable" and shall be assigned an Outstanding Balance of zero for the purpose of determining the aggregate amount of Principal Receivables on any day; provided, however, that if such representations and warranties with respect to such Receivable shall subsequently be true and correct in all material respects as if such Receivable had been created on such day or such Receivable shall subsequently satisfy the conditions set forth in the definition of Eligible Receivable, such Receivable shall be designated an Eligible Receivable, and the Outstanding Balance of such Receivable shall be included in determining the aggregate amount of Principal Receivables on such day. On and after the date of its designation as an Ineligible Receivable, each Ineligible Receivable shall not be given credit in determining the aggregate amount of Principal Receivables used in the calculation of any Investor Percentage, the Transferor Percentage or the Transferor Interest. In the event that on any Business Day the exclusion of an Ineligible Receivable from the calculation of the Transferor Interest would cause the Transferor Interest to be reduced below the Minimum Transferor Interest, the Transferor shall immediately make a deposit in the Excess Funding Account (for allocation as a Principal Receivable) in immediately available funds prior to the next succeeding Business Day in an amount equal to the amount by which the Transferor Interest would be reduced below the Minimum Transferor Interest as a result of the exclusion of such Ineligible Receivable. The portion of such deposit allocated to the Investor Certificates of each Series shall be distributed to the Investor Certificateholders of each Series in the manner specified in Article IV. (e) Reassignment of Trust Portfolio. In the event of a breach of any of the representations and warranties set forth in subsections 2.3(a), (b) and (c) and 2.4(a)(i) and (ii) with respect to any Series, either the Trustee or the Holders of Investor Certificates evidencing Undivided Interests aggregating more than 50% of the Invested Amount of such Series, by notice then given in writing to the Transferor (and to the Trustee and the Servicer, if given by the Investor Certificateholders of such Series), may direct the Transferor to accept reassignment of an amount of Principal Receivables equal to the face amount of the Invested Amount to be repurchased (as specified below) within 60 days of such notice (or within such longer period as may be specified in such notice), and the Transferor shall be obligated to accept reassignment of such Receivables on a Distribution Date specified by the Transferor (such Distribution Date, the "Reassignment Date") occurring within such applicable period on the terms and conditions set forth below; provided, however, that no such reassignment shall be required to be made, and no notice of such reassignment may be given, if, at any time during such applicable period, the representations and warranties contained in subsections 2.3(a), (b) and (c) and subsections 2.4(a)(i) and (ii) shall then be true and correct in all material respects. The Transferor shall, on the Transfer Date (in next day funds) preceding the Reassignment Date, deposit an amount equal to the reassignment deposit amount for such Series in the related Distribution Account or Series Account, as provided in the related Supplement, for distribution to the Investor Certificateholders pursuant to Article XII. The reassignment deposit amount with respect to any Series, unless otherwise stated in the related Supplement, shall be equal to (i) the Invested Amount of such Series at the end of the day on the last day of the Monthly Period preceding the Reassignment Date (provided, however, that with respect to any Series issued pursuant to a Variable Funding Supplement such amount shall be the Invested Amount of such Series as of the Reassignment Date, less the amount, if any, previously allocated for payment of principal to such Certificateholders on the related Reassignment Date, in the Monthly Period in which the Reassignment Date occurs), plus (ii) an amount equal to all interest accrued but unpaid on the Investor Certificates of such Series at the applicable Certificate Rate through such last day, less the amount, if any, previously allocated for payment of interest to the Certificateholders of such Series on the related Distribution Date in the Monthly Period in which the Reassignment Date occurs plus any other amounts accrued and owing as specified in the applicable Supplement. Payment of the reassignment deposit amount with respect to any Series, and all other amounts in the Distribution Account or the applicable Series Account in respect of the preceding Monthly Period, shall be considered a prepayment in full of the Receivables represented by the Investor Certificates of such Series. On the Distribution Date following the Transfer Date on which such amount has been deposited in full into the Distribution Account or the applicable Series Account, the Receivables and all monies due or to become due with respect thereto and all proceeds of the Receivables shall be released to the Transferor after payment of all amounts otherwise due hereunder on or prior to such dates and the Trustee shall execute and deliver such instruments of transfer or assignment, in each case without recourse, representation or warranty, as shall be prepared by and as are reasonably requested by the Transferor to vest in the Transferor, or its designee or assignee, all right, title and interest of the Trust in and to such Receivables, all monies due or to become due with respect thereto and all proceeds of such Receivables allocated to such Receivables pursuant to the related Supplement. If the Trustee or the Investor Certificateholders of any Series give notice directing the Transferor to accept reassignment as provided above, the obligation of the Transferor to accept reassignment of the applicable Receivables and pay the reassignment deposit amount pursuant to this subsection 2.4(e) shall constitute the sole remedy respecting a breach of the representations and warranties contained in subsections 2.3(a), (b) and (c) and 2.4(a)(i) and (ii) available to the Investor Certificateholders of such Series or the Trustee on behalf of the Investor Certificateholders of such Series. The Trustee shall have no duty to conduct any affirmative investigation as to the occurrence of any condition requiring the repurchase of any Receivable by the Transferor pursuant to this Agreement or any Supplement or the eligibility of any Receivable for purposes of this Agreement or any Supplement. Section 2.5 Covenants of the Transferor. The Transferor hereby covenants that: (a) Receivables to be Accounts or General Intangibles. The Transferor will take no action to cause any Receivable to be evidenced by any instrument (as defined in the UCC as in effect in the Relevant UCC State), except in connection with the enforcement or collection of a Receivable. Except in such circumstances, the Transferor will take no action to cause any Receivable to be anything other than an "account" or a "general intangible" (each as defined in the UCC as in effect in the Relevant UCC State). (b) Security Interests. Except for the conveyances hereunder, the Transferor will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien, on any Receivable, whether now existing or hereafter created, or any interest therein; the Transferor will immediately notify the Trustee of the existence of any Lien on any Receivable; and the Transferor shall defend the right, title and interest of the Trust in, to and under the Receivables, whether now existing or hereafter created, against all claims of third parties claiming through or under the Transferor; provided, however, that nothing in this subsection 2.5(b) shall prevent or be deemed to prohibit the Transferor from suffering to exist upon any of the Receivables any Permitted Lien. (c) Contracts and Credit and Collection Policies. The Transferor shall take all actions reasonably within its control to cause each Originator to comply with and perform its obligations under the Contracts relating to the Receivables and the Credit and Collection Policy except insofar as any failure to comply or perform would not materially and adversely affect the rights of the Trust or the Certificateholders hereunder or under the Certificates. The Transferor may change, and permit an Originator to change, the terms and provisions of the Contracts or the Credit and Collection Policy in any respect (i) if it would not, in the reasonable belief of the Transferor, materially impair the collectibility of any Receivable or cause, immediately or with the passage of time, a Pay Out Event to occur and (ii) if such change (A) (if it owns a comparable segment of receivables) is made applicable to the comparable segment of the receivables owned by the Transferor or such Originator, if any, which have characteristics the same as, or substantially similar to, the Receivables that are the subject of such change and (B) (if it does not own such a comparable segment of receivables) will not be made with the intent to materially benefit the Transferor over the Investor Certificateholders or to materially adversely affect the Investor Certificateholders, except as otherwise restricted by an endorsement, sponsorship, or other agreement between the Transferor and an unrelated third party or by the terms of the Contracts. (d) [Reserved] (e) Delivery of Collections. In the event that the Transferor receives Collections, the Transferor agrees to deposit such Collections into the Collection Account as soon as practicable after the receipt thereof, but in no event later than two Business Days following the Date of Processing thereof. (f) Conveyance of Receivables. The Transferor covenants and agrees that it will not permit any Originator to convey, assign, exchange or otherwise transfer any Receivable, to any Person other than the Transferor prior to the termination of this Agreement pursuant to Article XII except for transfers to FCI; provided, however, that the Transferor shall not be prohibited hereby from permitting an Originator to convey, assign, exchange or otherwise transfer a Receivable in connection with a transaction in which such Originator and its successor agree to comply with provisions substantially similar to those of Section 7.2. (g) Notice of Liens. The Transferor shall notify the Trustee promptly after becoming aware of any Lien on any Receivable other than Permitted Liens. (h) Enforcement of Purchase Agreement. The Transferor agrees to take all action necessary and appropriate to enforce its rights and claims under the Purchase Agreement and the Bank Receivables Purchase Agreement. (i) Separate Business. The Transferor shall at all times (i) to the extent the Transferor's office is located in the offices of any Affiliate of the Transferor, pay fair market rent for its office space located in the offices of such affiliate and a fair share of any overhead costs, (ii) maintain the Transferor's books, financial statements, accounting records and other corporate documents and records separate from those of its Affiliates or any other entity, (iii) not commingle the Transferor's assets with those of any Affiliate or any other entity, (iv) maintain the Transferor's books or account and payroll (if any) separate from those of any affiliate of the Transferor, (v) act solely in its corporate name and through its own authorized officers and agents, invoices and letterhead, (vi) separately manage the Transferor's liabilities from those of any of its Affiliates and pay its own material liabilities, including all material administrative expenses, from its own separate assets, provided that the Transferor's stockholder or other Affiliates may pay certain of the organizational expenses of the Transferor and expenses relating to the preparation, negotiation, execution and delivery of the documentation with respect to the issuance of Certificates from time to time, and the Transferor shall reimburse any Affiliate for its allocable portion of shared expenses paid by such Affiliate, and (vii) pay from the Transferor's assets all obligations and indebtedness of any kind incurred by the Transferor except as otherwise provided in clause (vi). The Transferor shall abide by all corporate formalities, including the maintenance of current minute books, and the Transferor shall cause its financial statements to be prepared in accordance with generally accepted accounting principles in a manner that indicates the separate existence of the Transferor and its assets and liabilities. The Transferor shall not assume the liabilities of any Affiliate, and shall not guarantee the liabilities of any Affiliate. The officers and directors of the Transferor (as appropriate) shall make decisions with respect to the business and daily operations of Transferor independent of and not dictated by any Affiliate of the Transferor. (j) Purchase Agreement Notices. The Transferor (i) shall promptly give the Trustee copies of any notices, reports or certificates given or delivered to the Transferor under the Purchase Agreement, (ii) shall not, without the consents, approvals and opinions, if any, required by Section 13.1, as if Section 13.1 related to the Purchase Agreement rather than this Agreement, enter into any amendment, supplement or other modification to, or waiver of any provision of, the Purchase Agreement and (iii) shall not permit the addition or removal of a Receivable to or from the operation of the Purchase Agreement unless there is a corresponding right or obligation of the Transferor to add or remove such Receivable to or from the Trust. Section 2.6 Addition of Receivables. (a) All receivables which meet the definition of Receivables shall be included as Receivables from and after the date upon which such Receivables are created and all such Receivables, whether such Receivables are then existing or thereafter created, shall be transferred automatically to the Trust upon purchase by the Transferor. (b) Receivables shall be transferred to the Trust as Eligible Receivables if, in addition to satisfying the requirements of clauses (a) through (g) of the definition of Eligible Receivables, the following condition is met: unless Moody's otherwise consents, with respect to any Monthly Period the number of new obligors on Fingerhut and FNB receivables (which shall include any obligors who, prior to the relevant measuring period, did not have a relationship with Fingerhut or FNB) since the first day of the eleventh preceding Monthly Period (or, in the case of any date on or before the last day of the June 1995 Monthly Period, the last day of the June 1994 Monthly Period) that are Back End Customers on Receivables minus the number of new obligors on Fingerhut and FNB receivables that are Back End Customers on Receivables who have previously been approved by Moody's since the first day of such eleventh preceding Monthly Period (or the last day of the June 1994 Monthly Period, as the case may be) shall not exceed 25% of the number of Back End Customers on Receivables at the close of business on the last day of such Monthly Period. Section 2.7. Defaulted Receivables. On the date on which a Receivable becomes a Defaulted Receivable, the Trust shall automatically and without further action or consideration be deemed to transfer, set over, and otherwise convey to the Transferor, without recourse, representation or warranty, all the right, title and interest of the Trust in and to such Defaulted Receivable, all monies due or to become due with respect thereto and all proceeds of such Defaulted Receivable allocable to the Trust with respect to such Defaulted Receivable, excluding Recoveries relating thereto, which shall remain a part of the Trust Property. On each Determination Date, the Servicer shall calculate the aggregate Investor Default Amount for the preceding Monthly Period with respect to each Series. Section 2.8 Covenants of the Transferor with Respect to the Purchase Agreement. The Transferor, in its capacity as purchaser of the Receivables from FCI or any Originator pursuant to a Purchase Agreement, hereby covenants that the Transferor will at all times enforce the covenants and agreements of FCI and each Originator in a Purchase Agreement and of FNB in the Bank Receivables Purchase Agreement, including, without limitation, the covenant to the effect set forth below. Contracts and Credit and Collection Policies. Each Originator shall take all actions reasonably within its control to comply with and perform its obligations under the Contracts relating to the Receivables and the Credit and Collection Policy except insofar as any failure to comply or perform would not materially and adversely affect the rights of the Trust or the Certificateholders hereunder or under the Certificates. Each Originator may change the terms and provisions of the Contracts or the Credit and Collection Policy in any respect (i) if it would not, in the reasonable belief of such Originator, materially impair the collectibility of any Receivable or cause, immediately or with the passage of time, a Pay Out Event to occur and (ii) if such change (A) (if it owns a comparable segment of receivables) is made applicable to the comparable segment of the receivables owned by such Originator, if any, which have characteristics the same as, or substantially similar to, the Receivables that are the subject of such change and (B) (if it does not own such a comparable segment of receivables) will not be made with the intent to materially benefit such Originator over the Trust or the Investor Certificateholders or to materially adversely affect the Trust or the Investor Certificateholders, except as otherwise restricted by an endorsement, sponsorship, or other agreement between such Originator and an unrelated third party or by the terms of the Contracts. [End of Article II] ARTICLE III ADMINISTRATION AND SERVICING OF RECEIVABLES Section 3.1 Acceptance of Appointment and Other Matters Relating to the Servicer. (a) FNB agrees to act as the Servicer under this Agreement. The Investor Certificateholders of each Series by their acceptance of the related Certificates and pursuant to subsection 3.1(a) of the Amended Pooling and Servicing Agreement consent to FNB acting as Servicer. Notwithstanding the foregoing or any other provisions of this Agreement or any Supplement, the Investor Certificateholders consent to Fingerhut or an Affiliate of Fingerhut acting as Servicer hereunder, in full substitution for FNB; provided that Fingerhut or any such Affiliate acting as Servicer shall expressly assume in writing (unless such assumption occurs by operation of law), by an agreement supplemental hereto, executed and delivered to the Trustee, the performance of every covenant and obligation of the Servicer, as applicable hereunder, and shall in all respects be designated the Servicer under this Agreement; provided, further, that, with respect to any Affiliate of Fingerhut acting as Servicer hereunder, Fingerhut will remain jointly and severally liable with such Affiliate. (b) The Servicer shall service and administer the Receivables and shall collect payments due under the Receivables in accordance with its customary and usual servicing procedures and the Credit and Collection Policies and shall have full power and authority, acting alone or through any party properly designated by it hereunder, to do any and all things in connection with such servicing and administration that it may deem necessary or desirable. Without limiting the generality of the foregoing and subject to Section 10.1, the Servicer is hereby authorized and empowered (i) to make withdrawals from the Collection Account as set forth in this Agreement, (ii) unless such power and authority is revoked by the Trustee on account of the occurrence of a Servicer Default pursuant to Section 10.1, to instruct the Trustee in writing to make withdrawals and payments, from any Interest Funding Account, the Excess Funding Account, any Principal Account and any Series Account, in accordance with such instructions as set forth in this Agreement, (iii) unless such power and authority is revoked by the Trustee on account of the occurrence of a Servicer Default pursuant to Section 10.1, to instruct the Trustee in writing to take any action permitted or required under any Enhancement at such time as set forth in this Agreement and any Supplement, (iv) to execute and deliver, on behalf of the Trust for the benefit of the Certificateholders, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Receivables and, after the delinquency of any Receivable and to the extent permitted under and in compliance with applicable law and regulations, to commence enforcement proceedings with respect to such Receivables, (v) to make any filings, reports, notices, applications, registrations with, and to seek any consents or authorizations from, the Securities and Exchange Commission and any state securities authority on behalf of the Trust as may be necessary or advisable to comply with any federal or state securities or reporting requirements and (vi) to delegate certain of its service, collection, enforcement and administrative duties hereunder with respect to the Receivables to any Person who agrees to conduct such duties in accordance with the Credit and Collection Policies; provided, however, that the Servicer shall notify the Trustee in writing of any such delegation; and provided further that the Servicer shall remain jointly and severally liable with such Person. The Trustee agrees that it shall promptly follow the instructions of the Servicer to withdraw funds from the Collection Account, any Principal Account, any Interest Funding Account, the Excess Funding Account, or any Series Account and to take any action required under any Enhancement at such time as required under this Agreement. The Trustee shall execute at the Servicer's written request such documents prepared by the Transferor and acceptable to the Trustee as the Servicer certifies are necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder. (c) [Reserved] (d) The Servicer shall not be obligated to use separate servicing procedures, offices or employees for servicing the Receivables from the procedures, offices and employees used by the Servicer in connection with servicing other receivables. Section 3.2 Servicing Compensation. As compensation for its servicing activities hereunder and reimbursement for its expenses as set forth in the immediately following paragraph, the Servicer shall be entitled to receive a servicing fee in respect of each day prior to the termination of the Trust pursuant to Section 12.1 (the "Servicing Fee"), payable in arrears on each date and in the manner specified in the applicable Supplement, equal to the product of (i) a fraction, the numerator of which is the actual number of days in the measuring period specified in the applicable Supplement and the denominator of which is the actual number of days in the year, (ii) the weighted average Series Servicing Fee Percentage for all Outstanding Series (based upon the Series Servicing Fee Percentage for each Series and the Invested Amount of such Series) and (iii) the daily average aggregate Outstanding Balance of all Principal Receivables over the term of such measuring period. The share of the Servicing Fee allocable to each Series with respect to any date of payment shall be equal to the product of (i) a fraction, the numerator of which is the actual number of days in the measuring period specified in the applicable Supplement and the denominator of which is the actual number of days in the year, (ii) the applicable Series Servicing Fee Percentage for such Series and (iii) the Invested Amount of such Series, as appropriate, as of the date of determination for such payment as specified in the applicable Supplement. The remainder of the Servicing Fee shall be paid by the Transferor, or retained by the Servicer as provided in Article IV, and in no event shall the Trust, the Trustee, any Enhancement Provider, or the Investor Certificateholders be liable for the share of the Servicing Fee to be paid by the Transferor. The Servicer shall be responsible for its own expenses, which shall include the amounts due to the Trustee pursuant to Section 11.5 and the reasonable fees and disbursements of independent public accountants and all other expenses incurred by the Servicer in connection with its activities hereunder; provided, that the Servicer shall not be liable for any liabilities, costs or expenses of the Trust, the Investor Certificateholders or the Certificate Owners arising under any tax law, including without limitation any federal, state or local income or franchise taxes or any other tax imposed on or measured by income (or any interest, penalties or additions with respect thereto or arising from a failure to comply therewith). In the event that the Servicer fails to pay any amounts due to the Trustee pursuant to Section 11.5, the Trustee shall be entitled to deduct and receive such amounts from the Servicing Fee prior to the payment thereof to the Servicer and the obligations of the Trust to pay any such amounts shall thereby be fully satisfied. The Servicer shall be required to pay such expenses for its own account and shall not be entitled to any payment therefor other than the Servicing Fee. Section 3.3 Representations and Warranties of the Servicer. FNB hereby makes, and any Successor Servicer by its appointment hereunder shall make, the following representations and warranties on which the Trustee has relied in accepting the Receivables in trust and in authenticating the Certificates issued on the Initial Closing Date: (a) Organization and Good Standing. The Servicer is either (i) a national banking association duly organized, validly existing and in good standing under the laws of the United States or (ii) a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has the corporate power, authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement. (b) Due Qualification. The Servicer is duly qualified to do business and is in good standing (or is exempt from such requirements) as a foreign corporation in any state where such qualification is necessary in order to service the Receivables as required by this Agreement and has obtained all necessary licenses and approvals as required under Federal and state law in order to service the Receivables as required by this Agreement, and if the Servicer shall be required by any Requirement of Law to so qualify or register or obtain such license or approval, then it shall do so except where the failure to obtain such license or approval does not materially affect the Servicer's ability to perform its obligations hereunder or the enforceability of the Receivables. (c) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions provided for herein, have been duly authorized by the Servicer by all necessary corporate action on the part of the Servicer. (d) Binding Obligation. This Agreement and the consummation of the transactions provided for herein, constitutes a legal, valid and binding obligation of the Servicer, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereinafter in effect, affecting the enforcement of creditors' rights in general and as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity). (e) No Violation. The execution and delivery of this Agreement by the Servicer, and the performance of the transactions contemplated by this Agreement and the fulfillment of the terms hereof applicable to the Servicer, will not violate, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, any Requirement of Law applicable to the Servicer or any material indenture, contract, agreement, mortgage, deed of trust or other material instrument to which the Servicer is a party or by which it is bound. (f) No Proceedings. There are no proceedings or investigations pending or, to the best knowledge of the Servicer, threatened against the Servicer before any Governmental Authority (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the issuance of the Certificates or the consummation of any of the transactions contemplated by this Agreement, (iii) seeking any determination or ruling that would materially and adversely affect the performance by the Servicer of its obligations under this Agreement, (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of this Agreement or (v) seeking to affect adversely the tax attributes of the Trust. (g) Compliance with Requirements of Law. The Servicer shall duly satisfy all obligations on its part to be fulfilled under or in connection with each Receivable, will maintain in effect all qualifications required under Requirements of Law in order to service properly each Receivable and will comply in all material respects with all other Requirements of Law in connection with servicing each Receivable the failure to comply with which would have a material adverse effect on the Certificateholders or any Enhancement Provider. (h) Protection of Certificateholders' Rights. The Servicer shall take no action which, nor omit to take any action the omission of which, would impair the rights of Certificateholders in any Receivable or the rights of any Enhancement Provider, nor shall it reschedule, revise or defer payments due on any Receivable except in accordance with the Credit and Collection Policies. (i) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Governmental Authority required in connection with the execution and delivery of this Agreement and the performance of the transactions contemplated by this Agreement and the fulfillment of the terms hereof, have been obtained; provided, however, that the Servicer makes no representation or warranty regarding State securities or "Blue Sky" laws in connection with the distribution of the Certificates. (j) Rescission or Cancellation. The Servicer shall not permit any rescission or cancellation of any Receivable except as ordered by a court of competent jurisdiction or other Governmental Authority or in accordance with the Credit and Collection Policy or the normal operating procedures of the Servicer. (k) Receivables Not To Be Evidenced by Promissory Notes. Except in connection with its enforcement or collection of a Receivable (in which case any such promissory note would be made in the name of the Trust on behalf of the Certificateholders), the Servicer will take no action to cause any Receivable to be evidenced by an instrument (as defined in the UCC as in effect in the Relevant UCC State). (l) Principal Place of Business. The Servicer shall at all times maintain its principal executive offices within the United States. Section 3.4 Reports and Records for the Trustee. (a) Daily Records. Upon reasonable prior notice by the Trustee, the Servicer shall make available at an office of the Servicer (or other location designated by the Servicer if such records are not accessible by the Servicer at an office of the Servicer) selected by the Servicer for inspection by the Trustee or its agent (reasonably acceptable to the Servicer) on a Business Day during the Servicer's normal business hours a record setting forth (i) the Collections on the Receivables and (ii) the amount of Receivables for the Business Day preceding the date of the inspection. The Servicer shall, at all times, maintain its computer files with respect to the Receivables in such a manner so that the Receivables may be specifically identified and, upon reasonable prior request of the Trustee, shall make available to the Trustee, at an office of the Servicer (or other location designated by the Servicer if such computer files are not located at an office of the Servicer) selected by the Servicer, on any Business Day of the Servicer during the Servicer's normal business hours any computer programs necessary to make such identification. (b) Daily Report. (i) On each Business Day the Servicer shall prepare a completed Daily Report. (ii) The Servicer shall deliver to the Trustee and the Paying Agent the Daily Report by 3:00 p.m. (New York City time) on each Business Day with respect to activity in the Receivables for the prior Business Day (or, in the case of a Daily Report delivered on the second Business Day following a Saturday, Sunday or other non-Business Day, the aggregate activity for the preceding Business Day and such preceding non-Business Days). (iii) Upon discovery of any error or receipt of notice of any error in any Daily Report, the Servicer, the Transferor and the Trustee shall arrange to confer and shall agree upon any adjustments necessary to correct any such errors. If any such error is material, the Servicer or the Trustee, as the case may be, shall retain all Collections which would otherwise be paid from the Trust (or such lesser amount as the Trustee and the Servicer shall agree to be necessary to cover any such error) in the Collection Account until such material error is corrected. Unless the Trustee has received written notice of any error or discrepancy, the Trustee may rely on each Daily Report delivered to it for all purposes hereunder. (c) Settlement Statement. On the second Business Day prior to each Distribution Date, the Servicer shall, prior to 3:00 p.m. (New York City time) on such day, deliver to the Trustee and the Paying Agent the Settlement Statement for the related Monthly Period substantially in the form of Exhibit C hereto, including the following information (which, in the case of clauses (iii), (iv) and (v) below, will be stated on the basis of an original principal amount of $1,000 per Certificate): (i) the aggregate amount of Collections received in the Collection Account for the Monthly Period preceding such Determination Date and the aggregate amount of Imputed Yield Collections and the aggregate amount of Principal Collections processed during such Monthly Period; (ii) with respect to the preceding Monthly Period for each Series of Certificates the aggregate amount of the applicable Investor Percentage of Principal Collections, and the aggregate amount of the applicable Investor Percentage of Imputed Yield Collections; (iii) for each Series and for each Class within any such Series, the total amount to be distributed to Investor Certificateholders on the next succeeding Distribution Date; (iv) for each Series and for each Class within any such Series, the amount of such distribution to Certificateholders allocable to principal; (v) for each Series and for each Class within any such Series, the amount of such distribution to Certificateholders allocable to interest; (vi) for each Series and each Class within a Series, the Investor Default Amount for the immediately preceding Monthly Period; (vii) for each Series and each Class within a Series, the amount of the Investor Charge-Offs and the amount of the reimbursements of Investor Charge-Offs for such Distribution Date; (viii) for each Series, the Servicing Fee for such Distribution Date; (ix) for each Series, the existing deficit controlled amortization amount, if applicable; (x) the Aggregate Principal Receivables in the Trust at the close of business on the last day of the Monthly Period preceding such Distribution Date; (xi) for each Series, the Invested Amount at the close of business on the last day of the Monthly Period immediately preceding such Distribution Date; (xii) the available amount of any Enhancement for each Class of each Series, if any; (xiii) for each Series and each Class within a Series, the Pool Factor as of the end of the related Monthly Period; (xiv) whether a Pay Out Event or a Prospective Pay Out Event with respect to any Series shall have occurred during or with respect to the related Monthly Period; (xv) the amount of any Adjustment Payments for the Related Monthly Period; and (xvi) such other calculations as may be required by any Supplement. The Trustee shall be under no duty to recalculate, verify or recompute the information supplied to it under this Section 3.4 or such other matters as are set forth in any Settlement Statement. The Servicer shall also provide a copy of the Settlement Statement in a prompt manner to each Rating Agency. Section 3.5 Annual Servicer's Certificate. The Servicer will deliver, in accordance with Section 13.5, to the Trustee, any Enhancement Provider and the Rating Agencies, within 100 days of the end of each fiscal year, beginning in 1994, an Officer's Certificate substantially in the form of Exhibit D stating that (a) a review of the activities of the Servicer during the preceding fiscal year and of its performance under this Agreement was made under the supervision of the officer signing such certificate and (b) to such officer's knowledge, based on such review, the Servicer has fully performed all its obligations under this Agreement throughout such period, or, if there has been a default in the performance of any such obligation, specifying each such default known to such officer and the nature and status thereof. A copy of such certificate may be obtained by any Investor Certificateholder by a request in writing to the Trustee addressed to the Corporate Trust Office. Section 3.6 Annual Independent Accountants' Servicing Report. (a) Within 100 days of the end of each fiscal year, the Servicer shall cause a firm of nationally recognized independent public accountants (who may also render other services to the Servicer or the Transferor) to furnish a report with respect to the prior fiscal year (or, in the case of the first such period, the period beginning on the Initial Closing Date and ending on the last day of the related fiscal year) to the Trustee, any Enhancement Provider and each Rating Agency, to the effect that such firm has applied certain procedures, agreed upon with the Servicer and the Trustee and substantially as set forth in Exhibit G hereto, which would re-perform certain accounting procedures performed by the Servicer pursuant to certain documents and records relating to the servicing of the Receivables under this Agreement. In addition, each report shall set forth the agreed upon procedures performed and the results of such procedures. (b) Within 100 days of the end of each fiscal year, the Servicer shall cause a firm of nationally recognized independent certified public accountants (who may also render other services to the Servicer or the Transferor) to furnish a report to the Trustee, any Enhancement Provider and the Rating Agency to the effect that they have compared the mathematical calculations set forth in each of the monthly certificates forwarded by the Servicer pursuant to subsection 3.4(c) during the period covered by such report with the computer reports which were the source of such amounts and that on the basis of such comparison, such amounts are in agreement, except for such exceptions as they believe to be immaterial and such other exceptions as shall be set forth in such report. A copy of such report will be sent by the Trustee to each Investor Certificateholder. Section 3.7 Tax Treatment. The Transferor has structured this Agreement and the Investor Certificates with the intention that the Investor Certificates will qualify under applicable federal, state, local and foreign tax law as indebtedness. Except to the extent expressly specified to the contrary in any Supplement, the Transferor, the Servicer, the Holder of the Exchangeable Transferor Certificate, each Investor Certificateholder, Holder of a Variable Funding Certificate, and each Certificate Owner agree to treat and to take no action inconsistent with the treatment of the Investor Certificates (or beneficial interest therein) as indebtedness for purposes of federal, state, local and foreign income or franchise taxes and any other tax imposed on or measured by income. Each Investor Certificateholder, Holder of a Variable Funding Certificate and the Holder of the Exchangeable Transferor Certificate, by acceptance of its Certificate and each Certificate Owner, by acquisition of a beneficial interest in a Certificate, agree to be bound by the provisions of this Section 3.7. Each Certificateholder agrees that it will cause any Certificate Owner acquiring an interest in a Certificate through it to comply with this Agreement as to treatment as indebtedness under applicable tax law, as described in this Section 3.7. Furthermore, subject to Section 11.11, the Trustee shall treat the Trust as a security device only, and shall not file tax returns or obtain an employer identification number on behalf of the Trust. Section 3.8 Adjustments. (a) If the Servicer adjusts downward the amount of any Receivable because of a rebate, refund, unauthorized charge or billing error to an Obligor, because such Receivable was created in respect of merchandise which was refused or returned by an Obligor, or if the Servicer otherwise adjusts downward the amount of any Receivable without receiving Collections therefor or without charging off such amount as uncollectible, then, in any such case, the Transferor Interest will be reduced and the aggregate amount of the Principal Receivables used to calculate the Investor Percentages applicable to any Series will be reduced by the principal amount of any such adjustment. Similarly, the aggregate amount of the Principal Receivables used to calculate the Investor Percentages applicable to any Series will be reduced by the amount of any Principal Receivable which was discovered as having been created through a fraudulent or counterfeit charge or with respect to which the covenant contained in subsection 2.5(b) was breached. Any adjustment required pursuant to either of the two preceding sentences shall be made on or prior to the end of the Monthly Period in which such adjustment obligation arises. In the event that, following any such exclusion, the Transferor Interest (excluding the interest represented by any Supplemental Certificate) would be less than the Minimum Transferor Interest, within two Business Days of the date on which such adjustment obligation arises, the Transferor shall pay to the Servicer, for deposit into the Excess Funding Account, in immediately available funds an amount equal to the amount by which the Transferor Interest (excluding the interest represented by any Supplemental Certificate) would be reduced below the Minimum Transferor Interest as a result of such adjustment or exclusion. Any amount deposited into the Excess Funding Account in connection with the adjustment of a Receivable (an "Adjustment Payment") shall be applied in accordance with Article IV and the terms of each Supplement. (b) If (i) the Servicer makes a deposit into the Collection Account in respect of a Collection of a Receivable and such Collection was received in the form of a check which is not honored for any reason or (ii) the Servicer makes a mistake with respect to the amount of any Collection and deposits an amount that is less than or more than the actual amount of such Collection, the Servicer shall appropriately adjust the amount subsequently deposited into the Collection Account to reflect such dishonored check or mistake. Any Receivable in respect of which a dishonored check is received shall be deemed not to have been paid. Notwithstanding the first two sentences of this paragraph, any adjustments made pursuant to this paragraph will be reflected in a current report but will not change any amount of Collections previously reported pursuant to subsection 3.4(b). Section 3.9 Notices to Fingerhut. In the event that FNB or any Affiliate thereof is no longer acting as Servicer, any Successor Servicer appointed pursuant to Section 10.2 shall deliver or make available to FNB and Fingerhut each certificate and report required to be prepared, forwarded or delivered thereafter pursuant to Sections 3.4, 3.5 and 3.6. [End of Article III] ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS Section 4.1 Rights of Certificateholders. Each Series of Investor Certificates shall represent Undivided Interests in the Trust, including the benefits of any Enhancement issued with respect to such Series and the right to receive the Collections and other amounts at the times and in the amounts specified in this Article IV to be deposited in the Investor Accounts or to be paid to the Investor Certificateholders of such Series; provided, however, that the aggregate interest represented by such Certificates at any time in the Principal Receivables shall not exceed an amount equal to the Invested Amount of such Certificates. The Exchangeable Transferor Certificate shall represent the remaining undivided interest in the Trust, including the right to receive the Collections and other amounts at the times and in the amounts specified in this Article IV to be paid to the Holder of the Exchangeable Transferor Certificate; provided, however, that the aggregate interest represented by such Certificate at any time in the Principal Receivables shall not exceed the Transferor Interest at such time and such Certificate shall not represent any interest in the Investor Accounts, except as provided in this Agreement, or the benefits of any Enhancement issued with respect to any Series. Section 4.2 Establishment of Accounts. (a) The Collection Account. The Servicer, for the benefit of the Certificateholders, shall establish in the name of the Trustee, on behalf of the Trust, a non- interest bearing segregated account (the "Collection Account") bearing a designation clearly indicating that the funds deposited therein are held in trust for the benefit of the Certificateholders, and shall cause such Collection Account to be established and maintained, (i) in a segregated trust account with the corporate trust department of a depositary institution or trust company (which may include the Trustee) organized under the laws of the United States of America or any one of the states thereof or the District of Columbia which has a long-term unsecured debt rating of at least Baa3 by Moody's and whose deposits are insured to the limits provided by law by the FDIC having corporate trust powers and acting as trustee for funds deposited therein (provided, however, that such account need not be maintained as a segregated trust account with the corporate trust department of such institution if at all times the certificates of deposit, short-term deposits or commercial paper or the long-term unsecured debt obligations (other than such obligation whose rating is based on collateral or on the credit of a Person other than such institution or trust company) of such depositary institution or trust company shall have a credit rating from Standard & Poor's of at least A-1+ and P-1 from Moody's in the case of the certificates of deposit, short-term deposits or commercial paper, or a rating from Standard & Poor's of AAA and from Moody's of Aaa in the case of the long-term unsecured debt obligations) or (ii) with a depositary institution, which may include the Trustee, which is acceptable to the Rating Agency (in the case of (i) and (ii), a "Qualified Institution"). If, at any time, the institution holding the Collection Account ceases to be a Qualified Institution, the Transferor shall direct the Servicer to establish within 10 Business Days a new Collection Account with a Qualified Institution, transfer any cash and/or any investments to such new Collection Account and from the date such new Collection Account is established, it shall be the "Collection Account." The Servicer shall give written notice to the Trustee of the location and account number of the Collection Account and shall notify the Trustee in writing prior to any subsequent change thereof. Pursuant to authority granted to it pursuant to subsection 3.1(b), the Servicer shall have the power revocable by the Trustee to withdraw funds from the Collection Account for the purposes of carrying out its duties hereunder. The Collection Account shall be under the sole dominion and control of the Trustee and the Trustee shall possess all right, title and interest in all funds from time to time on deposit in such account. (b) The Interest Funding and Principal Accounts. The Trustee, for the benefit of the Investor Certificateholders, shall establish and maintain with a Qualified Institution in the name of the Trust two segregated trust accounts for each Series (an "Interest Funding Account" and a "Principal Account," respectively), each bearing a designation clearly indicating that the funds therein are held for the benefit of the Investor Certificateholders of such Series. Except as provided in subsection 4.2(e), each Interest Funding Account and each Principal Account shall be under the sole dominion and control of the Trustee for the benefit of the Investor Certificateholders. Pursuant to authority granted to it hereunder, the Servicer shall have the revocable power to instruct the Trustee to withdraw funds from the Interest Funding Account and any Principal Account for any purpose of carrying out the Servicer's or the Trustee's duties hereunder. The Trustee at all times shall maintain accurate records reflecting each transaction in each Principal Account and each Interest Funding Account and that funds held therein shall at all times be held in trust for the benefit of the Investor Certificateholders of such Series. If, at any time, the institution holding the Interest Funding Account ceases to be a Qualified Institution, the Servicer shall direct the Trustee to establish within 10 Business Days a new Interest Funding Account meeting the conditions specified above with a Qualified Institution, transfer any cash and/or any investments to such new Interest Funding Account and from the date such new Interest Funding Account is established, it shall be the "Interest Funding Account." Similarly, if, at any time, the institution holding any Principal Account ceases to be a Qualified Institution, the Servicer shall direct the Trustee to establish within 10 Business Days a new Principal Account meeting the conditions specified above with a Qualified Institution, transfer any cash and/or any investments to such new Principal Account and from the date such new Principal Account is established, it shall be a "Principal Account." (c) Distribution Accounts. The Trustee, for the benefit of the Investor Certificateholders of each Series, shall cause to be established and maintained in the name of the Trust, with an office or branch of a Qualified Institution a non-interest-bearing segregated demand deposit account for each Series (a "Distribution Account") bearing a designation clearly indicating that the funds deposited therein are held in trust for the benefit of the Investor Certificateholders of such Series. Each Distribution Account shall be under the sole dominion and control of the Trustee for the benefit of the Investor Certificateholders of the related Series. Pursuant to the authority granted to the Paying Agent herein, the Paying Agent shall have the power, revocable by the Trustee, to make withdrawals and payments from the Distribution Account for the purpose of carrying out the Paying Agent's duties hereunder. If, at any time, the institution holding a Distribution Account ceases to be a Qualified Institution, the Servicer shall direct the Trustee to establish within 10 Business Days a new Distribution Account meeting the conditions specified above with a Qualified Institution, transfer any cash and/or any investments to such new Distribution Account and from the date such new Distribution Account is established, it shall be a "Distribution Account." (d) The Excess Funding Account. The Trustee, for the benefit of the Certificateholders, shall cause to be established in the name of the Trustee, on behalf of the Certificateholders, with a Qualified Institution, a segregated trust account (the "Excess Funding Account") bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Certificateholders. Except as provided in subsection 4.3(f), the Excess Funding Account shall, except as otherwise provided herein, be under the sole dominion and control of the Trustee for the benefit of the Certificateholders. Pursuant to the authority granted to the Servicer herein, the Servicer shall have the power, revocable by the Trustee, to make withdrawals and payments from the Excess Funding Account for the purpose of carrying out the Servicer's or Trustee's duties hereunder. If, at any time, the institution holding the Excess Funding Account ceases to be a Qualified Institution, the Servicer shall direct the Trustee to establish within 10 Business Days a new Excess Funding Account meeting the conditions specified above with a Qualified Institution, transfer any cash and/or any investments to such new Excess Funding Account and from the date such new Excess Funding Account is established, it shall be the "Excess Funding Account." (e) Administration of the Principal Accounts and the Interest Funding Accounts. Funds on deposit in each Principal Account and each Interest Funding Account shall at all times be invested by the Servicer (or, at the written direction of the Transferor, by the Trustee) on behalf of the Transferor in Cash Equivalents. Any such investment shall mature and such funds shall be available for withdrawal on the Transfer Date following the Monthly Period in which such funds were processed for collection. No such investments shall be liquidated prior to maturity. At the end of each month, all interest and earnings (net of losses and investment expenses) on funds on deposit in each Principal Account and each Interest Funding Account (unless otherwise specified in the applicable Supplement) shall be deposited by the Trustee in a separate deposit account with a Qualified Institution in the name of the Servicer, or a Person designated in writing by the Servicer, which shall not constitute a part of the Trust, or shall otherwise be turned over by the Trustee to the Servicer not less frequently than monthly. Subject to the restrictions set forth above, the Servicer, or a Person designated in writing by the Servicer, of which the Trustee shall have received written notification, shall have the authority to instruct the Trustee with respect to the investment of funds on deposit in any Principal Account and any Interest Funding Account. Any investment instructions to the Trustee shall be in writing, shall be given no later than 10:00 a.m. New York City time on a Business Day that such investment is proposed to be made and shall include a certification that the proposed investment is a Cash Equivalent that matures at or prior to the time required by this Agreement. For purposes of determining the availability of funds or the balances in any Interest Funding Account and any Principal Account for any reason under this Agreement, all investment earnings on such funds shall be deemed not to be available or on deposit. Section 4.3 Collections and Allocations. (a) Collections. Obligors shall make payments on the Receivables to the Servicer who shall deposit all such payments in the Collection Account no later than the second Business Day following the Date of Processing thereof. The Servicer shall allocate such amounts to each Series of Investor Certificates and to the Holder of the Exchangeable Transferor Certificate in accordance with this Article IV and shall cause the Trustee to withdraw the required amounts from the Collection Account or pay such amounts to the Holder of the Exchangeable Transferor Certificate in accordance with this Article IV. The Servicer shall make such deposits or payments on the date indicated herein by wire transfer or as otherwise provided in the Supplement for any Series of Certificates with respect to such Series. Notwithstanding anything in this Agreement to the contrary, but subject to the terms of any Supplement, for so long as, and only so long as, Fingerhut (or any successors to Fingerhut) or an Affiliate of Fingerhut shall remain the Servicer hereunder, and (a)(i) Fingerhut (or any successors to Fingerhut) or an Affiliate of Fingerhut provides to the Trustee a letter of credit or other form of Enhancement rated at least A-1 by Standard & Poor's and P-1 by Moody's (as certified to the Trustee by the Servicer), and (ii) after notifying each Rating Agency of the proposed use of such letter of credit or other form of Enhancement the Transferor shall have received a notice from each Rating Agency that making payments monthly rather than daily would not result in a downgrading or withdrawal of any of such Rating Agency's then-existing ratings of the Investor Certificates, or (b) FCI (or any successors to FCI) shall have and maintain a short-term credit rating of at least A-1 by Standard & Poor's and P-1 by Moody's (as certified to the Trustee by the Servicer), the Servicer need not deposit Collections from the Collection Account into the Principal Account or the Interest Funding Account or any Series Account, or make payments to the Holder of the Exchangeable Transferor Certificate, prior to the close of business on the day any Collections are deposited in the Collection Account as otherwise provided in this Article IV, but may instead make such deposits, payments and withdrawals on each Transfer Date in an amount equal to the net amount of such deposits, payments and withdrawals which would have been made but for the provisions of this paragraph. (b) Allocations for the Exchangeable Transferor Certificate. Throughout the existence of the Trust, unless otherwise stated in any Supplement, on each Business Day the Servicer shall allocate to the Holder of the Exchangeable Transferor Certificate an amount equal to the product of (A) the Transferor Percentage as of the end of the preceding Business Day and (B) the aggregate amount of Principal Collections and Imputed Yield Collections available in the Collection Account. The Servicer shall pay such amount to the Holder of the Exchangeable Transferor Certificate on each Business Day; provided, however, that amounts payable to the Holder of the Exchangeable Transferor Certificate pursuant to this clause (b) shall instead be deposited in the Excess Funding Account to the extent necessary to prevent the Transferor Interest from being less than the Minimum Transferor Interest. (c) [Reserved] (d) Allocation for Series. On each Business Day, (i) the amount of Imputed Yield Collections available in the Collection Account allocable to each Series shall be determined by multiplying the aggregate amount of such Imputed Yield Collections by the Floating Allocation Percentage for such Series, (ii) the amount of Principal Collections available in the Collection Account allocable to each Series shall be determined by multiplying the aggregate amount of such Principal Collections by (x) during the Revolving Period for a Series, the Floating Allocation Percentage for such Series and (y) during any Amortization Period for a Series, the Fixed/Floating Allocation Percentage for such Series, and (iii) the Defaulted Receivables allocable to each Series shall be determined by multiplying the aggregate amount of such Defaulted Receivables by the Floating Allocation Percentage for such Series. The Servicer shall, prior to the close of business on the day any Collections are deposited in the Collection Account, cause the Trustee to withdraw the required amounts from the Collection Account and cause the Trustee to deposit such amounts into the applicable Principal Account, the applicable Interest Funding Account, the Excess Funding Account, or any Series Account or pay such amounts to the Holder of the Exchangeable Transferor Certificate in accordance with the provisions of this Article IV. (e) Unallocated Principal Collections; Excess Funding Account. On each Business Day, Shared Principal Collections shall be allocated to each outstanding Series pro rata based on the Principal Shortfall, if any, for each such Series, and then, at the option of the Transferor, any remainder may be applied as principal with respect to the Variable Funding Certificates. The Servicer shall pay any remaining Shared Principal Collections on such Business Day to the Transferor; provided, that if the Transferor Interest as determined on such Business Day does not exceed the Minimum Transferor Interest, then such remaining Shared Principal Collections shall be deposited in the Excess Funding Account to the extent necessary to increase the Transferor Interest above the Minimum Transferor Interest; provided, further, that if an Amortization Period has commenced and is continuing with respect to more than one outstanding Series, such remaining Shared Principal Collections shall be allocated to such Series pro rata based on the Investor Percentage for Principal Receivables applicable for such Series. (f) Amounts in Excess Funding Account. Amounts on deposit in the Excess Funding Account on any Business Day will be invested by the Servicer (or, at the direction of the Transferor, by the Trustee) on behalf of the Transferor in Cash Equivalents which shall mature and be available on or before the next Business Day on which amounts may be released from the Excess Funding Account. Earnings from such investments received shall be deposited in the Collection Account and treated as Imputed Yield Collections. Any investment instructions to the Trustee shall be in writing and shall include a certification that the proposed investment is a Cash Equivalent that matures at or prior to the date required by this Agreement. If on any Business Day other than a Business Day on which a Prospective Pay Out Event has occurred and is continuing, the Transferor Interest is greater than the Minimum Transferor Interest, amounts on deposit in the Excess Funding Account may, at the option of the Transferor, be released to the Holder of the Exchangeable Transferor Certificate. On the first Business Day of the Amortization Period for any Series, funds on deposit in the Excess Funding Account will be deposited in the Principal Account for such Series to the extent of the lesser of (x) the Invested Amount of such Series and (y) the amount then on deposit in the Excess Funding Account. [THE REMAINDER OF ARTICLE IV IS RESERVED AND SHALL BE SPECIFIED IN ANY SUPPLEMENT WITH RESPECT TO ANY SERIES] [End of Article IV] ARTICLE V [ARTICLE V IS RESERVED AND SHALL BE SPECIFIED IN ANY SUPPLEMENT WITH RESPECT TO ANY SERIES] [End of Article V] ARTICLE VI THE CERTIFICATES Section 6.1 The Certificates. Subject to Sections 6.10 and 6.13, the Investor Certificates of each Series and any Class thereof may be issued in bearer form (the "Bearer Certificates") with attached interest coupons and, if applicable, a special coupon (collectively, the "Coupons") or in fully registered form (the "Registered Certificates"), and shall be substantially in the form of the exhibits with respect thereto attached to the related Supplement. The Exchangeable Transferor Certificate shall be substantially in the form of Exhibit A. The Investor Certificates and the Exchangeable Transferor Certificate shall, upon issue pursuant hereto or to Section 6.9 or Section 6.10, be executed and delivered by the Transferor to the Trustee for authentication and redelivery as provided in Sections 2.1 and 6.2. Any Investor Certificate shall be issuable in a minimum denomination of $1,000 Undivided Interest and integral multiples thereof, unless otherwise specified in any Supplement, and shall be issued upon original issuance in an original aggregate principal amount equal to the Initial Invested Amount. The Exchangeable Transferor Certificate shall be issued as a single certificate. Each Certificate shall be executed by manual or facsimile signature on behalf of the Transferor by its President or any Vice President. Certificates bearing the manual or facsimile signature of the individual who was, at the time when such signature was affixed, authorized to sign on behalf of the Transferor or the Trustee shall not be rendered invalid, notwithstanding that such individual has ceased to be so authorized prior to the authentication and delivery of such Certificates or does not hold such office at the date of such Certificates. No Certificate shall be entitled to any benefit under this Agreement, or be valid for any purpose, unless there appears on such Certificate a certificate of authentication substantially in the form provided for herein, executed by or on behalf of the Trustee by the manual signature of a duly authorized signatory, and such certificate upon any Certificate shall be conclusive evidence, and the only evidence, that such Certificate has been validly issued and duly authenticated and delivered hereunder. All Certificates shall be dated the date of their authentication except Bearer Certificates which shall be dated the applicable Issuance Date as provided in the related Supplement. Section 6.2 Authentication of Certificates. Contemporaneously with the initial assignment and transfer of the Receivables, whether now existing or hereafter created and the other components to the Trust, the Trustee shall authenticate and deliver the initial Series of Investor Certificates, upon the written order of the Transferor. Upon the issuance of such Investor Certificates, such Investor Certificates shall be validly issued, fully paid and non-assessable. The Trustee shall authenticate and deliver the Exchangeable Transferor Certificate to the Transferor simultaneously with its delivery of the initial Series of Investor Certificates. Upon an Exchange as provided in Section 6.9 and the satisfaction of certain other conditions specified therein, the Trustee shall authenticate and deliver the Investor Certificates of additional Series (with the designation provided in the related Supplement), upon the written order of the Transferor. Upon the written order of the Transferor, the Certificates of any Series shall be duly authenticated by or on behalf of the Trustee, in authorized denominations equal to (in the aggregate) the Initial Invested Amount of such Series of Investor Certificates. If specified in the related Supplement for any Series, the Trustee shall authenticate and deliver outside the United States the Global Certificate that is issued upon original issuance thereof, upon the written order of the Transferor, to the Depositary. If specified in the related Supplement for any Series, the Trustee shall authenticate Book-Entry Certificates that are issued upon original issuance thereof, upon the written order of the Transferor, to a Clearing Agency or its nominee as provided in Section 6.10. Section 6.3 Registration of Transfer and Exchange of Certificates. (a) The Trustee shall cause to be kept at the office or agency to be maintained by a transfer agent and registrar (the "Transfer Agent and Registrar") in accordance with the provisions of Section 11.16, a register (the "Certificate Register") in which, subject to such reasonable regulations as it may prescribe, the Transfer Agent and Registrar shall provide for the registration of the Investor Certificates of each Series (unless otherwise provided in the related Supplement) and of transfers and exchanges of the Investor Certificates as herein provided. Whenever reference is made in this Agreement to the transfer or exchange of the Certificates by the Trustee, such reference shall be deemed to include the transfer or exchange on behalf of the Trustee by a Transfer Agent and Registrar. The Bank of New York is hereby initially appointed Transfer Agent and Registrar for the purposes of registering the Investor Certificates and transfers and exchanges of the Investor Certificates as herein provided. If any form of Investor Certificate is issued as a Global Certificate, The Bank of New York may, or if and so long as any Series of Investor Certificates are listed on a stock exchange and such exchange shall so require, The Bank of New York shall appoint a co-transfer agent and co-registrar, which will also be a co-paying agent, in such city as the Transferor may specify. Any reference in this Agreement to the Transfer Agent and Registrar shall include any co- transfer agent and co-registrar unless the context otherwise requires. The Bank of New York shall be permitted to resign as Transfer Agent and Registrar upon 30 days' written notice to the Servicer. In the event that The Bank of New York shall no longer be the Transfer Agent and Registrar, the Transferor shall appoint a successor Transfer Agent and Registrar. If any Series with respect to which Book Entry Certificates were originally issued is no longer issued as Book-Entry Certificates, then the Servicer may appoint a successor Transfer Agent and Registrar. Upon surrender for registration of transfer of any Certificate at any office or agency of the Transfer Agent and Registrar maintained for such purpose, the Transferor shall execute, subject to the provisions of subsection 6.3(c), and the Trustee shall (unless the Transfer Agent and Registrar is different than the Trustee, in which case the Transfer Agent and Registrar shall) authenticate and deliver, in the name of the designated transferee or transferees, one or more new Certificates in authorized denominations of like aggregate Undivided Interests; provided, that the provisions of this paragraph shall not apply to Bearer Certificates. At the option of any Holder of Registered Certificates, Registered Certificates may be exchanged for other Registered Certificates of the same Series in authorized denominations of like aggregate Undivided Interests in the Trust, upon surrender of the Registered Certificates to be exchanged at any office or agency of the Transfer Agent and Registrar maintained for such purpose. At the option of a Bearer Certificateholder, subject to applicable laws and regulations (including without limitation, the Bearer Rules), Bearer Certificates may be exchanged for other Bearer Certificates or Registered Certificates of the same Series in authorized denominations of like aggregate Undivided Interests in the Trust, in the manner specified in the Supplement for such Series, upon surrender of the Bearer Certificates to be exchanged at an office or agency of the Transfer Agent and Registrar located outside the United States. Each Bearer Certificate surrendered pursuant to this Section 6.3 shall have attached thereto (or be accompanied by) all unmatured Coupons, provided that any Bearer Certificate so surrendered after the close of business on the Record Date preceding the relevant Distribution Date after the related Series Termination Date need not have attached the Coupons relating to such Distribution Date. Whenever any Investor Certificates of any Series are so surrendered for exchange, the Transferor shall execute, and the Trustee shall (unless the Transfer Agent and Registrar is different than the Trustee, in which case the Transfer Agent and Registrar shall) authenticate and deliver, the Investor Certificates of such Series which the Certificateholder making the exchange is entitled to receive. Every Investor Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in a form satisfactory to the Trustee and the Transfer Agent and Registrar duly executed by the Certificateholder thereof or his attorney-in-fact duly authorized in writing. The preceding provisions of this Section 6.3 notwithstanding, the Trustee or the Transfer Agent and Registrar, as the case may be, shall not be required to register the transfer of or exchange any Investor Certificate of any Series for the period from the Record Date preceding the due date for any payment to the Distribution Date with respect to the Investor Certificates of such Series. Unless otherwise provided in the related Supplement, no service charge shall be made for any registration of transfer or exchange of Certificates, but the Transfer Agent and Registrar may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Certificates. All Investor Certificates (together with any Coupons attached to Bearer Certificates) surrendered for registration of transfer or exchange shall be canceled by the Transfer Agent and Registrar and disposed of in a manner satisfactory to the Trustee. The Trustee shall cancel and dispose of any Global Certificate upon its exchange in full for Definitive Certificates, but shall not be required to destroy such Global Certificates. Such certificate shall also state that a certificate or certificates of each Foreign Clearing Agency to the effect referred to in Section 6.13 was received with respect to each portion of the Global Certificate exchanged for Definitive Certificates. The Transferor shall execute and deliver to the Trustee or the Transfer Agent and Registrar, as applicable, Bearer Certificates and Registered Certificates in such amounts and at such times as are necessary to enable the Trustee to fulfill its responsibilities under this Agreement and the Certificates. (b) Except as provided in Section 6.9 or 7.2 or in any Supplement, in no event shall the Exchangeable Transferor Certificate or any interest therein be transferred, sold, exchanged, pledged, participated or otherwise assigned hereunder, in whole or in part, unless the Transferor shall have consented in writing to such transfer and unless the Trustee shall have received (1) confirmation in writing from each Rating Agency that such transfer will not result in a lowering or withdrawal of its then-existing rating of any Series of Investor Certificates and (2) an Opinion of Counsel that such transfer does not (i) adversely affect the conclusions reached in any of the federal income tax opinions issued in connection with the original issuance of any Series of Investor Certificates or (ii) result in a taxable event to the holders of any such Series. (c) Unless otherwise provided in the related Supplement, registration of transfer of Registered Certificates containing a legend relating to the restrictions on transfer of such Registered Certificates (which legend shall be set forth in the Supplement relating to such Investor Certificates) shall be effected only if the conditions set forth in such related Supplement are satisfied. Whenever a Registered Certificate containing the legend set forth in the related Supplement is presented to the Transfer Agent and Registrar for registration of transfer, the Transfer Agent and Registrar shall promptly seek instructions from the Servicer regarding such transfer. The Transfer Agent and Registrar and the Trustee shall be entitled to receive written instructions signed by an officer of the Trustee prior to registering any such transfer or authenticating new Registered Certificates, as the case may be. The Servicer hereby agrees to indemnify the Transfer Agent and Registrar and the Trustee and to hold each of them harmless against any loss, liability or expense incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by them in reliance on any such written instructions furnished pursuant to this subsection 6.3(c). (d) The Transfer Agent and Registrar will maintain at its expense in the Borough of Manhattan, The City of New York, an office or offices or an agency or agencies where Investor Certificates of such Series may be surrendered for registration of transfer or exchange. (e) Prior to the Transfer of any portion of a Transferor Retained Class, the Trustee shall have received (i) an Officer's Certificate of the Transferor that on the date of the proposed Transfer, taking into account the certificates whose Transfer is proposed, more than 20% (by Invested Amount and by value) of the outstanding certificates issued by the Trust with respect to which no Opinion of Counsel was issued that the applicable class would be treated as debt for federal income tax purposes (including the Transferor Certificate and each Transferor Retained Class) shall be owned by the Transferor and (ii) an Opinion of Counsel to the effect that such proposed Transfer will not adversely affect the Federal, Minnesota or Delaware income tax characterization of any outstanding Series of Investor Certificates or the taxability (or tax characterization) of the Trust under Federal, Minnesota or Delaware income tax laws. The Transferor shall provide to Moody's notice of any such Transfer and a copy of the Opinion of Counsel described in clause (ii) above. Section 6.4 Mutilated, Destroyed, Lost or Stolen Certificates. If (a) any mutilated Certificate (together, in the case of Bearer Certificates, with all unmatured Coupons, if any, appertaining thereto) is surrendered to the Transfer Agent and Registrar, or the Transfer Agent and Registrar receives evidence to its satisfaction of the destruction, loss or theft of any Certificate and (b) there is delivered to the Transfer Agent and Registrar and the Trustee such security or indemnity as may be required by them to hold each of them and the Trust harmless, then, in the absence of notice to the Trustee that such Certificate has been acquired by a bona fide purchaser, the Trustee shall (unless the Transfer Agent and Registrar is different from the Trustee, in which case the Transfer Agent and Registrar shall) authenticate and deliver (in compliance with applicable law), in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like tenor and aggregate Undivided Interest. In connection with the issuance of any new Certificate under this Section 6.4, the Trustee or the Transfer Agent and Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee and the Transfer Agent and Registrar) connected therewith. Any duplicate Certificate issued pursuant to this Section 6.4 shall constitute complete and indefeasible evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time. Section 6.5 Persons Deemed Owners. Prior to due presentation of a Certificate for registration of transfer, the Trustee, the Paying Agent, the Transfer Agent and Registrar and any agent of any of them may treat the Person in whose name any Certificate is registered as the owner of such Certificate for the purpose of receiving distributions pursuant to Article V (as described in any Supplement) and Article XII and for all other purposes whatsoever, and neither the Trustee, the Paying Agent, the Transfer Agent and Registrar nor any agent of any of them shall be affected by any notice to the contrary; provided, however, that in determining whether the holders of Investor Certificates evidencing the requisite Undivided Interests have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Investor Certificates owned by the Transferor, the Servicer or any Affiliate thereof shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Investor Certificates which a Responsible Officer in the Corporate Trust Office of the Trustee knows to be so owned shall be so disregarded. Investor Certificates so owned that have been pledged in good faith shall not be disregarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Investor Certificates and that the pledgee is not the Transferor, the Servicer or an Affiliate thereof. In the case of a Bearer Certificate, the Trustee, the Paying Agent, the Transfer Agent and Registrar and any agent of any of them may treat the holder of a Bearer Certificate or Coupon as the owner of such Bearer Certificate or Coupon for the purpose of receiving distributions pursuant to Article V (as described in any Supplement) and Article XII and for all other purposes whatsoever, and neither the Trustee, the Paying Agent, the Transfer Agent and Registrar nor any agent of any of them shall be affected by any notice to the contrary. Certificates so owned that have been pledged in good faith shall not be disregarded and may be regarded as outstanding, if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Investor Certificates and that the pledgee is not the Transferor, the Servicer or an Affiliate thereof. Section 6.6 Appointment of Paying Agent. (a) The Paying Agent shall make distributions to Investor Certificateholders from the appropriate account or accounts maintained for the benefit of Certificateholders as specified in this Agreement or the related Supplement for any Series pursuant to Articles IV and V hereof. Any Paying Agent shall have the revocable power to withdraw funds from such appropriate account or accounts for the purpose of making distributions referred to above. The Trustee (or the Servicer if the Trustee is the Paying Agent) may revoke such power and remove the Paying Agent, if the Trustee (or the Servicer if the Trustee is the Paying Agent) determines in its sole discretion that the Paying Agent shall have failed to perform its obligations under this Agreement in any material respect or for other good cause. The Paying Agent, unless the Supplement with respect to any Series states otherwise, shall initially be The Bank of New York. The Bank of New York shall be permitted to resign as Paying Agent upon 30 days' written notice to the Servicer. Upon the resignation of the Paying Agent, if the Paying Agent was not the Trustee, the Trustee shall be the successor Paying Agent unless and until another successor has been appointed as Paying Agent. In the event that the Trustee, shall no longer be the Paying Agent, the Transferor shall appoint a successor to act as Paying Agent (which shall be a bank or trust company). Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. If specified in the related Supplement for any Series, so long as the Investor Certificates of such Series are outstanding and the Paying Agent is not located in New York City, the Transferor shall maintain a co-paying agent in New York City (for Registered Certificates only) or any other city designated in such Supplement. (b) The Trustee shall cause each Paying Agent (other than itself) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee that such Paying Agent will hold all sums, if any, held by it for payment to the Certificateholders in trust for the benefit of the Certificateholders entitled thereto and waive all rights of set off the Paying Agent may have against any sums held by it until such sums shall be paid to such Certificateholders and shall agree, and if the Trustee is the Paying Agent it hereby agrees, that it shall comply with all requirements of the Internal Revenue Code regarding the withholding by the Trustee of payments in respect of federal income taxes due from Certificate Owners. Section 6.7 Access to List of Certificate- holders' Names and Addresses. The Trustee will furnish or cause to be furnished by the Transfer Agent and Registrar to the Servicer or the Paying Agent, within five Business Days after receipt by the Trustee of a request therefor from the Servicer or the Paying Agent, respectively, in writing, a list in such form as the Servicer or the Paying Agent may reasonably require, of the names and addresses of the Investor Certificate- holders as of the most recent Record Date for pay- ment of distributions to Investor Certificateholders. Unless otherwise provided in the related Supplement, holders of Investor Certificates evidencing Undivided Interests aggregating not less than 25% of the Invested Amount of the Investor Certificates of any Series (the "Applicants") may apply in writing to the Trustee, and if such application states that the Applicants desire to communicate with other Investor Certificateholders of any Series with respect to their rights under this Agreement or under the Investor Certificates and is accompanied by a copy of the communication which such Applicants propose to transmit, then the Trustee, after having been adequately indemnified by such Applicants for its costs and expenses, shall afford or shall cause the Transfer Agent and Registrar to afford such Applicants access during normal business hours to the most recent list of Certificateholders held by the Trustee and shall give the Servicer notice that such request has been made, within five Business Days after the receipt of such application. Such list shall be as of a date no more than 45 days prior to the date of receipt of such Applicants' request. Every Certificateholder, by receiving and holding a Certificate, agrees with the Trustee that neither the Trustee, the Transfer Agent and Registrar, nor any of their respective agents shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Certificateholders hereunder, regardless of the source from which such information was obtained. Section 6.8 Authenticating Agent. (a) The Trustee may appoint one or more authenticating agents (each, an "Authenticating Agent") with respect to the Certificates which shall be authorized to act on behalf of the Trustee in authenticating the Certificates in connection with the issuance, delivery, registration of transfer, exchange or repayment of the Certificates. The Trustee will appoint any Transfer Agent and Registrar to be an Authentication Agent. Whenever reference is made in this Agreement to the authentication of Certificates by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent must be acceptable to the Transferor. The Trustee hereby initially appoints The Bank of New York as its Authenticating Agent. (b) Any institution succeeding to the corporate agency business of an Authenticating Agent shall continue to be an Authenticating Agent without the execution or filing of any paper or any further act on the part of the Trustee or such Authenticating Agent. (c) An Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Transferor. The Trustee may at any time terminate the agency of an Authenticating Agent by giving notice of termination to such Authenticating Agent and to the Transferor. Upon receiving such a notice of resignation or upon such a termination, or in case at any time an Authenticating Agent shall cease to be acceptable to the Trustee or the Transferor, the Trustee promptly may appoint a successor Authenticating Agent. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless acceptable to the Trustee and the Transferor. (d) The Servicer agrees to pay each Authenticating Agent from time to time reasonable compensation for its services under this Section 6.8. (e) The provisions of Sections 11.1, 11.2 and 11.3 shall be applicable to any Authenticating Agent. (f) Pursuant to an appointment made under this Section 6.8, the Certificates may have endorsed thereon, in lieu of the Trustee's certificate of authentication, an alternate certificate of authentication in substantially the following form: Trustee's Certificate of Authentication This is one of the certificates described in the Pooling and Servicing Agreement. -------------------------- as Authenticating Agent for the Trustee, By:----------------------- Authorized Signatory Dated: Section 6.9 Tender of Exchangeable Transferor Certificate. (a) Upon any Exchange, the Transferor shall deliver to the Trustee for authentication under Section 6.2, one or more new Series of Investor Certificates. Any such Series of Investor Certificates shall be substantially in the form specified in the related Supplement and shall bear, upon its face, the designation for such Series to which it belongs, as selected by the Transferor. Except as specified in any Supplement for a related Series, all Investor Certificates of any Series shall rank pari passu and be equally and ratably entitled as provided herein to the benefits hereof (except that the Enhancement provided for any Series shall not be available for any other Series) without preference, priority or distinction on account of the actual time or times of authentication and delivery, all in accordance with the terms and provisions of this Agreement and the related Supplement. (b) The Holder of the Exchangeable Transferor Certificate may (i) tender the Exchangeable Transferor Certificate to the Trustee in exchange for (A) one or more newly issued Series of Investor Certificates or, with respect to any pre-funded Series, interests therein and (B) a reissued Exchangeable Transferor Certificate, (ii) request the Trustee to issue to it one or more Classes of any newly issued Series of Investor Certificates which upon payment by the purchaser thereof of the Initial Invested Amount of such Certificates to a Defeasance Account, will represent an interest in the Trust equal to such Initial Invested Amount (an "Unfunded Certificate") or (iii) take a combination of the actions specified in clauses (i) and (ii) provided that the sum of the amount of Transferor Interest which is tendered under clause (i) and the amount to be paid to the Defeasance Account under clause (ii) equals the Initial Invested Amount of the Investor Certificates delivered to the Holder of the Exchangeable Transferor Certificate (any such event under clauses (i), (ii) or (iii), a "Transferor Exchange"). In addition, to the extent permitted for any Series of Investor Certificates as specified in the related Supplement, the Investor Certificateholders of such Series may tender their Investor Certificates and the Holder of the Exchangeable Transferor Certificate may tender the Exchangeable Transferor Certificate to the Trustee pursuant to the terms and conditions set forth in such Supplement in exchange for (i) one or more newly issued Series of Investor Certificates and (ii) a reissued Exchangeable Transferor Certificate (an "Investor Exchange"). Notwithstanding anything to the contrary herein, the Transferor shall not be permitted to deposit money into any Defeasance Account. The Transferor Exchange and Investor Exchange are referred to collectively herein as an "Exchange." The Holder of the Exchangeable Transferor Certificate may perform an Exchange by notifying the Trustee, in writing, at least five Business Days in advance (an "Exchange Notice") of the date upon which the Exchange is to occur (an "Exchange Date"). Any Exchange Notice shall state the designation of any Series to be issued on the Exchange Date and, with respect to each such Class or Series: (a) its Initial Invested Amount (or the method for calculating such Initial Invested Amount), which at any time may not be greater than the current principal amount of the Exchangeable Transferor Certificate at such time (or in the case of an Investor Exchange, the sum of the Invested Amount of any Class or Series of Investor Certificates to be exchanged plus the current principal amount of the Exchangeable Transferor Certificate) taking into account any Receivables transferred to the Trust simultaneous with such Exchange, (b) its Certificate Rate (or the method for allocating interest payments or other cash flows to such Series), if any, and (c) the Enhancement Provider, if any, with respect to such Series. On the Exchange Date, the Trustee shall authenticate and deliver any such Class or Classes of Series of Investor Certificates only upon delivery to it of the following: (a) a Supplement satisfying the criteria set forth in subsection 6.9(c) and in form reasonably satisfactory to the Trustee executed by the Transferor and the Servicer and specifying the Principal Terms of such Series, (b) the applicable Enhancement, if any, (c) the agreement, if any, pursuant to which the Enhancement Provider agrees to provide the Enhancement, if any, (d) an Opinion of Counsel to the effect that (i) any Class of the newly issued Series of Investor Certificates sold to third parties will be characterized as either indebtedness or partnership interests for Federal and applicable state income tax purposes or (ii) that the issuance of the newly issued Series of Investor Certificates will not adversely affect the Federal, Minnesota or Delaware income tax characterization of any outstanding Series of Investor Certificates or the taxability of the Trust under Federal, Minnesota or Delaware income tax laws, (e) written confirmation from each Rating Agency that the Exchange will not result in such Rating Agency's reducing or withdrawing its rating on any then outstanding Series as to which it is a Rating Agency, (f) an Officer's Certificate of the Transferor, that on the Exchange Date (i) after giving effect to such Exchange, the Transferor Interest would be at least equal to the Minimum Transferor Interest and (ii) the Retained Interest would be at least equal to the Minimum Retained Interest, (g) the existing Exchangeable Transferor Certificate or applicable Investor Certificates, as the case may be and (h) such other documents, certificates and Opinions of Counsel as may be required by the applicable Supplement. Upon satisfaction of such conditions, the Trustee shall cancel the existing Exchangeable Transferor Certificate or applicable Investor Certificates, as the case may be, and issue, as provided above, such Series of Investor Certificates and a new Exchangeable Transferor Certificate, dated the Exchange Date. There is no limit to the number of Exchanges that may be performed under this Agreement. (c) In conjunction with an Exchange, the parties hereto shall execute a Supplement, which shall specify the relevant terms with respect to any newly issued Series of Investor Certificates, which may include without limitation: (i) its name or designation, (ii) the Initial Invested Amount or the method of calculating the Initial Invested Amount, (iii) the Certificate Rate (or formula for the determination thereof), (iv) the Closing Date, (v) the rating agency or agencies rating such Series, (vi) the name of the Clearing Agency, if any, (vii) the rights of the Holder of the Exchangeable Transferor Certificate that have been transferred to the Holders of such Series pursuant to such Exchange (including any rights to allocations of Collections of Imputed Yield Receivables and Principal Receivables), (viii) the interest payment date or dates and the date or dates from which interest shall accrue, (ix) the method of allocating Principal Collections for such Series and the method by which the principal amount of Investor Certificates of such Series shall amortize or accrete and the method for allocating Imputed Yield Collections and Defaulted Receivables, (x) the names of any accounts to be used by such Series and the terms governing the operation of any such account, (xi) the Series Servicing Fee Percentage, (xii) the Minimum Transferor Interest, (xiii) the Series Termination Date, (xiv) the terms of any Enhancement with respect to such Series, (xv) the Enhancement Provider, if applicable, (xvi) the base rate applicable to such Series, (xvii) the terms on which the Certificates of such Series may be repurchased or remarketed to other investors, (xviii) any deposit into any account provided for such Series, (xix) the number of Classes of such Series and, if more than one Class, the rights and priorities of each such Class, (xx) whether any fees will be included in the funds available to be paid for such Series, (xxi) the subordination of such Series to any other Series, (xxii) the Pool Factor, (xxiii) the Minimum Aggregate Principal Receivables, (xxiv) whether such Series will be a part of a group or subject to being paired with any other Series, (xxv) whether such Series will be pre-funded, and (xxvi) any other relevant terms of such Series (including whether or not such Series will be pledged as collateral for an issuance of any other securities, including commercial paper) (all such terms, the "Principal Terms" of such Series). The terms of such Supplement may modify or amend the terms of this Agreement solely as applied to such new Series. If on the date of the issuance of such Series there is issued and outstanding one or more Series of Investor Certificates and no Series of Investor Certificates is currently rated by a Rating Agency, then as a condition to such Exchange a nationally recognized investment banking firm or commercial bank shall also deliver to the Trustee an officer's certificate stating, in substance, that the Exchange will not have an adverse effect on the timing or distribution of payments to such other Series of Investor Certificates then issued and outstanding. (d) The Transferor may surrender the Exchangeable Transferor Certificate to the Trustee in exchange for a newly issued Exchangeable Transferor Certificate and a second certificate (a "Supplemental Certificate"), the terms of which shall be defined in a supplement to this Agreement (which supplement shall be subject to Section 13.01 hereof to the extent that it amends any of the terms of this Agreement), to be delivered to or upon the order of the Transferor (or a Person designated by the Transferor, in the case of the transfer or exchange thereof, as provided below), upon satisfaction of the following conditions: (i) following such exchange, the Transferor Interest (less any interest therein represented by any Supplemental Certificates) in the Principal Receivables in the Trust equals or exceeds the greater of the Minimum Transferor Interest and the Minimum Retained Interest following such exchange and (ii) the Trustee received prior to such exchange (A) a letter from the Rating Agency stating that the then current ratings on the Investor Certificates of each rated class of each Series then outstanding will not be reduced or withdrawn because of the issuance of such Supplemental Certificate and (B) an Opinion of Counsel to the effect that (x) such Supplemental Certificate will be characterized as either indebtedness or a partnership interest for Federal and applicable state income tax purposes or (y) that such Supplemental Certificate will not adversely affect the Federal, Minnesota or Delaware income tax characterization of any outstanding Series of Investor Certificates or the taxability of the Trust under Federal, Minnesota or Delaware income tax laws. Section 6.10 Book-Entry Certificates. Unless otherwise provided in any related Supplement, the Investor Certificates, upon original issuance, shall be issued in the form of typewritten Certificates representing the Book-Entry Certificates, to be delivered to the depositary specified in such Supplement (the "Depositary") which shall be the Clearing Agency or Foreign Clearing Agency, by or on behalf of such Series. The Investor Certificates of each Series shall, unless otherwise provided in the related Supplement, initially be registered on the Certificate Register in the name of the nominee of the Clearing Agency or Foreign Clearing Agency. No Certificate Owner will receive a definitive certificate representing such Certificate Owner's interest in the related Series of Investor Certificates, except as provided in Section 6.12. Unless and until definitive, fully registered Investor Certificates of any Series ("Definitive Certificates") have been issued to Certificate Owners pursuant to Section 6.12: (i) the provisions of this Section 6.10 shall be in full force and effect with respect to each such Series; (ii) the Transferor, the Servicer, the Paying Agent, the Transfer Agent and Registrar and the Trustee may deal with the Clearing Agency and the Clearing Agency Participants for all purposes (including the making of distributions on the Investor Certificates of each such Series) as the authorized representatives of the Certificate Owners; (iii) to the extent that the provisions of this Section 6.10 conflict with any other provisions of this Agreement, the provisions of this Section 6.10 shall control with respect to each such Series; and (iv) the rights of Certificate Owners of Investor Certificates of each such Series shall be exercised only through the Clearing Agency or Foreign Clearing Agency and the applicable Clearing Agency Participants and shall be limited to those established by law and agreements between such Certificate Owners and the Clearing Agency or Foreign Clearing Agency and/or the Clearing Agency Participants. Pursuant to the Depositary Agreement applicable to a Series, unless and until Definitive Certificates of such Series are issued pursuant to Section 6.12, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit distributions of principal and interest on the Investor Certificates to such Clearing Agency Participants. Section 6.11 Notices to Clearing Agency. Whenever notice or other communication to the Certificateholders is required under this Agreement, unless and until Definitive Certificates shall have been issued to Certificate Owners pursuant to Section 6.12, the Trustee shall give all such notices and communications specified herein to be given to Holders of the Investor Certificates to the Clearing Agency or Foreign Clearing Agency. Section 6.12 Definitive Certificates. If (i) (A) the Transferor advises the Trustee in writing that the Clearing Agency or Foreign Clearing Agency is no longer willing or able to discharge properly its responsibilities under the applicable Depositary Agreement, and (B) the Transferor is unable to locate a qualified successor, (ii) the Transferor, at its option, advises the Trustee in writing that it elects to terminate the book-entry system through the Clearing Agency or Foreign Clearing Agency with respect to any Series of Certificates or (iii) after the occurrence of a Servicer Default, Certificate Owners of a Series representing beneficial interests aggregating not less than 50% of the Invested Amount of such Series advise the Trustee and the applicable Clearing Agency or Foreign Clearing Agency through the applicable Clearing Agency Participants in writing that the continuation of a book- entry system through the applicable Clearing Agency or Foreign Clearing Agency is no longer in the best interests of the Certificate Owners, the Trustee shall notify all Certificate Owners of such Series, through the applicable Clearing Agency Participants, of the occurrence of any such event and of the availability of Definitive Certificates to Certificate Owners of such Series requesting the same. Upon surrender to the Trustee of the Investor Certificates of such Series by the applicable Clearing Agency or Foreign Clearing Agency for registration, accompanied by registration instructions from the applicable Clearing Agency or Foreign Clearing Agency, the Trustee shall issue the Definitive Certificates of such Series. Neither the Transferor nor the Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon the issuance of Definitive Certificates of such Series, all references herein to obligations imposed upon or to be performed by the applicable Clearing Agency or Foreign Clearing Agency shall be deemed to be imposed upon and performed by the Trustee, to the extent applicable with respect to such Definitive Certificates, and the Trustee shall recognize the Holders of the Definitive Certificates of such Series as Certificateholders of such Series hereunder. Section 6.13 Global Certificate; Euro- Certificate Exchange Date. If specified in the related Supplement for any Series, the Investor Certificates may be initially issued in the form of a single temporary Global Certificate (the "Global Certificate") in bearer form, without interest coupons, in the denomination of the Initial Invested Amount of such Series and substantially in the form attached to the related Supplement. Unless otherwise specified in the related Supplement, the provisions of this Section 6.13 shall apply to such Global Certificate. The Global Certificate will be authenticated by the Trustee upon the same conditions, in substantially the same manner and with the same effect as the Definitive Certificates. The Global Certificate may be exchanged in the manner described in the related Supplement for Registered Certificates or Bearer Certificates in definitive form. Section 6.14 Meetings of Certificateholders. To the extent provided by the Supplement for any Series issued in whole or in part in Bearer Certificates, the Servicer or the Trustee may at any time call a meeting of the Certificateholders of such Series, to be held at such time and at such place as the Servicer or the Trustee, as the case may be, shall determine, for the purpose of approving a modification of or amendment to, or obtaining a waiver of, any covenant or condition set forth in this Agreement with respect to such Series or in the Certificates of such Series, subject to Section 13.1 of this Agreement. [End of Article VI] ARTICLE VII OTHER MATTERS RELATING TO THE TRANSFEROR Section 7.1 Liability of the Transferor. The Transferor shall be liable in accordance herewith solely to the extent of the obligations specifically undertaken by the Transferor. Section 7.2 Merger or Consolidation of, or Assumption of the Obligations of, the Transferor. (a) The Transferor shall not consolidate with or merge into any other business entity or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (i) the business entity formed by such consolidation or into which the Transferor is merged or the Person which acquires by conveyance or transfer the properties and assets of the Transferor substantially as an entirety shall be, if the Transferor is not the surviving entity, organized and existing under the laws of the United States of America or any State or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the performance of every covenant and obligation of the Transferor, as applicable hereunder and shall benefit from all the rights granted to the Transferor, as applicable hereunder. To the extent that any right, covenant or obligation of the Transferor, as applicable hereunder, is inapplicable to the successor entity, such successor entity shall be subject to such covenant or obligation, or benefit from such right, as would apply, to the extent practicable, to such successor entity. In furtherance hereof, in applying this Section 7.2 to a successor entity, Section 9.2 hereof shall be applied by reference to events of involuntary liquidation, receivership or conservatorship applicable to such successor entity as shall be set forth in the officer's certificate described in subsection 7.2(a)(ii); (ii) the Transferor shall have delivered to the Trustee an Officer's Certificate signed by a Vice President (or any more senior officer) of the Transferor stating that such consolidation, merger, conveyance or transfer and such supplemental agreement comply with this Section 7.2 and that all conditions precedent herein provided for relating to such transaction have been complied with and an Opinion of Counsel that such supplemental agreement is legal, valid and binding and that the entity surviving such consolidation, conveyance or transfer is organized and existing under the laws of the United States of America or any State or the District of Columbia and, subject to customary limitations and qualifications, such entity will not be substantively consolidated with Fingerhut, FCI, any Originator or the Servicer; (iii) the Transferor shall have delivered notice to the Rating Agency of such consolidation, merger, conveyance or transfer and the Rating Agency shall have provided written confirmation that such consolidation, merger, conveyance or transfer will not result in the Rating Agency reducing or withdrawing its rating on any then outstanding Series as to which it is a Rating Agency; (iv) the successor entity shall be a special purpose bankruptcy remote entity; and (v) if the Transferor is not the surviving entity, the surviving entity shall file new UCC-1 financing statements with respect to the interest of the Trust in the Receivables. (b) The obligations of the Transferor hereunder shall not be assignable nor shall any Person succeed to the obligations of the Transferor hereunder except for mergers, consolidations, assumptions or transfers in accordance with the provisions of the foregoing paragraph. Section 7.3 Limitation on Liability. The directors, officers, employees or agents of the Transferor shall not be under any liability to the Trust, the Trustee, the Certificateholders, any Enhancement Provider or any other Person hereunder or pursuant to any document delivered hereunder, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consideration for, the execution of this Agreement and any Supplement and the issuance of the Certificates; provided, however, that this provision shall not protect the officers, directors, employees, or agents of the Transferor against any liability which would otherwise be imposed upon them by reason of willful misfeasance, bad faith or gross negligence in the performance of duties or by reason of reckless disregard of obligations and duties hereunder. Except as provided in Sections 7.1 and 7.4 with respect to the Trust and the Trustee and its officers, directors, employees and agents, the Transferor shall not be under any liability to the Trust, the Trustee, its officers, directors, employees and agents, the Certificateholders, any Enhancement Provider or any other Person for any action taken or for refraining from the taking of any action in its capacity as Transferor pursuant to this Agreement or any Supplement whether arising from express or implied duties under this Agreement or any Supplement or otherwise; provided, however, that this provision shall not protect the Transferor against any liability which would otherwise be imposed upon it by reason of willful misfeasance, bad faith or gross negligence in the performance of duties or by reason of reckless disregard of obligations and duties hereunder. The Transferor and any director, officer, employee or agent may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. Section 7.4 Liabilities. Notwithstanding Section 7.3, by entering into this Agreement, the Transferor agrees to be liable, directly to the injured party, for the entire amount of any losses, claims, damages, penalties or liabilities (other than those incurred by a Certificateholder in the capacity of an investor in the Investor Certificates as a result of the performance of the Receivables, market fluctuations, a shortfall or failure by the Enhancement Provider to make payment under any Enhancement or other similar market or investment risks associated with ownership of the Investor Certificates) arising out of or based on the arrangement created by this Agreement and the actions of the Servicer taken pursuant hereto as though this Agreement created a partnership under the Delaware Uniform Partnership Law, in which the Transferor is a general partner. The Transferor agrees to pay, indemnify and hold harmless each Investor Certificateholder against and from any and all such loses, claims, damages and liabilities (other than those incurred by a Certificateholder in the capacity of an investor in the Investor Certificates as a result of the performance of the Receivables, market fluctuations, a shortfall or failure by an Enhancement Provider to make payment under an Enhancement or other similar market or investment risks) except to the extent that they arise from any action by such Investor Certificateholder. Subject to Sections 8.3 and 8.4, in the event of a Service Transfer, the Successor Servicer will indemnify and hold harmless the Transferor for any losses, claims, damages and liabilities of the Transferor as described in this Section 7.4 arising from the actions or omissions of such Successor Servicer. [End of Article VII] ARTICLE VIII OTHER MATTERS RELATING TO THE SERVICER Section 8.1 Liability of the Servicer. The Servicer shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Servicer in such capacity herein. Section 8.2 Merger or Consolidation of, or Assumption of the Obligations of, the Servicer. Subject to subsection 3.1(a), the Servicer shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (i) the corporation formed by such consolidation or into which the Servicer is merged or the Person which acquires by conveyance or transfer the properties and assets of the Servicer substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America or any State or the District of Columbia and, if the Servicer is not the surviving entity, shall expressly assume, by an agreement supplemental hereto, executed and delivered to the Trustee in form satisfactory to the Trustee, the performance of every covenant and obligation of the Servicer hereunder (to the extent that any right, covenant or obligation of the Servicer, as applicable hereunder, is inapplicable to the successor entity, such successor entity shall be subject to such covenant or obligation, or benefit from such right, as would apply, to the extent practicable, to such successor entity); and (ii) the Servicer shall have delivered to the Trustee an Officer's Certificate that such consolidation, merger, conveyance or transfer and such supplemental agreement comply with this Section 8.2 and that all conditions precedent herein provided for relating to such transaction have been complied with and an Opinion of Counsel that such supplemental agreement is legal, valid and binding with respect to the Servicer and that the entity surviving such consolidation, conveyance or transfer is organized and existing under the laws of the United States of America or any State or the District of Columbia; and (iii) the Servicer shall have delivered notice to the Rating Agency of such consolidation, merger, conveyance or transfer. Section 8.3 Limitation on Liability of the Servicer and Others. The directors, officers, employees or agents of the Servicer shall not be under any liability to the Trust, the Trustee, the Certificateholders, any Enhancement Provider or any other Person hereunder or pursuant to any document delivered hereunder, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consideration for, the execution of this Agreement and any Supplement and the issuance of the Certificates; provided, however, that this provision shall not protect the directors, officers, employees and agents of the Servicer against any liability which would otherwise be imposed upon them by reason of willful misfeasance, bad faith or gross negligence in the performance of duties or by reason of reckless disregard of obligations and duties hereunder. Except as provided in Sections 8.1 and 8.4 with respect to the Trustee, its officers, directors, employees and agents, the Servicer shall not be under any liability to the Trust, the Trustee, its officers, directors, employees and agents, the Certificateholders, any Enhancement Provider or any other Person for any action taken or for refraining from the taking of any action in its capacity as Servicer pursuant to this Agreement or any Supplement; provided, however, that this provision shall not protect the Servicer against any liability which would otherwise be imposed upon it by reason of willful misfeasance, bad faith or gross negligence in the performance of duties or by reason of its reckless disregard of its obligations and duties hereunder or under any Supplement. The Servicer may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Servicer shall not be under any obligation to appear in, prosecute or defend any legal action which is not incidental to its duties to service the Receivables in accordance with this Agreement which in its reasonable opinion may involve it in any expense or liability. Section 8.4 Servicer Indemnification of the Transferor, the Trust and the Trustee. Subject to the limitations on liability set forth in Section 8.3, the Servicer shall indemnify and hold harmless the Transferor, the Trustee and the Trust (each, an "Indemnified Party") from and against any loss, liability, reasonable expense, damage or injury, including, but not limited to, any judgment, award, settlement, reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim, suffered or sustained by reason of any acts or omissions or alleged acts or omissions of the Servicer with respect to activities of the Trust or the Trustee for which the Servicer is responsible pursuant to this Agreement; provided, however, that the Servicer shall not indemnify or hold harmless an Indemnified Party if such acts, omissions or alleged acts or omissions constitute or are caused by fraud, gross negligence, or willful misconduct by such Indemnified Party (or any of such Indemnified Party's officers, directors, employees or agents) or the Investor Certificateholders; provided, further, that the Servicer shall not indemnify or hold harmless the Trust, the Investor Certificateholders or the Certificate Owners for any losses, liabilities, expenses, damages or injuries suffered or sustained by any of them with respect to any action taken by the Trustee at the request of the Investor Certificateholders; provided further, that the Servicer shall not indemnify or hold harmless the Trust, the Investor Certificateholders or the Certificate Owners as to any losses, liabilities, expenses, damages or injuries suffered or sustained by any of them in their capacities as investors, including without limitation losses incurred as a result of Defaulted Receivables; provided further, that the Servicer shall not indemnify or hold harmless the Transferor, the Trust, the Investor Certificateholders or the Certificate Owners for any losses, liabilities, expenses, damages or injuries suffered or sustained by the Trust, the Investor Certificateholders or the Certificate Owners arising under any tax law, including without limitation, any federal, state, local or foreign income or franchise taxes or any other tax imposed on or measured by income (or any interest, penalties or additions with respect thereto or arising from a failure to comply therewith) required to be paid by the Trust, the Investor Certificateholders or the Certificate Owners in connection herewith to any taxing authority; and, provided, further, that in no event will the Servicer be liable, directly or indirectly, for or in respect of any indebtedness or obligation evidenced or created by any Certificate, recourse as to which shall be limited solely to the assets of the Trust allocated for the payment thereof as provided in this Agreement and any applicable Supplement. Any such indemnification shall not be payable from the assets of the Trust, but the Servicer shall be subrogated to the rights of the Trust with respect to the foregoing matters if and to the extent that the Servicer shall have indemnified the Trust with respect thereto. The Servicer shall indemnify and hold harmless the Trustee and its officers, directors, employees or agents from and against any loss, liability, reasonable expense, damage or injury suffered or sustained by reason of the acceptance of this Trust by the Trustee, the issuance by the Trust of the Certificates or any of the other matters contemplated herein or in any Supplement; provided, however, that the Servicer shall not indemnify the Trustee or its officers, directors, employees or agents for any loss, liability, expense, damage or injury caused by the fraud, negligence or willful misconduct of any of them. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof and shall survive the resignation or removal of the Servicer, the resignation or removal of the Trustee and/or the termination of the Trust and shall survive the termination of the Agreement. Section 8.5 The Servicer Not to Resign. Subject to subsection 3.1(a), the Servicer shall not resign from the obligations and duties hereby imposed on it except upon determination that (i) the performance of its duties hereunder is no longer permissible under applicable law and (ii) there is no reasonable action which the Servicer could take to make the performance of its duties hereunder permissible under applicable law. Any such determination permitting the resignation of the Servicer shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Trustee. No such resignation shall become effective until the Trustee or a Successor Servicer shall have assumed the responsibilities and obligations of the Servicer in accordance with Section 10.2 hereof. If the Trustee is unable within 120 days of the date of delivery to it of such Opinion of Counsel to appoint a Successor Servicer, the Trustee shall serve as Successor Servicer hereunder (but shall have continued authority to appoint another Person as Successor Servicer). Section 8.6 Access to Certain Documentation and Information Regarding the Receivables. The Servicer shall provide to the Trustee and its agents (who shall be reasonably acceptable to the Servicer) access to the documentation regarding the Receivables in such cases where the Trustee is required in connection with the enforcement of the rights of the Investor Certificateholders, or by applicable statutes or regulations, to review such documentation, such access being afforded without charge but only (i) upon reasonable request, (ii) during normal business hours, (iii) subject to the Servicer's normal security and confidentiality procedures and (iv) at offices designated by the Servicer. Nothing in this Section 8.6 shall derogate from the obligation of the Transferor, the Trustee or the Servicer to observe any applicable law prohibiting disclosure of information regarding the Obligors and the failure of the Servicer to provide access as provided in this Section 8.6 as a result of such obligations shall not constitute a breach of this Section 8.6. Section 8.7 Delegation of Duties. In the ordinary course of business, the Servicer may at any time delegate any duties hereunder to any Person who agrees to conduct such duties in accordance with the Credit and Collection Policies. Any such delegations shall not relieve the Servicer of its liability and responsibility with respect to such duties, and shall not constitute a resignation within the meaning of Section 8.5 hereof and the Servicer will remain jointly and severally liable with such Person for any amounts which would otherwise be payable pursuant to this Article VIII as if the Servicer had performed such duty; provided, however, that in the case of any significant delegation to a Person other than an Affiliate of FNB (i) written notice shall be given to the Trustee and to each Rating Agency of such delegation, (ii) Moody's shall have notified the Transferor and the Trustee in writing that such delegation will not result in the lowering or withdrawal of its then existing rating of any Series or Class of Investor Certificates and (iii) the Transferor shall not have received written notice from Standard & Poor's that such delegation would result in the lowering or withdrawal of its then existing rating of any Series or Class of Investor Certificates. [End of Article VIII] ARTICLE IX PAY OUT EVENTS Section 9.1 Pay Out Events. If any one of the following events (each, a "Trust Pay Out Event") shall occur: (a) the Transferor or Fingerhut shall consent to the appointment of a bankruptcy trustee or receiver or liquidator in any bankruptcy proceeding or any other insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to all or substantially all of its property; or a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a bankruptcy trustee or receiver or liquidator in any bankruptcy proceeding or any other insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Transferor, or Fingerhut; or the Transferor, or Fingerhut shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute including the U.S. bankruptcy code, make an assignment for the benefit of its creditors or voluntarily suspend payment of its obligations; or the Transferor shall become unable for any reason to transfer Receivables to the Trust in accordance with the provisions of this Agreement; or (b) the Trust shall become subject to regulation by the Securities and Exchange Commission as an "investment company" within the meaning of the Investment Company Act; then a Pay Out Event with respect to all Series of Certificates shall occur without any notice or other action on the part of the Trustee or the Investor Certificateholders immediately upon the occurrence of such event. The Trustee shall provide notice of a Pay Out Event in a prompt manner to each Rating Agency. Section 9.2 Additional Rights Upon the Occurrence of Certain Events. (a) If (x) the Transferor shall consent to the appointment of a bankruptcy trustee or receiver or liquidator for the winding-up or liquidation of its affairs, or a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a bankruptcy trustee or receiver or liquidator for the winding-up or liquidation of its affairs shall have been entered against the Transferor (an "Insolvency Event"), on the day of such Insolvency Event (the "Appointment Day") or (y) the Retained Percentage shall at any time be equal to or less than 2% (a "Trigger Event"), the following actions shall be taken and processes begun: (i) If an Insolvency Event shall have occurred, the Transferor shall immediately cease to transfer Receivables to the Trust and shall promptly give written notice to the Trustee of such Insolvency Event. Notwithstanding any cessation of the transfer to the Trust of additional Receivables, Collections with respect thereto shall continue to be allocated and paid in accordance with Article IV. (ii) If an Insolvency Event or a Trigger Event shall have occurred this Agreement and the Trust shall be deemed to have terminated, subject to the liquidation, winding-up and dissolution procedures described below; provided, however, that within 15 days of the date of written notice to the Trustee, the Trustee shall (i) publish a notice in an Authorized Newspaper that an Insolvency Event or a Trigger Event has occurred, that the Trust has terminated, and that the Trustee intends to sell, dispose of or otherwise liquidate the Receivables pursuant to this Agreement in a commercially reasonable manner and on commercially reasonable terms, which shall include the solicitation of competitive bids (a "Disposition"), and (ii) send written notice to the Investor Certificateholders describing the provisions of this Section 9.2 and requesting each Investor Certificateholder to advise the Trustee in writing that it elects one of the following options: (A) the Investor Certificateholder wishes the Trustee to instruct the Servicer not to effectuate a Disposition, or (B) the Investor Certificateholder refuses to advise the Trustee as to the specific action the Trustee shall instruct the Servicer to take or (C) the Investor Certificateholder wishes the Servicer to effect a Disposition. If after 90 days from the day notice pursuant to clause (i) above is first published (the "Publication Date"), the Trustee shall not have received the written instruction described in clause (A) above from Holders of Investor Certificates representing Undivided Interests aggregating in excess of 50% of the related Invested Amount of each Series (or, in the case of a Series having more than one Class, each Class of such Series) and the holders of any Supplemental Certificates or any other interest in the Exchangeable Transferor Certificate other than the Transferor as provided in Section 6.3(b) for each Series, a "Holders' Majority"), the Trustee shall instruct the Servicer to effectuate a Disposition, and the Servicer shall proceed to consummate a Disposition. If, however, with respect to the portion of the Receivables allocable to any outstanding Series, a Holders' Majority instruct the Trustee not to effectuate a Disposition of the portion of the Receivables allocable to such Series, the Trust shall be reconstituted and continue with respect to such Series pursuant to the terms of this Agreement and the applicable Supplement (as amended in connection with such reconstitution). The portion of the Receivables allocable to any Series shall be equal to the sum of (1) the product of (A) the Transferor Percentage, (B) the aggregate outstanding Principal Receivables and (C) a fraction the numerator of which is the related Investor Percentage of Imputed Yield Collections and the denominator of which is the sum of all Investor Percentages with respect to Imputed Yield Collections for all Series outstanding and (2) the Invested Amount of such Series. The Transferor or any of its Affiliates shall be permitted to bid for the Receivables. In addition, the Transferor or any of its Affiliates shall have the right to match any bid by a third person and be granted the right to purchase the Receivables at such matched bid price. The Trustee may obtain a prior determination from any such bankruptcy trustee, receiver or liquidator that the terms and manner of any proposed Distribution are commercially reasonable. The provisions of Sections 9.1 and 9.2 shall not be deemed to be mutually exclusive. (b) The proceeds from the Disposition pursuant to subsection (a) above shall be treated as Collections on the Receivables and shall be allocated and deposited in accordance with the provisions of Article IV; provided, however, that the proceeds from a Disposition with respect to any Series shall be applied solely to make payments to such Series; provided further, that the Trustee shall determine conclusively in its sole discretion the amount of such proceeds that are allocable to Imputed Yield Collections and the amount of such proceeds that are allocable to Collections of Principal Receivables. Unless the Trustee receives written instructions from Investor Certificateholders of one or more Series to continue the Trust with respect to such Series as provided in subsection 9.2(a) above, on the day following the last Distribution Date in the Monthly Period during which such proceeds are distributed to the Investor Certificateholders of each Series, the Trust shall terminate. (c) The Trustee may appoint an agent or agents to assist with its responsibilities pursuant to this Article IX with respect to competitive bids. [End of Article IX] ARTICLE X SERVICER DEFAULTS Section 10.1 Servicer Defaults. If any one of the following events (a "Servicer Default") shall occur and be continuing: (a) any failure by the Servicer to make any payment, transfer or deposit or to give instructions or notice to the Trustee pursuant to Article IV or to instruct the Trustee to make any required drawing, withdrawal, or payment under any Enhancement on or before the date occurring five Business Days after the date such payment, transfer, deposit, withdrawal or drawing or such instruction or notice is required to be made or given, as the case may be, under the terms of this Agreement; provided, however, that any such failure caused by a non- willful act of the Servicer shall not constitute a Servicer Default if the Servicer promptly remedies such failure within five Business Days after receiving notice of such failure or otherwise becoming aware of such failure; (b) failure on the part of the Servicer duly to observe or perform in any respect any other covenants or agreements of the Servicer set forth in this Agreement, which has a material adverse effect on the Investor Certificateholders of any Series and which continues unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer by the Trustee, or to the Servicer and the Trustee by the Holders of Investor Certificates evidencing Undivided Interests aggregating not less than 50% of the Invested Amount of any Series materially adversely affected thereby and continues to materially adversely affect such Investor Certificateholders for such period; or the Servicer shall delegate its duties under this Agreement, except as permitted by Section 8.7; (c) any representation, warranty or certification made by the Servicer in this Agreement or in any certificate delivered pursuant to this Agreement shall prove to have been incorrect when made, which has a material adverse effect on the Investor Certificateholders of any Series and which continues to be incorrect in any material respect for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer by the Trustee, or to the Servicer and the Trustee by the Holders of Investor Certificates evidencing Undivided Interests aggregating not less than 50% of the Invested Amount of any Series materially adversely affected thereby and continues to materially adversely affect such Investor Certificateholders for such period; or (d) the Servicer shall consent to the appointment of a bankruptcy trustee or receiver or liquidator in any bankruptcy proceeding or any other insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Servicer or of or relating to all or substantially all of its property; or a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a bankruptcy trustee or receiver or liquidator in any bankruptcy proceeding or any other insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Servicer, and such decree or order shall have remained in force undischarged or unstayed for a period of 60 days; or the Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make any assignment for the benefit of its creditors or voluntarily suspend payment of its obligations; then, so long as such Servicer Default shall not have been remedied, either the Trustee, or the Holders of Investor Certificates evidencing Undivided Interests aggregating more than 50% of the Aggregate Invested Amount, by notice then given in writing to the Servicer (and to the Trustee if given by the Investor Certificateholders) (a "Termination Notice"), may terminate all of the rights and obligations of the Servicer as Servicer under this Agreement. After receipt by the Servicer of such Termination Notice, and on the date that a Successor Servicer shall have been appointed by the Trustee pursuant to Section 10.2, all authority and power of the Servicer under this Agreement shall pass to and be vested in a Successor Servicer; and, without limitation, the Trustee is hereby authorized and empowered (upon the failure of the Servicer to cooperate) to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all documents and other instruments upon the failure of the Servicer to execute or deliver such documents or instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights and obligations. The Servicer agrees to cooperate with the Trustee and such Successor Servicer in effecting the termination of the responsibilities and rights of the Servicer to conduct servicing hereunder including, without limitation, the transfer to such Successor Servicer of all authority of the Servicer to service the Receivables provided for under this Agreement, including, without limitation, all authority over all Collections which shall on the date of transfer be held by the Servicer for deposit, or which have been deposited by the Servicer, in the Collection Account, the Excess Funding Account, the Interest Funding Account or the Principal Account, and any Series Account, or which shall thereafter be received with respect to the Receivables. The Servicer shall promptly transfer its electronic records or electronic copies thereof relating to the Receivables to the Successor Servicer in such electronic form as the Successor Servicer may reasonably request and shall promptly transfer to the Successor Servicer all other records, correspondence and documents necessary for the continued servicing of the Receivables in the manner and at such times as the Successor Servicer shall reasonably request. To the extent that compliance with this Section 10.1 shall require the Servicer to disclose to the Successor Servicer information of any kind which the Servicer deems to be confidential, the Successor Servicer shall be required to enter into such customary licensing and confidentiality agreements as the Servicer shall deem necessary to protect its interests. The Servicer shall, on the date of any servicing transfer, transfer all of its rights and obligations under the Enhancement with respect to any Series to the Successor Servicer. In connection with any service transfer, all reasonable costs and expenses (including attorneys' fees) incurred in connection with transferring the records, correspondence and other documents with respect to the Receivables and the other Trust Property to the Successor Servicer and amending this Agreement to reflect such succession as Successor Servicer pursuant to this Section 10.1 and Section 10.2 shall be paid by the Servicer (unless the Trustee is acting as the Servicer on a temporary basis, in which case the original Servicer shall be responsible therefor) upon presentation of reasonable documentation of such costs and expenses. Notwithstanding the foregoing, a delay in or failure of performance referred to in subsection 10.1(a) for a period of five Business Days or under subsection 10.1(b) or (c) for a period of 60 days, shall not constitute a Servicer Default if such delay or failure could not be prevented by the exercise of reasonable diligence by the Servicer and such delay or failure was caused by an act of God or the public enemy, acts of declared or undeclared war, public disorder, rebellion, riot or sabotage, epidemics, landslides, lightning, fire, hurricanes, tornadoes, earthquakes, nuclear disasters or meltdowns, floods, power outages, bank closings, communications outages, computer failure or similar causes. The preceding sentence shall not relieve the Servicer from using its best efforts to perform its obligations in a timely manner in accordance with the terms of this Agreement and the Servicer shall provide the Trustee, any Enhancement Provider, the Transferor and the Holders of Investor Certificates with an Officer's Certificate giving prompt notice of such failure or delay by it, together with a description of the cause of such failure or delay and its efforts so to perform its obligations. Section 10.2 Trustee to Act; Appointment of Successor. (a) On and after the receipt by the Servicer of a Termination Notice pursuant to Section 10.1, the Servicer shall continue to perform all servicing functions under this Agreement until the date specified in the Termination Notice or as otherwise specified by the Trustee in writing or, if no such date is specified in such Termination Notice, or otherwise specified by the Trustee, until a date mutually agreed upon by the Servicer and Trustee. The Trustee shall notify each Rating Agency of such removal of the Servicer. The Trustee shall, as promptly as possible after the giving of a Termination Notice, appoint a successor servicer (the "Successor Servicer"), and such Successor Servicer shall accept its appointment by a written assumption in a form acceptable to the Trustee. If such Successor Servicer is unable to accept such appointment, the Trustee may obtain bids from any potential successor servicer. If the Trustee is unable to obtain any bids from any potential successor servicer and the Servicer delivers an Officer's Certificate to the effect that it cannot in good faith cure the Servicer Default which gave rise to a transfer of servicing, and if the Trustee is legally unable to act as Successor Servicer, then the Trustee shall offer the Transferor the right to accept reassignment of all of the Receivables for an amount equal to the Aggregate Invested Amount on the date of such purchase plus all interest accrued but unpaid on all of the outstanding Investor Certificates at the applicable Certificate Rate through the date of such purchase; provided, however, that no such purchase by the Transferor shall occur unless the Transferor shall deliver an Opinion of Counsel reasonably acceptable to the Trustee that such purchase would not constitute a fraudulent conveyance of the Transferor. The proceeds of such sale shall be deposited in the Distribution Account or any Series Account, as provided in the related Supplement, for distribution to the Investor Certificateholders of each outstanding Series pursuant to Section 12.3 of the Agreement. In the event that a Successor Servicer has not been appointed and has not accepted its appointment at the time when the Servicer ceases to act as Servicer, the Trustee without further action shall automatically be appointed the Successor Servicer (but shall have continued authority to appoint another Person as Successor Servicer). The Trustee may delegate any of its servicing obligations to an affiliate or agent of the Trustee in accordance with Article III hereof. Any such delegations shall not relieve the Trustee of its liability and responsibility with respect to such duties. Notwithstanding the above, the Trustee shall, if it is legally unable to act, petition a court of competent jurisdiction to appoint any established financial institution having, in the case of an entity that is subject to risk-based capital adequacy requirements, risk-based capital of at least $50,000,000 or, in the case of an entity that is not subject to risk- based capital requirements, having a net worth of not less than $50,000,000 and whose regular business includes the servicing of receivables similar to the Receivables as the Successor Servicer hereunder. (b) Upon its appointment, the Successor Servicer shall be the successor in all respects to the Servicer with respect to servicing functions under this Agreement and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof, and all references in this Agreement to the Servicer shall be deemed to refer to the Successor Servicer. Any Successor Servicer, by its acceptance of its appointment, will automatically agree to be bound by the terms and provisions of each Enhancement. (c) In connection with such appointment and assumption, the Trustee shall be entitled to such compensation, or may make such arrangements for the compensation of the Successor Servicer out of Collections, as it and such Successor Servicer shall agree; provided, however, that no such compensation shall be in excess of the Servicing Fee permitted to the Servicer pursuant to Section 3.2. The Transferor agrees that if the Servicer is terminated hereunder, it will agree to deposit a portion of the Collections in respect of Imputed Yield Receivables that it is entitled to receive pursuant to Article IV to pay its ratable share of the compensation of the Successor Servicer. (d) All authority and power granted to the Successor Servicer under this Agreement shall automatically cease and terminate upon termination of the Trust pursuant to Section 12.1 and shall pass to and be vested in the Transferor and, without limitation, the Transferor is hereby authorized and empowered to execute and deliver, on behalf of the Successor Servicer, as attorney-in-fact or otherwise, all documents and other instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights. The Successor Servicer agrees to cooperate with the Transferor in effecting the termination of the responsibilities and rights of the Successor Servicer to conduct servicing on the Receivables. The Successor Servicer shall transfer its electronic records relating to the Receivables to the Transferor in such electronic form as the Transferor may reasonably request and shall transfer all other records, correspondence and documents to the Transferor in the manner and at such times as the Transferor shall reasonably request. To the extent that compliance with this Section 10.2 shall require the Successor Servicer to disclose to the Transferor information of any kind which the Successor Servicer deems to be confidential, the Transferor shall be required to enter into such customary licensing and confidentiality agreements as the Successor Servicer shall deem necessary to protect its interests. Section 10.3 Notification to Certificate- holders. Upon the Servicer becoming aware of any Servicer Default, the Servicer shall give prompt written notice thereof to the Trustee and any Enhancement Provider and, upon receipt of such written notice, the Trustee shall give notice to the Investor Certificateholders at their respective addresses appearing in the Certificate Register. Upon any termination or appointment of a Successor Servicer pursuant to this Article X, the Trustee shall give prompt written notice thereof to Investor Certificateholders at their respective addresses appearing in the Certificate Register. Section 10.4 Waiver of Past Defaults. The Holders of Investor Certificates evidencing Undivided Interests aggregating not less than 66-2/3% of the Invested Amount of each Series materially adversely affected by any default by the Servicer or Transferor may, on behalf of all Certificateholders of such Series, waive any default by the Servicer or Transferor in the performance of its obligations hereunder and its consequences, except a default in the failure to make any required deposits or payments of interest or principal relating to such Series pursuant to Article IV, which default does not result from the failure of the Paying Agent to perform its obligations to make any required deposits or payments of interest and principal in accordance with Article IV. Upon any such waiver of a past default, such default shall cease to exist, and any default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon except to the extent expressly so waived. [End of Article X] ARTICLE XI THE TRUSTEE Section 11.1 Duties of Trustee. (a) The Trustee, prior to the occurrence of any Servicer Default of which a Responsible Officer of the Trustee has actual knowledge and after the curing of all Servicer Defaults which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or duties shall be read into this Agreement against the Trustee. If a Responsible Officer has received written notice that a Servicer Default has occurred (and such Servicer Default has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs; provided, however, that if the Trustee shall assume the duties of the Servicer pursuant to Section 8.5 or 10.2, the Trustee in performing such duties shall use the degree of skill and attention customarily exercised by a servicer with respect to comparable receivables that it services for itself or others. (b) The Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, orders or other instruments furnished to the Trustee that are specifically required to be furnished pursuant to any provision of this Agreement, shall examine them to determine whether they substantially conform to the requirements of this Agreement. The Trustee shall retain all such items for at least one year after receipt and shall make such items available for inspection by any Investor Certificateholder at the Corporate Trust Office, such inspection to be made during regular business hours and upon reasonable prior notice to the Trustee. (c) Subject to subsection 11.1(a), no provision of this Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own misconduct; provided, however, that: (i) the Trustee shall not be personally liable for an error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (ii) the Trustee shall not be personally liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the Holders of Investor Certificates evidencing Undivided Interests aggregating more than 50% of the Invested Amount of any Series relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee with respect to such Series, or exercising any trust or power conferred upon the Trustee with respect to such Series, under this Agreement; and (iii) the Trustee shall not be charged with knowledge of any failure by the Servicer referred to in clauses (a) and (b) of Section 10.1 or of any breach by the Servicer contemplated by clause (c) of Section 10.1 or any Pay Out Event unless a Responsible Officer of the Trustee obtains actual knowledge of such failure, breach or Pay-Out Event or the Trustee receives written notice of such failure, breach or Pay Out Event from the Servicer or any Holders of Investor Certificates evidencing Undivided Interests aggregating not less than 10% of the Invested Amount of any Series adversely affected thereby. (d) The Trustee shall not be required to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it, and none of the provisions contained in this Agreement shall in any event require the Trustee to perform, or be responsible for the manner of performance of, any of the obligations of the Servicer under this Agreement except during such time, if any, as the Trustee shall be the successor to, and be vested with the rights, duties, powers and privileges of, the Servicer in accordance with the terms of this Agreement. (e) Except for actions expressly authorized by this Agreement, the Trustee shall take no action reasonably likely to impair the interests of the Trust in any Receivable now existing or hereafter created or to impair the value of any Receivable now existing or hereafter created. (f) Except as provided in this Agreement, the Trustee shall have no power to vary the corpus of the Trust. (g) If a Responsible Officer of the Trustee, has received written notice that the Paying Agent or the Transfer Agent and Registrar shall fail to perform any obligation, duty or agreement in the manner or on the day required to be performed by the Paying Agent or the Transfer Agent and Registrar, as the case may be, under this Agreement, the Trustee shall be obligated promptly upon its obtaining knowledge thereof by a Responsible Officer of the Trustee to perform such obligation, duty or agreement in the manner so required. (h) If the Transferor has agreed to transfer any of its accounts receivable (other than the Receivables) to another Person, upon the written request of the Transferor, the Trustee on behalf of the Trust will enter into such intercreditor agreements with the transferee of such receivables as are customary and necessary to identify separately the rights, if any, of the Trust and such other Person in the Transferor's accounts receivable; provided, however, that the Trust shall not be required to enter into any intercreditor agreement that could adversely affect the interests of the Certificateholders or the Trustee and, upon the request of the Trustee, the Transferor will deliver an Opinion of Counsel on any matters relating to such intercreditor agreement, reasonably requested by the Trustee. Section 11.2 Certain Matters Affecting the Trustee. Except as otherwise provided in Section 11.1: (a) the Trustee may rely on and shall be protected in acting on, or in refraining from acting in accordance with, the initial report, the Daily Report, the Settlement Statement, the annual Servicer's certificate, the monthly payment instructions and notification to the Trustee, the monthly Certificateholder's statement, any resolution, Officer's Certificate, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond or other paper or document believed by it to be genuine and to have been signed or presented to it pursuant to this Agreement by the proper party or parties; (b) the Trustee may consult with counsel, and the advice or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (c) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement or any Enhancement, or to institute, conduct or defend any litigation hereunder or in relation hereto, at the request, order or direction of any of the Certificateholders or any Enhancement Provider, pursuant to the provisions of this Agreement, unless such Certificateholders or Enhancement Provider shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; nothing contained herein shall, however, relieve the Trustee of the obligations, upon the occurrence of any Servicer Default (which has not been cured or waived) of which a Responsible Officer of the Trustee has knowledge, to exercise such of the rights and powers vested in it by this Agreement and any Enhancement, and to use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs; (d) the Trustee shall not be personally liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement; (e) the Trustee shall not be bound to make any investigation into the facts of matters stated in the initial report, the Daily Report, the Settlement Statement, the annual Servicer's certificate, the monthly payment instructions and notification to the Trustee, the monthly Certificateholders statement, any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing so to do by Holders of Investor Certificates evidencing Undivided Interests aggregating more than 50% of the Invested Amount of any Series which could be adversely affected if the Trustee does not perform such acts; (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys or a custodian, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent, attorney or custodian appointed with due care by it hereunder; (g) except as may be required by subsection 11.1(a), the Trustee shall not be required to make any initial or periodic examination of any documents or records related to the Receivables for the purpose of establishing the presence or absence of defects, the compliance by the Transferor with its representations and warranties or for any other purpose; (h) whenever in the administration of this Agreement the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officer's Certificate; and (i) the right of the Trustee to perform any discretionary act enumerated in this Agreement or any Supplement shall not be construed as a duty, and the Trustee shall not be answerable for performance of any such act. Section 11.3 Trustee Not Liable for Recitals in Certificates. The Trustee assumes no responsibility for the correctness of the recitals contained herein and in the Certificates (other than the certificate of authentication on the Certificates). Except as set forth in Section 11.15, the Trustee makes no representations as to the validity or sufficiency of this Agreement or of the Certificates (other than the certificate of authentication on the Certificates) or of any Receivable or related document. The Trustee shall not be accountable for the use or application by the Transferor of any of the Certificates or of the proceeds of such Certificates, or for the use or application of any funds paid to the Transferor in respect of the Receivables or deposited in or withdrawn from the Collection Account, the Excess Funding Account, the Principal Account or the Interest Funding Account, or any Series Account or other accounts now or hereafter established to effectuate the transactions contemplated herein and in accordance with the terms hereof. The Trustee shall have no responsibility for filing any financing or continuation statement in any public office at any time or to otherwise perfect or maintain the perfection of any security interest or Lien granted to it hereunder (unless the Trustee shall have become the Successor Servicer) or to prepare or file any Securities and Exchange Commission filing for the Trust or to record this Agreement or any Supplement. Section 11.4 Trustee May Own Certificates. The Trustee in its individual or any other capacity may become the owner or pledgee of Investor Certificates and may deal with the Transferor, the Servicer or any Enhancement Provider with the same rights as it would have if it were not the Trustee. The Trustee in its capacity as Trustee shall exercise its duties and responsibilities hereunder independent of and without reference to its investment, if any, in Investor Certificates. Section 11.5 The Servicer to Pay Trustee's Fees and Expenses. The Servicer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to receive, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) for all services rendered by the Trustee in the execution of the trust hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and, subject to Section 8.4, the Servicer will pay or reimburse the Trustee (without reimbursement from any Investor Account, any Series Account or otherwise) upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Agreement (including the reasonable fees and expenses of its agents and counsel) except any such expense, disbursement or advance as may arise from its own negligence or bad faith and except as provided in the following sentence. If the Trustee is appointed Successor Servicer pursuant to Section 10.2, the provisions of this Section 11.5 shall not apply to expenses, disbursements and advances made or incurred by the Trustee in its capacity as Successor Servicer (which shall be covered out of the Servicing Fee). The obligations of the Servicer under this Section 11.5 shall survive the termination of the Trust and the resignation or removal of the Trustee. Section 11.6 Eligibility Requirements for Trustee. The Trustee hereunder shall at all times (a) be a corporation organized and doing business under the laws of the United States of America or any state thereof authorized under such laws to exercise corporate trust powers, having a long-term unsecured debt rating of at least Baa3 by Moody's, having, in the case of an entity that is subject to risk-based capital adequacy requirements, risk-based capital of at least $50,000,000 or, in the case of an entity that is not subject to risk- based capital adequacy requirements, having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal or state authority and (b) not be a Related Person. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purpose of this Section 11.6, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 11.6, the Trustee shall resign immediately in the manner and with the effect specified in Section 11.7. Section 11.7 Resignation or Removal of Trustee. (a) The Trustee may at any time resign and be discharged from the Trust hereby created by giving written notice thereof to the Servicer. Upon receiving such notice of resignation, the Servicer shall promptly appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted such appointment within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee. (b) If at any time the Trustee shall cease to be eligible in accordance with the provisions of Section 11.6 hereof and shall fail to resign after written request therefor by the Transferor, or if at any time the Trustee shall be legally unable to act, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Transferor may, but shall not be required to, remove the Trustee and promptly appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee. (c) If (i) the Trustee shall fail to perform any of its obligations hereunder, (ii) a Certificateholder shall deliver written notice of such failure to the Trustee, and (iii) the Trustee shall not have corrected such failure for 60 days thereafter, then the Holders of Investor Certificates representing more than 50% of the Invested Amount (including related commitments of holders of Variable Funding Certificates) shall have the right to remove the Trustee and (with the consent of the Transferor, which shall not be unreasonably withheld) promptly appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 11.7 shall not become effective until acceptance of appointment by the successor trustee as provided in Section 11.8 hereof and any liability of the Trustee arising hereunder shall survive such appointment of a successor trustee. Notice of any resignation or removal of the Trustee and appointment of a successor trustee shall be provided to Moody's and Standard & Poor's by the Servicer in a prompt manner. Section 11.8 Successor Trustee. (a) Any successor trustee appointed as provided in Section 11.7 hereof shall execute, acknowledge and deliver to the Transferor and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor hereunder, with the like effect as if originally named as Trustee herein. The predecessor Trustee shall deliver to the successor trustee all documents and statements held by it hereunder, and the Transferor and the predecessor Trustee shall execute and deliver such instruments and do such other things as may reasonably be required for fully and certainly vesting and confirming in the successor trustee all such rights, powers, duties and obligations. (b) No successor trustee shall accept appointment as provided in this Section 11.8 unless at the time of such acceptance such successor trustee shall be eligible under the provisions of Section 11.6 hereof. (c) Upon acceptance of appointment by a successor trustee as provided in this Section 11.8, such successor trustee shall mail notice of such succession hereunder to all Certificateholders at their addresses as shown in the Certificate Register. Section 11.9 Merger or Consolidation of Trustee. Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be eligible under the provisions of Section 11.6 hereof, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 11.10 Appointment of Co-Trustee or Separate Trustee. (a) Notwithstanding any other provisions of this Agreement, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Trust may at the time be located, the Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as a co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Certificateholders, such title to the trust, or any part thereof, and, subject to the other provisions of this Section 11.10, such powers, duties, obligations, rights and trusts as the Trustee may consider necessary or desirable. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 11.6 and no notice to Certificateholders of the appointment of any co-trustee or separate trustee shall be required under Section 11.8 hereof. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Trustee shall be conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Trustee joining in such act), except to the extent that under any laws of any jurisdiction in which any particular act or acts are to be performed (whether as Trustee hereunder or as successor to the Servicer hereunder), the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Trustee; (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article XI. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically including every provision of this Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Trustee. Every such instrument shall be filed with the Trustee and a copy thereof given to the Servicer. (d) Any separate trustee or co-trustee may at any time constitute the Trustee as its agent or attorney- in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect to this Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. Section 11.11 Tax Returns. Consistent with Section 3.7, the Trustee shall not file any Federal tax returns on behalf of the Trust; provided, however, that if a class of Certificates is issued that will be characterized as a partnership for federal income tax purposes, partnership information returns shall be prepared and signed by the Transferor, as general partner. In the event the Trust shall be required to file tax returns, the Servicer shall at its expense prepare or cause to be prepared any tax returns required to be filed by the Trust and, to the extent possible, shall remit such returns to the Trustee for signature at least five days before such returns are due to be filed. The Trustee is hereby authorized to sign any such return on behalf of the Trust. The Servicer shall prepare or shall cause to be prepared all tax information required by law to be distributed to Certificateholders and shall deliver such information to the Trustee at least five days prior to the date it is required by law to be distributed to Certificateholders. The Trustee, upon request, will furnish the Servicer with all such information known to the Trustee as may be reasonably required in connection with the preparation of all tax returns of the Trust and shall, upon request, execute such return. In no event shall the Trustee be liable for any liabilities, costs or expenses of the Trust, the Investor Certificateholders or the Certificate Owners arising under any tax law, including without limitation federal, state, local or foreign income or excise taxes or any other tax imposed on or measured by income (or any interest or penalty or addition with respect thereto or arising from a failure to comply therewith). Section 11.12 Trustee May Enforce Claims Without Possession of Certificates. All rights of action and claims under this Agreement or any Series of Certificates may be prosecuted and enforced by the Trustee without the possession of any of the Certificates or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee. Any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of any Series of Certificateholders in respect of which such judgment has been obtained. Section 11.13 Suits for Enforcement. If a Servicer Default of which a Responsible Officer of the Trustee has knowledge shall occur and be continuing, the Trustee, in its discretion may, subject to the provisions of Section 10.1, proceed to protect and enforce its rights and the rights of any Series of Certificateholders under this Agreement by a suit, action or proceeding in equity or at law or otherwise, whether for the specific performance of any covenant or agreement contained in this Agreement or in aid of the execution of any power granted in this Agreement or for the enforcement of any other legal, equitable or other remedy as the Trustee, being advised by counsel, shall deem most effectual to protect and enforce any of the rights of the Trustee or any Series of Certificateholders. Section 11.14 Rights of Certificateholders to Direct Trustee. Holders of Investor Certificates evidencing Undivided Interests aggregating more than 50% of the Aggregate Invested Amount (or, with respect to any remedy, trust or power that does not relate to all Series, 50% of the aggregate Invested Amount of the Investor Certificates of all Series to which such remedy, trust or power relates) shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that Holders of Investor Certificates aggregating more than 50% of the aggregate Invested Amount of any Class may direct the Trustee to exercise its rights under Section 8.6; provided, further, that, subject to Section 11.1, the Trustee shall have the right to decline to follow any such direction if the Trustee being advised by counsel determines that the action so directed may not lawfully be taken, or if the Trustee in good faith shall, by a Responsible Officer or Responsible Officers of the Trustee, determine that the proceedings so directed would be illegal or involve it in personal liability or be unduly prejudicial to the rights of Certificateholders not parties to such direction; and provided, further that nothing in this Agreement shall impair the right of the Trustee to take any action deemed proper by the Trustee and which is not inconsistent with such direction of such Holders of Investor Certificates. Section 11.15 Representations and Warranties of Trustee. The Trustee represents and warrants that: (i) the Trustee is a corporation organized, existing and authorized to engage in the business of banking under the laws of the State of its incorporation; (ii) the Trustee is an entity that satisfies the eligibility requirements of Section 11.6; (iii) the Trustee has full power, authority and right to execute, deliver and perform this Agreement, and has taken all necessary action to authorize the execution, delivery and performance by it of this Agreement; and (iv) this Agreement has been duly executed and delivered by the Trustee. Section 11.16 Maintenance of Office or Agency. The Trustee will maintain at its expense an office or offices, or agency or agencies, where notices and demands to or upon the Trustee in respect of the Certificates and this Agreement may be served. The Trustee initially appoints its Corporate Trust Office as its office for such purposes. The Trustee will give prompt written notice to the Servicer and to Certificateholders (or in the case of Holders of Bearer Certificates, in the manner provided for in the related Supplement) of any change in the location of the Certificate Register or any such office or agency. [End of Article XI] ARTICLE XII TERMINATION Section 12.1 Termination of Trust. (a) The respective obligations and responsibilities of the Transferor, the Servicer and the Trustee created hereby (other than the obligation of the Trustee to make payments to Certificateholders as hereafter set forth) shall terminate, except with respect to the duties described in Section 8.4 and 11.5 and subsection 12.3(b), on the Trust Termination Date; provided, however, that the Trust shall not terminate on the date specified in clause (i) of the definition of "Trust Termination Date" if each of the Servicer and the Holder of the Exchangeable Transferor Certificate notify the Trustee in writing, not later than five Business Days preceding such date, that they desire that the Trust not terminate on such date, which notice (such notice, a "Trust Extension") shall specify the date on which the Trust shall terminate (such date, the "Extended Trust Termination Date"); provided, however, that the Extended Trust Termination Date shall be not later than June 29, 2034. The Servicer and the Holder of the Exchangeable Transferor Certificate may, on any date following the Trust Extension, so long as no Series of Certificates is outstanding, deliver a notice in writing to the Trustee changing the Extended Trust Termination Date. (b) In the event that (i) the Trust has not terminated by the Distribution Date occurring in the second month preceding the Trust Termination Date, and (ii) the Invested Amount of any Series, exclusive of any Transferor Retained Class (after giving effect to all transfers, withdrawals, deposits and drawings to occur on such date and the payment of principal on any Series of Certificates to be made on the related Distribution Date during such month pursuant to Article IV), would be greater than zero, the Servicer shall sell within 30 days after such Transfer Date an amount of Receivables up to the remaining Invested Amount if it can do so in a commercially reasonable manner. The Servicer shall notify each Enhancement Provider of the proposed sale of the Receivables and shall provide each Enhancement Provider an opportunity to bid on the Receivables. The Transferor shall have the right of first refusal to purchase the Receivables on terms equivalent to the best purchase offer as determined by the Trustee in its sole discretion. The proceeds of any such sale shall be treated as Collections on the Receivables and shall be allocated and deposited in accordance with Article IV; provided, however, that the Trustee shall determine conclusively in its sole discretion the amount of such proceeds which are allocable to Imputed Yield Collections and the amount of such proceeds which are allocable to Principal Collections. During such thirty-day period, the Servicer shall continue to collect payments on the Receivables and allocate and deposit such payments in accordance with the provisions of Article IV. (c) All principal or interest with respect to any Series of Investor Certificates shall be due and payable no later than the Series Termination Date with respect to such Series. Unless otherwise provided in a Supplement, in the event that the Invested Amount of any Series of Certificates is greater than zero, exclusive of any Class held by the Transferor, on its Series Termination Date (the "Affected Series"), after giving effect to all transfers, withdrawals, deposits and drawings to occur on such date and the payment of principal to be made on such Series on such date, and the Trustee will sell or cause to be sold, and the Trustee will pay the proceeds to all Certificateholders of such Series pro rata in final payment of all principal of and accrued interest on such Series of Certificates or, if any Class of such Series is subordinated, in order of their respective seniorities, an amount of Principal Receivables and the related Imputed Yield Receivables (or interests therein) up to 110% of the Invested Amount of such Series at the close of business on such date (but the amount of such Principal Receivables not to be more than an amount of Receivables equal to the sum of (1) the product of (A) the Transferor Percentage, (B) the aggregate outstanding Principal Receivables and (C) a fraction the numerator of which is the Invested Amount of such Series on such date and the denominator of which is the sum of the Invested Amounts of all Series on such Date and (2) the Invested Amount of such Series). Receivables on which the Obligor has not made the full monthly payment for the prior months shall be deemed to be in default for purposes of this Section 12.1(c) to the extent that the cash allocated to any Class of Transferor Retained Certificates of such Series pursuant to a sale under Section 12.1(c) is less than the amount that would have been allocated to the Exchangeable Transferor Certificate and the Transferor Retained Certificates had the proceeds from such sale been allocated pursuant to Section 4.3. The Servicer shall notify each Enhancement Provider of the proposed sale of such Receivables and shall provide each Enhancement Provider an opportunity to bid on such Receivables. The Transferor shall be permitted to purchase such Receivables in such case and shall have a right of first refusal with respect thereto to the extent of a bona fide offer by an unrelated third party or to the extent the Receivables represent Defaulted Receivables. Any proceeds of such sale in excess of such principal and interest paid shall be paid to the Holder of the Exchangeable Transferor Certificate. Upon such Series Termination Date with respect to the applicable Series of Certificates, final payment of all amounts allocable to any Investor Certificates of such Series shall be made in the manner provided in Section 12.3. Section 12.2 Optional Termination. (a) If so provided in any Supplement, the Transferor may, but shall not be obligated to, cause a final distribution to be made in respect of the related Series of Certificates on a Distribution Date specified in such Supplement by depositing into the Distribution Account or the applicable Series Account, not later than the Transfer Date preceding such Distribution Date, for application in accordance with Section 12.3, the amount specified in such Supplement; provided, however that if the short-term deposits or long-term unsecured debt obligations of the Transferor are not rated at the time of such purchase of Receivables at least P-3 or Baa3, respectively, by Moody's, no such event shall occur unless the Transferor shall deliver to the Trustee, with a copy to Moody's, an Opinion of Counsel that such deposit into the Distribution Account or any Series Account as provided in the related Supplement would not constitute a fraudulent conveyance of the Transferor. (b) The amount deposited pursuant to subsection 12.2(a) shall be paid to the Investor Certificateholders of the related Series pursuant to Section 12.3 on the related Distribution Date following the date of such deposit. All Certificates of a Series with respect to which a final distribution has been made pursuant to subsection 12.2(a) shall be delivered by the Holder to, and be canceled by, the Transfer Agent and Registrar and be disposed of in a manner satisfactory to the Trustee and the Transferor. The Invested Amount of each Series with respect to which a final distribution has been made pursuant to subsection 12.2(a) shall, for the purposes of the definition of "Transferor Interest," be deemed to be equal to zero on the Distribution Date following the making of the deposit, and the Transferor Interest shall thereupon be deemed to have been increased by the Invested Amount of such Series. Section 12.3 Final Payment with Respect to any Series. (a) Written notice of any termination, specifying the Distribution Date upon which the Investor Certificateholders of any Series may surrender their Certificates for payment of the final distribution with respect to such Series and cancellation, shall be given (subject to at least four Business Days' prior notice from the Servicer to the Trustee) by the Trustee to Investor Certificateholders of such Series mailed not later than the fifth day of the month of such final distribution (or in the manner provided by the Supplement relating to such Series) specifying (i) the Distribution Date (which shall be the Distribution Date in the month (x) in which the deposit is made pursuant to subsection 2.4(e), 9.2(a), 10.2(a), or 12.2(a) of the Agreement or such other section as may be specified in the related Supplement, or (y) in which the related Series Termination Date occurs) upon which final payment of such Investor Certificates will be made upon presentation and surrender of such Investor Certificates at the office or offices therein designated (which, in the case of Bearer Certificates, shall be outside the United States), (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Distribution Date is not applicable, payments being made only upon presentation and surrender of the Investor Certificates at the office or offices therein specified. The Servicer's notice to the Trustee in accordance with the preceding sentence shall be accompanied by an Officers' Certificate setting forth the information specified in Article V of this Agreement covering the period during the then current calendar year through the date of such notice and setting forth the date of such final distribution. The Trustee shall give such notice to the Transfer Agent and Registrar and the Paying Agent at the time such notice is given to such Investor Certificateholders. (b) Notwithstanding the termination of the Trust pursuant to subsection 12.1(a) or the occurrence of the Series Termination Date with respect to any Series, all funds then on deposit in the Excess Funding Account, the Interest Funding Account, the Principal Account, the Distribution Account or any Series Account applicable to the related Series shall continue to be held in trust for the benefit of the Certificateholders of the related Series and the Paying Agent or the Trustee shall pay such funds to the Certificateholders of the related Series upon surrender of their Certificates (which surrenders and payments, in the case of Bearer Certificates, shall be made only outside the United States). In the event that all of the Investor Certificateholders of any Series shall not surrender their Certificates for cancellation within six months after the date specified in the above- mentioned written notice, the Trustee shall give a second written notice (or, in the case of Bearer Certificates, publication notice) to the remaining Investor Certificateholders of such Series upon receipt of the appropriate records from the Transfer Agent and Registrar to surrender their Certificates for cancellation and receive the final distribution with respect thereto. If within one and one half years after the second notice with respect to a Series, all the Investor Certificates of such Series shall not have been surrendered for cancellation, the Trustee may take appropriate steps or may appoint an agent to take appropriate steps, to contact the remaining Investor Certificateholders of such Series concerning surrender of their Certificates, and the cost thereof shall be paid out of the funds in the Distribution Account or any Series Account held for the benefit of such Investor Certificateholders. The Trustee and the Paying Agent shall pay to the Transferor upon request any monies held by them for the payment of principal or interest which remains unclaimed for two years. After payment to the Transferor, Investor Certificateholders entitled to the money must look to the Transferor for payment as general creditors unless an applicable abandoned property law designates another Person. (c) All Certificates surrendered for payment of the final distribution with respect to such Certificates and cancellation shall be canceled by the Transfer Agent and Registrar and be disposed of in a manner satisfactory to the Trustee and the Transferor. Section 12.4 Termination Rights of Holder of Exchangeable Transferor Certificate. Upon the termination of the Trust pursuant to Section 12.1, and after payment of all amounts due hereunder on or prior to such termination and the surrender of the Exchangeable Transferor Certificate, the Trustee shall execute a written reconveyance substantially in the form of Exhibit F pursuant to which it shall reconvey to the Holder of the Exchangeable Transferor Certificate (without recourse, representation or warranty) all right, title and interest of the Trust in the Receivables, whether then existing or thereafter created, all moneys due or to become due with respect thereto (including all amounts theretofore posted as Imputed Yield Receivables) allocable to the Trust pursuant to any Supplement, except for amounts held by the Trustee pursuant to subsection 12.3(b). The Trustee shall execute and deliver such instruments of transfer and assignment, in each case prepared by the Transferor and without recourse, representation or warranty (other than a warranty that such property is conveyed free and clear of any Lien of any Person claiming by or through the Trustee) as shall be reasonably requested by the Holder of the Exchangeable Transferor Certificate to vest in such Holder all right, title and interest which the Trust had in the Receivables and other Trust Property. [End of Article XII] ARTICLE XIII MISCELLANEOUS PROVISIONS Section 13.1 Amendment. (a) This Agreement (including any Supplement) may be amended from time to time by the Servicer, the Transferor and the Trustee, without the consent of any of the Certificateholders, (i) to cure any ambiguity, to revise any exhibits or Schedules (other than Schedule 1), to correct or supplement any provisions herein or thereon which may be inconsistent with any other provisions herein or thereon or (ii) to add any other provisions with respect to matters or questions raised under this Agreement which shall not be inconsistent with the provisions of this Agreement; provided, however, that such action shall not, as evidenced by an Opinion of Counsel, adversely affect in any material respect the interests of any of the Investor Certificateholders. Additionally, this Agreement may be amended from time to time by the Servicer, the Transferor and the Trustee, without the consent of any of the Certificateholders, to add to or change any of the provisions of this Agreement to provide that Bearer Certificates may be registrable as to principal, to change or eliminate any restrictions on the payment of principal of (or premium, if any) or any interest on Bearer Certificates to comply with the Bearer Rules, to permit Bearer Certificates to be issued in exchange for Registered Certificates (if then permitted by the Bearer Rules), to permit Bearer Certificates to be issued in exchange for Bearer Certificates of other authorized denominations or to permit the issuance of Certificates in uncertificated form. This Agreement (including any Supplement), and any schedule or exhibit thereto may also be amended from time to time by the Servicer, the Transferor and the Trustee, without the consent of any of the Certificateholders, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement, or of modifying in any manner the rights of the Holders of Certificates; provided, however, that (i) the Servicer shall have provided an Officer's Certificate to the Trustee to the effect that such amendment will not materially and adversely affect the interests of the Certificateholders, (ii) such amendment shall not, as evidenced by an Opinion of Counsel, cause the Trust to be characterized for Federal income tax purposes as an association taxable as a corporation or otherwise have any material adverse impact on the Federal income taxation of any outstanding Series of Investor Certificates or any Certificate Owner and (iii) the Servicer shall have provided at least ten Business Days prior written notice to each Rating Agency of such amendment and shall have received written confirmation from each Rating Agency to the effect that the rating of any Series or any class of any Series will not be reduced or withdrawn as a result of such amendment; provided, further, that such amendment shall not reduce in any manner the amount of, or delay the timing of, distributions which are required to be made on any Investor Certificate of such Series without the consent of the related Investor Certificateholder, change the definition of or the manner of calculating the interest of any Investor Certificateholder of such Series without the consent of the related Investor Certificateholder or reduce the percentage pursuant to Subsection 13.1(b) required to consent to any such amendment, in each case without the consent of all such Investor Certificateholders; provided, further, that the transfer of the Receivables to and the generation of new Receivables by, a credit card bank established by Fingerhut or any Affiliate thereof and/or the appointment of a credit card bank established by Fingerhut as Servicer hereunder in connection with such transfer and any other transactions related, supplemental or incidental thereto shall be deemed not to materially and adversely affect the interests of the Certificateholders. (b) This Agreement and any Supplement may also be amended from time to time by the Servicer, the Transferor and the Trustee with the consent of the Holders of Investor Certificates evidencing Undivided Interests aggregating not less than 66-2/3% of the Invested Amount of each and every Series adversely affected, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Investor Certificateholders of any Series then issued and outstanding; provided, however, that no such amendment under this subsection shall (i) reduce in any manner the amount of, or delay the timing of, distributions which are required to be made on any Investor Certificate of such Series without the consent of all of the related Investor Certificateholders; (ii) change the definition of or the manner of calculating the interest of any Investor Certificateholder of such Series without the consent of the related Investor Certificateholder or (iii) reduce the aforesaid percentage required to consent to any such amendment, in each case without the consent of all such Investor Certificateholders. (c) Notwithstanding anything in this Section 13.1 to the contrary, the Supplement with respect to any Series may be amended on the items and in accordance with the procedures provided in such Supplement. (d) Promptly after the execution of any such amendment (other than an amendment pursuant to paragraph (a)), the Trustee shall furnish notification of the substance of such amendment to each Investor Certificateholder of each Series adversely affected and ten Business Days prior to the proposed effective date for such amendment the Servicer shall furnish notification of the substance of such amendment to each Rating Agency providing a rating for such Series. (e) It shall not be necessary to obtain the consent of Investor Certificateholders under this Section 13.1 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consents and of evidencing the authorization of the execution thereof by Investor Certificateholders shall be subject to such reasonable requirements as the Trustee may prescribe. (f) Any Supplement executed and delivered pursuant to Section 6.9, executed in accordance with the provisions hereof, shall not be considered amendments to this Agreement for the purpose of subsections 13.1(a) and (b). (g) In connection with any amendment, the Trustee may request an Opinion of Counsel from the Transferor or Servicer to the effect that the amendment complies with all requirements of this Agreement. The Trustee may, but shall not be obligated to, enter into any amendment which affects the Trustee's rights, duties or immunities under this Agreement or otherwise. Section 13.2 Protection of Right, Title and Interest to Trust. (a) The Servicer shall cause this Agreement, all amendments hereto and/or all financing statements and continuation statements and any other necessary documents covering the Certificateholders and the Trustee's right, title and interest to the Trust to be promptly recorded, registered and filed, and at all times to be kept recorded, registered and filed, all in such manner and in such places as may be required by law fully to preserve and protect the right, title and interest of the Certificateholders or the Trustee, as the case may be, hereunder to all property comprising the Trust. The Servicer shall deliver to the Trustee file-stamped copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available following such recording, registration or filing. The Transferor shall cooperate fully with the Servicer in connection with the obligations set forth above and will execute any and all documents reasonably required to fulfill the intent of this subsection 13.2(a). (b) Within 30 days after the Transferor makes any change in its name, identity or corporate structure which would make any financing statement or continuation statement filed in accordance with paragraph (a) above materially misleading within the meaning of Section 9- 402(7) of the UCC as in effect in the Relevant UCC State, the Transferor shall give the Trustee written notice of any such change and shall file such financing statements or amendments as may be necessary to continue the perfection of the Trust's security interest in the Receivables and the proceeds thereof. (c) Each of the Transferor and the Servicer will give the Trustee prompt written notice of any relocation of any office from which it services Receivables or keeps records concerning the Receivables or of its principal executive office and whether, as a result of such relocation, the applicable provisions of the UCC would require the filing of any amendment of any previously filed financing or continuation statement or of any new financing statement and shall file such financing statements or amendments as may be necessary to continue the perfection of the Trust's security interest in the Receivables and the proceeds thereof. Each of the Transferor and the Servicer will at all times maintain each office from which it services Receivables and its principal executive office within the United States of America. (d) The Servicer will deliver to the Trustee on or before March 31 of each year, beginning with March 31, 1995, an Opinion of Counsel, substantially in the form of Exhibit E. Section 13.3 Limitation on Rights of Certificateholders. (a) The death or incapacity of any Investor Certificateholder shall not operate to terminate this Agreement or the Trust, nor shall such death or incapacity entitle such Certificateholder's legal representatives or heirs to claim an accounting or to take any action or commence any proceeding in any court for a partition or winding up of the Trust, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. (b) No Investor Certificateholder shall have any right to vote (except with respect to the Investor Certificateholders as provided in Section 13.1 hereof) or in any manner otherwise control the operation and management of the Trust, or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Certificates, be construed so as to constitute the Certificateholders from time to time as members of an association; nor shall any Investor Certificateholder be under any liability to any third person by reason of any action taken by the parties to this Agreement pursuant to any provision hereof. (c) No Certificateholder shall have any right by virtue of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Certificateholder previously shall have given written notice to the Trustee, and unless the Holders of Certificates evidencing Undivided Interests aggregating more than 50% of the Invested Amount of any Series which may be adversely affected but for the institution of such suit, action or proceeding, shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding; it being understood and intended, and being expressly covenanted by each Certificateholder with every other Certificateholder and the Trustee, that no one or more Certificateholders shall have the right in any manner whatever by virtue or by availing itself or themselves of any provisions of this Agreement to affect, disturb or prejudice the rights of the Certificateholders of any other of the Certificates, or to obtain or seek to obtain priority over or preference to any other such Certificateholder, or to enforce any right under this Agreement, except in the manner herein provided and for the equal, ratable and common benefit of all Certificateholders. For the protection and enforcement of the provisions of this Section 13.3, each and every Certificateholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Section 13.4 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. Section 13.5 Notices. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered at, sent by facsimile to, sent by courier at or mailed by registered mail, return receipt requested, to (a) in the case of the Transferor, to 4400 Baker Road, Suite F480, Minnetonka, Minnesota, 55343, Attention: Chief Financial Officer, with a copy to the Servicer as provided below, (b) in the case of the Servicer, to 3904 West Technology Circle, Suite 102, Sioux Falls, South Dakota 57106, Attention: President, with a copy to Fingerhut, 4400 Baker Road, Minnetonka, Minnesota 55343, Attention: Treasurer, (c) in the case of the Trustee, to the Corporate Trust Office, (d) in the case of the Enhancement Provider for a particular Series, the address, if any, specified in the Supplement relating to such Series and (e) in the case of the Rating Agency for a particular Series, the address, if any, specified in the Supplement relating to such Series; or, as to each party, at such other address as shall be designated by such party in a written notice to each other party. Unless otherwise provided with respect to any Series in the related Supplement any notice required or permitted to be mailed to a Certificateholder shall be given by first class mail, postage prepaid, at the address of such Certificateholder as shown in the Certificate Register, or with respect to any notice required or permitted to be made to the Holders of Bearer Certificates, by publication in the manner provided in the related Supplement. If and so long as any Series or Class is listed on the Luxembourg Stock Exchange and such Exchange shall so require, any Notice to Investor Certificateholders shall be published in an authorized newspaper of general circulation in Luxembourg within the time period prescribed in this Agreement. Any notice so mailed within the time prescribed in this Agreement shall be conclusively presumed to have been duly given, whether or not the Certificateholder receives such notice. Section 13.6 Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall for any reason whatsoever be held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement or of the Certificates or rights of the Certificateholders thereof. Section 13.7 Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 8.2, this Agreement may not be assigned by the Servicer without the prior consent of Holders of Investor Certificates evidencing Undivided Interests aggregating not less than 66 2/3% of the Invested Amount of each Series on a Series by Series basis. Upon such assignment, the Trustee shall provide notice to Moody's in a prompt manner. Section 13.8 Certificates Non-Assessable and Fully Paid. Except to the extent otherwise expressly provided in Section 7.4 with respect to the Transferor, it is the intention of the parties to this Agreement that the Investor Certificateholders shall not be personally liable for obligations of the Trust, that the Undivided Interests represented by the Certificates shall be non- assessable for any losses or expenses of the Trust or for any reason whatsoever, and that Certificates upon authentication thereof by the Trustee pursuant to Sections 2.1 and 6.2 are and shall be deemed fully paid. Section 13.9 Further Assurances. The Transferor and the Servicer agree to do and perform, from time to time, any and all acts and to execute any and all further instruments required or reasonably requested by the Trustee more fully to effect the purposes of this Agreement, including, without limitation, the execution of any financing statements or continuation statements relating to the Receivables and the other Trust Property for filing under the provisions of the UCC of any applicable jurisdiction. Section 13.10 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Trustee, any Enhancement Provider or the Investor Certificateholders, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exhaustive of any rights, remedies, powers and privileges provided by law. Section 13.11 Counterparts. This Agreement may be executed in two or more counterparts (and by different parties on separate counterparts), each of which shall be an original, but all of which together shall constitute one and the same instrument. Section 13.12 Third-Party Beneficiaries. This Agreement will inure to the benefit of and be binding upon the parties hereto, the Certificateholders and, to the extent provided in the related Supplement, to the Enhancement Provider named therein, and their respective successors and permitted assigns. Except as otherwise provided in this Article XIII, no other Person will have any right or obligation hereunder. Section 13.13 Actions by Certificateholders. (a) Wherever in this Agreement a provision is made that an action may be taken or a notice, demand or instruction given by Investor Certificateholders, such action, notice or instruction may be taken or given by any Investor Certificateholder, unless such provision requires a specific percentage of Investor Certificateholders. (b) Any request, demand, authorization, direction, notice, consent, waiver or other act by a Certificateholder shall bind such Certificateholder and every subsequent holder of such Certificate issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done or omitted to be done by the Trustee or the Servicer in reliance thereon, whether or not notation of such action is made upon such Certificate. (c) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement or any Supplement to be given or taken by Certificateholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Certificateholders in person or by agent duly appointed in writing; and except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, when required, to the Transferor or the Servicer. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Agreement or any Supplement and conclusive in favor of the Trustee, the Transferor and the Servicer, if made in the manner provided in this Section. (d) The fact and date of the execution by any Certificateholder of any such instrument or writing may be proved in any reasonable manner which the Trustee deems sufficient. Section 13.14 Rule 144A Information. For so long as any of the Investor Certificates of any Series or any Class are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, each of the Transferor, the Servicer, the Trustee and the Enhancement Provider for such Series agree to cooperate with each other to provide to any Investor Certificateholders of such Series or Class and to any prospective purchaser of Certificates designated by such an Investor Certificateholder upon the request of such Investor Certificateholder or prospective purchaser, any information required to be provided to such holder or prospective purchaser to satisfy the condition set forth in Rule 144A(d)(4) under the Securities Act. Section 13.15 Merger and Integration. Except as specifically stated otherwise herein, this Agreement sets forth the entire understanding of the parties relating to the subject matter hereof, and all prior understandings, written or oral, are superseded by this Agreement. This Agreement may not be modified, amended, waived or supplemented except as provided herein. Section 13.16 Headings. The headings herein are for purposes of reference only and shall not otherwise affect the meaning or interpretation of any provision hereof. [End of Article XIII] IN WITNESS WHEREOF, the Transferor, the Servicer and the Trustee have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. FINGERHUT RECEIVABLES, INC. Transferor By: /s/ James M. Wehmann Name: James M. Wehmann Title: Vice President, Assistant Treasurer FINGERHUT NATIONAL BANK Servicer By: /s/ Terry H. Hughes Name: Terry H. Hughes Title: Chief Executive Officer THE BANK OF NEW YORK (DELAWARE) Trustee By: /s/ Joseph G. Ernst Name: Joseph G. Ernst Title: Assistant Vice President SCHEDULE 1 TAX RETURNS AND PAYMENTS The Transferor, Fingerhut, FNB and FCI have filed all applicable federal, state and material local tax returns and have paid or caused to be paid all associated taxes due and payable on such returns or on any assessments received by them; except that the Transferor, Fingerhut, FNB and FCI have not filed certain tax returns purported to be required because they believe the requirements are invalid and unenforceable under the commerce clause of the United States Constitution as interpreted by the Supreme Court in National Bellas Hess v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and the supporting lines of cases, including Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992). The following are the states in which the Transferor, Fingerhut, FNB and FCI are currently collecting sales/use taxes: California Ohio Florida Pennsylvania Illinois South Carolina Iowa South Dakota Minnesota Tennessee New York Notwithstanding the Supreme Court decisions, the following states, to the best knowledge of the Transferor, Fingerhut, FNB and FCI currently have legislation in effect which purports to require the Transferor, Fingerhut, FNB and FCI to collect sales or use taxes: Alabama Missouri Arizona Nebraska Arkansas Nevada California New Jersey Colorado New Mexico Connecticut New York Florida North Carolina Georgia North Dakota Idaho Ohio Illinois Oklahoma Indiana Pennsylvania Iowa Rhode Island Kansas South Carolina Kentucky South Dakota Louisiana Tennessee Massachusetts Texas Michigan Utah Minnesota Vermont Mississippi Virginia Washington West Virginia In addition, because FNB is a national banking entity (established in 1996) which derives the majority of its income from granting credit, it may be subject to special financial institution rules in certain states. Such rules attempt to impute state income tax nexus to a company if it obtains finance revenue and/or has receivables generated from customers in that state. Of the states that have adopted such financial institution rules, Minnesota is the only state where FNB is currently filing income or franchise tax returns. States which currently have rules pursuant to which they may attempt to impose income tax nexus based upon such activity include: Arkansas Minnesota California New Mexico Hawaii Tennessee Indiana West Virginia Massachusetts FNB has not filed in states implementing such rules other than Minnesota because it believes the above-referenced financial institution rules to be unconstitutional. Note that FNB does file tax returns in South Dakota, its state of domicile. EXHIBIT A FORM OF EXCHANGEABLE TRANSFEROR CERTIFICATE No. 1 One Unit FINGERHUT MASTER TRUST ASSET BACKED CERTIFICATE THIS CERTIFICATE WAS ISSUED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY BE SOLD ONLY PURSUANT TO A REGISTRATION STATEMENT EFFECTIVE UNDER THE ACT OR AN EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE ACT. IN ADDITION, THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO RESTRICTIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. A COPY OF THE POOLING AND SERVICING AGREEMENT WILL BE FURNISHED TO THE HOLDER OF THIS CERTIFICATE BY THE TRUSTEE UPON WRITTEN REQUEST. This Certificate represents an Undivided Interest in the Fingerhut Master Trust Evidencing an undivided interest in a trust, the corpus of which consists of receivables generated from time to time in the ordinary course of business from a portfolio of installment sale contracts generated or to be generated by certain customers of Fingerhut Corporation ("Fingerhut") and other assets and interests constituting the Trust under the Pooling and Servicing Agreement described below. (Not an interest in or a recourse obligation of Fingerhut Receivables, Inc., Fingerhut Corporation, Fingerhut National Bank, Fingerhut Companies, Inc. or any Affiliate of either of them.) This certifies that FINGERHUT RECEIVABLES, INC. ("FRI", the "Holder" or the "Transferor," as the context requires) is the registered owner of a fractional undivided interest in the Fingerhut Master Trust (the "Trust") issued pursuant to the Pooling and Servicing Agreement, dated as of June 29, 1994 (the "Pooling and Servicing Agreement"; such term to include any amendment or Supplement thereto) by and among FRI, as Transferor, Fingerhut National Bank, as Servicer (the "Servicer"), and The Bank of New York (Delaware), as Trustee (the "Trustee"), as supplemented by each supplement thereto existing from time to time. The corpus of the Trust will include (i) a portfolio of Receivables (the "Receivables") generated from time to time by Fingerhut satisfying certain criteria, (ii) all funds to be collected from Obligors in respect of the Receivables, (iii) all right, title, and interest of the Transferor in, to, and under the Purchase Agreement, (iv) the benefit of funds on deposit in the Excess Funding Account, (v) Recoveries, (vi) moneys on deposit in the Pre-Funding Account, (vii) proceeds of the foregoing, (viii) all monies due or to become due with respect thereto and all amounts received with respect to the Receivables in existence on the Closing Date or generated thereafter, all monies on deposit in the Collection Account, the Interest Funding Account, the Principal Account, the Distribution Account, the Pre-Funding Account and the Excess Funding Account (excluding any investment earnings on such deposited amounts except for such amounts as are on deposit in the Pre-Funding Account and the Excess Funding Account), and all other assets and interests constituting the Trust and (ix) all proceeds of the foregoing. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Pooling and Servicing Agreement. This Certificate is issued under and is subject to the terms, provisions and conditions of the Pooling and Servicing Agreement, to which Pooling and Servicing Agreement, as amended from time to time, the Holder by virtue of the acceptance hereof assents and by which the Holder is bound. This Certificate has not been registered or qualified under the Securities Act of 1933, as amended, or any state securities law. No sale, transfer or other disposition of this Certificate shall be permitted other than in accordance with the provisions of Section 6.3, 6.9 or 7.2 of the Pooling and Servicing Agreement. The Receivables arise generally from amounts charged to Obligors for consumer goods, services or financial service products. This Certificate is the Exchangeable Transferor Certificate (the "Certificate"), which represents an undivided interest in the Trust, including the right to receive the Collections and other amounts at the times and in the amounts specified in the Pooling and Servicing Agreement to be paid to the Holder of the Exchangeable Transferor Certificate. The aggregate interest represented by this Certificate at any time in the Principal Receivables in the Trust shall not exceed the Transferor Interest at such time. In addition to this Certificate, Series of Investor Certificates will be issued to investors pursuant to the Pooling and Servicing Agreement, each of which will represent an Undivided Interest in the Trust. This Certificate shall not represent any interest in any Enhancement, except to the extent provided in the Pooling and Servicing Agreement. The Transferor Interest on any date of determination will be an amount equal to the aggregate amount of Principal Receivables at the end of the day immediately prior to such date of determination plus amounts on deposit in the Excess Funding Account and Pre-Funding Account (but not including any investment earnings thereon) minus the Aggregate Invested Amount at the end of such day. The Servicer shall deposit all Collections in the Collection Account as promptly as possible after the Date of Processing of such Collections. Unless otherwise stated in any Supplement, throughout the existence of the Trust, the Servicer shall allocate to the Holder of the Certificate an amount equal to the product of (A) the Transferor Percentage and (B) the aggregate amount of such Principal Collections and Imputed Yield Collections, respectively, in respect of each Monthly Period. Notwithstanding the first sentence of this paragraph, the Servicer need not deposit this amount or any other amounts so allocated to the Certificate pursuant to the Pooling and Servicing Agreement into the Collection Account and shall pay, or be deemed to pay, such amounts as collected to the Holder of the Certificate. FNB or any permitted successor or assignee, as Servicer, is entitled to receive as servicing compensation a monthly servicing fee. The portion of the servicing fee which will be allocable to the Holder of the Certificate pursuant to the Pooling and Servicing Agreement will be payable by the Holder of the Certificate and neither the Trust nor the Trustee or the Investor Certificateholders will have any obligation to pay such portion of the servicing fee. This Certificate does not represent a recourse obligation of, or any interest in, the Transferor or the Servicer. This Certificate is limited in right of payment to certain Collections respecting the Receivables, all as more specifically set forth hereinabove and in the Pooling and Servicing Agreement. Upon the termination of the Trust pursuant to Section 12.1 of the Pooling and Servicing Agreement, the Trustee shall assign and convey to the Holder of the Certificate (without recourse, representation or warranty) all right, title and interest of the Trust in the Receivables, whether then existing or thereafter created, and all proceeds relating thereto. The Trustee shall execute and deliver such instruments of transfer and assignment, in each case without recourse, as shall be reasonably requested by the Holder of the Certificate to vest in such Holder all right, title and interest which the Trustee had in the Receivables. Unless the certificate of authentication hereon has been executed by or on behalf of the Trustee, by manual signature, this Certificate shall not be entitled to any benefit under the Pooling and Servicing Agreement, or be valid for any purpose. IN WITNESS WHEREOF, the Transferor has caused this Certificate to be duly executed. FINGERHUT RECEIVABLES, INC. By:__________________ Name: Title: Date: CERTIFICATE OF AUTHENTICATION This is the Exchangeable Transferor Certificate referred to in the within-mentioned Pooling and Servicing Agreement. THE BANK OF NEW YORK Authenticating Agent By:____________________________ Name: Title: EXHIBIT B FORM OF DAILY REPORT FINGERHUT RECEIVABLES, INC. ______________________________ FINGERHUT MASTER TRUST ______________________________ The undersigned, a duly authorized representative of Fingerhut National Bank (the "Servicer"), as Servicer pursuant to the Amended and Restated Pooling and Servicing Agreement dated as of January 12, 1997 (the "Pooling and Servicing Agreement"; such term to include any amendment or Supplement thereto) by and among Fingerhut Receivables Inc. (the "Transferor"), the Servicer and The Bank of New York (Delaware), as Trustee, does hereby certify as follows: [TO BE SUPPLIED] [Will need to know: Beginning Total Receivables Total Collections Principal Collections Imputed Yield Collections New Receivables generated Default Amount] EXHIBIT C FORM OF SETTLEMENT STATEMENT [TO BE SUPPLIED] EXHIBIT D FORM OF ANNUAL SERVICER'S CERTIFICATE ______________________________ FINGERHUT MASTER TRUST ______________________________ The undersigned, a duly authorized representative of Fingerhut National Bank ("FNB"), as Servicer pursuant to the Amended and Restated Pooling and Servicing Agreement dated as of January 12, 1997 (the "Pooling and Servicing Agreement"; such term to include any amendment or Supplement thereto) by and among Fingerhut Receivables, Inc. (the "Transferor"), FNB, as Servicer and The Bank of New York (Delaware), as trustee (the "Trustee") does hereby certify that: 1. FNB is Servicer under the Pooling and Servicing Agreement. 2. The undersigned is duly authorized pursuant to the Pooling and Servicing Agreement to execute and deliver this Certificate to the Trustee. 3. This Certificate is delivered pursuant to Section 3.5 of the Pooling and Servicing Agreement. 4. A review of the activities of the Servicer during (the period from the Closing Date until) (the twelve fiscal month period ended) ________, 19__ was conducted under our supervision. 5. Based on such review, the Servicer has, to the best of our knowledge, fully performed all its obligations under the Pooling and Servicing Agreement throughout such period and no default in the performance of such obligations has occurred or is continuing except as set forth in paragraph 6 below. 6. The following is a description of each default in the performance of the Servicer's obligations under the provisions of the Pooling and Servicing Agreement, including any Supplement, known to us to have been made during such period which sets forth in detail (i) the nature of each such default, (ii) the action taken by the Servicer, if any, to remedy each such default and (iii) the current status of each such default: [If applicable, insert "None."] IN WITNESS WHEREOF, the undersigned has duly executed this certificate this ___ day of ________, ____. FINGERHUT NATIONAL BANK as Servicer ------------------------------------- Name: Title: EXHIBIT E FORM OF ANNUAL OPINION OF COUNSEL The opinion set forth below, which is to be delivered pursuant to subsection 13.2(d)(ii) of the Pooling and Servicing Agreement, may be subject to certain qualifications, assumptions, limitations and exceptions taken or made in the opinion of counsel delivered on the Initial Closing Date with respect to similar matters. No filing or other action, other than such filing or action described in such opinion, is necessary from the date of such opinion through ________ of the following year to continue the perfected status of the interest of the Trust in the collateral described in the financing statements referred to in such opinion. EXHIBIT F FORM OF RECONVEYANCE OF RECEIVABLES RECONVEYANCE OF RECEIVABLES, dated as of _____ __ , 19__ by and between FINGERHUT RECEIVABLES, INC., a corporation organized and existing under the laws of the State of Delaware (the "Transferor"), and THE BANK OF NEW YORK (DELAWARE), a banking corporation organized and existing under the laws of the State of Delaware (the "Trustee") pursuant to the Pooling and Servicing Agreement referred to below. W I T N E S S E T H: WHEREAS, the Transferor and the Trustee are parties to the Amended and Restated Pooling and Servicing Agreement dated as of January 12, 1997 (hereinafter as such agreement may have been, or may from time to time be, amended, supplemented or otherwise modified, the "Pooling and Servicing Agreement") by and among the Transferor, Fingerhut National Bank as Servicer, and the Trustee; WHEREAS, pursuant to the Pooling and Servicing Agreement, the Transferor wishes to cause the Trustee to reconvey all of the Receivables and proceeds thereof, whether now existing or hereafter created, from the Trust to the Transferor pursuant to the terms of Section 12.4 of the Pooling and Servicing Agreement upon termination of the Trust pursuant to subsection 12.1(a) of the Pooling and Servicing Agreement (as each such term is defined in the Pooling and Servicing Agreement); WHEREAS, the Trustee is willing to reconvey the Receivables subject to the terms and conditions hereof; NOW THEREFORE, the Transferor and the Trustee hereby agree as follows: 1. Defined Terms. All terms defined in the Pooling and Servicing Agreement and used herein shall have such defined meanings when used herein, unless otherwise defined herein. "Reconveyance Date" shall mean _____ __, 19__. 2. Return of Lists of Receivables. The Trustee shall deliver to the Transferor or the bailee of the Transferor, not later than three Business Days after the Reconveyance Date, each and every computer file or microfiche list of Receivables delivered to the Trustee pursuant to the terms of the Pooling and Servicing Agreement. 3. Conveyance of Receivables. (a) The Trustee does hereby reconvey to the Transferor, without recourse, representation or warranty, on and after the Reconveyance Date, all right, title and interest of the Trust in and to each and every Receivable now existing and hereafter created, all monies due or to become due with respect thereto (including all Imputed Yield Receivables), all proceeds (as defined in Section 9-306 of the UCC as in effect in the Relevant UCC State) of such Receivables, except for amounts, if any, held by the Trustee pursuant to subsection 12.3(b) of the Pooling and Servicing Agreement. (b) In connection with such transfer, the Trustee agrees to execute and deliver to the Transferor on or prior to the date of this Reconveyance, such UCC termination statements as the Transferor may reasonably request, evidencing the release by the Trust of its lien on the Receivables. 4. Counterparts. This Reconveyance may be executed in two or more counterparts (and by different parties on separate counterparts), each of which shall be an original, but all of which together shall constitute one and the same instrument. 5. Governing Law. THIS RECONVEYANCE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS. IN WITNESS WHEREOF, the undersigned have caused this Reconveyance of Receivables to be duly executed and delivered by their respective duly authorized officers on the day and year first above written. FINGERHUT RECEIVABLES, INC. By ____________________________ Name: Title: THE BANK OF NEW YORK (DELAWARE), Trustee By ____________________________ Name: Title: EXHIBIT G FORM OF AGREED-UPON PROCEDURES The Servicer and Trustee will engage a firm of nationally recognized independent public accountants (who may also render other services to the Servicer or any of its subsidiaries) to perform certain agreed-upon procedures substantially similar to the following: [Describe appropriate procedures] EX-10 3 EXHIBIT 10.A(iii) _________________________________________________________ FINGERHUT RECEIVABLES, INC. Transferor FINGERHUT NATIONAL BANK Servicer and THE BANK OF NEW YORK (DELAWARE) Trustee on behalf of the Series 1997-1 Certificateholders SERIES 1997-1 SUPPLEMENT Dated as of January 21, 1997 to AMENDED AND RESTATED POOLING AND SERVICING AGREEMENT Dated as of January 12, 1997 ____________________________________ FINGERHUT MASTER TRUST Variable Funding Trust Certificate, Series 1997-1, Class A Variable Funding Trust Certificate, Series 1997-1, Class B _________________________________________________________ TABLE OF CONTENTS Page SECTION 1. Designation . . . . . . . . . . . . . . . . . 1 SECTION 2. Definitions . . . . . . . . . . . . . . . . . 1 SECTION 3. Reassignment Terms . . . . . . . . . . . . . . 18 SECTION 4. Delivery and Payment for the Series 1997-1 Certificates . . . . . . . . . . . . . . . . . 19 SECTION 5. Form of Delivery of Series 1997-1 Certificates . . . . . . . . . . . . . . . . . 19 SECTION 6. Article IV of Agreement . . . . . . . . . . . 19 ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS . . . . . . . . . . . . . . . 20 Section 4.4 Rights of Certificateholders . . . . 20 Section 4.5 Collections and Allocation; Payments on Exchangeable Transferor Certificate . . . . . . . . . . . . 20 Section 4.6 Determination of Interest for the Series 1997-1 Certificates . . . . . 21 Section 4.7 Determination of Principal Amounts . 22 Section 4.8 Shared Principal Collections . . . . 24 Section 4.9 Application of Funds on Deposit in the Collection Account for the Certificates . . . . . . . . . . . . 25 Section 4.10 Coverage of Required Amount for the Series 1997-1 Certificates . . . . . 33 Section 4.11 Payment of Certificate Interest . . 34 Section 4.12 Payment of Certificate Principal . . 35 Section 4.13 Investor Charge-Offs . . . . . . . . 35 Section 4.14 Reallocated Principal Collections for the Series 1997-1 Certificates . 36 Section 4.15 Payment Reserve Account . . . . . . 37 SECTION 7. Article V of the Agreement . . . . . . . . . . 38 ARTICLE V DISTRIBUTIONS AND REPORTS TO INVESTOR CERTIFICATEHOLDERS . . . . . . . . . . . 38 Section 5.1 Distributions . . . . . . . . . . . 38 Section 5.2 Certificateholders' Statement . . . 39 SECTION 8. Article VI of the Agreement . . . . . . . . . 41 ARTICLE VI THE CERTIFICATES . . . . . . . . . . . . 41 Section 6.15 Additional Class A Invested Amounts . . . . . . . . . . . . . . 41 Section 6.16 Additional Class B Invested Amounts. . . . . . . . . . . . . . . 43 Section 6.17 Extension . . . . . . . . . . . . . 44 SECTION 9. Series 1997-1 Pay Out Events . . . . . . . . . 46 SECTION 10. Series 1997-1 Termination . . . . . . . . . . 48 SECTION 11. Class A Pre-Payment . . . . . . . . . . . . . 48 SECTION 12. Legends; Transfer and Exchange; Restrictions on Transfer of Series 1997-1 Certificates; Tax Treatment . . . . . . . . . . . . . . . . 49 SECTION 13. Sale of Class B Certificates . . . . . . . . . 54 SECTION 14. Purchases of the Class A Certificates by the Transferor . . . . . . . . . . . . . . . . . . 56 SECTION 15. Increased Costs . . . . . . . . . . . . . . . 56 SECTION 16. Replacement of Certain Investor Certificateholders . . . . . . . . . . . . . . 58 SECTION 17. FCI Note . . . . . . . . . . . . . . . . . . . 59 SECTION 18. GOVERNING LAW . . . . . . . . . . . . . . . . 60 SECTION 19. Instructions in Writing . . . . . . . . . . . 60 SECTION 20. Amendments . . . . . . . . . . . . . . . . . . 60 SECTION 21. Ratification of Agreement . . . . . . . . . . 61 SECTION 22. Counterparts . . . . . . . . . . . . . . . . . 61 EXHIBITS EXHIBIT A Form of Class A Investor Certificate EXHIBIT B Form of Class B Investor Certificate EXHIBIT C Form of Monthly Certificateholders' Statement EXHIBIT D Form of 144A Exchange Notice and Certification EXHIBIT E Form of Extension Notice EXHIBIT F Form of Investor Certificateholder Election Notice SERIES 1997-1 SUPPLEMENT, dated as of January 21, 1997 (this "Series Supplement") by and among FINGERHUT RECEIVABLES, INC., a corporation organized and existing under the laws of the State of Delaware, as Transferor (the "Transferor"), FINGERHUT NATIONAL BANK, a national banking association organized and existing under the laws of the United States, as Servicer (the "Servicer"), and THE BANK OF NEW YORK (DELAWARE), a Delaware banking corporation organized and existing under the laws of the State of Delaware, as trustee (together with its successors in trust thereunder as provided in the Agreement referred to below, the "Trustee") under the Amended and Restated Pooling and Servicing Agreement, dated as of January 12, 1997, as amended, supplemented or otherwise modified from time to time (the "Agreement"), among the Transferor, the Servicer and the Trustee. Section 6.9 of the Agreement provides, among other things, that the Transferor and the Trustee may at any time and from time to time enter into a supplement to the Agreement for the purpose of authorizing the issuance by the Trustee to the Transferor, for execution and redelivery to the Trustee for authentication, of one or more Series of Certificates. Pursuant to this Series Supplement, the Transferor and the Trustee shall create a new Series of Investor Certificates and shall specify the Principal Terms thereof. SECTION 1. Designation. There is hereby created a Series of Investor Certificates to be issued pursuant to the Agreement and this Series Supplement to be known generally as the "Series 1997-1 Certificates." The Series 1997-1 Certificates shall be issued in two Classes, which shall be designated generally as the Variable Funding Trust Certificates, Series 1997-1, Class A (the "Class A Certificates") and the Variable Funding Trust Certificates, Series 1997-1, Class B (the "Class B Certificates"). Series 1997-1 shall be a Series of Variable Funding Certificates. SECTION 2. Definitions. In the event that any term or provision contained herein shall conflict with or be inconsistent with any provision contained in the Agreement, the terms and provisions of this Series Supplement shall govern with respect to the Series 1997-1 Certificates. All Article, Section or subsection references herein shall mean Article, Section or subsections of the Agreement, as amended or supplemented by this Series Supplement, except as otherwise provided herein. All capitalized terms not otherwise defined herein are defined in the Agreement. Each capitalized term defined herein shall relate only to the Series 1997-1 Certificates and no other Series of Certificates issued by the Trust. "Additional Class A Invested Amounts" shall have the meaning specified in Section 6.15 of the Agreement. "Additional Class B Invested Amounts" shall have the meaning specified in Section 6.16 of the Agreement. "Additional Interest" shall mean, at any time of determination, the sum of Class A Additional Interest and Class B Additional Interest. "Amortization Period" shall mean the period beginning on the day following the last day of the Revolving Period and ending on the Series 1997-1 Termination Date. "Amortization Period Commencement Date" shall mean (i) the earlier of the first day of the May 1998 Monthly Period and the Pay Out Commencement Date or (ii) if there is any Extension, the earlier of the date specified as such in the most recent Extension Notice and the Pay Out Commencement Date. "Available Series 1997-1 Imputed Yield Collections" shall have the meaning specified in subsection 4.9(a) of the Agreement. "Base Rate" shall mean, as of any Business Day, the sum of (i) the Class A Certificate Rate, plus (ii) the Series Servicing Fee Percentage. "Benefit Plan" shall mean (i) an employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code or (iii) any entity whose underlying assets include plan assets by reason of a plan's investment in the entity. "Carryover Class A Interest" shall mean any Class A Interest due but not paid on any previous Distribution Date. "Carryover Class B Interest" shall mean any Class B Interest due but not paid on any previous Distribution Date. "Class A Adjusted Invested Amount" shall mean, with respect to any date of determination, an amount equal to the Class A Invested Amount minus the Defeasance Account Balance on such date of determination. "Class A Available Commitment" shall mean initially $417,600,000 but may be increased from time to time to an amount not to exceed the Class A Maximum Invested Amount by written notice from the Transferor and The Chase Manhattan Bank to the Trustee and the Servicer and shall be reduced by the amount of principal payments made to the Class A Certificateholders pursuant to subsection 11(a) of this Series Supplement; provided, however, that if the Class A Certificateholders shall permanently no longer be obligated to make future purchases hereunder, the Class A Available Commitment shall be zero. "Class A Breakage Costs" shall have the meaning specified in subsection 11(b) of this Agreement. "Class A Certificateholders" shall mean the Persons in whose names a Class A Certificate is registered in the Certificate Register. "Class A Certificateholders' Interest" shall mean the portion of the Series 1997-1 Certificateholders' Interest evidenced by the Class A Certificates. "Class A Certificates" shall mean the variable funding certificates executed by the Transferor and authenticated by or on behalf of the Trustee, substantially in the form of Exhibit A hereto. "Class A Certificate Rate" shall mean with respect to each Interest Accrual Period, a per annum rate .35% in excess of the LIBOR Rate, as determined on the related LIBOR Determination Date; provided, however, that on and after the date of receipt of a rating of all or a portion of the Class A Certificates of at least A by Standard & Poor's or A2 by Moody's and for so long as such a rating or higher rating shall remain in effect, the Class A Certificate Rate with respect to such portion of the Class A Invested Amount shall be a per annum rate .25% in excess of the LIBOR Rate, as determined on the related LIBOR Determination Date. "Class A Costs" shall mean with respect to any Business Day, the sum of (a) the increased costs, if any, specified in Section 15 of this Series Supplement, (b) Class A Breakage Costs and (c) the product of (i) a fraction the numerator of which is the actual number of days from but excluding the next preceding Business Day to and including the current Business Day and the denominator of which is the actual number of days in the then current calendar year, (ii) the excess of the Class A Available Commitment over the Class A Invested Amount on such Business Day after giving effect to all transactions on such Business Day and (iii) the sum of (x) .125% multiplied by a fraction, the numerator of which is the portion of the Class A Available Amount which is rated at least A by Standard & Poor's or A2 by Moody's on such Business Day, and the denominator of which is the Class A Available Amount, plus (y) .175% multiplied by a fraction, the numerator of which is the Class A Available Amount minus the portion of the Class A Available Amount which is rated at least A by Standard & Poor's or A2 by Moody's on such Business Day, and the denominator of which is the Class A Available Amount. "Class A Floating Allocation Percentage" shall mean, with respect to any Business Day, the percentage equivalent of a fraction, the numerator of which is the Class A Adjusted Invested Amount on such day after taking into account all adjustments of the Class A Invested Amount on such day and the denominator of which is the greater of (a) the total amount of Principal Receivables in the Trust and the amounts on deposit in the Excess Funding Account as of the end of the preceding Business Day and (b) the sum of the numerators with respect to all Classes of all Series then outstanding used to calculate the applicable allocation percentage; provided, however, that with respect to the allocation of Principal Collections on and prior to the Series 1994-1 Funding Date, the numerator specified above shall be zero. "Class A Interest" shall mean the interest distributable in respect of the Class A Certificates as calculated in accordance with subsection 4.6(a) of the Agreement. "Class A Invested Amount" shall mean, when used with respect to any Business Day, an amount equal to (a) $59,600,000, plus (b) the aggregate principal amount of any Additional Class A Invested Amounts purchased pursuant to Section 6.15 of the Agreement, minus (c) the aggregate amount of principal payments made to Class A Certificateholders through and including such Business Day, minus (d) the aggregate amount of Class A Investor Charge-Offs for all prior Distribution Dates, minus (e) the Class A Invested Amount represented by any Class A Certificates purchased by the Transferor on the secondary market which have been cancelled by the Trustee at the Transferor's request in accordance with Section 14 of this Series Supplement, plus (f) the sum of the aggregate amount allocated with respect to Class A Investor Charge- Offs and available on all prior Distribution Dates pursuant to subsection 4.9(a)(vi) of the Agreement and, with respect to such subsection and pursuant to subsections 4.10(a) and (b) and Section 4.14 of the Agreement, and the amount designated pursuant to subsection 4.13(c) of the Agreement for the purpose of reinstating amounts reduced pursuant to the foregoing clause (d). "Class A Investor Charge-Offs" shall have the meaning specified in subsection 4.13(b) of the Agreement. "Class A Investor Percentage" shall mean, for any Business Day, (a) with respect to Imputed Yield Receivables and Defaulted Receivables at any time or Principal Receivables during the Revolving Period, the Class A Floating Allocation Percentage and (b) with respect to Principal Receivables during the Amortization Period, the Fixed/Floating Allocation Percentage. "Class A Maximum Invested Amount" shall mean $900,000,000 less the Class B Maximum Required Amount. "Class A Outstanding Principal Amount" shall mean with respect to the Class A Certificates, when used with respect to any Business Day, an amount equal to (a) $59,600,000, plus (b) the aggregate principal amount of any Additional Class A Invested Amounts purchased by the Class A Certificateholders on or prior to such Business Day pursuant to Section 6.15 of the Agreement minus (c) the aggregate amount of principal payments made to the Class A Certificateholders on or prior to such Business Day. "Class A Percentage" shall mean a fraction the numerator of which is the Class A Invested Amount and the denominator of which is the sum of the Class A Invested Amount and the Class B Invested Amount. "Class A Principal" shall mean the principal distributable in respect of the Class A Certificates as calculated in accordance with subsection 4.7(a) of the Agreement. "Class A Required Amount" shall mean the amount determined by the Servicer on each Business Day equal to the excess, if any, of (x) the sum of (i) the amount described in subsection 4.9(a)(i)(y) of the Agreement for such Business Day, (ii) the Class A Floating Allocation Percentage of the Servicing Fee for such Business Day, (iii) the Class A Floating Allocation Percentage of the Default Amount, if any, for such Business Day and, to the extent not previously paid, for any previous Business Day in such Monthly Period, (iv) on each Transfer Date the Class A Percentage of the Series Allocation Percentage of the Adjustment Payment required to be made by the Transferor but not made on such Transfer Date and (v) the amount of unreimbursed Class A Investor Charge-Offs over (y) the Available Series 1997-1 Imputed Yield Collections plus any Excess Imputed Yield Collections from other Series and any Transferor Imputed Yield Collections allocated with respect to the amounts described in clauses (x)(i) through (v). "Class B Certificateholder" shall mean the Person in whose name a Class B Certificate is registered in the Certificate Register. "Class B Certificateholders' Interest" shall mean the portion of the Series 1997-1 Certificateholders' Interest evidenced by the Class B Certificates. "Class B Certificate Rate" shall mean with respect to each Interest Accrual Period, initially zero; provided, however, that such certificate rate may be increased pursuant to the terms of a supplemental agreement or amended and restated series supplement entered into in accordance with Section 13 of this Series Supplement. "Class B Certificates" shall mean any of the certificates executed by the Transferor and authenticated by or on behalf of the Trustee, substantially in the form of Exhibit B hereto. "Class B Daily Principal Amount" shall have the meaning specified in subsection 4.9(c)(ii) of the Agreement. "Class B Fixed/Floating Allocation Percentage" shall mean for any Business Day the percentage equivalent of a fraction, the numerator of which is the Class B Invested Amount at the end of the last day of the Revolving Period (or, if the Pay Out Commencement Date occurs prior to the Series 1994-1 Funding Date, the Class B Invested Amount at the end of the day on the Series 1994-1 Funding Date) and the denominator of which is the greater of (a) the sum of the aggregate amount of Principal Receivables and the amount on deposit in the Excess Funding Account at the end of the preceding Business Day and (b) the sum of the numerators used to calculate the allocation percentages with respect to Principal Collections for all Series; provided, however, that with respect to the allocation of Principal Collections on and prior to the Series 1994-1 Funding Date, the numerator specified above shall be zero. "Class B Floating Allocation Percentage" shall mean, with respect to any Business Day, the percentage equivalent of a fraction, the numerator of which is the Class B Invested Amount as of the end of the preceding Business Day and the denominator of which is the greater of (a) the total amount of Principal Receivables in the Trust and the amount on deposit in the Excess Funding Account as of the end of the preceding Business Day and (b) the sum of the numerators with respect to all Classes of all Series then outstanding used to calculate the applicable allocation percentage; provided, however, that with respect to the allocation of Principal Collections on and prior to the Series 1994-1 Funding Date, the numerator specified above shall be zero. "Class B Interest" shall mean the interest distributable in respect of the Class B Certificates as calculated in accordance with subsection 4.6(b) of the Agreement. "Class B Invested Amount" shall mean, when used with respect to any Business Day, an amount equal to (a) upon the initial issuance of the Class B Certificate, zero, plus (b) the aggregate principal amount of any Additional Class B Invested Amounts pursuant to Section 6.16 of the Agreement, minus (c) the aggregate amount of principal payments made to Class B Certificateholders prior to such Business Day, minus (d) the aggregate amount of Class B Investor Charge-Offs for all prior Distribution Dates pursuant to subsections 4.13(a) and 4.13(c) of the Agreement, minus (e) the aggregate amount of Reallocated Principal Collections for all prior Business Days, plus (f) the sum of the aggregate amount allocated and available on all prior Business Days pursuant to subsection 4.9(a)(vii) of the Agreement and, with respect to such subsection, pursuant to subsections 4.10(a) and (b) of the Agreement, for the purpose of reinstating amounts reduced pursuant to the foregoing clauses (d) and (e). "Class B Investor Charge-Offs" shall have the meaning specified in subsection 4.13(a) of the Agreement. "Class B Investor Percentage" shall mean, for any Distribution Date, (a) with respect to Imputed Yield Receivables and Defaulted Receivables at any time or Principal Receivables during the Revolving Period, the Class B Floating Allocation Percentage and (b) with respect to Principal Receivables during the Amortization Period, the Fixed/Floating Allocation Percentage. "Class B Maximum Required Amount" shall mean initially zero; provided, however, that such Class B Maximum Required Amount may be increased pursuant to the terms of a supplemental agreement or amended and restated series supplement entered into in accordance with Section 13 of this Series Supplement. "Class B Outstanding Principal Amount" shall mean, when used with respect to any Business Day, an amount equal to (a) the aggregate principal amount of any Additional Class B Invested Amounts pursuant to Section 6.16 of the Agreement, minus (b) the aggregate amount of principal payments made to Class B Certificateholders prior to such Business Day. "Class B Percentage" shall mean a fraction the numerator of which is the Class B Invested Amount and the denominator of which is the sum of the Class A Invested Amount and the Class B Invested Amount. "Class B Principal" shall mean the principal distributable in respect of the Class B Certificates as calculated in accordance with subsection 4.7(b) of the Agreement. "Class B Principal Payment Commencement Date" shall mean the earlier of (a) the first Distribution Date in an Amortization Period on which the Class A Invested Amount equals or is reduced to zero or, if there are no Principal Collections allocable to the Series 1997-1 Certificates remaining after payments have been made to the Class A Certificates on such Distribution Date, the Distribution Date following the Distribution Date on which the Class A Invested Amount is paid in full and (b) the Distribution Date following a sale or repurchase of the Receivables as set forth in Section 2.4(e), 9.2, 10.2, 12.1 or 12.2 of the Agreement or Section 3 of this Series Supplement. "Closing Date" shall mean January 21, 1997. "Defeasance Account" shall have the meaning specified in subsection 11(a) of this Series Supplement. "Defeasance Account Balance" shall mean, with respect to any date of determination, the principal amount, if any, on deposit in the Defeasance Account on such date of determination. "Distribution Date" shall mean February 20, 1997, and the twentieth day of each month thereafter, or if such day is not a Business Day, the next succeeding Business Day; provided, that the final Distribution Date with respect to the payment of principal and interest shall be the Scheduled Series 1997-1 Termination Date. "Early Amortization Period" shall mean the period beginning on the day on which a Pay Out Event occurs or is deemed to have occurred and ending on the earlier of (i) the date on which the Class A Invested Amount and the Class B Invested Amount have been paid in full and (ii) the Series 1997-1 Termination Date. "Election Date" shall have the meaning specified in subsection 6.17(a) of the Agreement. "Election Notice" shall have the meaning specified in subsection 6.17(a) of the Agreement. "Enhancement" shall mean, with respect to the Class A Certificates, the subordination of the Class B Invested Amount (including any portion thereof arising pursuant to Section 6.16 of the Agreement in connection with the cancellation of the Series 1994-1 Class D Investor Certificates). "Eurocurrency Reserve Requirements" shall mean, for any day, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System. "Excess Imputed Yield Collections" shall mean, with respect to any Business Day, as the context requires, either (x) the amount described in subsection 4.9(a)(x) of the Agreement allocated to the Series 1997-1 Certificates but available to cover shortfalls in amounts paid from Imputed Yield Collections for other Series, if any, or (y) the aggregate amount of Imputed Yield Collections allocable to other Series in excess of the amounts necessary to make required payments with respect to such Series, if any, and available to cover shortfalls with respect to the Series 1997-1 Certificates. "Extension" shall mean the procedure by which the Investor Certificateholders consent to the extension of the Revolving Period to the new Amortization Period Commencement Date set forth in the Extension Notice, pursuant to Section 6.17 of the Agreement. "Extension Date" shall mean April 20, 1998 or if an Extension has already occurred, the date of the next Extension Date set forth in the Extension Notice relating to the Extension then in effect (or, if any such date is not a Business Day, the next preceding Business Day). "Extension Notice" shall have the meaning specified in subsection 6.17(a) of the Agreement. "Extension Opinion" shall have the meaning specified in subsection 6.17(a) of the Agreement. "Extension Tax Opinion" shall have the meaning specified in subsection 6.17(a) of the Agreement. "FCI Note" shall have the meaning specified in Section 17 of this Series Supplement. "FCI Note Required Amount" shall have the meaning specified in Section 17 of this Series Supplement. "Fixed/Floating Allocation Percentage" shall mean for any Business Day the percentage equivalent of a fraction, the numerator of which is the Invested Amount at the end of the last day of the Revolving Period (or, if the Pay Out Commencement Date occurs prior to the Series 1994-1 Funding Date, the Invested Amount at end of the day on the Series 1994-1 Funding Date) and the denominator of which is the greater of (a) the sum of the aggregate amount of Principal Receivables and the amount on deposit in the Excess Funding Account as of the end of the preceding Business Day and (b) the sum of the numerators with respect to all Classes of all Series then outstanding used to calculate the applicable allocation percentage; provided, however, that with respect to the allocation of Principal Collections on and prior to the Series 1994-1 Funding Date the numerator specified above shall be zero. "Floating Allocation Percentage" shall mean for any Business Day the sum of the applicable Class A Floating Allocation Percentage and Class B Floating Allocation Percentage for such Business Day. "Interest Accrual Period" shall mean a Monthly Period and, with respect to a Distribution Date, the preceding Monthly Period; provided, however, that the initial Interest Accrual Period shall be the period from the Closing Date to and including the last day of the Monthly Period preceding the initial Distribution Date. "Invested Amount" shall mean, when used with respect to any Business Day, an amount equal to the sum of (a) the Class A Invested Amount as of such Business Day and (b) the Class B Invested Amount as of such Business Day; provided, however, that for purposes of determining the Servicing Fee and the Aggregate Invested Amount, the Invested Amount shall mean an amount equal to the sum of the Class A Adjusted Invested Amount as of such Business Day and the Class B Invested Amount as of such Business Day; provided, further, that for so long as the Series 1994-1 Certificates are outstanding, for purposes of determining the Minimum Aggregate Principal Receivables under the Agreement, the Invested Amount shall be deemed to be zero. "Investment Earnings" shall mean, with respect to any Business Day, the investment earnings on amounts on deposit in (i) the Payment Reserve Account, deposited in the Collection Account pursuant to subsection 4.15(c) of the Agreement and (ii) the Defeasance Account, deposited in the Collection Account pursuant to subsection 11(a) of this Series Supplement. "Investor Certificateholder" shall mean the Holder of record of an Investor Certificate of Series 1997-1. "Investor Certificates" shall mean the Class A Certificates and the Class B Certificates. "Investor Charge-Offs" shall mean the sum of Class A Investor Charge-Offs and Class B Investor Charge- Offs. "Investor Default Amount" shall mean, with respect to each Business Day, an amount equal to the product of the Default Amount identified since the prior reporting date and the Floating Allocation Percentage applicable for such Business Day. "Investor Percentage" shall mean for any Business Day, (a) with respect to Imputed Yield Collections and Defaulted Amounts at any time or Principal Collections during the Revolving Period, the Floating Allocation Percentage and (b) with respect to Principal Collections during the Amortization Period, the Fixed/Floating Allocation Percentage. "LIBOR Base Rate" shall mean, for any Interest Accrual Period, the rate for deposits in United States dollars for a period equal to such Interest Accrual Period (commencing on the first day of the relevant Interest Accrual Period) which appears on Telerate Page 3750 as of 11:00 A.M., London time, on the LIBOR Determination Date for such Interest Accrual Period; provided that, the LIBOR Base Rate for the Initial Interest Accrual Period shall be 5.44531%. If such rate does not appear on Telerate Page 3750, the rate for such Interest Accrual Period will be determined on the basis of the rates at which deposits in United States dollars are offered by the Reference Banks (as defined below) at approximately 11:00 A.M., London time, on such LIBOR Determination Date to prime banks in the London interbank market for a period equal to such Interest Accrual Period (commencing on the first day of such Interest Accrual Period). The Trustee will request the principal London office of each of the Reference Banks to provide a quotation of its rate. If at least two such quotations are provided, the rate for such Interest Accrual Period will be the arithmetic mean of the quotations. If fewer than two quotations are provided, the rate for such Interest Accrual Period will be the arithmetic mean of the rates quoted by major banks in New York City, selected by the Trustee, at approximately 11:00 A.M., New York City time, on the first day of such Interest Accrual Period for loans in United States dollars to leading European banks for a period equal to such Interest Accrual Period (commencing on the first day of such Interest Period). As used in this definition, "Reference Banks" means four major banks in the London interbank market selected by the Trustee. "LIBOR Determination Date" shall mean the second Business Day prior to the commencement of each Interest Accrual Period. For purposes of this definition, a Business Day is any day on which banks in London and New York are open for the transaction of international business. "LIBOR Rate" shall mean, with respect to each day during each Interest Accrual Period, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): LIBOR Base Rate ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Minimum Rating Condition" shall mean that a rating of at least BBB by Standard & Poor's or Baa2 by Moody's has been obtained with respect to the Class A Maximum Invested Amount and has not been withdrawn or reduced as a result of the failure to maintain the Stated Class B Amount. "Minimum Retained Percentage" shall mean 2%. "Minimum Transferor Percentage" shall mean 0%; provided, however, that in certain circumstances such percentage may be increased. "Monthly Period" shall have the meaning specified in the Agreement, except that the first Monthly Period with respect to the Series 1997-1 Certificates shall begin on and include the Closing Date and shall end on and include the last day of the then current fiscal month of the Transferor. "Net Revolving Principal Collections" shall have the meaning specified in subsection 4.9(b) of the Agreement. "Negative Carry Amount" shall have the meaning specified in subsection 4.10(a) of the Agreement. "Paying Agent" shall mean, for the Series 1997-1 Certificates, The Bank of New York. "Payment Reserve Account" shall have the meaning specified in subsection 4.15 of the Agreement. "Pay Out Commencement Date" shall mean the date on which a Trust Pay Out Event is deemed to occur pursuant to Section 9.1 of the Agreement or a Series 1997-1 Pay Out Event is deemed to occur pursuant to Section 9 of this Series Supplement. "Portfolio Yield" shall mean for the Series 1997-1 Certificates, with respect to any Monthly Period, the annualized percentage equivalent of a fraction, the numerator of which is an amount equal to the sum of the aggregate amount of Available Series 1997-1 Imputed Yield Collections for such Monthly Period (not including the Floating Allocation Percentage of the portion of Imputed Yield Collections for such period described in clause (D) of the definition thereof or the amounts on deposit in the Payment Reserve Account, if any), calculated on a cash basis, minus the aggregate Investor Default Amount for such Monthly Period and the Series Allocation Percentage of any Adjustment Payments which the Transferor is required but fails to make pursuant to the Pooling and Servicing Agreement for such Monthly Period, and the denominator of which is the average daily Invested Amount for such Monthly Period. "Principal Shortfalls" shall mean on any Business Day (i) prior to the Amortization Period Commencement Date, zero and (ii) after the Amortization Period Commencement Date, the Invested Amount of the Class then receiving principal payments after the application of Principal Collections on such Business Day (less the amount then on deposit in the Principal Account for the benefit of such Class); provided, however, that on and prior to the Series 1994-1 Funding Date the Principal Shortfall for Series 1997-1 shall be equal to the lesser of the amount specified above and the maximum amount that will allow Shared Principal Collection allocable with respect to any principal shortfall for the Series 1994-1 Certificates to be equal to the full amount of the principal shortfall for such Series. "Rating Agency" shall mean with respect to any Business Day each statistical rating agency selected by the Transferor to rate the Class A Certificates which on such Business Day has issued a rating which is outstanding with respect to the Class A Certificates. "Rating Agency Condition" shall mean, at any time at which the Class A Certificates are rated by a Rating Agency, the written confirmation of the Rating Agency that a specified event or modification of the terms of the Investor Certificates will not result in the withdrawal or downgrade of the rating of the Class A Certificates then in effect. "Reallocated Principal Collections" shall have the meaning specified in subsection 4.14 of the Agreement. "Required Amount" shall have the meaning specified in subsection 4.10(b) of the Agreement. "Revolving Period" shall mean the period from and including the Closing Date to, but not including, the Amortization Period Commencement Date. "Scheduled Series 1997-1 Termination Date" shall mean the October 2002 Distribution Date, unless (i) a different date shall be set forth in any Extension Notice, or (ii) a different date shall be specified in a written notice from the Transferor to the Trustee as necessary to satisfy the Minimum Rating Condition. "Revolving Principal Collections" shall have the meaning specified in subsection 4.9(b) of the Agreement. "Series 1994-1 Certificates" shall mean the investor certificates issued pursuant to the Series 1994-1 Supplement. "Series 1994-1 Funding Date" shall mean the first Business Day on which an amount equal to the invested amount of the Series 1994-1 Class A, Class B and Class C Investor Certificates has been deposited in the Principal Account for the benefit of such Series 1994-1 Certificates. "Series 1994-1 Supplement" shall mean the Series 1994-1 Supplement, dated as of June 29, 1994 by and among Fingerhut Receivables, Inc., as Transferor, Fingerhut Corporation (as predecessor servicer to Fingerhut National Bank), as Servicer, and The Bank of New York (Delaware), as Trustee under the Agreement, as it may be amended from time to time. "Series 1997-1" shall mean the Series of the Fingerhut Master Trust represented by the Series 1997-1 Certificates. "Series 1997-1 Certificates" shall mean the Class A Certificates and the Class B Certificates. "Series 1997-1 Certificateholder" shall mean the holder of record of any Series 1997-1 Certificate. "Series 1997-1 Certificateholders' Interest" shall have the meaning specified in Section 4.4 of the Agreement. "Series 1997-1 Pay Out Event" shall have the meaning specified in Section 9 of this Series Supplement. "Series 1997-1 Termination Date" shall mean the earlier to occur of (i) the day after the Distribution Date on which the Series 1997-1 Certificates are paid in full, or (ii) the Scheduled Series 1997-1 Termination Date. "Series Servicing Fee Percentage" shall mean 2.00% per annum. "Servicing Fee" shall mean for any Business Day, an amount equal to the product of (i) a fraction the numerator of which is the actual number of days from but excluding the next preceding Business Day to and including the current Business Day and the denominator of which is the actual number of days in the then current calendar year, (ii) the applicable Series Servicing Fee Percentage and (iii) the Invested Amount on such Business Day after giving effect to all transactions on such Business Day. "Shared Principal Collections" shall mean, as the context requires, either (a) the amount allocated to the Series 1997-1 Certificates which, in accordance with subsections 4.9(b) and 4.9(c)(iii) of the Agreement, may be applied in accordance with Section 4.3(e) of the Agreement or (b) the amounts allocated to the investor certificates (other than Transferor Retained Certificates) of other Series which the applicable Series Supplements for such Series specify are to be treated as "Shared Principal Collections" and which may be applied to cover Principal Shortfalls with respect to the Series 1997-1 Certificates. "Stated Class B Amount" shall mean initially zero; provided, however, that such Stated Class B Amount may be increased pursuant to the terms of a supplemental agreement or amended and restated series supplement entered into in accordance with Section 13 of this Series Supplement or may be increased by written notice from the Transferor to the Trustee in connection with obtaining one or more ratings of the Class A Certificates and shall thereafter be the amount specified in such written notice. "Targeted Holder" shall mean (i) each holder of a right to receive interest or principal with respect to investor certificates (or other interests in the Trust), including the Class A Certificates, other than certificates (or other such interests) with respect to which an opinion is rendered that such certificates (or other such interests) will be treated as debt for Federal income tax purposes and (ii) any holder of a right to receive any amount in respect of the Transferor Interest; provided, that any person holding more than one interest each of which would cause such person to be a Targeted Holder shall be treated as a single Targeted Holder. "Termination Payment Date" shall mean the earlier of the first Distribution Date following the liquidation or sale of the Receivables as a result of an Insolvency Event and the occurrence of the Scheduled Series 1997-1 Termination Date. "Transferor Imputed Yield Collections" shall mean on any Business Day the product of (a) the Imputed Yield Collections for such Business Day, (b) the Transferor Percentage and (c) the Series Allocation Percentage. "Transferor Retained Certificates" shall mean investor certificates of any Series, including the Class B Certificate, which the Transferor retains, but only to the extent that and for so long as the Transferor is the Holder of such Certificates. SECTION 3. Reassignment Terms. The Series 1997-1 Certificates shall be subject to termination by the Transferor at its option, in accordance with the terms specified in subsection 12.2(a) of the Agreement, on any Distribution Date on or after the Distribution Date on which the Class A Invested Amount is reduced to an amount less than or equal to 10% of the sum of the highest invested amount during the Revolving Period of the Class A Certificates plus, to the extent that the Class B Certificates, any portion thereof or any other Class of Series 1997-1 Certificates is sold by the Transferor in accordance with the provisions of Section 13 of this Series Supplement, the highest invested amount during the Revolving Period of such Class B Certificates or other Class of Series 1997-1 Certificates sold by the Transferor. The deposit required in connection with any such termination and final distribution shall be equal to the sum of the Class A Invested Amount, the Class B Invested Amount and the invested amount of any other Class of Series 1997-1 Certificates then outstanding plus accrued and unpaid interest on the Series 1997-1 Certificates through the day prior to the Distribution Date on which the final distribution occurs. SECTION 4. Delivery and Payment for the Series 1997-1 Certificates. The Transferor shall execute and deliver the Series 1997-1 Certificates to the Trustee for authentication in accordance with Section 6.1 of the Agreement. The Trustee shall deliver the Series 1997-1 Certificates to or upon the order of the Transferor when authenticated in accordance with Section 6.2 of the Agreement. SECTION 5. Form of Delivery of Series 1997-1 Certificates. The Class A Certificates and the Class B Certificates shall be delivered as Registered Certificates as provided in Section 6.1 of the Agreement. SECTION 6. Article IV of Agreement. Sections 4.1, 4.2 and 4.3 of the Agreement shall read in their entirety as provided in the Agreement. Article IV of the Agreement (except for Sections 4.1, 4.2 and 4.3 thereof) shall read in its entirety as follows and shall be applicable only to the Series 1997-1 Certificates: ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS Section 4.4 Rights of Certificateholders. The Series 1997-1 Certificates shall represent undivided interests in the Trust, including the right to receive, to the extent necessary to make the required payments with respect to such Series 1997-1 Certificates at the times and in the amounts specified in this Agreement, (a) the Floating Allocation Percentage and the Fixed/Floating Allocation Percentage (as applicable from time to time) of Collections (including Imputed Yield Collections) available in the Collection Account, (b) funds allocable to the Series 1997-1 Certificates on deposit in the Excess Funding Account and (c) funds on deposit in the Interest Funding Account, the Principal Account, the Distribution Account, the Payment Reserve Account and the Defeasance Account (for such Series, the "Series 1997-1 Certificateholders' Interest"). The Class B Invested Amount shall be subordinated to the Class A Certificates to the extent provided in this Article IV. Except in connection with a payment of Class B Daily Principal pursuant to subsection 4.9(e) of this Agreement, the Class B Certificates will not have the right to receive payments of principal until the Class A Invested Amount has been paid in full. Section 4.5 Collections and Allocation; Payments on Exchangeable Transferor Certificate. (a) Collections. The Servicer will apply or will instruct the Trustee to apply all funds on deposit in the Collection Account and the Excess Funding Account allocable to the Series 1997-1 Certificates, and all funds on deposit in the Interest Funding Account, the Principal Account, the Distribution Account, the Payment Reserve Account and the Defeasance Account maintained for this Series, as described in this Article IV. (b) Payments to the Holder of the Exchangeable Transferor Certificate. On each Business Day, the Servicer shall determine whether a Pay Out Event is deemed to have occurred with respect to the Series 1997-1 Certificates, and the Servicer shall allocate and pay Collections in accordance with the Daily Report with respect to such Business Day to the Holder of the Exchangeable Transferor Certificate as follows: (i) For each Business Day with respect to the Revolving Period after the Series 1994-1 Funding Date, in addition to amounts allocated and paid to the Holder of the Exchangeable Transferor Certificate pursuant to subsection 4.3(b) of the Agreement, an amount equal to (w) the product of the Floating Allocation Percentage and the amount of Principal Collections on such Business Day, minus (x) the portion thereof constituting a part of Net Revolving Principal Collections to be deposited in the Defeasance Account pursuant to subsection 4.9(b) of the Agreement, minus (y) the Reallocated Principal Collections for such Business Day minus (z) the amount of any Class B Daily Principal for such Business Day; and (ii) For each Business Day during the Amortization Period, the amount of payments of Principal Collections made to the Holder of the Exchangeable Transferor Certificate shall be determined only as provided in subsection 4.3(b) of the Agreement. Notwithstanding the foregoing, amounts payable to the Transferor pursuant to subsection 4.5(b)(i) of the Agreement shall instead be deposited in the Excess Funding Account to the extent necessary to prevent the Transferor Interest from being less than the Minimum Transferor Interest. The allocations to be made pursuant to this subsection 4.5(b) also apply to deposits into the Collection Account that are treated as Collections, including Adjustment Payments, payment of the reassignment price pursuant to Section 2.4(e) of the Agreement and proceeds from the sale, disposition or liquidation of the Receivables pursuant to Section 9.2, 10.2, 12.1 or 12.2 of the Agreement and Section 3 of this Series Supplement. Such deposits to be treated as Collections will be allocated as Imputed Yield Receivables or Principal Receivables as provided in the Agreement. Section 4.6 Determination of Interest for the Series 1997-1 Certificates. (a) The amount of interest (the "Class A Interest") allocable to the Class A Certificates with respect to any Business Day shall be an amount equal to the product of (i) the Class A Certificate Rate and (ii) a fraction, the numerator of which is the actual number of days from and including the immediately preceding Business Day to but excluding such Business Day, and the denominator of which is 360 and (iii) the Class A Outstanding Principal Amount on such Business Day after giving effect to all transactions on such Business Day. (b) The amount of interest (the "Class B Interest") allocable to the Class B Certificates with respect to any Business Day shall be an amount equal to the product of (i) the Class B Certificate Rate and (ii) a fraction, the numerator of which is the actual number of days from and including the immediately preceding Business Day to but excluding such Business Day, and the denominator of which is 360 and (iii) the Class B Outstanding Principal Amount on such Business Day after giving effect to all transactions on such Business Day. Section 4.7 Determination of Principal Amounts. (a) The amount of principal (the "Class A Principal") distributable from the Distribution Account with respect to the Class A Certificates on each Distribution Date with respect to (A) the Revolving Period shall be an amount equal to the amounts deposited into the Principal Account from the Defeasance Account pursuant to Section 11 of this Series Supplement and (B) the Amortization Period shall be equal to an amount calculated as follows: the sum of (i) an amount equal to the product of the Fixed/Floating Allocation Percentage and the aggregate amount of Principal Collections (less the amount of Reallocated Principal Collections) with respect to the preceding Monthly Period (or, in the case of the Distribution Date in the first Monthly Period in the Amortization Period following the Series 1994-1 Funding Date, the Fixed/Floating Allocation Percentage of Principal Collections from the day following the Series 1994-1 Funding Date), (ii) any amount on deposit in the Excess Funding Account allocated to the Class A Certificates pursuant to subsection 4.9(d) of the Agreement with respect to the preceding Monthly Period, (iii) the amount, if any, allocated to the Class A Certificates pursuant to subsections 4.9(a)(iv), (v), (vi) and (vii) of the Agreement and, with respect to such subsections, pursuant to subsections 4.10(a) and (b) and 4.14 of the Agreement with respect to such Distribution Date and, (iv) the amount of Shared Principal Collections allocated to the Class A Certificates with respect to such Distribution Date and pursuant to subsection 4.3(e) and Section 4.8 of the Agreement; provided, however, that with respect to any Business Day, Class A Principal may not exceed the Class A Invested Amount; provided, further, that with respect to the Scheduled Series 1997-1 Termination Date, the Class A Principal shall be an amount equal to the Class A Invested Amount. (b) The amount of principal (the "Class B Principal") distributable from the Distribution Account with respect to the Class B Certificates on each Distribution Date, beginning with the Class B Principal Payment Commencement Date, or in the case of distributions of Class B Daily Principal pursuant to the last proviso of this subsection 4.7(b) of the Agreement, on each Business Day, shall equal an amount calculated as follows: the sum of (i) an amount equal to the product of the Fixed/Floating Allocation Percentage and the aggregate amount of Principal Collections (less the amount of Reallocated Principal Collections) with respect to the preceding Monthly Period (or, in the case of the first Distribution Date in the Amortization Period following the date on which an amount equal to the Class A Invested Amount is paid to the Class A Certificateholders in respect of Class A Principal, the Fixed/Floating Allocation Percentage of Principal Collections from the date on which such deposit is made), (ii) any amount on deposit in the Excess Funding Account allocated to the Class B Certificates pursuant to subsection 4.9(d) of the Agreement with respect to the preceding Monthly Period, (iii) the amount, if any, allocated to the Class B Certificates pursuant to subsections 4.9(a)(iv), (v) and (vii) of the Agreement and, with respect to such subsections, pursuant to subsections 4.10(a) and (b) of the Agreement with respect to such Distribution Date and (iv) the amount of Shared Principal Collections allocated to the Class B Certificates with respect to the preceding Monthly Period pursuant to subsection 4.3(e) and Section 4.8 of the Agreement on and after the Class B Principal Payment Commencement Date; provided, however, that with respect to any Distribution Date, Class B Principal may not exceed the Class B Invested Amount; provided, further, that with respect to the Scheduled Series 1997-1 Termination Date, the Class B Principal shall be an amount equal to the Class B Invested Amount; provided further, that on any Business Day during any period other than an Early Amortization Period, the Transferor may designate that either (x) an amount up to the lesser of (i) the excess of the Class B Invested Amount over the Stated Class B Amount on such day after taking into account all adjustments of the Class A Invested Amount on such day and (ii) (I) during the Revolving Period an amount equal to (x) the product of the Class B Floating Allocation Percentage and the amount of Principal Collections on such Business Day minus (y) Reallocated Principal Collections on such Business Day or (II) after the Amortization Period Commencement Date an amount equal to (x) the product of the Fixed/Floating Allocation Percentage and the amount of Principal Collections on such Business Day minus (y) the amount with of Principal Collections to be applied with respect to Class A Principal on such Business Day minus (z) Reallocated Principal Collections on such Business Day (such designated amount, the "Class B Daily Principal") shall be distributed in accordance with subsection 4.9(e) or (y) an amount up to the excess of the Class B Invested Amount over the Stated Class B Amount on such day after taking into account all adjustments of the Class B Invested Amount on such day, shall be subtracted from the Class B Invested Amount and added to the Transferor Interest. Section 4.8 Shared Principal Collections. Shared Principal Collections allocated to the Series 1997-1 Certificates and to be applied pursuant to subsections 4.9(b), 4.9(c)(i)(z) and 4.9(c)(ii)(z) for any Business Day shall mean an amount equal to the sum of (i) the product of (x) Shared Principal Collections for all Series for such Business Day and (y) a fraction, the numerator of which is the Principal Shortfall for the Series 1997-1 Certificates for such Business Day and the denominator of which is the aggregate amount of Principal Shortfalls for all Series for such Business Day and (ii) Shared Principal Collections for all Series for such Business Day, less the amount thereof to be applied with respect to Principal Shortfalls for all Series for such Business Day to the extent provided below. Prior to the Pay Out Commencement Date and with respect to the period on and after the April 1997 Distribution Date, if the Minimum Rating Condition is satisfied with respect to the Class A Certificates, the amounts specified in clause (ii) of the preceding sentence shall be applied to the Series 1997-1 Certificates solely at the option of the Transferor in accordance with Section 4.3(e) of the Agreement. On and after the April 1997 Distribution Date, if the Minimum Rating Condition is not satisfied with respect to the Class A Certificates, the Transferor, promptly following receipt by the Servicer and the Trustee of written directions from Holders of Series 1997-1 Certificates evidencing Undivided Interests aggregating more than 50% of the Class A Invested Amount, shall direct the Servicer and the Trustee that the amounts specified in clause (ii) of the first sentence of this Section 4.8 be deposited in the Defeasance Account or the Principal Account as specified in subsections 4.9(b) and 4.9(c)(i) and (ii) of the Agreement. If the Minimum Rating Condition is not satisfied on the May 1997 Distribution Date, the amounts deposited in the Defeasance Account or the Principal Account pursuant to the preceding sentence shall be applied to make principal payments with respect to the Class A Certificates or, if the Minimum Rating Condition is satisfied on the May 1997 Distribution Date, such amounts shall be paid to the Holder of the Exchangeable Transferor Certificate. On and after the May 1997 Distribution Date, if the Minimum Rating Condition was not satisfied on the May 1997 Distribution Date with respect to the Class A Certificates, the Transferor shall direct the Servicer and the Trustee that the amounts specified in clause (ii) of the first sentence of this Section 4.8 be deposited in the Defeasance Account or the Principal Account as specified in subsection 4.9(b) and 4.9(c)(i) and (ii) of the Agreement for distribution to the Certificateholders on each subsequent Distribution Date. Section 4.9 Application of Funds on Deposit in the Collection Account for the Certificates. (a) On each Business Day, the Servicer shall deliver to the Trustee a Daily Report in which it shall instruct the Trustee to withdraw, and the Trustee, acting in accordance with such instructions, shall withdraw from the Collection Account, to the extent of the sum of (w) the Floating Allocation Percentage of Imputed Yield Collections available in the Collection Account, (x) Investment Earnings on deposit in the Collection Account and (y) amounts on deposit in the Payment Reserve Account, if any, if and to the extent so designated by the Transferor (the "Available Series 1997-1 Imputed Yield Collections") the amounts set forth in subsections 4.9(a)(i) through 4.9(a)(x) of the Agreement. (i) Class A Interest. On each Business Day during a Monthly Period, the Trustee, acting in accordance with instructions from the Servicer, shall allocate to the Class A Certificates and withdraw first from the Collection Account and then from the Payment Reserve Account and deposit into the Interest Funding Account, to the extent of the Available Series 1997-1 Imputed Yield Collections, an amount equal to the lesser of (x) the Available Series 1997-1 Imputed Yield Collections and (y) the sum of (A) the Class A Interest for such Business Day plus (B) the excess, if any, of the amount required to be deposited pursuant to clause (A) above on each prior Business Day over the amount on deposit in the Interest Funding Account with respect thereto on such Business Day plus (C) an amount equal to the portion of Carryover Class A Interest attributable to amounts required to be deposited pursuant to clause (A) above that were not so deposited prior to such Business Day minus the amounts required to be deposited pursuant to clause (B) above. (ii) Class B Interest. On each Business Day during a Monthly Period, the Trustee, acting in accordance with instructions from the Servicer, shall allocate to the Class B Certificates and withdraw first from the Collection Account and then from the Payment Reserve Account and deposit into the Interest Funding Account, to the extent of the Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawal pursuant to subsection 4.9(a)(i) of the Agreement, an amount equal to the lesser of (x) any such remaining Available Series 1997-1 Imputed Yield Collections and (y) the sum of (A) the Class B Interest for such Business Day plus (B) the excess, if any, of the amount required to be deposited pursuant to clause (A) above on each prior Business Day over the amount on deposit in the Interest Funding Account with respect thereto on such Business Day plus (C) an amount equal to the portion of Carryover Class B Interest attributable to amounts required to be deposited pursuant to clause (A) above that were not so deposited prior to such Business Day minus the amounts required to be deposited pursuant to clause (B) above. (iii) Investor Servicing Fee. On each Business Day, the Trustee, acting in accordance with instructions from the Servicer, shall withdraw first from the Collection Account and then from the Payment Reserve Account and distribute to the Servicer, to the extent of any Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawals pursuant to subsections 4.9(a)(i) and (ii) of the Agreement, an amount equal to the lesser of (x) any such remaining Available Series 1997-1 Imputed Yield Collections and (y) the Servicing Fee for such Business Day plus any Servicing Fees due with respect to any prior Business Day but not distributed to the Servicer. (iv) Investor Default Amount. On each Business Day, the Trustee, acting in accordance with instructions from the Servicer, shall withdraw first from the Collection Account and then from the Payment Reserve Account, to the extent of any Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawals pursuant to subsections 4.9(a)(i) through (iii) of the Agreement, an amount equal to the lesser of (x) any such remaining Available Series 1997-1 Imputed Yield Collections and (y) the sum of (1) the aggregate Investor Default Amount for such Business Day plus (2) the unpaid Investor Default Amount for each previous Business Day during such Monthly Period, such amount to be (A) during the Revolving Period treated as Shared Principal Collections, (B) during the Amortization Period on and prior to the day on which an amount equal to the Class A Invested Amount is deposited in the Principal Account, to be deposited in the Principal Account for distribution to the Class A Certificateholders on the related Distribution Date and (C) during the Amortization Period, on and after the day on which such deposit to the Principal Account with respect to the Class A Invested Amount has been made and on and prior to the day on which an amount equal to the Class B Invested Amount is deposited in the Principal Account, to be deposited in the Principal Account for payment to the Class B Certificateholders on the related Distribution Date. (v) Adjustment Payment Shortfalls. On each Business Day, the Trustee, acting in accordance with instructions from the Servicer, shall withdraw first from the Collection Account and then from the Payment Reserve Account, to the extent of any Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawals pursuant to subsections 4.9(a)(i) through (iv) of the Agreement, an amount equal to the lesser of (x) any such remaining Available Series 1997-1 Imputed Yield Collections and (y) an amount equal to the Series Allocation Percentage of any Adjustment Payment which the Transferor is required but fails to make pursuant to subsection 3.8(a) of the Agreement, such amount, (i) during the Revolving Period, to be treated as Shared Principal Collections, (ii) during the Amortization Period on and prior to the day on which an amount equal to the Class A Invested Amount is deposited in the Principal Account, to be deposited in the Principal Account for distribution to the Class A Certificateholders on the next Distribution Date and (iii) during the Amortization Period, on and after the day on which such deposit to the Principal Account with respect to the Class A Invested Amount has been made and on and prior to the day on which an amount equal to the Class B Invested Amount is deposited in the Principal Account for payment to the Class B Certificateholders on the related Distribution Date. (vi) Reimbursement of Class A Investor Charge-Offs. On each Business Day, the Trustee, acting in accordance with instructions from the Servicer, shall withdraw first from the Collection Account and then from the Payment Reserve Account, to the extent of any Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawals pursuant to subsections 4.9(a)(i) through (v) of the Agreement, an amount equal to the lesser of (x) any such remaining Available Series 1997-1 Imputed Yield Collections and (y) the unreimbursed Class A Investor Charge-Offs, if any, such amount to be applied to reimburse Class A Investor Charge-Offs, and, during the Revolving Period, to be treated as Shared Principal Collections, and during the Amortization Period on and prior to the day on which an amount equal to the Class A Invested Amount is deposited in the Principal Account to be deposited in the Principal Account for distribution to the Class A Certificateholders on the related Distribution Date. (vii) Reimbursement of Class B Investor Charge-Offs. On each Business Day, the Trustee, acting in accordance with instructions from the Servicer, shall withdraw first from the Collection Account and then from the Payment Reserve Account, to the extent of any Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawals pursuant to subsections 4.9(a)(i) through (vi) of the Agreement, an amount equal to the lesser of (x) any such remaining Available Series 1997-1 Imputed Yield Collections and (y) the unreimbursed amount by which the Class B Invested Amount has been reduced on prior Business Days pursuant to clauses (d) and (e) of the definition of Class B Invested Amount, if any, such amount, (i) during the Revolving Period to be treated as Shared Principal Collections, (ii) during the Amortization Period, on and prior to the day on which an amount equal to the Class A Invested Amount is deposited in the Principal Account, to be deposited in the Principal Account for distribution to the Class A Certificateholders on the related Distribution Date, and (iii) during the Amortization Period, on and after the day on which such deposit has been made and on and prior to the day on which the Class B Invested Amount has been deposited in the Principal Account, to be deposited in the Principal Account for payment to the Class B Certificateholders on the related Distribution Date. (viii) Class A Costs. On each Business Day, the Trustee acting in accordance with instructions from the Servicer, shall withdraw first from the Collection Account and then from the Payment Reserve Account and deposit into the Interest Funding Account, to the extent of any Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawals pursuant to subsections 4.9(a)(i) through (vii) of the Agreement, an amount equal to the lesser of (x) any such remaining Available Series 1997-1 Imputed Yield Collections and (y) the Class A Costs for such Business Day and any such amounts that remain unpaid from any source from previous days to the extent not included in Class A Costs for such Business Day. (ix) Payment Reserve Account. On each Business Day, the Trustee acting in accordance with instructions from the Servicer, shall withdraw from the Collection Account, to the extent of any Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawals pursuant to subsections 4.9(a)(i) through (viii) of the Agreement an amount equal to the lesser of (x) any such remaining Available Series 1997-1 Imputed Yield Collections and (y) the amount designated by the Transferor in writing (which includes facsimile transmission) in its instructions to the Trustee on such Business Day and deposit such amount, if any, into the Payment Reserve Account. (x) Excess Imputed Yield Collections. Any amounts remaining in the Collection Account to the extent of any Available Series 1997-1 Imputed Yield Collections remaining after giving effect to the withdrawals pursuant to subsections 4.9(a)(i) through (ix) of the Agreement, shall be treated as Excess Imputed Yield Collections, and the Servicer shall direct the Trustee in writing on each Business Day to withdraw such amounts from the Collection Account and to first make such amounts available to pay to Certificateholders of other Series to the extent of shortfalls, if any, in amounts payable to such certificateholders from Imputed Yield Collections allocated to such other Series, then to pay any unpaid commercially reasonable costs and expenses of a Successor Servicer, if any, and then pay any remaining Excess Imputed Yield Collections to the Transferor. (b) For each Business Day with respect to the Revolving Period, the funds on deposit in the Collection Account to the extent of the lesser of (A) the Class A Invested Amount and (B) the sum of (x) product of (i) the Floating Allocation Percentage and (ii) the amount of Principal Collections on such Business Day (such product the "Revolving Principal Collections") less the amount of Reallocated Principal Collections on such Business Day (the Revolving Principal Collections less the Reallocated Principal Collections on the related Business Day, the "Net Revolving Principal Collections"), and (y) Shared Principal Collections allocated to the Series 1997-1 Certificates in accordance with Section 4.8 on such Business Day may, at the option of the Transferor, pursuant to instructions delivered to the Servicer and the Trustee by facsimile or other similar means of documented communication, or, to the extent specified in subsection 4.8 of the Agreement, shall, be deposited into the Defeasance Account and applied as provided in Section 11(b) of this Series Supplement. During the Revolving Period, an amount equal to the Net Revolving Principal Collections less any amount deposited to the Defeasance Account pursuant to the immediately preceding sentence shall be treated as Shared Principal Collections and applied pursuant to the written direction of the Servicer in the Daily Report for such Business Day, as provided in Section 4.3(e) of the Agreement. (c) For each Business Day on and after the Amortization Period Commencement Date, the amount of funds on deposit in the Collection Account and the other amounts described below will be distributed, pursuant to the written direction of the Servicer in the Daily Report for such Business Day in the following priority: (i) on and prior to the day on which an amount equal to the Class A Invested Amount has been deposited in the Principal Account to be applied to the payment of Class A Principal, an amount (not in excess of the Class A Invested Amount) equal to the sum of (w) the product of the Fixed/Floating Allocation Percentage and Principal Collections in the Collection Account at the end of the preceding Business Day (less the amount thereof to be applied as Reallocated Principal Collections on such Business Day), (x) any amount on deposit in the Excess Funding Account allocated to the Class A Certificates on such Business Day pursuant to subsection 4.9(d) of the Agreement, (y) amounts to be paid pursuant to subsections 4.9(a)(iv), (v), (vi) and (vii) of the Agreement from Available Series 1997-1 Imputed Yield Collections and from amounts available pursuant to subsections 4.10(a) and (b) and 4.14 of the Agreement on such Business Day, and (z) the amount of Shared Principal Collections allocated to the Series 1997-1 Certificates in accordance with subsection 4.3(e) and Section 4.8 of the Agreement on such Business Day, will be deposited into the Principal Account; (ii) on and after the day on which an amount equal to the Class A Invested Amount has been deposited in the Principal Account to be applied to the payment of Class A Principal, an amount (not in excess of the Class B Invested Amount) equal to the sum of (w) an amount equal to the product of the Fixed/Floating Allocation Percentage and Principal Collections in the Collection Account at the end of the preceding Business Day (less the amount thereof to be applied as Reallocated Principal Collections on such Business Day), (x) any amount on deposit in the Excess Funding Account allocated to the Class B Certificates on such Business Day pursuant to subsection 4.9(d) of the Agreement, (y) the amount, if any, allocated to be paid to the Class B Certificates pursuant to subsections 4.9(a)(iv), (v) and (vii) of the Agreement from Available Series Imputed Yield Collections and from amounts available pursuant to subsections 4.10(a) and (b) of the Agreement with respect to such Business Day, and (z) the amount of Shared Principal Collections allocated to the Series 1997-1 Certificates in accordance with subsection 4.3(e) and Section 4.8 of the Agreement on such Business Day (such sum, the "Class B Daily Principal Amount") will be deposited into the Principal Account; (iii) an amount equal to the excess, if any, of (A) the sum of the amounts described in clauses (i)(w) and (y) and (ii)(w) and (y) above over (B) the sum of Class A Principal and Class B Principal will be treated as Shared Principal Collections and applied as provided in subsection 4.3(e) of the Agreement. (d) On the first Business Day of the Amortization Period, funds on deposit in the Excess Funding Account will be deposited in the Principal Account; provided, however, that if any other Series enters its Amortization Period, as defined in its related Series Supplement, at the same time as Series 1997-1 the amount of the foregoing deposit shall be equal to the product of an amount equal to the amount of funds on deposit in the Excess Funding Account and a fraction the numerator of which is the Invested Amount and the denominator of which is equal to the sum of the invested amounts of each Series then entering its related Amortization Period as defined in its related Series Supplement; provided, further, that on any Business Day prior to the Series 1994-1 Funding Date any amounts allocated to the Series 1997-1 Certificates from the Excess Funding Account as described above shall instead be reallocated to the Series 1994-1 Certificates. Amounts deposited in the Principal Account pursuant to the foregoing sentence will be allocated in the following order of priority: (i) to the Class A Certificates in an amount not to exceed the Class A Principal after subtracting therefrom any amounts to be paid to the Class A Certificateholders with respect thereto pursuant to subsections 4.9(c)(i)(w) and (y) of the Agreement, and (ii) to the Class B Certificates in an amount not to exceed the Class B Principal after subtracting therefrom any amounts to be deposited in the Principal Account with respect thereto pursuant to subsections 4.9(c)(ii)(w) and (y). (e) On each Business Day on which Class B Daily Principal has been allocated pursuant to subsection 4.7(b) of the Agreement, funds on deposit in the Collection Account in an amount equal to the Class B Daily Principal Amount designated by the Transferor with respect to such Business Day will be distributed to the Class B Certificateholders. Section 4.10 Coverage of Required Amount for the Series 1997-1 Certificates. (a) To the extent that any amounts are on deposit in the Excess Funding Account on any Business Day, the Servicer shall apply, in the manner specified for application of Available Series 1997-1 Imputed Yield Collections in subsections 4.9(a)(i) through (ix), Transferor Imputed Yield Collections in an amount equal to the excess of (x) the product of (a) the Base Rate, (b) the amounts on deposit in the Excess Funding Account and (c) the number of days elapsed since the previous Business Day divided by the actual number of days in such year over (y) the aggregate amount of all earnings since the previous Business Day available from the Cash Equivalents in which funds on deposit in the Excess Funding Account are invested (the "Negative Carry Amount"). (b) To the extent that on any Business Day payments are being made pursuant to any of subsections 4.9(a)(i) through (ix), respectively, and the full amount to be paid pursuant to any such subsection receiving payments on such Business Day is not paid in full on such Business Day, the Servicer shall apply, in the manner specified for application of Available Series 1997-1 Imputed Yield Collections in subsections 4.9(a)(i) through (ix), all or a portion of the Excess Imputed Yield Collections from other Series with respect to such Business Day allocable to the Series 1997-1 Certificates in an amount equal to the excess of the full amount to be allocated or paid pursuant to the applicable subsection over the amount applied with respect thereto from Available Series 1997-1 Imputed Yield Collections and Transferor Imputed Yield Collections on such Business Day (the "Required Amount"). Excess Imputed Yield Collections allocated to the Series 1997-1 Certificates for any Business Day shall mean an amount equal to the product of (x) Excess Imputed Yield Collections available from all other Series for such Business Day and (y) a fraction, the numerator of which is the Required Amount for such Business Day and the denominator of which is the aggregate amount of shortfalls in required amounts or other amounts to be paid from Imputed Yield Collections for all Series for such Business Day. Section 4.11 Payment of Certificate Interest. On each Transfer Date, the Trustee, acting in accordance with instructions from the Servicer set forth in the Daily Report for such day, shall withdraw the amount on deposit in the Interest Funding Account with respect to the preceding Monthly Period allocable to the Series 1997-1 Certificates and deposit such amount in the Distribution Account. On each Distribution Date, the Paying Agent shall pay in accordance with Section 5.1 of the Agreement (x) to the Class A Certificateholders from the Distribution Account the amount deposited into the Interest Funding Account during the preceding Monthly Period pursuant to subsections 4.9(a)(i) and 4.9(a)(viii) and Sections 4.10 and 4.14 with respect to the related Interest Accrual Period and (y) the Class B Certificateholders from the Distribution Account the amount deposited into the Interest Funding Account during the preceding Monthly Period pursuant to subsections 4.9(a)(ii) and Section 4.10 with respect to the related Interest Accrual Period. Section 4.12 Payment of Certificate Principal. (a) On the Transfer Date preceding the first Distribution Date in the Amortization Period and on each Distribution Date thereafter, the Trustee, acting in accordance with instructions from the Servicer set forth in the Daily Report for such day, shall withdraw from the Principal Account and deposit in the Distribution Account, to the extent of funds available, an amount equal to the Class A Principal for such Distribution Date. On the first Distribution Date in the Amortization Period and on each Distribution Date thereafter until the Class A Invested Amount is paid in full, the Paying Agent shall pay in accordance with subsection 5.1(a) to the Class A Certificateholders from the Distribution Account such amount deposited into the Distribution Account on the related Transfer Date. (b) On each Business Day the Trustee acting in accordance with instructions from the Servicer set forth in the Daily Report for such Business Day shall make payments of principal to the Class B Certificateholders of Class B Daily Principal, if any, designated by the Transferor pursuant to Section 4.7(b) of the Agreement. Any amounts remaining in the Principal Account and allocable to the Series 1997-1 Certificates, after the Class B Invested Amount has been paid in full, will be treated as Shared Principal Collections and applied in accordance with Section 4.3(e) of the Agreement. Section 4.13 Investor Charge-Offs. (a) If, on any Determination Date, the aggregate Investor Default Amount and the Series Allocation Percentage of unpaid Adjustment Payments, if any, for each Business Day in the preceding Monthly Period exceeded the Available Series 1997-1 Imputed Yield Collections applied to the payment thereof pursuant to subsections 4.9(a)(iv) and (v) of the Agreement and the amount of Transferor Imputed Yield Collections and Excess Imputed Yield Collections allocated thereto pursuant to Section 4.10 of the Agreement, and the amount of Reallocated Principal Collections applied with respect thereto pursuant to Section 4.14 of the Agreement, the Class B Invested Amount will be reduced by the amount by which the remaining aggregate Investor Default Amount and Series Allocation Percentage of unpaid Adjustment Payments exceed the amount applied with respect thereto during such preceding Monthly Period (a "Class B Investor Charge-Off"). (b) In the event that any such reduction of the Class B Invested Amount would cause the Class B Invested Amount to be a negative number, the Class B Invested Amount will be reduced to zero, and the Class A Invested Amount will be reduced by the amount by which the Class B Invested Amount would have been reduced below zero, but not more than the remaining aggregate Investor Default Amount and Series Allocation Percentage of unpaid Adjustment Payments for such Monthly Period (a "Class A Investor Charge-Off"). (c) Following the occurrence of a Class A Investor Charge-Off, if the Class B Invested Amount is increased, including any increase thereof pursuant to Section 6.16 of the Agreement, to the extent of the Class B Invested Amount the amount of any unreimbursed Class A Investor Charge-Off shall be reduced and, the Class A Invested Amount shall be correspondingly increased in an amount not to exceed the amount of such increased Class B Invested Amount, the Class B Invested Amount shall be correspondingly decreased and the amount of such decrease shall be deemed to be a Class B Investor Charge-Off. Section 4.14 Reallocated Principal Collections for the Series 1997-1 Certificates. On each Business Day, the Servicer will determine an amount equal to the least of (i) the Class B Invested Amount, (ii) the product of (x)(I) during the Revolving Period, the Class B Floating Allocation Percentage or (II) during an Amortization Period, the Class B Fixed/Floating Allocation Percentage and (y) the amount of Principal Collections with respect to such Business Day and (iii) an amount equal to the Class A Required Amount for such Business Day (such amount called "Reallocated Principal Collections") and shall apply Principal Collections in an amount equal to such amount to the components of the Class A Required Amount in the same priority as amounts are applied to such components from Available Series 1997-1 Imputed Yield Collections pursuant to subsection 4.9(a) of the Agreement. Section 4.15 Payment Reserve Account (a) The Servicer shall establish and maintain or cause to be established and maintained with a Qualified Institution, which may be the Trustee, in the name of the Trustee, on behalf of the Certificateholders, the "Payment Reserve Account," which shall be a segregated trust account with the corporate trust department of such Qualified Institution, bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Certificateholders. The Trustee shall possess all right, title and interest in all funds on deposit from time to time in the Payment Reserve Account and in all proceeds thereof. The Payment Reserve Account shall be under the sole dominion and control of the Trustee for the benefit of the Certificateholders. If, at any time, the institution holding the Payment Reserve Account ceases to be a Qualified Institution, the Trustee shall within 20 Business Days establish a new Payment Reserve Account meeting the conditions specified above with a Qualified Institution, and shall transfer any cash or any investments to such new Payment Reserve Account. From the date such new Payment Reserve Account is established, it shall be the "Payment Reserve Account." (b) The Transferor, at its discretion, may withdraw on any Determination Date a part or all of any amounts remaining in the Payment Reserve Account after giving effect to any withdrawals required to be made under Section 4.9(a) above. (c) Funds on deposit in the Payment Reserve Account shall be invested in Cash Equivalents by the Trustee (or, at the direction of the Trustee, by the Servicer on behalf of the Trustee) at the direction of the Servicer. Funds on deposit in the Payment Reserve Account on any Business Day, after giving effect to any withdrawals from the Payment Reserve Account, shall be invested in Cash Equivalents that will mature so that such funds will be available for withdrawal on or prior to the following Business Day. The proceeds of any such investments shall be invested in Cash Equivalents that will mature so that such funds will be available for withdrawal on or prior to the following Business Day. On each Business Day following a deposit of funds to the Payment Reserve Account, the aggregate proceeds of any such investment shall be deposited in the Collection Account and treated as Investment Proceeds for application as Available Series 1997-1 Imputed Yield Collections. SECTION 7. Article V of the Agreement. Article V of the Agreement shall read in its entirety as follows and shall be applicable only to the Series 1997-1 Certificates: ARTICLE V DISTRIBUTIONS AND REPORTS TO INVESTOR CERTIFICATEHOLDERS Section 5.1 Distributions. (a) On each Distribution Date, the Paying Agent shall distribute (in accordance with the Settlement Statement delivered by the Servicer to the Trustee and the Paying Agent pursuant to subsection 3.4(c)) to each Class A Certificateholder of record on the preceding Record Date (other than as provided in subsection 2.4(e) or in Section 12.3 respecting a final distribution) such Certificateholder's pro rata share (based on the aggregate Undivided Interests represented by Class A Certificates held by such Certificateholder) of amounts on deposit in the Distribution Account as are payable to the Class A Certificateholders pursuant to Section 4.11 and 4.12 of the Agreement by wire transfer to an account or accounts designated by such Class A Certificateholders by written notice given to the Paying Agent not less than five days prior to the related Distributed Date; provided, however, that with respect to amounts payable pursuant to Section 4.11, the portion of such amounts constituting increased costs and Class A Breakage Costs shall be paid to Class A Certificateholders on the basis of certifications provided to the Trustee and the Servicer pursuant to Section 15 and subsection 11(b) of this Series Supplement; provided, further, that the final payment in retirement of the Class A Certificates will be made only upon presentation and surrender of the Class A Certificates at the office or offices specified in the notice of such final distribution delivered by the Trustee pursuant to Section 12.3. (b) On each Distribution Date, the Paying Agent shall distribute (in accordance with the Settlement Statement delivered by the Servicer to the Trustee and the Paying Agent pursuant to subsection 3.4(c)) to each Class B Certificateholder of record on the preceding Record Date (other than as provided in subsection 2.4(e) or in Section 12.3 respecting a final distribution) such Certificateholder's pro rata share (based on the aggregate Undivided Interests represented by Class B Certificates held by such Certificateholders) of amounts on deposit in the Distribution Account as are payable to the Class B Certificateholders pursuant to Section 4.11 and 4.12 of the Agreement by wire transfer to an account or accounts designated by such Class B Certificateholder by written notice given to the Paying Agent not less than five days prior to the related Distributed Date; provided, however, that the final payment in retirement of the Class B Certificates will be made only upon presentation and surrender of the Class B Certificates at the office or offices specified in the notice of such final distribution delivered by the Trustee pursuant to Section 12.3. Section 5.2 Certificateholders' Statement. (a) On the 20th day of each calendar month (or if such day is not a Business Day the next succeeding Business Day), the Paying Agent shall forward to each Certificateholder a statement substantially in the form of Exhibit C prepared by the Servicer and delivered to the Trustee and the Paying Agent on the preceding Determination Date setting forth the following information: (i) the total amount distributed; (ii) the amount of such distribution allocable to Certificate Principal; (iii) the amount of such distribution allocable to Certificate Interest; (iv) the amount of Principal Collections received in the Collection Account during the preceding Monthly Period and allocated in respect of the Class A Certificates and the Class B Certificates, respectively; (v) the amount of Imputed Yield Collections processed during the preceding Monthly Period and allocated in respect of the Class A Certificates and the Class B Certificates, respectively; (vi) the aggregate amount of Principal Receivables, the Invested Amount, the Class A Invested Amount, the Class B Invested Amount, the Floating Allocation Percentage and, during the Amortization Period, the Fixed/Floating Allocation Percentage and Class B Fixed/Floating Allocation Percentage, as of the end of the day on the last day of the related Monthly Period; (vii) the aggregate outstanding balance of Receivables which are current, 30-59, 60-89, and 90 days and over delinquent as of the end of the day on the last day of the related Monthly Period; (viii) the aggregate Investor Default Amount for the preceding Monthly Period; (ix) the aggregate amount of Class A Investor Charge-Offs and Class B Investor Charge- Offs for the preceding Monthly Period; (x) the amount of the Servicing Fee for the preceding Monthly Period; (xi) the amount of unreimbursed Reallocated Principal Collections for the related Monthly Period; and (xii) the aggregate amount of funds in the Excess Funding Account as of the last day of the Monthly Period immediately preceding the Distribution Date. (b) Annual Certificateholders' Tax Statement. On or before January 31 of each calendar year, beginning with calendar year 1998, the Paying Agent shall distribute to each Person who at any time during the preceding calendar year was a Series 1997-1 Certificateholder, a statement prepared by the Servicer containing the information required to be contained in the regular report to Series 1997-1 Certificateholders, as set forth in subclauses (i), (ii) and (iii) above, aggregated for such calendar year or the applicable portion thereof during which such Person was a Series 1997-1 Certificateholder, together with, on or before January 31 of each year, beginning in 1998, such other customary information (consistent with the treatment of the Certificates as debt) as the Trustee or the Servicer deems necessary or desirable to enable the Series 1997-1 Certificateholders to prepare their tax returns. Such obligations of the Trustee shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Trustee pursuant to any requirements of the Internal Revenue Code as from time to time in effect. SECTION 8. Article VI of the Agreement. Article VI (except for Sections 6.1 through 6.14 thereof) shall read in its entirety as follows and shall be applicable only to the Series 1997-1: ARTICLE VI THE CERTIFICATES Section 6.15 Additional Class A Invested Amounts. Each Class A Certificateholder agrees, by acceptance of the Class A Certificates, that the Transferor may from time to time, other than after a Pay Out Commencement Date, request that such Class A Certificateholder acquire on any Distribution Date additional undivided interests in the Trust in specified amounts (such amounts, the "Additional Class A Invested Amounts") in an aggregate amount equal to the excess of the amount of the reduction in the invested amount of the Series 1994-1 Certificates on such Distribution over the amount of the increase of the Class B Invested Amount on such Distribution Date; provided, however, that if such an increase in the Class A Invested Amount would cause a Trust Pay Out Event or a Series 1997-1 Pay Out Event to occur, then the amount of the increase in the Class A Invested Amount shall be limited on such Distribution Date to the maximum increase in the Class A Invested Amount that may be obtained without causing either a Trust Pay Out Event or a Series 1997-1 Pay Out Event to occur; provided further, that in no case shall the Class A Invested Amount be increased above the lesser of (x) the Class A Maximum Invested Amount and (y) the Class A Available Commitment; and provided, further, that if the Minimum Rating Condition is not satisfied with respect to the Class A Certificates (i) on the April 1997 Distribution Date, after giving effect to any increase of the Class A Invested Amount and Class B Invested Amount on such Distribution Date, the Class A Invested Amount shall not be increased on such Distribution Date, or (ii) on the May 1997 Distribution Date, after giving effect to any increase or decrease of the Class A Invested Amount or Class B Invested Amount on such Distribution Date, the Class A Invested Amount shall not be increased on such Distribution Date or thereafter. The Additional Class A Invested Amount on any Distribution Date shall not exceed an amount equal to the excess of the sum of the aggregate amount of Principal Receivables and amounts on deposit in the Excess Funding Account over the greater of (a) the sum of (i) the aggregate invested amount of each Series then outstanding as of such day, including the Series 1997-1 Certificates (prior to giving effect to such Additional Class A Invested Amount), minus amounts on deposit in the Principal Account for any Series, if any, and (ii) the Minimum Transferor Interest as of such day or (b) the Minimum Aggregate Principal Receivables less any principal repaid to the Series 1994-1 Certificates. The Class A Certificateholders shall acquire such Additional Class A Invested Amount, only if (a) the Class B Invested Amount following the acquisition of such Additional Class A Invested Amount shall be at least equal to the Stated Class B Amount (including increases to the Class B Invested Amount pursuant to Section 6.16 of the Agreement) and (b) after giving effect to the proposed increase in the Class A Invested Amount no Series 1997-1 Pay Out Event shall exist or occur as a result of such increase. If the Class A Certificateholders acquire such Additional Class A Invested Amount, such Class A Certificateholders shall pay an amount equal to the Additional Class A Invested Amount to the Trustee and, in consideration of such Certificateholder's payment of the Additional Class A Invested Amount, the Servicer shall appropriately note such Additional Class A Invested Amount (and the increased Class A Invested Amount) on the next succeeding Servicer's report and direct the Trustee in writing to pay to the Transferor such Additional Class A Invested Amount, and the Invested Amount of the Class A Certificates will be equal to the Invested Amount of the Class A Certificates stated in such Servicer's report. The purchase of any Additional Class A Invested Amount shall be in an aggregate principal amount that is not less than $1,000,000 or integral multiples of $100,000 in excess thereof. Each Class A Certificateholder shall be and is hereby authorized to record on the grid attached to its Class A Certificate (or at such Class A Certificate- holder's option, in its internal books and records) the date and amount of its percentage interest in any Additional Class A Invested Amount purchased by it, and each repayment thereof; provided that failure to make any such recordation on such grid or any error in such grid shall not adversely affect such Class A Certificateholder's rights with respect to its Class A Invested Amount and its right to receive interest payments in respect of the Class A Invested Amount held by such Class A Certificateholder. Section 6.16 Additional Class B Invested Amounts. On each Distribution Date while any Series 1997-1 Certificates are outstanding, the Transferor may elect to increase the Class B Invested Amount and after the Pay Out Commencement Date the Transferor agrees to increase the Class B Invested Amount (such additional amounts, "Additional Class B Invested Amounts") by written notice to the Trustee on such date which notice shall specify the effective date and the amount of such increase in the Class B Invested Amount; provided, however, that if such an increase in the Class B Invested Amount would cause a Trust Pay Out Event or a Series 1997-1 Pay Out Event to occur, then the amount of the increase in the Class B Invested Amount shall be limited on such Business Day to the maximum increase in the Class B Invested Amount that may be obtained without causing either a Trust Pay Out Event or a Series 1997-1 Pay Out Event to occur; provided further, that in no case shall the Class B Invested Amount be increased above the Class B Maximum Required Amount; and provided further that no such increase in the Class B Invested Amount shall be permitted under this Section 6.16 unless: (i) after giving effect to the proposed increase in Class B Invested Amount the Transferor Interest shall equal or exceed the Minimum Transferor Interest and (ii) no Series 1997-1 Pay Out Event will occur as a result of such increase in the Class B Invested Amount. The Transferor agrees that, subject to satisfaction of the conditions specified above, (i) the Transferor shall increase the Class B Invested Amount on each Distribution Date after the Pay Out Commencement Date by an amount equal to the reduction of the invested amount of the Series 1994-1 Certificates on each such Distribution Date and (ii) on the Business Day on which the aggregate invested amounts of the Class A, Class B and Class C Investor Certificates of Series 1994-1 are paid in full, the Transferor shall increase the Class B Invested Amount by an amount equal to the invested amount of the Series 1994-1 Class D Investor Certificates on such Business Day and shall cancel such Series 1994-1 Class D Investor Certificates concurrently with such increase of the Class B Invested Amount; provided, however, that in no event shall the Transferor be required to increase the Class B Invested Amount to an amount in excess of the lesser of (x) 30% of the sum of the Class A Invested Amount and the Class B Invested Amount and (y) the amount of Class B Invested Amount relative to the then outstanding Class A Invested Amount which is required by Standard & Poor's or Moody's to satisfy the Minimum Rating Condition or, if such rating shall be higher, to maintain the then current rating of the Class A Certificates. Section 6.17 Extension. (a) If a Pay Out Event has not occurred on or before the 30th Business Day preceding the Extension Date, the Transferor, in its sole discretion, may deliver to the Trustee on or before such date a notice substantially in the form of Exhibit E (the "Extension Notice") to this Series Supplement. The Trustee shall deliver a copy of the Extension Notice and all documents annexed thereto to the Investor Certificateholders of record on the date of receipt thereof. The Transferor shall state in the Extension Notice that it intends to extend the Revolving Period until the later Amortization Period Commencement Date set forth in the Extension Notice. The Extension Notice shall also set forth the next Extension Date. The following documents shall be annexed to the Extension Notice: (i) a form of the Opinion of Counsel addressed to the Transferor and the Trustee to the effect that despite the extension the Trust will not be treated as an association taxable as a corporation (the "Extension Tax Opinion"); (ii) a form of the Opinion of Counsel addressed to the Transferor and the Trustee (the "Extension Opinion") to the effect that (A) the Transferor has the corporate power and authority to effect the Extension, (B) the extension has been duly authorized by the Transferor, and (C) all conditions precedent to the Extension required by this Section 6.17 have been fulfilled; and (iii) a form of Investor Certificateholder Election Notice substantially in the form of Exhibit F (the "Election Notice") to this Series Supplement. In addition, the Extension Notice shall state that any Investor Certificateholder electing to approve the Extension must do so on or before the Election Date (as defined below) by returning the annexed Election Notice properly executed to the Trustee in the manner described below. The Extension Notice shall also state that an Investor Certificateholder may withdraw any such election in whole or in part on or before the Election Date, and the Transferor, in its sole discretion, may, prior to the Election Date, withdraw its election to extend the Revolving Period. Any Holder that elects to approve an Extension hereunder shall deliver a duly executed Election Notice to the Trustee at the address designated in the Extension Notice on or before 3:00 p.m., New York City time, on or before the fifth Business Day preceding the Extension Date (such Business Day constituting the "Election Date"). (b) No extension shall occur unless each of the following conditions have been satisfied prior to the close of business on the Election Date: (i) no Pay Out Event shall have occurred and be continuing, (ii) there shall have been delivered to the Trustee (A) the Extension Tax Opinion and the Extension Opinion, each addressed to the Trustee and (B) written confirmation from each Rating Agency rating any class of the Certificates at the request of the Transferor at the time of such Extension that the Extension will not cause such Rating Agency to lower or withdraw its then current rating of such Investor Certificates, (iii) each of the holders of the Class A Certificates and the Class B Certificates, shall have elected to approve the Extension by returning to the Trustee on or before the Election Date the executed Election Notice annexed to the Extension Notice delivered to the Certificateholders pursuant to subsection 6.17(a) of the Agreement. If, by the close of business on the Election Date, all of the conditions stated in this subsection 6.17(b) of the Agreement have not been satisfied and all such documents delivered to the Trustee pursuant to this subsection 6.17(b) of the Agreement are not in form satisfactory to it, or if the Transferor has notified the Trustee, prior to the Election Date, that the Transferor has exercised its right to withdraw its election of an Extension, no Extension shall occur. (c) The execution by the required number of Investor Certificateholders of the applicable Election Notice and return thereof to the Trustee by the required date and time, the continued election by the Transferor to extend the Revolving Period at the Election Date, and the compliance with all of the provisions of this Section 6.17, shall evidence an extension or renewal of the obligations represented by the Investor Certificates, and not a novation or extinguishment of such obligations or a substitution with respect thereto. (d) To the extent required by applicable laws and regulations, as evidenced by an Opinion of Counsel delivered by the Transferor to the Trustee, the provisions of this Section 6.17 shall or may be modified to comply with all applicable laws and regulations in effect at the time of the Extension. SECTION 9. Series 1997-1 Pay Out Events. If any one of the following events shall occur with respect to the Series 1997-1 Certificates: (a) failure on the part of the Transferor (i) to make any payment or deposit required to be made by the Transferor by the terms of (A) the Agreement or (B) this Series Supplement, on or before the date occurring five Business Days after the date such payment or deposit is required to be made herein, (ii) to perform in all material respects the Transferor's covenant not to sell, pledge, assign, or transfer to any person, or grant any unpermitted lien on, any Receivable, except as expressly provided in the Agreement; or (iii) duly to observe or perform in any material respect any covenants or agreements of the Transferor set forth in the Agreement or this Series Supplement, which failure has a material adverse effect on the Series 1997-1 Certificateholders and which continues unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Transferor by the Trustee, or to the Transferor and the Trustee by the Holders of Series 1997-1 Certificates evidencing Undivided Interests aggregating not less than 50% of any of the Class A Invested Amount or the Class B Invested Amount, and continues to affect materially and adversely the interests of the Series 1997-1 Certificateholders for such period; (b) any representation or warranty made by the Transferor in the Agreement or this Series Supplement, (i) shall prove to have been incorrect in any material respect when made, which continues to be incorrect in any material respect for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Transferor by the Trustee, or to the Transferor and the Trustee by the Holders of the Series 1997-1 Certificates evidencing Undivided Interests aggregating more than 50% of any of the Class A Invested Amount or the Class B Invested Amount, and (ii) as a result of which the interests of the Series 1997-1 Certificateholders are materially and adversely affected and continue to be materially and adversely affected for such period; provided, however, that a Series 1997-1 Pay Out Event pursuant to this subsection 8(b) shall not be deemed to have occurred hereunder if the Transferor has accepted reassignment of the related Receivable, or all of such Receivables, if applicable, during such period in accordance with the provisions of the Agreement; (c) the average of the Portfolio Yields for any three consecutive Monthly Periods is reduced to a rate which is less than the weighted average of the weighted average Base Rates for such three consecutive Monthly Periods; (d) (i) the Transferor Interest shall be less than the Minimum Transferor Interest, (ii) (A) the Series Allocation Percentage of the sum of the total amount of Principal Receivables plus amounts on deposit in the Excess Funding Account shall be less than (B) the sum of the Class A Outstanding Principal Amount and the Class B Outstanding Principal Amount or (iii) the total amount of Principal Receivables and the amount on deposit in the Excess Funding Account shall be less than the Minimum Aggregate Principal Receivables, in each case as of any Determination Date; (e) any Servicer Default shall occur which would have a material adverse effect on the Series 1997-1 Certificateholders; or (f) the amount on deposit in the Excess Funding Account as a percentage of the sum of the aggregate amount of Principal Receivables plus the amount on deposit in the Excess Funding Account shall equal or exceed 30% on the last day of three consecutive Monthly Periods; then, in the case of any event described in subparagraph (a), (b) or (e), after the applicable grace period, if any, set forth in such subparagraphs, the Holders of Series 1997-1 Certificates evidencing Undivided Interests aggregating more than 50% of any of the Class A Invested Amount or the Class B Invested Amount by notice then given in writing to the Trustee, the Transferor and the Servicer may declare that a pay out event (a "Series 1997-1 Pay Out Event") has occurred as of the date of such notice, and in the case of any event described in subparagraphs (c), (d) or (f), a Series 1997-1 Pay Out Event shall occur without any notice or other action on the part of the Trustee or the Series 1997-1 Certificateholders immediately upon the occurrence of such event. SECTION 10. Series 1997-1 Termination. The right of the Series 1997-1 Certificateholders to receive payments from the Trust will terminate on the first Business Day following the Series 1997-1 Termination Date unless such Series is an Affected Series as specified in Section 12.1(c) of the Agreement and the sale contemplated therein has not occurred by such date, in which event the Series 1997-1 Certificateholders shall remain entitled to receive proceeds of such sale when such sale occurs. SECTION 11. Class A Pre-Payment. (a) The Holder of the Exchangeable Transferor Certificate may specify upon an Exchange, pursuant to Section 6.9 of the Agreement, that the purchaser of a newly issued Series deposit payment therefor, in full or in part, in the Defeasance Account in an amount not to exceed the Invested Amount on such date. On the Closing Date the Trustee shall, for the benefit of the Certificateholders, establish and maintain with a Qualified Institution in the name of the Trust, a certain segregated trust account (the "Defeasance Account"). Any amounts on deposit in the Defeasance Account on any Business Day shall be invested at the direction of the Servicer in Cash Equivalents which mature on the next succeeding Business Day. On each Business Day following a deposit of funds to the Defeasance Account, the aggregate proceeds of any such investment shall be deposited in the Collection Account and treated as Investment Proceeds for application as Available Series 1997-1 Imputed Yield Collections. (b) Upon the direction of the Servicer any amounts, up to the Invested Amount, on deposit in the Defeasance Account may, or upon the occurrence of a Pay Out Event the amount on deposit in the Defeasance Account shall, be deposited in the Principal Account for distribution on a date to be specified by the Transferor (which shall not be later than the Distribution Date in the next succeeding Monthly Period) to be applied first to the payment of Class A Principal and second to the payment of Class B Principal. Such amounts shall be applied and paid in accordance with Sections 4.7, 4.12 and 5.1 of the Agreement. In the event the date of payment of such amounts is not a Distribution Date, a Certificateholder may provide to the Trustee and the Servicer within 30 days of such payment a written certificate setting forth any reasonable loss or expense that such Certificateholder sustained or incurred as a consequence of such payment being made on a date other than a Distribution Date (with respect to the Class A Certificates, "Class A Breakage Costs") and an amount equal to the Class A Breakage Costs shall be paid to Class A Certificateholders to the extent of funds available therefor pursuant to subsection 4.9(a)(viii) of the Agreement and as further specified in Section 4.11 and subsection 5.1(a) of the Agreement. Subsequent to any reduction of the Class A Invested Amount as a result of payments pursuant to this Section 11, the Class A Invested Amount may be increased pursuant to the terms and conditions set forth in Section 6.15 of the Agreement. SECTION 12. Legends; Transfer and Exchange; Restrictions on Transfer of Series 1997-1 Certificates; Tax Treatment. (a) Each Class A Certificate will bear a legend substantially in the following form: THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW. THE HOLDER HEREOF, BY PURCHASING THIS CERTIFICATE, AGREES THAT THIS CERTIFICATE MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY PURSUANT TO RULE 144A UNDER THE SECURITIES ACT TO AN INSTITUTIONAL INVESTOR THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A ("QIB") PURCHASING FOR ITS OWN ACCOUNT OR A QIB PURCHASING FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS INFORMED, IN EACH CASE, THAT THE REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, OR TO THE TRANSFEROR. EACH CERTIFICATE OWNER BY ACCEPTING A BENEFICIAL INTEREST IN THIS CERTIFICATE IS DEEMED TO REPRESENT THAT IT IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR A QIB PURCHASING FOR THE ACCOUNT OF ANOTHER QIB. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO CERTAIN CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. NO SALE, ASSIGNMENT, PARTICIPATION, PLEDGE, HYPOTHECATION, TRANSFER OR OTHER DISPOSITION OF A CLASS A CERTIFICATE (OR ANY INTEREST THEREIN) SHALL BE MADE UNLESS THE TRANSFEROR SHALL HAVE GRANTED ITS PRIOR CONSENT THERETO, WHICH CONSENT MAY NOT BE UNREASONABLY WITHHELD. NOR MAY AN INTEREST IN THIS CERTIFICATE BE MARKETED, ON OR THROUGH AN "ESTABLISHED SECURITIES MARKET" WITHIN THE MEANING OF SECTION 7704(B)(1) OF THE CODE AND ANY PROPOSED, TEMPORARY OR FINAL TREASURY REGULATION THEREUNDER, INCLUDING, WITHOUT LIMITATION, AN OVER-THE-COUNTER- MARKET OR AN INTERDEALER QUOTATION SYSTEM THAT REGULARLY DISSEMINATES FIRM BUY OR SELL QUOTATIONS. (b) Each Class A Certificate and Class B Certificate will bear a legend substantially in the following form: EACH PURCHASER REPRESENTS AND WARRANTS FOR THE BENEFIT OF FINGERHUT RECEIVABLES, INC. THAT, UNLESS SUCH PURCHASER, AT ITS EXPENSE, DELIVERS TO THE TRUSTEE, THE SERVICER AND THE TRANSFEROR AN OPINION OF COUNSEL SATISFACTORY TO THEM TO THE EFFECT THAT THE PURCHASE OR HOLDING OF A CLASS A CERTIFICATE OR CLASS B CERTIFICATE BY SUCH PURCHASER WILL NOT RESULT IN THE ASSETS OF THE TRUST BEING DEEMED TO BE "ASSETS OF THE BENEFIT PLAN" AND SUBJECT TO THE PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE CODE AND WILL NOT SUBJECT THE TRUSTEE, THE TRANSFEROR OR THE SERVICER TO ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN THE POOLING AND SERVICING AGREEMENT, SUCH PURCHASER IS NOT (I) AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3(3) OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA")) THAT IS SUBJECT TO THE PROVISIONS OF TITLE I OF ERISA, (II) A PLAN DESCRIBED IN SECTION 4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (III) A GOVERNMENTAL PLAN, AS DEFINED IN SECTION 3(32) OF ERISA, SUBJECT TO ANY FEDERAL, STATE, OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE PROVISIONS OF SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE, (IV) AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF A PLAN'S INVESTMENT IN THE ENTITY OR (V) A PERSON INVESTING "PLAN ASSETS" OF ANY SUCH PLAN (INCLUDING FOR PURPOSES OF CLAUSES (IV) AND (V), ANDY INSURANCE COMPANY GENERAL ACCOUNT, BUT EXCLUDING ANY ENTITY REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED). (c) Each Class B Certificate will bear a legend substantially in the following form: THIS CERTIFICATE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS REGISTERED PURSUANT TO OR EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND ANY OTHER APPLICABLE SECURITIES LAW. FINGERHUT RECEIVABLES, INC. SHALL BE PROHIBITED FROM TRANSFERRING ANY INTEREST IN OR PORTION OF THIS CERTIFICATE UNLESS, PRIOR TO SUCH TRANSFER, IT SHALL HAVE DELIVERED TO THE TRUSTEE AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH PROPOSED TRANSFER WILL NOT ADVERSELY AFFECT THE FEDERAL INCOME TAX CHARACTERIZATION OF ANY OUTSTANDING SERIES OF INVESTOR CERTIFICATES. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO CERTAIN CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. NO SALE, ASSIGNMENT, PARTICIPATION, PLEDGE, HYPOTHECATION, TRANSFER OR OTHER DISPOSITION OF A CLASS B CERTIFICATE (OR ANY INTEREST THEREIN) SHALL BE MADE UNLESS THE TRANSFEROR SHALL HAVE GRANTED ITS PRIOR CONSENT THERETO, WHICH CONSENT MAY NOT BE UNREASONABLY WITHHELD. NOR MAY AN INTEREST IN THIS CERTIFICATE BE MARKETED, ON OR THROUGH AN "ESTABLISHED SECURITIES MARKET" WITHIN THE MEANING OF SECTION 7704(B)(1) OF THE CODE AND ANY PROPOSED, TEMPORARY OR FINAL TREASURY REGULATION THEREUNDER, INCLUDING, WITHOUT LIMITATION, AN OVER-THE-COUNTER- MARKET OR AN INTERDEALER QUOTATION SYSTEM THAT REGULARLY DISSEMINATES FIRM BUY OR SELL QUOTATIONS. (d) Upon surrender for registration of transfer of a Class A Certificate or Class B Certificate at the office of the Transfer Agent and Registrar, accompanied by a certification by the potential purchase substantially in the form attached as Exhibit D executed by such purchaser or by such purchaser's attorney thereunto duly authorized in writing, such Class A Certificate or Class B Certificate shall be transferred upon the register, and the Transferor shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferees one or more new registered Class A Certificates or Class B Certificates of any authorized denominations and of a like aggregate principal amount and tenor. Transfers and exchanges of Class A Certificates and Class B Certificates shall be subject to the restrictions set forth in this Section 12, to such restrictions as shall be set forth in the text of the Class A Certificates and Class B Certificates and such reasonable regulations as may be prescribed by the Transferor. Successive registrations and registrations of transfers as aforesaid may be made from time to time as desired, and each such registration shall be noted on the register. (e) The Transferor shall be prohibited from transferring any interest in or portion of the Class B Certificate unless, prior to such Transfer, it shall have delivered to the Trustee an Opinion of Counsel to the effect that such proposed Transfer will not adversely affect the Federal income tax characterization of any outstanding Series of Investor Certificates. In no event shall any interest in or portion of the Class B Certificate be transferred to Fingerhut. Prior to the transfer of any interest in the Class B Certificate by the Transferor the conditions specified in Section 13 of this Series Supplement must be satisfied. (f) No transfer of a Class A Certificate or Class B Certificate will be permitted to be made to a Benefit Plan unless such Benefit Plan, at its expense, delivers to the Trustee, the Servicer and the Transferor an opinion of counsel satisfactory to them to the effect that the purchase or holding of a Class A Certificate or Class B Certificate by such Benefit Plan will not result in the assets of the Trust being deemed to be "assets of the Benefit Plan" and subject to the prohibited transaction provisions of ERISA and the Code and will not subject the Trustee, the Transferor or the Servicer to any obligation in addition to those undertaken in the Agreement. Unless such opinion is delivered, each person acquiring a Class A Certificate or Class B Certificate or the beneficial ownership of a Class A Certificate or Class B Certificate will be deemed to represent to the Trustee, the Transferor and the Servicer that it is not (i) an employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code, (iii) a governmental plan, as defined in Section 3(32) of ERISA, subject to any federal, state or local law which is, to a material extent, similar to the provisions of Section 406 of ERISA or Section 4975 of the Code, (iv) an entity whose underlying assets include plan assets by reason of a plan's investment in the entity or (v) a person investing "plan assets" of any such plan (including for purposes of clauses (iv) and (v), insurance company general account, but excluding any entity registered under the Investment Company Act of 1940, as amended). (g) The Class A Certificateholders shall comply with their obligations under Section 3.7 of the Agreement with respect to the tax treatment of the Class A Certificates, except to the extent that a relevant taxing authority has disallowed such treatment. (h) In accordance with Section 6.2 of the Agreement, no sale, assignment, participation, pledge, hypothecation, transfer or other disposition of a Class A Certificate or a Class B Certificate (or any interest therein) shall be made unless the Transferor shall have granted its prior consent thereto, which consent may not be unreasonably withheld; provided, however, that for purposes of this sentence, it shall in all cases be reasonable for the Transferor to withhold consent to such proposed sale, assignment, participation, pledge, hypothecation, transfer or other disposition of all or any part of a Class A Certificate or a Class B Certificate (or any interest therein) if the transaction would, if effected, give rise to any adverse tax consequence, as determined in the sole and absolute discretion of the Transferor. (i) Each purchaser of an interest in a Class A Certificate or a Class B Certificate shall certify that it is a Person who is either (A)(i) a citizen or resident of the United States, (ii) a corporation or other entity organized in or under the laws of the United States or any political subdivision thereof or (iii) a Person not described in (i) or (ii) whose ownership of the Class A Certificates or Class B Certificates is effectively connected with a such person's conduct of a trade or business within the United States (within the meaning of the Code) and whose ownership of any interest in a Class A Certificate or Class B Certificate will not result in any withholding obligation with respect to any payments with respect to the Class A Certificates or Class B Certificates, as applicable, by any Person or (B) an estate or trust the income of which is includible in gross income for United States federal income tax purposes. Each such purchaser shall agree that if they are a Person described in clause (A)(iii) above, they will furnish to the Person from whom they are acquiring a Class A Certificate or Class B Certificate, the Servicer and the Trustee, a properly executed U.S. Internal Revenue Service Form 4224 and a new Form 4224, or any successor applicable form, upon the expiration or obsolescence of any previously delivered form (and such other certifications, representations or opinions of counsel as may be requested by the Transferor, the Servicer or the Trustee). (j) No subsequent transfer of a Class A Certificate is permitted unless (i) such transfer is of a Class A Certificate with a minimum principal amount of at least $1,000,000 and (ii) the condition specified in clause (h) above shall have been satisfied; provided, that any attempted transfer that would cause the number of Targeted Holders to exceed ninety-nine shall be void. SECTION 13. Sale of Class B Certificates. The Transferor may at any time, without the consent of the Class A Certificateholders, (i) sell or transfer all or a portion of the Class B Certificates in one or more classes and (ii) in connection with any such sale or transfer, enter into a supplemental agreement with the Trustee or an amendment and restatement of this Series Supplement pursuant to which the Transferor and the Trustee may amend the Class B Certificate Rate, set forth the amount of monthly interest due Class B Certificateholders, provide for the payment of additional amounts with respect to any shortfall in payments of such Class B Interest and provide for such other provisions with respect to the Class B Certificates as may be specified in such agreement, provided that in each such case (A) the Transferor shall have given notice to the Trustee, the Servicer and any Rating Agencies then rating the outstanding Class A Certificates at the request of the Transferor of such proposed sale or transfer of the Class B Certificates and such agreement at least five Business Days prior to the consummation of such sale or transfer and the execution of such proposed agreement; (B) the Rating Agency Condition shall have been satisfied prior to the consummation of such proposed sale or transfer of Class B Certificates or the execution of such agreement; (D) the Transferor shall have delivered an Officer's Certificate, dated the date of the consummation of such sale or transfer and the effectiveness of such agreement, to the effect that, in the reasonable belief of the Transferor, such action will not, based on the facts known to such officer at the time of such certification, cause a Pay Out Event to occur with respect to any Series, and (E) the Transferor will have delivered an Opinion of Counsel dated the date of such sale or subdivision to the effect that (i) the certificates issued and sold to third parties will be characterized as indebtedness or an interest in a partnership (not taxable as a corporation) for Federal income tax purposes, (ii) the subdivision will not adversely affect the Federal income tax characterization of any outstanding Series of investor certificates or outstanding Class of Series 1997-1 Certificates and (iii) the subdivision will not be treated as a taxable sale, exchange or other disposition for Federal income tax purposes; provided, further, as a condition to the sale or transfer of all or a portion of the Class B Certificates the transferee shall be required to agree not to institute against, or join any other Person in instituting against, the Trust or the Transferor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, for one year and one day after all Investor Certificates are paid in full. SECTION 14. Purchases of the Class A Certificates by the Transferor. The Transferor may from time to time, purchase Certificates on the secondary market and request the Trustee to cancel such Certificates held by the Transferor and reduce the Invested Amount by a corresponding amount. SECTION 15. Increased Costs. (a) Notwithstanding any other provision herein, if after the Closing Date), any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Class A Certificateholder that is a commercial bank or controlled by a commercial bank of the principal of or interest on any Class A Certificate (other than changes in respect of taxes imposed on the overall net income of such Class A Certificateholder by the jurisdiction in which such Class A Certificateholder has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Class A Certificateholder, or shall impose on such Class A Certificateholder or the London interbank market any other condition affecting this Series Supplement or any Class A Certificate owned by such Class A Certificateholder, and the result of any of the foregoing shall be to increase the cost to such Class A Certificateholder of holding any Class A Certificate or to reduce the amount of any sum received or receivable by such Class A Certificateholder hereunder (whether of principal or interest) in respect thereof by an amount deemed by such Class A Certificateholder to be material, then the Trustee will pay to such Class A Certificateholder upon demand such additional amount or amounts as will compensate such Class A Certificateholder for such additional costs incurred or reduction suffered. Any Class A Certificateholder claiming any additional amounts payable pursuant to this Section 15 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Transferor or the Trustee or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any additional amount which may thereafter accrue and would not, in the sole determination of such Class A Certificateholder, be otherwise disadvantageous to such Class A Certificateholder. (b) If any Class A Certificateholder that is a commercial bank or controlled by a commercial bank shall have determined that the adoption after the Closing Date of any other law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any such Class A Certificateholder (or any lending office of such Class A Certificateholder) or any such Class A Certificateholder's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Class A Certificateholder's capital or on the capital of such Class A Certificateholder's holding company, if any, as a consequence of this Series Supplement or the Class A Certificates owned by such Class A Certificateholder to a level below that which such Class A Certificateholder or such Class A Certificateholder's holding company could have achieved but for such adoption, change or compliance (taking into consideration such Class A Certificate- holder's policies and the policies of such Class A Certificateholder's holding company with respect to such capital adequacy) by an amount deemed by such Class A Certificateholder to be material, then from time to time the Trustee shall pay to such Class A Certificateholder such additional amount or amounts as will compensate such Class A Certificateholder or such Trustee's holding company for any such reduction suffered after the date hereof. (c) A certificate of a Class A Certificateholder setting forth such amount or amounts, along with such Class A Certificateholder's method of computation of such amounts, as shall be necessary to compensate such Class A Certificateholder as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Trustee and the Servicer and shall be conclusive absent manifest error. The Trustee shall pay each Class A Certificate- holder the amount shown as due on any such certificate delivered by it on the Distribution Date immediately succeeding the Monthly Period in which such certificate is delivered; provided however, that the amounts owing by the Trustee pursuant to this Section 15 shall be payable solely from amounts available therefor pursuant to subsections 4.9(a)(viii) of the Agreement. (d) Failure on the part of any eligible Class A Certificateholder to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Class A Certificateholder's right to demand compensation with respect to such period or any other period; provided, however, that no Class A Certificateholder shall be entitled to compensation for any such increased costs or reductions unless it shall have submitted a certificate under subsection 15(c) of this Series Supplement with respect thereto not more than 90 days after the date that such Class A Certificateholder knows that such increased costs have been incurred or such reduction suffered. Notwithstanding any other provision of this Section 15, no Class A Certificateholder shall demand compensation for any increased cost or reduction referred to above if it shall not at the time be the general policy of such Class A Certificateholder to demand such compensation in similar circumstances under comparable provisions of credit or other similar agreements, and each Class A Certificateholder shall in good faith endeavor to allocate increased costs or reductions fairly among all of its affected commitments and credit extensions (whether or not it seeks compensation from all affected borrowers). The protection of this Section 15 shall be available to each Class A Certificateholder that is a commercial bank or controlled by a commercial bank regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. SECTION 16. Replacement of Certain Investor Certificateholders. In the event that (i) a Class A Certificateholder requests compensation pursuant to Section 15 of this Series Supplement, (ii) a Holder of Investor Certificates (a "Non-Consenting Holder") does not consent to an amendment, supplement, waiver or other modification with respect to this Series Supplement or to the Agreement, as provided in Section 20 of this Series Supplement within the time period specified for delivery of such consent pursuant to the documentation associated therewith and the amendment, supplement, waiver or other modification is not approved in accordance with said Section 20 of this Series Supplement, or (iii) an Investor Certificateholder fails to approve any Extension requested by the Transferor pursuant to Section 6.17 of the Agreement, the Transferor shall have the right to replace such Holder with a Person or Persons meeting the requirements of Section 12 of this Series Supplement, by giving three Business Days prior written notice to the Trustee and such Holder, specifying the date on which such Holder s Certificates shall be transferred; provided, however that, (a) such transfer shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority, and (b) in the case of clause (ii) above, all Non-Consenting Holders with respect to any one proposed amendment, supplement, waiver or other modification or Extension must be concurrently replaced in accordance with this Section 16. In the event of the replacement of an Investor Certificateholder, such Investor Certificateholder agrees to assign, without recourse, its rights and obligations hereunder to a replacement Holder selected by the Transferor upon payment by the replacement Holder to such Investor Certificateholder in immediately available funds of the principal amount of such Investor Certificateholder's outstanding Certificates and any interest accrued and unpaid thereon and all other amounts owing to such Investor Certificateholder hereunder and to execute and/or deliver any certification or other document required to be delivered pursuant to Section 12 of this Series Supplement. SECTION 17. FCI Note. The Transferor has received a note from Fingerhut Companies, Inc. in the amount of $18,000,000 (such note, together with any additional notes of Fingerhut Companies, Inc. held by the Transferor at any time, the "FCI Note"). The Transferor hereby agrees that at no time shall aggregate the principal amount of the FCI Note be less than $1,000,000 (the "FCI Note Required Amount"). The FCI Note may not be sold, transferred, assigned, pledged, hypothecated, participated or otherwise conveyed or encumbered, nor may the Transferor grant any security interest in the FCI Note. SECTION 18. GOVERNING LAW. THIS SERIES SUPPLEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 19. Instructions in Writing. All instructions or other communications given by the Servicer or any other person to the Trustee pursuant to this Series Supplement shall be in writing, and, with respect to the Servicer, may be included in a Daily Report or Settlement Statement. SECTION 20. Amendments. Solely with respect to any amendment pursuant to Section 13.1(b) of the Agreement and any consent required pursuant thereto from the Holders of Investor Certificates of Series 1997-1, this Series Supplement and the Agreement may be amended from time to time by the Servicer, the Transferor and the Trustee with the consent of the Holders of Investor Certificates evidencing Undivided Interests aggregating not less than 66 2/3% of the Invested Amount of the Series 1997-1 Certificates and (y) not less than 51% of the Class A Invested Amount to the extent that such Class would be adversely affected, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Series Supplement or the Agreement or of modifying in any manner the rights of the Certificateholders of any Class of the Series 1997-1 Certificates then issued and outstanding; provided, however, that no such amendment under this Section 20 shall (i) reduce in any manner the amount of, or delay the timing of, distributions which are required to be made on any Investor Certificate of such Class without the consent of all of the related Investor Certificateholders; (ii) change the definition of or the manner of calculating the interest of any Investor Certificate of such Class without the consent of the related Investor Certificateholders or (iii) reduce the aforesaid percentage required to consent to any such amendment, in each case without the consent of all such Investor Certificateholders. SECTION 21. Ratification of Agreement. (a) As supplemented by this Series Supplement, the Agreement is in all respects ratified and confirmed and the Agreement as so supplemented by this Series Supplement shall be read, taken, and construed as one and the same instrument. (b) For so long as any of the Class A Certificates are outstanding, each of the Transferor, the Servicer and the Trustee agree to cooperate with each other to provide to any Class A Certificateholder and to any prospective purchaser of Class A Certificates designated by such a Class A Certificateholder upon the request of such Class A Certificateholder or prospective purchaser, any information required to be provided to such holder or prospective purchaser to satisfy the condition set forth in Rule 144A(d)(4) under the Securities Act. SECTION 22. Counterparts. This Series Supplement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the Transferor, the Servicer and the Trustee have caused this Series 1997-1 Supplement to be duly executed by their respective officers as of the day and year first above written. FINGERHUT RECEIVABLES, INC. Transferor By:/s/ James M. Wehmann ---------------------------- Name: James M. Wehmann Title: Vice President, Assistant Treasurer FINGERHUT NATIONAL BANK Servicer By:/s/ Terry H. Hughes --------------------------- Name: Terry H. Hughes Title: Chief Executive Officer THE BANK OF NEW YORK (DELAWARE) Trustee By:/s/ Joseph G. Ernst --------------------------- Name: Joseph G. Ernst Title: Assistant Vice President Exhibit A [FORM OF CLASS A VARIABLE FUNDING CERTIFICATE] THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW. THE HOLDER HEREOF, BY PURCHASING THIS CERTIFICATE, AGREES THAT THIS CERTIFICATE MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY PURSUANT TO RULE 144A UNDER THE SECURITIES ACT TO AN INSTITUTIONAL INVESTOR THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A ("QIB") PURCHASING FOR ITS OWN ACCOUNT OR A QIB PURCHASING FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS INFORMED, IN EACH CASE, THAT THE REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, OR TO THE TRANSFEROR. EACH CERTIFICATE OWNER BY ACCEPTING A BENEFICIAL INTEREST IN THIS CERTIFICATE IS DEEMED TO REPRESENT THAT IT IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR A QIB PURCHASING FOR THE ACCOUNT OF ANOTHER QIB. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO CERTAIN CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. NO SALE, ASSIGNMENT, PARTICIPATION, PLEDGE, HYPOTHECATION, TRANSFER OR OTHER DISPOSITION OF A CLASS A CERTIFICATES (OR ANY INTEREST THEREIN) SHALL BE MADE UNLESS THE TRANSFEROR SHALL HAVE GRANTED ITS PRIOR CONSENT THERETO, WHICH CONSENT MAY NOT BE UNREASONABLY WITHHELD. NOR MAY AN INTEREST IN THIS CERTIFICATE BE MARKETED ON OR THROUGH AN "ESTABLISHED SECURITIES MARKET" WITHIN THE MEANING OF SECTION 7704(B)(1) OF THE CODE AND ANY PROPOSED, TEMPORARY OR FINAL TREASURY REGULATION THEREUNDER, INCLUDING, WITHOUT LIMITATION, AN OVER-THE-COUNTER- MARKET OR AN INTERDEALER QUOTATION SYSTEM THAT REGULARLY DISSEMINATES FIRM BUY OR SELL QUOTATIONS. EACH PURCHASER REPRESENTS AND WARRANTS FOR THE BENEFIT OF FINGERHUT RECEIVABLES, INC. THAT, UNLESS SUCH PURCHASER, AT ITS EXPENSE, DELIVERS TO THE TRUSTEE, THE SERVICER AND THE TRANSFEROR AN OPINION OF COUNSEL SATISFACTORY TO THEM TO THE EFFECT THAT THE PURCHASE OR HOLDING OF A CLASS A CERTIFICATE OR CLASS B CERTIFICATE BY SUCH PURCHASER WILL NOT RESULT IN THE ASSETS OF THE TRUST BEING DEEMED TO BE "ASSETS OF THE BENEFIT PLAN" AND SUBJECT TO THE PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE CODE AND WILL NOT SUBJECT THE TRUSTEE, THE TRANSFEROR OR THE SERVICER TO ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN THE POOLING AND SERVICING AGREEMENT, SUCH PURCHASER IS NOT (I) AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3(3) OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA")) THAT IS SUBJECT TO THE PROVISIONS OF TITLE I OF ERISA, (II) A PLAN DESCRIBED IN SECTION 4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (III) A GOVERNMENTAL PLAN, AS DEFINED IN SECTION 3(32) OF ERISA, SUBJECT TO ANY FEDERAL, STATE, OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE PROVISIONS OF SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE, (IV) AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF A PLAN'S INVESTMENT IN THE ENTITY OR (V) A PERSON INVESTING "PLAN ASSETS" OF ANY SUCH PLAN (INCLUDING FOR PURPOSES OF CLAUSES (IV) AND (V), ANDY INSURANCE COMPANY GENERAL ACCOUNT, BUT EXCLUDING ANY ENTITY REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED). No. _____ Percentage Interest: ___% FINGERHUT MASTER TRUST VARIABLE FUNDING TRUST CERTIFICATE, SERIES 1997-1, CLASS A Evidencing an undivided interest in a trust, the corpus of which consists of receivables generated from time to time in the ordinary course of business from a portfolio of installment sale contracts or loans generated or to be generated by Fingerhut Corporation ("Fingerhut") or Fingerhut National Bank (the "Bank" or the "Servicer") and other assets and interests constituting the Trust under the Agreement described below. (Not an interest in or a recourse obligation of Fingerhut Receivables, Inc., Fingerhut, the Bank or any affiliate thereof.) This certifies that _________ (the "Certificateholder") is the registered owner of a fractional undivided interest in the Fingerhut Master Trust (the "Trust") issued pursuant to the Amended and Restated Pooling and Servicing Agreement, dated as of January 12, 1997 (the "Pooling and Servicing Agreement"; such term to include any amendment thereto) by and between Fingerhut Receivables, Inc., as Transferor (the "Transferor"), the Bank, as Servicer, and The Bank of New York (Delaware), as Trustee (the "Trustee"), and the Series 1997-1 Supplement, dated as of January 21, 1997 (the "Series 1997-1 Supplement"), among the Transferor, the Bank as Servicer and the Trustee (the Pooling and Servicing Agreement, as supplemented by the Series 1997-1 Supplement, is herein referred to as the "Agreement"). The corpus of the Trust consists of all of the Transferor's right, title and interest in, to and under the Trust Property (as defined in the Agreement) and Section 4.4 of the Agreement. This Certificate does not purport to summarize the Agreement and reference is made to the Agreement for information with respect to the interests, rights, benefits, obligations, proceeds, and duties evidenced hereby and the rights, duties and obligations of the Trustee. To the extent not defined herein, the capitalized terms used herein have the meanings ascribed to them in the Agreement. This Certificate is one of a Class of Certificates entitled the "Fingerhut Master Trust Variable Funding Trust Certificates, Series 1997-1, Class A" (the "Class A Certificates"), each of which represents a fractional undivided interest in the Trust, and is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement, as amended from time to time, the Certificateholder by virtue of the acceptance hereof assents and by which the Certificateholder is bound. In the case of any conflict between terms specified in this Certificate and terms specified in the Agreement, as amended from time to time, the terms of the Agreement shall govern. The Transferor has structured the Agreement and the Class A Certificates with the intention that the Class A Certificates will qualify under applicable tax law as indebtedness, and both the Transferor and each holder of Class A Certificates (a "Class A Certificateholder") or any interest therein by acceptance of its Certificate or any interest therein, agrees to treat the Class A Certificates for purposes of federal, state and local income or franchise taxes and any other tax imposed on or measured by income, as indebtedness. Except in limited circumstance described in the third succeeding paragraph no principal will be payable to the Class A Certificateholders before the first Business Day in the Amortization Period. Except in connection with a payment of Class B Daily Principal, the Class B Certificate will not have the right to receive payments of principal until the Class A Invested Amount has been paid in full. Upon issuance, the Class A Certificates represents the right to receive, on each Business Day, an amount equal to the lesser of (x) the Available Series 1997-1 Imputed Yield Collections for such Business Day and (y) the sum of (A) the product of (i) the Class A Certificate Rate, (ii) a fraction the numerator of which is the actual number of days from and including the next preceding Business Day to but excluding such Business Day and the denominator of which is 360, and (iii) the Class A Outstanding Principal Amount as of the closed of business on the preceding Business Day plus (B) the excess, if any, of the amount payable to the Class A Certificateholders pursuant to clause (A) on each prior Business Day over the amount which has been deposited in the Interest Funding Account with respect thereto on each prior Business Day. Principal will be distributed to the Class A Certificateholders on each Distribution Date with respect to the Amortization Period following the Series 1994-1 Funding Date. On any Business Day during the Revolving Period, the Transferor may specify an amount, not to exceed the Net Revolving Principal Collections, to be deposited into the Defeasance Account. Any amounts so deposited, shall be paid to the Class A Certificateholders in accordance with Section 11 of the Agreement and upon payment shall reduce the Class A Invested Amount by an amount equal to any such payment. In addition the Transferor may specify, upon the issuance of a new Series pursuant to an Exchange made at any time during the Revolving Period that the proceeds of such issuance be deposited into the Defeasance Account for payment to the Class A Certificateholders pursuant to Section 11 of the Agreement. The Class A Invested Amount will be reduced by an amount equal to the amount of any such payments made. In addition, pursuant to Section 6.15 of the Agreement, the holders of this Certificate may from time to time be required, prior to the Pay Out Commencement Date, to purchase Additional Class A Invested Amounts on the terms and conditions specified therein. The holder of this Certificate is authorized to record on the grid attached to its Class A Certificates (or at such Certificateholder's option, in its internal books and records) the date and amount of any Additional Class A Invested Amount purchased by it, and each repayment thereof; provided that failure to make any such recordation on such grid or any error in such grid shall not adversely affect such Certificateholder's rights with respect to its Class A Invested Amount and its right to receive interest payments in respect of the Class A Invested Amount held by such Certificateholder. "Class A Invested Amount" means, when used with respect to any Business Day, an amount equal to (a) $59,600,000 plus (b) the aggregate principal amount of any Additional Class A Invested Amounts purchased pursuant to Section 6.15 of the Agreement, minus (c) the aggregate amount of principal payments made to Class A Certificateholders prior to such date, and minus (d) the aggregate amount of Class A Investor Charge-Offs for all prior Distribution Dates, and plus (e) the aggregate amount of Available Series Imputed Yield Collections, Transferor Imputed Yield Collections, Excess Imputed Yield Collections and Reallocated Principal Collections applied on all prior Distribution Dates for the purpose of reimbursing amounts deducted pursuant to the foregoing clause (d). Subject to the Agreement, payments of principal are limited to the unpaid Class A Invested Amount of the Class A Certificates, which may be less than the unpaid balance of the Class A Certificates pursuant to the terms of the Agreement. All principal of and interest on the Class A Certificates is due and payable no later than the October 2002 Distribution Date, unless (i) a different date shall be set forth in any Extension Notice, or (ii) a different date shall be specified in a written notice from the Transferor to the Trustee as necessary to satisfy the Minimum Rating Condition (the "Scheduled Series 1997-1 Termination Date"). After the Scheduled Series 1997-1 Termination Date neither the Trust nor the Transferor will have any further obligation to distribute principal or interest on the Class A Certificates. In the event that the Class A Invested Amount is greater than zero on the Scheduled Series Termination Date, the Trustee will sell or cause to be sold, to the extent necessary, an amount of interests in the Receivables or certain of the Receivables up to 110% of the Class A Invested Amount and the Class B Invested Amount at the close of business on such date (but not more than the total amount of Receivables allocable to the Investor Certificates), and shall pay the proceeds to the Class A Certificateholders pro rata in final payment of the Class A Certificates, then to the Class B Certificateholders pro rata in final payment of the Class B Certificates. Unless the certificate of authentication hereon has been executed by or on behalf of the Trustee, by manual signature, this Certificate shall not be entitled to any benefit under the Agreement, or be valid for any purpose. IN WITNESS WHEREOF, the Transferor has caused this Certificate to be duly executed. FINGERHUT RECEIVABLES, INC. By: ---------------------------- Name: Title: Dated: CERTIFICATE OF AUTHENTICATION This is the Class A Certificates referred to in the within-mentioned Pooling and Servicing Agreement. THE BANK OF NEW YORK By: ---------------------------- Name: Title: Beginning Ending Principal Principal Date Balance Additions Payments Balance ---- --------- --------- -------- --------- Exhibit B [FORM OF CLASS B VARIABLE FUNDING CERTIFICATE] THIS CERTIFICATE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS REGISTERED PURSUANT TO OR EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND ANY OTHER APPLICABLE SECURITIES LAW. FINGERHUT RECEIVABLES, INC. SHALL BE PROHIBITED FROM TRANSFERRING ANY INTEREST IN OR PORTION OF THIS CERTIFICATE UNLESS, PRIOR TO SUCH TRANSFER, IT SHALL HAVE DELIVERED TO THE TRUSTEE AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH PROPOSED TRANSFER WILL NOT ADVERSELY AFFECT THE FEDERAL INCOME TAX CHARACTERIZATION OF ANY OUTSTANDING SERIES OF INVESTOR CERTIFICATES. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO CERTAIN CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. NO SALE, ASSIGNMENT, PARTICIPATION, PLEDGE, HYPOTHECATION, TRANSFER OR OTHER DISPOSITION OF A CLASS B CERTIFICATE (OR ANY INTEREST THEREIN) SHALL BE MADE UNLESS THE TRANSFEROR SHALL HAVE GRANTED ITS PRIOR CONSENT THERETO, WHICH CONSENT MAY NOT BE UNREASONABLY WITHHELD. NOR MAY AN INTEREST IN THIS CERTIFICATE BE MARKETED ON OR THROUGH AN "ESTABLISHED SECURITIES MARKET" WITHIN THE MEANING OF SECTION 7704(B)(1) OF THE CODE AND ANY PROPOSED, TEMPORARY OR FINAL TREASURY REGULATION THEREUNDER, INCLUDING, WITHOUT LIMITATION, AN OVER-THE-COUNTER- MARKET OR AN INTERDEALER QUOTATION SYSTEM THAT REGULARLY DISSEMINATES FIRM BUY OR SELL QUOTATIONS. EACH PURCHASER REPRESENTS AND WARRANTS FOR THE BENEFIT OF FINGERHUT RECEIVABLES, INC. THAT, UNLESS SUCH PURCHASER, AT ITS EXPENSE, DELIVERS TO THE TRUSTEE, THE SERVICER AND THE TRANSFEROR AN OPINION OF COUNSEL SATISFACTORY TO THEM TO THE EFFECT THAT THE PURCHASE OR HOLDING OF A CLASS B CERTIFICATE BY SUCH PURCHASER WILL NOT RESULT IN THE ASSETS OF THE TRUST BEING DEEMED TO BE "ASSETS OF THE BENEFIT PLAN" AND SUBJECT TO THE PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE CODE AND WILL NOT SUBJECT THE TRUSTEE, THE TRANSFEROR OR THE SERVICER TO ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN THE POOLING AND SERVICING AGREEMENT, SUCH PURCHASER IS NOT (I) AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3(3) OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA")) THAT IS SUBJECT TO THE PROVISIONS OF TITLE I OF ERISA, (II) A PLAN DESCRIBED IN SECTION 4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (III) A GOVERNMENTAL PLAN, AS DEFINED IN SECTION 3(32) OF ERISA, SUBJECT TO ANY FEDERAL, STATE, OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE PROVISIONS OF SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE, (IV) AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF A PLAN'S INVESTMENT IN THE ENTITY OR (V) A PERSON INVESTING "PLAN ASSETS" OF ANY SUCH PLAN (INCLUDING FOR PURPOSES OF CLAUSES (IV) AND (V) ANY INSURANCE COMPANY GENERAL ACCOUNT, BUT EXCLUDING ANY ENTITY REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED). No. Percentage Interest: ___% FINGERHUT MASTER TRUST VARIABLE FUNDING TRUST CERTIFICATE, SERIES 1997-1, CLASS B Evidencing an undivided interest in a trust, the corpus of which consists of receivables generated from time to time in the ordinary course of business from a portfolio of installment sale contracts or loans generated or to be generated by Fingerhut Corporation ("Fingerhut") of Fingerhut National Bank (the "Bank" or the "Servicer") and other assets and interests constituting the Trust under the Agreement described below. (Not an interest in or a recourse obligation of Fingerhut Receivables, Inc., Fingerhut, the Bank or any affiliate thereof.) This certifies that _________ (the "Certificateholder") is the registered owner of a fractional undivided interest in the Fingerhut Master Trust (the "Trust") issued pursuant to the Amended and Restated Pooling and Servicing Agreement, dated as of January 12, 1997 (the "Pooling and Servicing Agreement"; such term to include any amendment thereto) by and between Fingerhut Receivables, Inc., as Transferor (the "Transferor"), the Bank, as Servicer, and The Bank of New York (Delaware), as Trustee (the "Trustee"), and the Series 1997-1 Supplement, dated as of January 21, 1997 (the "Series 1997-1 Supplement"), among the Transferor, the Bank as Servicer and the Trustee (the Pooling and Servicing Agreement, as supplemented by the Series 1997-1 Supplement, is herein referred to as the "Agreement"). The corpus of the Trust consists of all of the Transferor's right, title and interest in, to and under the Trust Property (as defined in the Agreement) and Section 4.4 of the Agreement. This Certificate does not purport to summarize the Agreement and reference is made to the Agreement for information with respect to the interests, rights, benefits, obligations, proceeds, and duties evidenced hereby and the rights, duties and obligations of the Trustee. To the extent not defined herein, the capitalized terms used herein have the meanings ascribed to them in the Agreement. This Certificate is one of a Class of Certificates entitled "Fingerhut Master Trust Variable Funding Trust Certificates, Series 1997-1, Class B" (the "Class B Certificates"), each of which represents a fractional undivided interest in the Trust, and is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement, as amended from time to time, the Certificateholder by virtue of the acceptance hereof assents and by which the Certificateholder is bound. In the case of any conflict between terms specified in this Certificate and terms specified in the Agreement, as amended from time to time, the terms of the Agreement shall govern. [The Transferor has structured the Agreement, the Class B Certificates, the Fingerhut Master Trust Variable Funding Trust Certificate, Series 1997-1, Class A (the "Class A Certificates ) with the intention that the Class A Certificates and the Class B Certificates will qualify under applicable tax law as indebtedness, and both the Transferor and each holder of a Class B Certificate (a "Class B Certificateholder") or any interest therein by acceptance of its Certificate or any interest therein, agrees to treat the Class B Certificate for purposes of federal, state and local income or franchise taxes and any other tax imposed on or measured by income, as indebtedness.] Principal will be payable to the Class B Certificateholders on the Class B Principal Payment Commencement Date, which is the Distribution Date either on or following the Distribution Date, on which the Class A Invested Amount had been paid in full. Except in connection with a payment of Class B Daily Principal, principal will be payable to the Class B Certificateholders until all principal payments have been made to the Class A Certificateholders. "Class B Invested Amount" means an amount equal to (a) the aggregate principal amount of any Additional Class B Invested amount pursuant to Section 6.16 of the Agreement minus (b) the aggregate amount of principal payments made to Class B Certificateholders prior to such date minus (c) the aggregate amount of Class B Investor Charge-Offs for all prior Distribution Dates, minus (d) the aggregate amount of Reallocated Principal Collections for all prior Business Days and plus (e) the aggregate amount of Available Series Imputed Yield Collections, Transferor Imputed Yield Collections, Excess Imputed Yield Collections and Reallocated Principal Collections applied on all prior Distribution Dates for the purpose of reimbursing amounts deducted pursuant to the foregoing clauses (c) and (d). Subject to the Agreement, payments of principal are limited to the unpaid Class B Invested Amount of the Class B Certificates, which may be less than the unpaid balance of the Class B Certificate pursuant to the terms of the Agreement. All principal of and interest on the Class B Certificate is due and payable no later than the October 2002 Distribution Date, unless (i) a different date shall be set forth in any Extension Notice, or (ii) a different date shall be specified in a written notice from the Transferor to the Trustee as necessary to satisfy the Minimum Rating Condition (the "Scheduled Series 1997-1 Termination Date"). After the Scheduled Series 1997-1 Termination Date neither the Trust nor the Transferor will have any further obligation to distribute principal or interest on the Class B Certificates. In the event that the Class B Invested Amount is greater than zero on the Scheduled Series 1997-1 Termination Date, the Trustee will sell or cause to be sold, to the extent necessary, an amount of interests in the Receivables or certain of the Receivables up to 110% of the Class A Invested Amount and the Class B Invested Amount at the close of business on such date (but not more than the total amount of Receivables allocable to the Investor Certificates), and shall pay the proceeds to the Class A Certificateholders pro rata in final payment of the Class A Certificates, then to the Class B Certificateholders pro rata in final payment of the Class B Certificates. Unless the certificate of authentication hereon has been executed by or on behalf of the Trustee, by manual signature, this Certificate shall not be entitled to any benefit under the Agreement, or be valid for any purpose. IN WITNESS WHEREOF, the Transferor has caused this Certificate to be duly executed. FINGERHUT RECEIVABLES, INC. By: ---------------------------- Name: Title: Dated: CERTIFICATE OF AUTHENTICATION This is one of the Class B Certificates referred to in the within-mentioned Pooling and Servicing Agreement. THE BANK OF NEW YORK By: ---------------------------- Name: Title: Exhibit C [Form of Monthly Certificateholders' Statement] Exhibit D ____________, ____ Fingerhut Receivables, Inc. 4400 Baker Road Suite F480 Minnetonka, MN 55343 The Bank of New York (Delaware) White Clay Center Route 273 Newark, Delaware 19711 Re: Class A Certificates, Series 1997-1 Ladies and Gentlemen: In connection with our proposed purchase of $___________ in principal amount of Fingerhut Master Trust, Variable Funding Trust Certificates, Series 1997- 1, Class A (the "Class A Certificates"), we confirm that: 1. We have received such information and documentation as we deem necessary in order to make our investment decision. We understand that such information and documentation speaks only as of its date and that such information and documentation may not be correct or complete as of any time subsequent to such date. 2. We agree to be bound by the restrictions and conditions set forth in the Amended and Restated Pooling and Servicing Agreement, dated as of January 12, 1997, as supplemented by the Series 1997-1 Supplement dated as of January 21, 1997 (the "Series 1997-1 Supplement" and together with the Pooling and Servicing Agreement, each as amended from time to time, the "Pooling and Servicing Agreement"), each by and among Fingerhut Receivables, Inc., as Transferor, Fingerhut National Bank, as Servicer, and The Bank of New York (Delaware), as Trustee, relating to the Class A Certificates, including the obligation to purchase Additional Class A Invested Amounts, as specified in Section 6.15 of the Pooling and Servicing Agreement, and agree to be bound by, and not reoffer, resell, pledge or otherwise transfer (any such act, a "Transfer") the Class A Certificates except in compliance with, such restrictions and conditions including but not limited to those in Section 12 of the Series 1997-1 Supplement. 3. We understand that the Class A Certificates have not been and will not be registered under the Securities Act of 1933, as amended (the "Securities Act") or any state securities law and agree that the Class A Certificates may be reoffered, resold, pledged or otherwise transferred only in compliance with the Securities Act and other applicable laws and only (i) to the Transferor or (ii) pursuant to Rule 144A under the Securities Act to a person that we reasonably believe is a qualified institutional buyer within the meaning of Rule 144A ("QIB") purchasing for its own account or a QIB purchasing for the account of a QIB, whom we have informed, in each case, that the reoffer, resale, pledge or other transfer is being made in reliance on Rule 144A. 4. We have neither acquired nor will we Transfer any Class A Certificate we acquire (or any interest therein) or cause any Class A Certificate (or any interest therein) to be marketed on or through an "established securities market" within the meaning of Section 7704(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code") and any treasury regulation thereunder, including, without limitation, an over-the- counter-market or an interdealer quotation system that regularly disseminates firm buy or sell quotations. 5. We are not and will not become, for so long as we hold any interest in the Class A Certificates, a partnership, Subchapter S corporation or grantor trust for United States federal income tax purposes. 6. We are a person who is either (A)(i) a citizen or resident of the United States, (ii) a corporation or other entity organized in or under the laws of the United States or any political subdivision thereof or (iii) a person not described in (i) or (ii) whose ownership of the Class A Certificates is effectively connected with a such person's conduct of a trade or business within the United States (within the meaning of the Code) and our ownership of any interest in a Class A Certificate will not result in any withholding obligation with respect to any payments with respect to the Class A Certificates by any person or (B) an estate or trust the income of which is includible in gross income for United States federal income tax purposes. We agree that if we are a person described in clause (A)(iii) above, we will furnish to the person from whom we are acquiring a Class A Certificate, the Servicer and the Trustee, a properly executed U.S. Internal Revenue Service Form 4224 and a new Form 4224, or any successor applicable form, upon the expiration or obsolescence of any previously delivered form (and such other certifications, representations or opinions of counsel as may be requested by the Transferor, the Servicer or the Trustee). We recognize that if we are a tax-exempt entity, payments with respect to the Class A Certificates may constitute unrelated business taxable income. 7. We understand that no subsequent Transfer of a Class A Certificate is permitted unless (i) such Transfer is of a Class A Certificate with a minimum principal amount of at least $1,000,000 and (ii) the Transferor consents in writing to the proposed Transfer; provided, that any attempted Transfer that would cause the number of Targeted Holders to exceed ninety-nine shall be void. 8. We are a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) purchasing for our own account or for the account of a "qualified institutional buyer" and we understand that the sale to us is being made in reliance on Rule 144A under the Securities Act. 9. We are acquiring each of the Class A Certificates purchased by us for our own account or for a single account (each of which is a "qualified institutional buyer") as to which we exercise sole investment discretion. 10. We are not (i) an employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code, (iii) a governmental plan, as defined in Section 3(32) of ERISA, subject to any federal, state or local law which is, to a material extent, similar to the provisions of Section 406 of ERISA or Section 4975 of the Code, (iv) an entity whose underlying assets include plan assets by reason of a plan's investment in the entity, or (v) a person investing "plan assets" of any such plan (including for purposes of clauses (iv) and (v) any insurance company general account, but excluding any entity registered under the Investment Company Act of 1940, as amended). 11. We understand that any purported Transfer of any Class A Certificate in contravention of the restrictions and conditions in paragraphs 1 through 10 above (including any violation of the representation in paragraph 5 by an investor who continues to hold a Class A Certificate occurring any time after the Transfer in which it acquired such Class A Certificate) shall be null and void and the purported transferee shall not be recognized by the Trust or any other person as a Class A Certificateholder for any purpose. 12. We further understand that, on any proposed resale, pledge or transfer of any Class A Certificates, we will be required to furnish to the Trustee and the Registrar, such certification and other information as the Trustee or the Registrar may reasonably require to confirm that the proposed sale complies with the foregoing restrictions and with the restrictions and conditions of the Class A Certificates and the Pooling and Servicing Agreement pursuant to which the Class A Certificates were issued and we agree that if we determine to Transfer any Class A Certificate, we will cause our proposed transferee to provide the Transferor, the Servicer and the Trustee with a letter substantially in the form of this letter. We further understand that Class A Certificates purchased by us will bear a legend to the foregoing effect. 13. The person signing this letter on behalf of the ultimate beneficial purchaser of the Class A Certificates has been duly authorized by such beneficial purchaser of the Class A Certificates to do so. 14. The Class A Certificates purchased by us should be registered in the name and issued in the denominations set forth on Schedule 1 hereto. All payments on the Class A Certificates held by us should be wired to us in accordance with the instructions set forth on Schedule 1 hereto unless we otherwise notify the Transferor, the Servicer and the Trustee in writing. You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours [NAME OF PURCHASER] By: ---------------------------- Name: Title: Schedule 1 Registration and Payment Instructions ------------------------------------- Registration Instructions: ------------------------- Full Legal Name of Purchaser:__________________________ Number and Denomination of Certificates:________________ ________________ Payment Instructions: -------------------- Name of Bank: ____________________ Address of Bank:____________________ Account Name: ___________________ Account Number:___________________ ABA Number: ___________________ Reference: ___________________ Exhibit E FORM OF EXTENSION NOTICE FINGERHUT MASTER TRUST, SERIES 1997-1 The undersigned, a duly authorized representative of Fingerhut Receivables, Inc., a Delaware corporation (the "Transferor"), as Transferor pursuant to the Amended and Restated Pooling and Servicing Agreement dated as of January 12, 1997 (the "Pooling and Servicing Agreement"), by and among the Transferor, Fingerhut National Bank, as servicer (the "Servicer"), and The Bank of New York (Delaware), as trustee (the "Trustee"), as supplemented by the Series 1997-1 Supplement, dated as of January 21, 1997 (the "Series 1997-1 Supplement"), by and between the Transferor, the Servicer and the Trustee (the Pooling and Servicing Agreement, as supplemented by the Series 1997-1 Supplement, and as each may from time to time be amended, supplemented, or modified, the "Agreement"), does hereby notify the Trustee (or any successor Trustee) and the Investor Certificateholders: A. Capitalized terms used but not defined in this Certificate shall have the respective meanings set forth in the Agreement. References herein to certain sections and subsections are references to the respective sections and subsections of the Agreement. B. The undersigned is a [Vice President] or more senior officer of the Transferor who is duly authorized to execute and deliver this Certificate on behalf of the Transferor. C. This Certificate is being delivered pursuant to Section 6.17(a) of the Agreement. D. The Transferor is the Transferor under the Agreement. E. No Pay Out Event has occurred that has not been remedied pursuant to the provisions of the Agreement. F. The Certificate is being delivered to the Trustee on or before the date specified in subsection 6.17(a) for delivery. G. NOTIFICATION OF EXTENSION Pursuant to subsection 6.17(a) and in respect of [ , ] (the "Current Extension Date"), the Transferor hereby notifies the Trustee and the Investor Certificateholders of the Transferor's intention to extend the Revolving Period in respect of Series 1997-1 on the Current Extension Date pursuant to the provisions of Section 6.17, until the date set forth below (such extension, the "Extension"). H. REQUIREMENTS TO COMPLETE EXTENSION (1) Annexed hereto is an election notice (an "Election Notice") to be returned by any Investor Certificateholder electing to approve the Extension. No Extension shall occur unless Investor Certificateholders holding at least more than fifty percent of each of the aggregate principal amount of Class A Certificates and Class B Certificates, respectively, shall return properly executed Election Notices approving the Extension by the Election Date (as defined below). Any Investor Certificateholder electing to approve the Extension must deliver a properly executed Election Notice at the office of the Trustee, [ ] on or before 3:00 p.m., [] time, on [ ,] (the "Election Date"). Any Investor Certificateholder may withdraw any Election Notice delivered by it to the Trustee by notifying the Trustee in writing at the address set forth in the previous sentence on or prior to the Election Date. (2) THE EXTENSION SHALL NOT OCCUR UNTIL PRIOR SATISFACTION OF CERTAIN CONDITIONS PRECEDENT BY THE CLOSE OF BUSINESS ON THE ELECTION DATE, INCLUDING THE APPROVAL OF SUCH EXTENSION BY THE INVESTOR CERTIFICATEHOLDERS HOLDING THE REQUIRED AGGREGATE PRINCIPAL AMOUNT OF CLASS A CERTIFICATES AND CLASS B CERTIFICATES THAT NO PAY OUT EVENT SHALL HAVE OCCURRED AND BE CONTINUING, AND THAT CERTAIN LEGAL OPINIONS AND RATING AGENCY CONFIRMATIONS SHALL HAVE BEEN DELIVERED TO THE TRANSFEROR AND THE TRUSTEE PURSUANT TO SECTION 6.17(b). THE TRANSFEROR MAY IN ITS SOLE DISCRETION WITHDRAW THIS EXTENSION NOTICE AT ANY TIME ON OR PRIOR TO THE ELECTION DATE BY DELIVERING NOTICE OF SUCH WITHDRAWAL IN WRITING TO THE TRUSTEE. IF ANY SUCH NOTICE OF WITHDRAWAL SHALL BE SO DELIVERED, NO EXTENSION SHALL OCCUR. I. NEW PROVISIONS TO BECOME EFFECTIVE ON THE EXTENSION DATE (1) The new Amortization Period Commencement Date shall be the earlier of (a) [,] or (b) the Pay Out Commencement Date. (2) The new Extension Date shall be [ , ]. [(3) The new Scheduled Series 1997-1 Termination Date shall be [,].] (4) The new Class A Expected Payment Date is ______. [(5) The following are additional provisions that will apply to the Investor Certificates on and after the Extension Date: INSERT PROVISIONS] J. Annexed hereto are the following: (1) the form of Extension Tax Opinion. (2) the form of Extension Opinion. (3) the Election Notice. IN WITNESS WHEREOF, the undersigned has duly executed this certificate this [ ] day of [ , ]. FINGERHUT RECEIVABLES, INC. By: ---------------------------- Name: Title: Exhibit F FORM OF INVESTOR CERTIFICATEHOLDER ELECTION NOTICE [INSERT NAME AND ADDRESS OF TRUSTEE] Re: Fingerhut Master Trust: Election Notice to Extend Series 1997-1 Ladies and Gentlemen: The undersigned hereby elects to approve the extension of the Revolving Period for Series 1997-1 until the Amortization Period Commencement Date set forth in the Extension Notice dated [ , ] (the "Extension Notice") and delivered to the undersigned pursuant Section 6.17(a) of the Amended and Restated Pooling and Servicing Agreement, dated as of January 12, 1997, including the Series 1997-1 Supplement thereto, dated as of January 21, 1997, each by and among Fingerhut Receivables, Inc., as transferor, Fingerhut National Bank, as servicer, and The Bank of New York (Delaware), as trustee (collectively, and as each may be amended, supplemented or modified from time to time, the "Pooling and Servicing Agreement"). The undersigned hereby acknowledges that, commencing on the Current Extension Date (as defined in the Extension Notice), the terms and provisions of the Pooling and Servicing Agreement shall be modified as set forth in the Extension Notice. IN WITNESS WHEREOF, the undersigned registered owner(s) has [have] executed this Election Notice as of the date set forth below. Dated: Name(s):_______________________ Address:_______________________ (Please Print) Signature(s):__________________ EX-10 4 Exhibit 10.g(i) AMENDMENT dated as of February 4, 1997 to Fingerhut Companies, Inc. Stock Option Plan The following amendments to the Fingerhut Companies, Inc. Stock Option Plan (the "1990 Plan") were adopted by the Board of Directors of Fingerhut Companies, Inc., on February 4, 1997: 1. Effective as of the date hereof, Section 5(c) of the 1990 Plan is hereby amended to read in its entirety as follows: "(c) Except as otherwise determined by the Committee or in an option or award agreement, no option or award granted under the Plan shall be transferable by an optionee or grantee, otherwise than by will or the laws of descent or distribution and during the lifetime of an optionee or grantee, the option shall be exercisable only by such optionee." 2. Effective as of the date hereof, Section 9(b) of the 1990 Plan is hereby amended to read in its entirety as follows: "(b) Except as otherwise provided in this Plan or in an option or award agreement, a participant's rights and interest under the Plan may not be assigned or transferred in whole or in part either directly or by operation of law or otherwise including, but not limited to, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner and no such right or interest of any participant in the Plan shall be subject to any obligation or liability of such participant." 3. Effective as of the date hereof, the introductory language set forth in Section 5(d) of the 1990 Plan is hereby amended to read as follows: "Except as set forth in Section 5(h) below, the Option shall not be exercisable:" 4. Effective as of the date hereof, Section 5(g) of the 1990 Plan is hereby amended to read as follows: "Except as otherwise set forth in Section 5(h) below, no Option shall be exercised during the first year following its grant and, except as otherwise determined by the Committee, any Option shall be exercisable, on a cumulative basis, with respect to twenty percent (20%) of the Common Shares subject to such Option on each annual anniversary date from the date granted." 5. Effective as of the date hereof, the 1990 Plan is hereby amended to add a new Section 5(h) to read in its entirety as expressly set forth below: (h) Notwithstanding the vesting provisions contained in Section 5 hereof, but subject to the other terms and conditions set forth herein, an Option may be exercised in full immediately following the date of a "Change in Control" (as hereinafter defined). For purposes of this Plan, the following terms shall have the definitions set forth below: (A) "Change in Control" shall mean: (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; or (ii) the public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or any "person" (as such term issued in Sections 13(d) and 14(d) of the Exchange Act) that such person has become the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; provided, however, that notwithstanding the foregoing, no Change of Control shall be deemed to have occurred for purposes of this Plan by reason of ownership of 30% or more of the total voting capital stock of the Company then issued and outstanding by any subsidiary of the Company or any employee benefit plan of the Company or of any subsidiary of the Company or any entity holding shares of the Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan (any such person or entity described in this proviso is referred to herein as a "Company Entity"); or (iii) the announcement of a tender offer by any person or entity (other than a Company Entity) for 30% or more of the Company's voting capital stock then issued and outstanding, which tender offer has not been approved by the Board, a majority of the members of which are Continuing Directors (as hereinafter defined), and recommended to the shareholders of the Company; or (iv) the Continuing Directors (as hereinafter defined) cease to constitute a majority of the Company's Board of Directors; or (v) the shareholders of the Company approve (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company stock would be converted into cash, securities or other property, other than a merger of the Company in which shareholders immediately prior to the merger have the same proportionate ownership of stock of the surviving corporation immediately after the merger; (y) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (z) any plan of liquidation or dissolution of the Company. (B) "Continuing Director" shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person (as defined below) or an Affiliate or Associate (as defined below) of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (x) was a member of the Board of Directors on the date of the applicable option or award agreement or (y) subsequently becomes a member of the Board of Directors, if such person's initial nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. For purposes of this subparagraph (ii), "Acquiring Person" shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities, but shall not include any Company Entity; and "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. __________________________ Michael P. Sherman Senior Vice President, New Business Development, General Counsel and Secretary EX-10 5 Exhibit 10.i(i) AMENDMENT NO. 1 dated as of February 4, 1997 to Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock Option Plan The following amendments to the Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock Option Plan (the "1995 Plan") were adopted by the Board of Directors of Fingerhut Companies, Inc., on February 4, 1997: 1. Effective as of the date hereof, Section 14 of the 1995 Plan is hereby amended to read in its entirety as follows: "14. Limits on Transferability. Except as otherwise determined by the Committee or in an option or award agreement, no option or award granted under the Plan shall be transferable by an optionee or grantee, otherwise than by will or the laws of descent or distribution and during the lifetime of an optionee or grantee, the option shall be exercisable only by such optionee." 2. Effective upon and subject to shareholder approval, Section 2 of the 1995 Plan is amended by replacing the number "2,500,000" therein with the number "4,500,000." _____________________ Michael P. Sherman Senior Vice President, New Business Development, General Counsel and Secretary EX-10 6 EXHIBIT 10.i(iii) FINGERHUT COMPANIES, INC. 1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN RESTRICTED STOCK AWARD AGREEMENT This Restricted Stock Agreement is made as of February 14, 1996 by and between Fingerhut Companies, Inc. (the "Company") and [name] ("the Participant"). WHEREAS, the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") desires to provide Participant with an award of restricted shares of common stock of the Company pursuant to the provisions of the Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock Option Plan (the "Plan") and this Restricted Stock Award Agreement (the "Agreement"), and Participant desires to acquire such option. NOW, THEREFORE, for and in consideration of the mutual covenants and promises contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Award of Restricted Stock The Company hereby grants to the Participant a restricted stock award of [number] ([no]) shares (the "Shares") of common stock, par value $.01 per share, of the Company (the "Common Stock"') subject to the terms and conditions set forth herein and in the Plan. The grant of this award of Shares to the Participant shall become effective upon the Participant signing and returning this Agreement to the Senior Vice President, Human Resources of the Company. 2. Vesting; Change in Control (a) Subject to the terms and conditions of this Agreement, the Shares shall vest in Participant according to the following schedule: 25% on March 31, 1996, 25% on March 31, 1997 and 50% on August 31, 1998, if Participant remains continuously employed by the Company or any of its subsidiaries until such respective dates. The portion of the Shares that vest on March 31, 1996 shall remain subject to the transfer restrictions set forth in Section 4(b). (b) Notwithstanding the foregoing, in the event of a Change in Control (as defined below) prior to the vesting of the Shares, all Shares shall vest in full in Participant as of the date of such Change in Control if Participant has been continuously employed by the Company or any of its subsidiaries until the date of such Change in Control. (c) For purposes of this Agreement, "Change in Control" shall mean: (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; or (ii) the public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that such person has become the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; provided, however, that notwithstanding the foregoing, no Change of Control shall be deemed to have occurred for purposes of this Agreement by reason of ownership of 30% or more of the total voting capital stock of the Company then issued and outstanding by any subsidiary of the Company or any employee benefit plan of the Company or of any subsidiary of the Company or any entity holding shares of the Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan (any such person or entity described in this proviso is referred to herein as a "Company Entity"); or (iii) the announcement of a tender offer by any person or entity (other than a Company Entity) for 30% or more of the Company's voting capital stock then issued and outstanding, which tender offer has not been approved by the Board, a majority of the members of which are Continuing Directors (as hereinafter defined), and recommended to the shareholders of the Company; or (iv) the Continuing Directors (as hereinafter defined) cease to constitute a majority of the Company's Board of Directors; or (v) the shareholders of the Company approve (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company stock would be converted into cash, securities or other property, other than a merger of the Company in which shareholders immediately prior to the merger have the same proportionate ownership of stock of the surviving corporation immediately after the merger; (y) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (z) any plan of liquidation or dissolution of the Company. (b) "Continuing Director" shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person (as defined below) or an Affiliate or Associate (as defined below) of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (x) was a member of the Board of Directors on the date of this Agreement as first written above or (y) subsequently becomes a member of the Board of Directors, if such person's initial nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. For purposes of this subparagraph (ii), "Acquiring Person" shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities, but shall not include any Company Entity; and "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. 3. Forfeiture; Early Vesting in Event of Death or Disability (a) If Participant ceases to be an employee of the Company or any of its subsidiaries (as defined in the Plan) for any reason other than death or Disability (as defined below) prior to the vesting of the Shares pursuant to Section 2 hereof, then Participant's rights to all of the Shares not theretofore vested shall be immediately and irrevocably forfeited. (b) If Participant ceases to be an employee of the Company or any of its subsidiaries by reason of death or Disability prior to the vesting of the Shares pursuant to Section 2 hereof, then Participant or Participant's Representative (as defined below) shall become immediately vested, as of the date of such death or Disability in all unvested Shares. No transfer by will or by laws of descent and distribution of any Shares which vest by reason of Participant's death shall be effective to bind the Company, unless the Company shall have been furnished with written notice of such transfer and a copy of the will or such other evidence as the Company may deem necessary to establish the validity of the transfer. (c) For purposes of this Agreement, the following terms shall be defined as follows: (i) "Disability" shall have the meaning given to "permanent and total disability" in Section 22(e)(3) of the Code (as defined in the Plan) and shall be determined by the Committee (as defined in the Plan) in its sole and absolute discretion. (ii) "Representative" shall mean the person or persons to whom Participant's rights under this Agreement shall pass upon death, whether by will or by the applicable laws of descent and distribution. (d) A leave of absence granted in accordance with the Company's usual procedure which does not operate to interrupt continuous employment for other benefits granted by the Company shall not be considered a termination of employment under this Agreement. A period of "related employment" during which Participant is not employed by the Company nor a subsidiary (as defined in the Plan) shall not be considered a termination of employment under this Agreement if (i) such employment is undertaken by Participant at the request of the Company or a subsidiary, (ii) immediately prior to the undertaking of such employment Participant was an officer or employee of the Company or a subsidiary or was engaged in related employment, and (iii) such employment is recognized by the Committee, in its sole discretion, as related employment. The death or Disability of Participant during a period of related employment shall be treated, for purposes of this agreement, as if such death or the onset of such disability had occurred while Participant was an officer or employee of the Company or a subsidiary. (e) The Committee may accelerate the vesting schedule provided in Section 2 at any time in its sole discretion. 4. Restriction on Transfer (a) Except as provided in subsection 4(b) below, none of the Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of or encumbered until they vest pursuant to Section 2 or 3 hereof, and no attempt to transfer the unvested Shares, whether voluntary or involuntary, by operation of law or otherwise, shall vest the transferee with any interest or right in or with respect to such Shares. (b) To the extent such transfers are permitted under the Plan and are not restricted by Rule 16b-3 promulgated under the Exchange Act, the Committee, in its sole discretion, may establish, as permitted by applicable law, rules and conditions under which a Participant may transfer the unvested restricted stock granted pursuant to this Agreement to any member of Participant's "immediate family" (as such term is defined in Rule 16a-1(e) promulgated under the Exchange Act), to a trust whose beneficiaries are members of Participant's "immediate family" or to or for the benefit of an organization exempt from federal income tax pursuant to Section 501 of the Code. Any such transferee will remain subject to the vesting and forfeiture provisions contained in Section 2 and 3 hereof. (c) Notwithstanding the foregoing, none of the Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of or encumbered until August 15, 1996, and no attempt to transfer the Shares, whether voluntary or involuntary, by operation of law or otherwise, shall vest the transferee with any interest or right in or with respect to the Shares. 5. Issuance and Custody of Certificate (a) The Company shall cause to be issued one or more stock certificates, registered in the name of Participant, evidencing the Shares. Unvested Shares may be registered in book entry form at the Company's transfer agent. Each such certificate or book entry registration shall bear one or both of the following legends or other similar legends: (i) "THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO FORFEITURE, AND THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF COMMON STOCK REPRESENTED HEREBY ARE SUBJECT TO THE RESTRICTIONS, TERMS AND CONDITIONS (INCLUDING RESTRICTIONS AGAINST TRANSFER) CONTAINED IN THE FINGERHUT COMPANIES, INC. 1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN FINGERHUT COMPANIES, INC. AND THE REGISTERED OWNER OF SUCH SHARES. COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICE OF THE SECRETARY OF FINGERHUT COMPANIES, INC., 4400 BAKER ROAD, MINNETONKA, MINNESOTA 55343." (ii) If required under then applicable securities laws: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT (I) THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF SUCH SECURITIES THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION OR QUALIFICATION UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR (II) SUCH REGISTRATION OR QUALIFICATION." (b) Participant agrees to sign stock powers relating to the Shares from time to time and to deliver them to the Company. These stock powers will be used to authorize the issuance of new certificates upon lapse of restrictions upon vesting. (c) Each certificate issued pursuant to Section 5(a) hereof, together with the stock powers relating to the Shares, shall be deposited by the Company with the Secretary of the Company or a custodian designated by the Secretary. Upon request, the Secretary or such custodian shall issue a receipt to the Participant evidencing the certificate or certificates held which are registered in the name of the Participant. (d) After Shares vest pursuant to Sections 2 or 3 hereof, the Company shall promptly cause to be issued a certificate or certificates evidencing such vested Shares, free of the legend provided in Section 5(a)(i) and, subject to receipt of an opinion of counsel satisfactory to the Company (which may be counsel for the Company), free of the legend provided in Section 5(a)(ii) hereof, and shall cause such certificate or certificates, the stock powers relating to such vested Shares and any additional shares of Common Stock, any securities and any other property held in custody with respect to such vested Shares pursuant to Section 6(c) hereof to be delivered to the Participant or the Participant's Representative. Only whole Shares shall be issued to the Participant pursuant to this Agreement. 6. Distributions and Adjustments (a) In the event that the outstanding shares of Common Stock (other than shares held by dissenting shareholders) shall be changed into, or exchanged for, a different number or kind of shares of Common Stock or other securities of the Company, or, if further changes or exchanges of any Common Stock or other securities into which the Common Stock shall have been changed, or for which it shall have been exchanged, shall be made (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividend, reclassification, split-up, combination of shares or otherwise), then for each Share, there shall be substituted and exchanged therefor the number and kind of shares of Common Stock or other securities into or for which each outstanding share of Common Stock (other than shares held by dissenting shareholders) shall be so changed or exchanged. If in the event of any such changes or exchanges in order to prevent dilution or enlargement of rights under this Agreement, it is necessary to make an adjustment in the number or kind of the Shares, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of this Agreement. (b) Any additional shares of Common Stock, any other securities of the Company and any other property (except for cash dividends or other cash distributions) distributed with respect to the Shares prior to the date the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares. Any cash dividends or other cash distributions payable with respect to the Shares shall be distributed to Participant at the same time cash dividends or other cash distributions are distributed to stockholders of the Company generally. (c) Any additional shares of Common Stock, any securities and any another property (except for cash dividends or other cash distributions) distributed with respect to the Shares prior to the date such Shares vest shall be promptly deposited with the Secretary or the custodian designated by the Secretary to be held in custody in accordance with Section 5(c) hereof. 7. Taxes The Participant shall immediately notify the Company of any election he/she may make under Section 83 of the Code with respect to this restricted stock award. In order to comply with all applicable federal or state income, social security, payroll, withholding or other tax laws or regulations, the Company may take such action, and may require Participant to take such action, as it deems appropriate to ensure that all applicable federal or state income, social security, payroll, withholding or other taxes, which are the sole and absolute responsibility of the Participant, are withheld or collected from Participant. The Company reserves the right to withhold from any transfer or payment under the Plan or from any other payment due to the Participant from the Company any taxes as may be required pursuant to law and the Participant shall provide any documentation necessary with respect to such withholding. The Participant shall, if required by the Company in its discretion, pay to the Company in cash any amount required to be withheld for any applicable employment or withholding taxes, and the Company may condition delivery of vested, nonrestricted stock certificates upon receipt of such payment. 8. Miscellaneous (a) This Agreement is subject in all respects to the terms of the Plan. By signing this Agreement, the Participant acknowledges receipt of a copy of the Plan. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of the Plan shall govern. Any question of administration or interpretation arising under this Agreement shall be determined by the Committee or its delegates, and such determination shall be final and conclusive upon all parties in interest. (b) Any compensation realized from the receipt or payment of (or the lapse of restrictions relating to) this restricted stock award shall constitute a special long-term incentive payment to the Participant and shall not be taken into account as compensation in determining the amount of any benefit under any retirement or other employee benefit plan of the Company or any of its affiliates. 10. Limitation of Liability. Nothing in this Agreement shall be construed to: (a) limit in any way the right of the Company or a subsidiary to terminate the employment of Participant; or (b) be evidence of any agreement or understanding, express or implied, that the Company or a subsidiary shall employ Participant in any particular position at any particular rate of compensation or for any particular period of time. 11. Severability. It is intended that each provision of this Agreement shall be viewed as separate and divisible. In the event that any provision hereof shall be held to be invalid or unenforceable, the remaining provisions of this Agreement shall continue to be in full force and effect. 12. Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the State of Minnesota without regard for conflicts of laws principles thereof. 13. Further Assurances. Each party hereto agrees to execute and deliver such further instruments and to take such other action as shall be reasonably required to carry out the intent and purposes of this Agreement. 14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. 15. Notices. All notices that are required or may be given pursuant to the terms of this Agreement shall be in writing and delivered personally or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows and shall be deemed to have been given upon delivery to the addressee: To the Company: Fingerhut Companies, Inc. 4400 Baker Road Minnetonka, MN 55343 Attention: General Counsel To Participant: At Participant's residence address listed in the Company's personnel records. Notice of a change in address of one of the parties hereto shall be given in writing to the other party as provided above, but shall be effective only upon actual receipt. 16. Amendment. This Agreement may not be amended or modified by the parties hereto in any manner, except by a written instrument signed by both parties hereto. 17. Binding Effect: Assignment. This Agreement shall be binding upon the heirs, successors and assigns of the parties hereto. This Agreement shall not be assigned by either party hereto without the express written consent of the other party. 18. Entire Agreement. The Plan and this Agreement constitute, except as to any written agreement between the parties hereto which specifically references this Section 18, the entire understanding between the parties hereto with respect to the matters covered herein and supersede all previous written, oral or implied understandings between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the Company and Participant have executed this Agreement as of the day and year first above written. FINGERHUT COMPANIES, INC. By John D. Buck PARTICIPANT SIGNATURE [name] Social Security #: [ssn] Date: EX-10 7 Exhibit 10.j(i) AMENDMENT NO. 1 dated as of February 4, 1997 to Fingerhut Companies, Inc. 1992 Long-Term Incentive and Stock Option Plan The following amendment to the Fingerhut Companies, Inc. 1992 Long-Term Incentive and Stock Option Plan (the "1992 Plan") was adopted by the Board of Directors of Fingerhut Companies, Inc., on February 4, 1997: 1. Effective as of the date hereof, Section 14 of the 1992 Plan is hereby amended to read in its entirety as follows: "14. Limits on Transferability. Except as otherwise determined by the Committee or in an option or award agreement, no option or award granted under the Plan shall be transferable by an optionee or grantee, otherwise than by will or the laws of descent or distribution and during the lifetime of an optionee or grantee, the option shall be exercisable only by such optionee." -------------------- Michael P. Sherman Senior Vice President, New Business Development, General Counsel and Secretary EX-10 8 Exhibit 10.u FINGERHUT CORPORATION PENSION EXCESS PLAN 1996 REVISION Table of Contents Page ARTICLE 1 Description 1.1 Plan Name 1.2 Plan Purpose 1.3 Plan Type ARTICLE 2 Definitions, Construction and Interpretation 2.1 Administrator 2.2 Board 2.3 Code 2.4 Company 2.5 ERISA 2.6 Governing Law 2.7 Headings 2.8 Number and Gender 2.9 Participant 2.10 Pension Plan 2.11 Plan 2.12 Trust 2.13 Trustee ARTICLE 3 Participation 3.1 Participation 3.2 Condition of Participation ARTICLE 4 Benefits 4.1 Amount 4.2 Form and Time of Payment 4.3 Entitlement, Reductions 4.4 Payment in the Event of Incapacity ARTICLE 5 Source of Payments; Nature of Interest 5.1 Establishment of Trust 5.2 Source of Payments 5.3 Status of Plan 5.4 Non-assignability of Benefits ARTICLE 6 Amendment and Termination 6.1 Amendment 6.2 Termination of Participation 6.3 Termination ARTICLE 7 Administration 7.1 Administrator 7.2 Rules and Regulations 7.3 Administrator's Discretion 7.4 Specialist's Assistance 7.5 Indemnification 7.6 Benefit Claim Procedure 7.7 Disputes ARTICLE 8 Miscellaneous 8.1 Withholding and Offsets 8.2 Other Benefits 8.3 No Warranties Regarding Tax Treatment 8.4 No Employment Rights Created FINGERHUT CORPORATION PENSION EXCESS PLAN 1996 REVISION ARTICLE 1 Description of Plan 1.1 Plan Name. The name of the Plan is the "Fingerhut Corporation Pension Excess Plan." 1.2 Plan Purpose. The purpose of the Plan is to ensure, to the extent provided in Section 4.1 of the Plan, that Participants will not be deprived of benefits that would otherwise be payable under the Pension Plan because of the limitation on compensation imposed by Code section 401(a)(17). 1.3 Plan Type. The Plan is an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees and, as such, is exempt from Parts 2, 3 and 4 of Subtitle B of Title I of ERISA by operation of sections 201(2), 302(a)(3) and 401(a)(4) thereof, respectively, and from Title IV of ERISA by operation of section 4021(a)(6) thereof. The Plan is also intended to be unfunded for tax purposes. The Plan will be construed and administered in a manner that is consistent with and gives effect to the foregoing. ARTICLE 2 Definitions, Construction and Interpretation The definitions and rules of construction and interpretation set forth in this article apply in construing the Plan unless the context otherwise indicates. 2.1 Administrator. "Administrator" means the Company or any individual or committee appointed by the Board to perform administrative duties pursuant to Section 7.1. 2.2 Board. "Board" means the Company's Board of Directors or any individual or committee authorized to act on behalf of such Board of Directors. 2.3 Code. "Code" means the Internal Revenue Code of 1986, as amended. Any reference to a specific provision of the Code includes a reference to that provision as it may be amended from time to time and to any successor provision. 2.4 Company. "Company" means Fingerhut Corporation or any successor thereto. 2.5 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Any reference to a specific provision of ERISA includes a reference to that provision as it may be amended from time to time and to any successor provision. 2.6 Governing Law. To the extent state law is not preempted by the provisions of ERISA or any other laws of the United States, this Plan will be administered, and all questions pertaining to the construction, validity, effect and enforcement of the Plan will be determined, in accordance with the internal, substantive laws of the State of Minnesota without regard to the conflict of law rules of the State of Minnesota or of any other jurisdiction. 2.7 Headings. The headings of articles, sections, subsections and clauses are included solely for convenience and, if there is a conflict between such headings and the text of the Plan, the text will control. 2.8 Number and Gender. Wherever appropriate, the singular may be read as the plural, the plural may be read as the singular and one gender may be read as the other gender. 2.9 Participant. "Participant" means an individual described in Section 3.1. 2.10 Pension Plan. "Pension Plan" means the Fingerhut Corporation Pension Plan, as amended from time to time. 2.11 Plan. "Plan" means the Fingerhut Corporation Pension Excess Plan, as amended from time to time. 2.12 Trust. "Trust" means any trust or trusts established by the Company pursuant to Section 5.1. 2.13 Trustee. "Trustee" means the independent corporate trustee or trustees that at the relevant time has or have been appointed to act as Trustee of the Trust. ARTICLE 3 Participation 3.1 Participation. To be eligible to participate in the Plan, an individual must (a) be an employee of the Company after 1995 who is eligible to participate in the Pension Plan, (b) have compensation from the Company for a calendar year (of the type that would be taken into account in determining the Participant's normal retirement benefit under the Pension Plan but for the limitation in effect for the calendar year under Code section 401(a)(17)) under the Pension Plan in excess of the limitation in effect for the calendar year under Code section 401(a)(17) and (c) not be a party to a separate agreement with the Company pursuant to which he or she is not eligible to receive benefits pursuant to the Plan. A Participant will cease to be such as of the date on which all benefits to which he or she is entitled under the Plan have been distributed in full. 3.2 Condition of Participation. As a condition to the receipt of benefits pursuant to the Plan, each Participant is bound by all of the terms and conditions of the Plan, including but not limited to the reserved right of the Board to amend or terminate the Plan and the provisions of Section 7.7, and is required to furnish to the Administrator such pertinent information, and must execute such instruments, as the Administrator may require. ARTICLE 4 Benefits 4.1 Amount. (A) As of the date on which a Participant's Pension Plan benefit is scheduled to commence, the Administrator will determine the amount of the benefit to which the Participant is entitled pursuant to the Plan in accordance with Subsection (B). (B) Subject to Sections 4.2 and 4.3, the amount of the benefit to which a Participant is entitled pursuant to the Plan will be computed in the following manner: (1) The Administrator will determine a monthly benefit amount equal to the amount by which the monthly benefit determined pursuant to clause (a) exceeds the monthly benefit determined pursuant to clause (b), in each case based on a benefit payable in the normal form under the Pension Plan commencing at the later of the Participant's normal retirement date under the Pension Plan or the date on which benefits under the Pension Plan are scheduled to commence. (a) The monthly benefit to which the Participant would be entitled under the Pension Plan determined as if (i) the limitation in effect under Code section 401(a)(17) for each calendar year after 1993 and before 1997 were $235,840 and for each calendar year after 1996 were $300,000 and (ii) the limitation in effect under Code section 415(b)(1)(A) were $115,641. (b) The actual amount of the monthly benefit to which the Participant is entitled under the Pension Plan. (2) The amount determined pursuant to clause (1) will be adjusted in the same manner as the Participant's benefit under the Pension Plan to reflect any early or late commencement of the benefit. (C) If a Participant dies before his or her "annuity starting date," within the meaning of Code section 417(f)(2), and the Participant's surviving spouse is entitled to a "qualified preretirement survivor annuity," within the meaning of Code section 417(c), from the Pension Plan or the Pension Plan provides for the payment of any other death benefit to the surviving spouse or any other person, the amount of the benefit to which the surviving spouse or other person is entitled pursuant to the Plan will be determined in accordance with Subsection (B) but based, for the purpose of clause (1), on the difference between the normal form of the death benefit determined under items (a) and (b). 4.2 Form and Time of Payment. (A) Payment of a benefit to any Participant determined pursuant to Section 4.1(B) or surviving spouse or other person determined pursuant to Section 4.1(C) will be made or commence, as the case may be, at the same time and in the same form as his or her benefit under the Pension Plan. (B) If a Participant, surviving spouse or other person entitled to receive a benefit under the Plan elects to receive his or her benefit under the Pension Plan in a form other than the normal form, the benefit under the Plan will be actuarially adjusted to reflect the form in which it is paid in the same manner as the benefit under the Pension Plan. (C) If a Participant dies following the commencement of monthly benefit payments, any death benefits payable under the form of payment applicable to the Participant's benefit under the Plan will be paid to the same beneficiary or joint or contingent annuitant, as the case may be, as his or her benefit under the Pension Plan. 4.3 Entitlement, Reductions. Notwithstanding the foregoing provisions of this Article 4 - (A) The Company has no obligation to pay a benefit pursuant to the Plan to any former Participant to the extent the obligation to pay the benefit has been transferred to or assumed by a successor to all or any portion of the business of the Company. (B) If a Participant who is receiving or entitled to receive a benefit pursuant to the Plan is reemployed with the Company or an affiliate of the Company and, in connection with such reemployment, his or her Pension Plan benefit payment is suspended, his or her benefit under the Plan will be suspended for the same period. The Participant's benefit under the Plan will recommence at the same time as his or her benefit under the Pension Plan and the amount of the benefit at recommencement will be adjusted, based on a methodology and assumptions determined by the Administrator to be reasonable, to reflect any additional benefits earned and benefits previously paid. 4.4 Payment in the 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 thereof, 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 of the following (as may be chosen by the Administrator): the person's beneficiary or joint or contingent annuitant for purposes of his or her benefit under the Plan, if any, 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 payment so made completely discharges all liability under the Plan to the extent of such payment. ARTICLE 5 Source of Payments; Nature of Interest 5.1 Establishment of Trust. With the prior approval of the Board, the Company may establish a Trust with an independent corporate trustee. The Trust must (a) be a grantor trust with respect to which the Company is treated as grantor for purposes of Code section 677, (b) not cause the Plan to be funded for purposes of Title I of ERISA and (c) provide that Trust assets will, upon the insolvency of the Company, be used to satisfy claims of the Company's general creditors. The Company may from time to time transfer to the Trust cash, marketable securities or other property acceptable to the Trustee in accordance with the terms of the Trust. 5.2 Source of Payments. (A) Subject to Subsection (B), a Participant's benefit will be paid by the Company. (B) The Trustee, if any, will make distributions to Participants and Beneficiaries from the Trust in satisfaction of the Company's obligations under the Plan in accordance with the terms of the Trust. 5.3 Status of Plan. Nothing contained in the Plan or Trust is to be construed as providing for assets to be held for the benefit of any Participant or any other person or persons to whom benefits are to be paid pursuant to the terms of this Plan, the Participant's or other person's only interest under the Plan being the right to receive the benefits set forth herein. The Trust is established only for the convenience of the Company and the Participants, and no Participant has any interest in the assets of the Trust. To the extent the Participant or any other person acquires a right to receive benefits under this Plan or the Trust, such right is no greater than the right of any unsecured general creditor of the Company. 5.4 Non-assignability of Benefits. The benefits payable under the Plan and the right to receive future benefits under the Plan may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process. ARTICLE 6 Amendment and Termination 6.1 Amendment. (A) The Company reserves the right to amend the Plan at any time to any extent that it may deem advisable. To be effective, an amendment must be stated in a written instrument approved in advance or ratified by the Board and executed in the name of the Company by its President or a Vice President and attested by the Secretary or an Assistant Secretary. (B) An amendment adopted in accordance with Subsection (A) is binding on all interested parties as of the effective date stated in the amendment; provided, however, that no amendment will have any retroactive effect so as to deprive any Participant, or the beneficiary or joint or contingent annuitant of a deceased Participant, of any benefit to which he or she is entitled under the terms of the Plan in effect immediately prior to the effective date of the amendment, determined in the case of a Participant who is employed by the Company or an affiliate as if he or she had terminated employment immediately prior to the effective date of the amendment. (C) The provisions of the Plan in effect at the termination of a Participant's employment will, except as otherwise expressly provided by a subsequent amendment, continue to apply to such Participant. 6.2 Termination of Participation. Notwithstanding any other provision of the Plan to the contrary, if determined by the Administrator to be necessary to ensure that the Plan is exempt from ERISA to the extent contemplated by Section 1.3 or upon the Administrator's determination that a Participant's interest in the Plan has been or is likely to be includable in the Participant's gross income for federal income tax purposes prior to the actual payment of benefits pursuant to the Plan, the Administrator may take any or all of the following steps: (a) terminate the Participant's future participation in the Plan; (b) cause the Participant's entire interest in the Plan to be distributed to the Participant in the form of an immediate lump sum calculated based on a methodology and assumptions determined by the Administrator to be reasonable; and/or (c) transfer the benefits that would otherwise be payable pursuant to the Plan for all or any of the Participants to a new plan that is similar in all material respects (other than those which require the action in question to be taken.) 6.3 Termination. (A) The Company reserves the right to terminate the Plan in its entirety or with respect to any group of similarly situated current or former employees. The Plan will terminate in its entirety or with respect to a particular group of current or former employees as of the date specified by the Company in a written instrument adopted and executed in the manner of an amendment. (B) Upon the termination of the Plan in its entirety or with respect to any group of current or former employees, the Company will either cause (1) any benefits to which Participants have become entitled prior to the effective date of the termination to continue to be paid in accordance with the provisions of Article 4 or (2) the entire interest in the Plan of any or all Participants, or the beneficiaries or joint or contingent annuitants of any or all deceased Participants, to be distributed in the form of an immediate lump sum payment calculated based on a methodology and assumptions determined by the Administrator to be reasonable. ARTICLE 7 Administration 7.1 Administrator. The Plan may be administered on behalf of the Company by the Board or an individual or committee selected by the Board. 7.2 Rules and Regulations. The Administrator has the discretionary power and authority to make such rules and regulations as the Administrator determines to be consistent with the terms, and necessary or advisable in connection with the administration, of the Plan and to modify or rescind any such rules or regulations. 7.3 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 and regulations whenever necessary to carry out its intent and purpose and to facilitate its administration, including, without limitation, the discretionary power and authority to remedy ambiguities, inconsistencies, omissions and erroneous benefit calculations. In the exercise of its discretionary power and authority, the Administrator will treat all persons determined by the Administrator to be similarly situated in a uniform manner. The Administrator's interpretations, determinations, rules, procedures, methodologies, assumptions and calculations are final and binding on all persons and parties concerned. 7.4 Specialist's Assistance. The Administrator may retain such actuarial, accounting, legal, clerical and other services as may reasonably be required in the administration of the Plan, and may pay reasonable compensation for such services. All costs of administering the Plan will be paid by the Company. 7.5 Indemnification. The Company will indemnify and hold harmless, to the extent permitted by law, each director, officer and employee of the Company 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 director, officer or employee at any time by reason of his or her services in connection with the Plan, but only if he or she 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 Company has the right, but not the obligation, to select counsel and control the defense and settlement of any action for which a director, officer or employee may be entitled to indemnification under this provision. 7.6 Benefit Claim Procedure. (A) If a request for a benefit by a person is denied in whole or in part, the person may, not later than 30 days after the denial, file with the Administrator a written claim objecting to the denial. (B) The Administrator, not later than 90 days after receipt of such claim, will render a written decision to the claimant on the claim. If the claim is denied, in whole or in part, such decision will include the reason or reasons for the denial; a reference to the Plan provisions on which the denial is based; a description of any additional material or information, if any, necessary for the claimant to perfect his or her claim; an explanation as to why such information or material is necessary; and an explanation of the Plan's claim procedure. (C) The claimant may file with the Administrator, not later than 60 days after receiving the Administrator's written decision, a written notice of request for review of the Administrator's decision, and the claimant or his or her representative may thereafter review relevant Plan documents which relate to the claim and may submit written comments to the Administrator. (D) Not later than 60 days after receipt of such review request, the Administrator will render a written decision on the claim, which decision will include the specific reasons for the decision, including a reference to the Plan's specific provisions where appropriate. (E) The foregoing 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 special circumstances beyond the Administrator's control so require and notice of such extension is given to the claimant prior to the expiration of such initial 90 or 60-day period, as the case may be. (F) A person must exhaust the procedure described in this section before making any claim of entitlement to benefits pursuant to the Plan in any court or any other proceeding. 7.7 Disputes. (A) In the case of a dispute between a Participant or beneficiary and the Company, Board, Administrator or other person relating to or arising from the Plan, the United States District Court for the District of Minnesota is a proper venue for any action initiated by or against the Company, Board, Administrator or other person and such court will have personal jurisdiction over any Participant or beneficiary named in the action. (B) Regardless of where an action relating to or arising from the Plan is pending, the law as stated and applied by the United States Court of Appeals for the Eighth Circuit or the United States District Court for the District of Minnesota will apply to and control all actions relating to the Plan brought against the Plan, Company, Administrator or any other person or against any Participant or beneficiary. ARTICLE 8 Miscellaneous 8.1 Withholding and Offsets. The Company and the Trustee retain the right to withhold from any compensation or benefit payment pursuant to the Plan any and all income, employment, excise and other tax as the Company or Trustee deem necessary in connection with any benefits earned or paid pursuant to the Plan and the Company may offset against amounts payable to any person under the Plan any amounts then owing to the Company by such person. 8.2 Other Benefits. Amounts paid pursuant to the Plan do not constitute salary or compensation for the purpose of computing benefits under any other benefit plan, practice, policy or procedure of the Company or any affiliate of the Company unless otherwise expressly provided thereunder. 8.3 No Warranties Regarding Tax Treatment. The Company make no warranties regarding the tax treatment to any person of participation in the Plan or any action or omission of the Company or Participant in connection therewith and each Participant will hold the Administrator and the Company and their officers, directors, employees, agents and advisors harmless from any liability resulting from any tax position taken in good faith in connection with the Plan. 8.4 No Employment Rights Created. Neither the establishment of nor participation in the Plan gives any employee a right to continued employment or limits the right of the Company or any affiliate of the Company to discharge, transfer, demote or modify the terms and conditions of employment or otherwise deal with any employee without regard to the effect such action might have on his or her with respect to the Plan. EX-10 9 Exhibit 10.v FINGERHUT CORPORATION PROFIT SHARING EXCESS PLAN 1996 REVISION Table of Contents ARTICLE 1 Description of Plan 1.1 Plan Name 1.2 Plan Purpose ARTICLE 2 Definitions 2.1 Administrator 2.2 Board 2.3 Code 2.4 Company 2.5 Participant 2.6 Plan 2.7 Plan Year 2.8 Profit Sharing Plan ARTICLE 3 Participation 3.1 Participation 3.2 Condition of Participation ARTICLE 4 Payments 4.1 Amount of Payment 4.2 Timing of Payment ARTICLE 5 Miscellaneous 5.1 Administration 5.2 Status of Plan 5.3 Non-assignability of Benefits 5.4 Amendment and Termination 5.5 No Employment Rights Created 5.6 Withholding and Offsets 5.7 Other Benefits 5.8 Disputes 5.9 Governing Law FINGERHUT CORPORATION PROFIT SHARING EXCESS PLAN 1996 REVISION ARTICLE 1 Description of Plan 1.1 Plan Name. The name of the Plan is the "Fingerhut Corporation Profit Sharing Excess Plan." 1.2 Plan Purpose. The Plan provides current cash payments to Participants for Plan Years beginning after 1995 to compensate them to the extent provided in Section 4.1 of the Plan for the reduction in contributions made on their behalf under the Profit Sharing Plan due to the limitation on compensation imposed by Code section 401(a)(17). ARTICLE 2 Definitions The definitions set forth in this article apply in construing the Plan unless the context otherwise requires. 2.1 Administrator. "Administrator" means the Company or any individual or committee appointed by the Board to perform administrative duties pursuant to Section 5.1. 2.2 Board. "Board" means the Company's Board of Directors or any individual or committee authorized to act on behalf of such Board of Directors. 2.3 Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a specific provision of the Code includes a reference to that provision as it may be amended from time to time and to any successor provision. 2.4 Company. "Company" means Fingerhut Corporation or any successor thereto. 2.5 Participant. "Participant" means an individual described in Section 3.1. 2.6 Plan. "Plan" means the Fingerhut Corporation Profit Sharing Excess Plan, as amended from time to time. 2.7 Plan Year. "Plan Year" means a calendar year. 2.8 Profit Sharing Plan. "Profit Sharing Plan" means the Fingerhut Corporation Profit Sharing Plan, as amended from time to time. ARTICLE 3 Participation 3.1 Participation. To be eligible to receive payments pursuant to the Plan for a Plan Year after 1995, an individual must (a) be eligible to share in the Company's contribution to the Profit Sharing Plan for the Plan Year, (b) have compensation from the Company for the Plan Year (of the type that would be taken into account in allocating the Company's contribution to the Profit Sharing Plan for the Plan Year but for the limitation in effect for the Plan Year under Code section 401(a)(17)) in excess of the limitation in effect for the Plan Year under Code section 401(a)(17) and (c) not be a party to a separate agreement with the Company pursuant to which he or she is not eligible to receive payments pursuant to the Plan for the Plan Year. 3.2 Condition of Participation. Each Participant is bound by all of the terms and conditions of the Plan, including but not limited to the reserved right of the Board to amend or terminate the Plan, and is required to furnish to the Administrator such pertinent information, and must execute such instruments, as the Administrator may require. ARTICLE 4 Payments 4.1 Amount of Payment. For each Plan Year beginning after 1995 for which the Company makes a contribution to the Profit Sharing Plan and the Company's Chief Executive Officer authorizes payments pursuant to the Plan, the Company will make a cash payment to each Participant in an amount equal to the sum of (a) the amount of the contribution that would have been made on the Participant's behalf for the Plan Year under the Profit Sharing Plan if the limitation in effect for the Plan Year under Code section 401(a)(17) were $235,840 for Plan Years ending before 1997 or $300,000 for Plan Years beginning after 1996, minus the amount of the Company contribution actually made on the Participant's behalf under the Profit Sharing Plan for the Plan Year, provided that if for any Plan Year the sum of the amount determined pursuant to this clause (a) plus the amount of the Company contribution actually made on the Participant's behalf under the Profit Sharing Plan would otherwise exceed $30,000, the amount determined pursuant to this clause (a) will be reduced to the extent necessary to prevent such excess, plus (b) a corresponding tax "gross up" amount, as determined by the Administrator based on assumptions and calculation methodology determined by the Administrator to be reasonable after consultation with the Company's Tax Department, that reimburses the Participant for his or her state and federal income tax liability, as determined by the Administrator, with respect to the payment received by the Participant pursuant to the Plan for the Plan Year (including the amount received pursuant to this clause (b)). 4.2 Timing of Payment. The Company's payment for a Plan Year, if any, will be made on a date determined by the Company but in no case more than 30 days following the date on which the Company has made its final contribution to the Profit Sharing Plan for the Plan Year. ARTICLE 5 Miscellaneous 5.1 Administration. The Plan may be administered on behalf of the Company by the Board or an individual or committee selected by the Board. The Administrator has the discretionary power and authority to issue, modify and revoke such rules and procedures as the Administrator deems advisable, to construe, interpret, apply and enforce the terms of the Plan and Plan rules and procedures and to remedy ambiguities, inconsistencies, omissions and erroneous Account balances. Whenever the Plan requires the Administrator to make a determination, the determination will be made by the Administrator in his, her or its sole discretion and without regard to whether different determinations have been made in the past with respect to other persons, whether or not similarly situated. The Administrator's interpretations, determinations, rules, procedures and calculations are final and binding on all persons and parties concerned. 5.2 Status of Plan. Nothing contained in the Plan is to be construed as providing for assets to be held for the benefit of any Participant or any other person or persons to whom benefits are to be paid pursuant to the terms of this Plan, the Participant's or other person's only interest under the Plan being the right to receive the benefits set forth herein. To the extent the Participant or any other person acquires a right to receive benefits under this Plan, such right is no greater than the right to any unsecured general creditor of the Company. 5.3 Non-assignability of Benefits. The benefits payable under the Plan and the right to receive future benefits under the Plan may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered or subjected to any charge. 5.4 Amendment and Termination. The Company reserves the right to amend or terminate the Plan at any time by way of a written instrument approved or ratified by the Board and executed in the name of the Company by a duly authorized officer. No amendment or termination may adversely affect a payment to which a Participant or Beneficiary became entitled under the Plan prior to the date of such amendment or termination. 5.5 No Employment Rights Created. Nothing in this Plan gives any Participant a right to continued employment or limits the right of the Company to discharge, transfer, demote, modify terms and conditions of employment or otherwise deal with the Participant without regard to the effect such action might have on him or her under the Plan. 5.6 Withholding and Offsets. The Company retains the right to withhold from any benefit payment under the Plan, any and all income, employment, excise and other tax as the Company may, in its sole discretion, deem necessary and the Company may offset against amounts payable to a Participant under the Plan any amounts then owing to the Company by such Participant. 5.7 Other Benefits. Amounts paid pursuant to the Plan do not constitute salary or compensation for the purpose of computing benefits under any other benefit plan, practice, policy or procedure of the Company unless otherwise expressly provided thereunder. 5.8 Disputes. In the event of a dispute over whether the Participant is entitled to a payment under this Plan, the amount or timing of a payment or any other provision of this Plan, the Participant is responsible for paying any costs he or she incurs, including attorneys' fees and legal expenses, and the Company is responsible for paying any costs it incurs, including attorneys' fees and any legal expenses. Any such dispute may be brought only in a court of competent jurisdiction in Minnesota. 5.9 Governing Law. All questions pertaining to the construction, validity, effect and enforcement of the Plan will be determined in accordance with the internal, substantive laws of the State of Minnesota without regard to the conflict of law rules of the State of Minnesota or of any other jurisdiction. EX-11 10 EXHIBIT 11 FINGERHUT COMPANIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE FOR THE FISCAL YEARS ENDED DECEMBER 27, 1996, DECEMBER 29, 1995 AND DECEMBER 30, 1994 (In thousands of dollars, except share and per share data) 1996 1995 1994 Primary Net earnings (a) $ 40,159 $ 50,858 $ 45,925 =========== =========== =========== Weighted average shares of common stock outstanding 46,210,151 45,834,575 46,237,706 Common stock equivalents 2,418,157 2,644,396 4,032,713 Weighted average shares of common stock and common stock equivalents (b) 48,628,308 48,478,971 50,270,419 =========== =========== =========== Primary earnings per share of common stock and common stock equivalents (a / b) $ .83 $1.05 $ .91 =========== =========== =========== Fully Diluted Net earnings (c) $ 40,159 $ 50,858 $ 45,925 =========== =========== =========== Weighted average shares of common stock outstanding 46,210,151 45,834,575 46,237,706 Common stock equivalents 2,457,936 2,684,995 4,054,602 Weighted average shares of common stock and common stock equivalents (d) 48,668,087 48,519,570 50,292,308 =========== =========== =========== Fully diluted earnings per share of common stock and common stock equivalents (c / d) $ .83 $1.05 $ .91 =========== =========== ===========
Common stock equivalents for primary earnings per share are computed by the treasury stock method using the average market price. Common stock equivalents for fully diluted earnings per share are computed by the treasury stock method using the ending market price or the average of the fully diluted monthly amounts, whichever is higher. EX-13 11 FINGERHUT COMPANIES, INC. AND SUBSIDIARIES FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (In thousands of dollars, except per share data) For the fiscal year ended December 27, December 29, December 30, December 31, December 25, 1996 1995 1994 1993 (d) 1992 ------------ ------------ ------------ ------------ ------------ Earnings data: Revenues (a) $ 2,027,356 $ 2,077,344 $ 1,914,457 $ 1,792,595 $ 1,585,640 Earnings before income taxes and minority interest (c) $ 64,991 $ 76,306 $ 70,926 $ 111,879 $ 93,930 Net earnings (c) $ 40,159 $ 50,858 $ 45,925 $ 75,328 $ 61,806 Net earnings as a percent of revenues (c) 2.0% 2.4% 2.4% 4.2% 3.9% Per share: Earnings (b) (c) $ .83 $ 1.05 $ .91 $ 1.50 $ 1.19 Dividends declared $ .16 $ .16 $ .16 $ .16 $ .16 At fiscal year-end Financial position data: Total assets $ 1,352,049 $ 1,281,077 $ 1,097,933 $ 988,302 $ 925,649 Total current debt $ 73,084 $ 215,099 $ 336 $ 313 $ 333 Long-term debt and capitalized leases, less current portion $ 271,481 $ 146,564 $ 246,516 $ 246,852 $ 247,190 Total stockholders' equity $ 605,401 $ 547,490 $ 500,950 $ 472,389 $ 399,591
(a) Prior year revenues have been restated to reflect the reclassification of customer allowances from "administrative and selling expenses" to "net sales." These amounts totaled $32.6 million, $19.9 million, $15.3 million and $20.5 million for the fiscal years ended December 29, 1995, December 30, 1994, December 31, 1993 and December 25, 1992, respectively. (b) Based on a weighted average of 48,628,308; 48,478,971; 50,270,419; 50,101,739 and 51,937,936 shares of common stock and common stock equivalents for the fiscal years ended December 27, 1996; December 29, 1995; December 30, 1994; December 31, 1993 and December 25, 1992, respectively. (c) 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. See Note 3 to the Consolidated Financial Statements. (d) In 1993, the Company sold certain assets of COMB Corporation and FDC, Inc., a subsidiary of Figi's Inc. Fingerhut Companies, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND 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. 1996 COMPARED WITH 1995 The Company reported revenues of $2.027 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 Companies Inc. ("Metris"). In October 1996, Metris, a then wholly owned subsidiary, completed an initial public offering of its common shares, which reduced the Company's ownership interest to approximately 83 percent. As a result of Metris becoming a more significant portion of the Company's overall operations, management's discussion of 1996 results will include individual analyses of both the Direct-to-the-Consumer Marketing Segment and Metris. Direct-to-the-Consumer Marketing Segment Highlights of Operations: For the Fiscal Year Ended (In thousands of dollars) 1996 1995 Net sales $1,638,363 $1,782,282 Finance income and other revenues $ 241,130 $ 245,001 Product cost $ 827,086 $ 890,737 Administrative and selling expenses $ 633,448 $ 687,789 Provision for uncollectible accounts $ 283,762 $ 272,295 Discount on sale of accounts receivable $ 77,447 $ 82,392 Interest expense, net $ 25,305 $ 25,213 Net earnings $ 21,123 $ 46,277 Net sales in 1996 were $1.638 billion compared to net sales of $1.782 billion in 1995, a decrease of 8 percent. Fingerhut Corporation ("Fingerhut"), the Company's core business in this segment, 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. ("Figi's") 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. ("Infochoice") 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 revenues for the year were $241.1 million compared to $245.0 million in 1995. The decrease was due primarily to the decline in net sales as a result of Fingerhut's strategy to reduce mailings, which was partially offset by the 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. This strategy is designed to optimize profitability through the trade-off of a lower sales price for an increase in response rates. Administrative and selling expenses in 1996 were $633.4 million, or 38.7 percent of net sales, compared to $687.8 million, or 38.6 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 startup of two phone centers in Tampa, Florida. The provision for uncollectible accounts in 1996 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. The increase as a percent of net sales was due primarily to the higher ongoing delinquency levels Fingerhut experienced as a result of the systems error reported in the third quarter. In addition, 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. Fingerhut has implemented corrective measures to mitigate the risk of credit losses, including tighter credit screens as well as accelerated collection programs. Management believes that the reserves at December 27, 1996 are adequate to cover future anticipated losses. Discount on sale of accounts receivable for the year was $77.4 million compared to $82.4 million for 1995. The decrease resulted primarily from lower amortization expense due to the expiration of an interest rate cap agreement in December 1995 (the premium paid for this cap was previously capitalized and amortized over the life of the agreement) as well as lower short- term interest rates. These decreases were partially offset by an increase in the amount of accounts receivable sold. Net interest expense for the year was $25.3 million compared to $25.2 million in 1995. Fingerhut incurred additional interest expense during 1996 due to a $60.0 million capital contribution made to Metris, which resulted in the segment having to incur additional borrowings to fund operations. This increase was offset by lower interest rates as well as an increase in interest income. The effective consolidated tax rate, which includes both the Direct-to-the-Consumer Marketing Segment and the Financial Services Segment, 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 exam. As a result of the items discussed above, the Direct-to-the- Consumer Marketing Segment generated net earnings of $21.1 million, or $.44 per share, compared with $46.3 million, or $.96 per share, for 1995. Financial Services Segment (Metris Companies Inc.) Highlights of Operations: For the year ended December 31, Income Statement Data (Managed Basis, in thousands) 1996 1995 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 -------- -------- Net income $ 20,016 $ 4,581 ======== ======== Credit Card Data (Managed Basis) Total accounts 1,418,062 702,891 Average managed loans (in thousands) $1,018,856 $183,274 Net charge-off ratio 6.16% 2.19% Delinquency ratio 5.53% 3.95% Metris reported net income for the year ended December 31, 1996, of $20.0 million, or $.41 per share, up from $4.6 million, or $.09 per share for 1995. The 337 percent increase in net income is the result of an increase in net interest income and other operating income partially offset by increases in the provision for loan losses and other operating expenses. These increases are largely attributable to the growth in average managed loans from $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 the net charge-offs consistent with the continued seasoning of the portfolio and industry trends. The managed net charge-off rate was 6.16 percent for 1996, compared to 2.19 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 investments in the infrastructure to support the growth of all three Metris businesses: consumer credit products, extended service plans, and fee-based products and services. 1995 COMPARED WITH 1994 (CONSOLIDATED) The Company reported record revenues of $2.077 billion in 1995. Revenues reflected increased sales from Fingerhut's existing customer list and new customer acquisition programs as well as a significant increase in finance income. The Company reduced mailings to its existing customers in the second half of fiscal 1995 to increase sales per mailing and improve profitability. 1995 results also included higher provisions for uncollectible accounts as well as higher administrative and selling expenses as a result of increased paper and postage prices. The Company's net sales in 1995 were $1.794 billion compared to $1.699 billion in 1994, an increase of 6 percent. Fingerhut had net sales of $1.639 billion in 1995 compared to $1.557 billion in 1994, an increase of 5 percent. Net sales from Fingerhut's existing customer list increased 4 percent to $1.362 billion primarily as a result of a higher average order size and higher sales per mailing. Net sales from Fingerhut's new customer acquisition programs increased 10 percent in 1995 to $277 million primarily due to increased mailings as well as higher average order size. Net sales from Figi's increased 18 percent in 1995 to $82 million compared to $70 million in 1994 due to an increase in mailings coupled with a higher average order size and higher sales per mailing. Net sales from Infochoice were $57 million in 1995 compared to $58 million for 1994. MWD had net sales of $165 million compared to $188 million for 1994. Finance income and other revenues for the year were $283.6 million compared to $215.7 million in 1994. The increase was due to net revenues from MasterCardr accounts issued by the Company's subsidiary, Direct Merchants Credit Card Bank, National Association ("Direct Merchants Bank"). These net revenues include finance income, net of asset backed financing expense, loan loss provisions, and administrative and other fees related to the sale of credit card receivables. Fingerhut also recognized increased finance income for the year as a result of higher revenues from existing customers and the effect of lengthened payment plans. Product cost for the year was $892.8 million, or 49.8 percent of net sales, compared to $854.5 million, or 50.3 percent of net sales, during the prior year. The decrease as a percent of net sales was due to cost efficiencies partially offset by margin reductions in the second half of the year as a result of offering lower retail prices to improve the customer value package. Administrative and selling expenses in 1995 were $723.3 million, or 40.3 percent of net sales, compared to $681.7 million, or 40.1 percent of net sales, in the prior year. Price increases for paper and postage, increased investment in new customer acquisition programs, as well as operating and account acquisition expenses associated with Direct Merchants Bank contributed to the higher ratio of expense to net sales in 1995. These increases were partially offset by benefits realized due to the Company's cost reduction program, the absence of operating expenses associated with, and the cancellation of, S The Shopping Network and provisions for corporate streamlining in 1994, as well as the partial recovery in 1995 of these restructuring reserves. The provision for uncollectible accounts in 1995 was $276.7 million, or 15.4 percent of net sales, compared with $229.4 million, or 13.5 percent of net sales, for the prior year. The increase as a percent of net sales was due primarily to higher delinquency levels experienced on both existing and new customer receivables and an increase in new customer acquisitions which have higher reserve requirements. In addition, provisions were established for the portion of the MasterCard receivables that remain on the Company's balance sheet. Discount on sale of accounts receivable for the year was $82.4 million compared to $53.7 million for 1994. The increase resulted primarily from higher short-term interest rates in 1995, an increase in the amount of accounts receivable sold due to both an increase in 1995 sales and the replacement of the Receivables Transfer Agreement with the Fingerhut Master Trust in June 1994, as well as the impact of extended pay plans. Net interest expense for the year was $25.9 million compared to $24.3 million in 1994. The increase was primarily due to the higher utilization of the revolving credit agreement used to fund normal business needs and to finance the growth of the MasterCard portfolio, partially offset by the expiration of an interest rate swap agreement in June 1994. The effective tax rate for 1995 was 33.3 percent compared with 35.2 percent in the prior year. The decrease in the effective tax rate was due to an increase in merchandise donations, as well as a one-time benefit for prior years' net favorable resolution of an Internal Revenue Service exam. These factors were partially offset by additional state income taxes in 1995. The above factors resulted in net earnings for 1995 of $50.9 million, or $1.05 per share, compared with $45.9 million, or $.91 per share, for 1994. LIQUIDITY AND CAPITAL RESOURCES 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 (formerly known as the Fingerhut Financial Services Master Trust) (the "Master Trusts"), 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 $1.280 billion and $1.254 billion at December 27, 1996 and December 29, 1995, respectively. Net proceeds received from the sale of MasterCard receivables were $1.397 billion at December 31, 1996 and $445.3 million at December 31, 1995, of which $17.0 million and $25.8 million, respectively, was deposited in an investor reserve account held by the trustee of the Metris Master Trust for the benefit of the 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 are now being 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 approximately half of the amortizing certificates. The Company believes the Fingerhut Master Trust will be able to issue a new series of certificates to replace the remaining portion of the amortizing 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. The Revolving Credit Facilities provide for aggregate commitments of up to $500.0 million, of which $200.0 million represents the Company'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 $73.0 million and outstanding letters of credit totaled $5.9 million, as of year-end 1996. As of year-end 1995, the Company had an outstanding revolving credit balance of $115.0 million and outstanding letters of credit of $4.6 million, under the then existing Revolving Credit Facility. Additional outstanding open letters of credit under a separate agreement aggregated $23.2 million and $34.3 million at December 27, 1996 and December 29, 1995, respectively. In September 1996, the Company sold $125.0 million of three-year notes via a private placement. As a result of this financing, the Company had fixed rate notes outstanding of $270.0 million as of December 27, 1996. This compared to fixed rate notes outstanding of $245.0 million as of December 29, 1995. 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. The Company generated $26.9 million in cash from operations in 1996 compared with $29.1 million used for operations in 1995. This $56.0 million net increase in cash generated from operations resulted from decreased working capital requirements, partially offset by the decrease in earnings. The most significant items affecting working capital were increases in customer accounts receivable and deferred income taxes and decreases in inventory, promotional material and other current assets, and accounts payable. The change in customer accounts receivable from a $112.6 million use of cash in 1995 to a $83.2 million use of cash in 1996 resulted primarily from the decrease in the growth of retained receivables associated with MasterCard accounts issued by Direct Merchants Bank. Deferred income taxes increased primarily as a result of an increase in reserve provisions for uncollectible accounts. The decreases in inventory, promotional material and other current assets were due to lower inventory levels as a result of the planned reduction in mailings. The $20.9 million decrease in accounts payable compared to the $29.4 million increase in 1995 was due to a decrease in purchasing activity as a result of reduced mailings. In addition, 1995 accounts payable reflected a significant increase in activity with respect to Metris. Net cash used by investing activities was $51.9 million in 1996 compared with $94.4 million in 1995. The lower level of spending in 1996 was primarily due to a significant reduction in capital expenditures relating to the western distribution center in Spanish Fork, Utah, as well as the data and technology center in Plymouth, Minnesota, which opened in the second quarter of 1995. 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. The Company completed this purchase in January 1996. Net cash provided by financing activities was $19.9 million in 1996 compared with $104.3 million in 1995. This net $84.4 million decrease in cash provided by financing activities was due primarily to the decrease in borrowings under the Revolving Credit Facilities, partially offset by a $25.1 million net increase in long-term debt as well as $47.4 million of net proceeds generated from the Metris initial public stock offering. On January 23, 1997, the Company declared a cash dividend of $.04 per share, or an aggregate of $1.8 million, payable on February 20, 1997 to shareholders of record as of the close of business on February 10, 1997. 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 1996, the Company repurchased at prevailing market prices 358,800 shares of its common stock for an aggregate of $4.9 million. Total purchases through December 27, 1996 were 1,380,300 shares for an aggregate of $21.5 million. 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. 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. In addition, most foreign purchase orders are denominated in U.S. dollars. Accordingly, the results of operations for the periods discussed have not been significantly affected by these factors. Fingerhut Companies, Inc. and Subsidiaries 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; 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 27, 1996. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars, except share and per share data) For the fiscal year ended December 27, December 29, December 30, 1996 1995 1994 Revenues: ------------ ------------ ------------ Net sales $ 1,652,869 $ 1,793,727 $ 1,698,719 Finance income and other revenues 374,487 283,617 215,738 ----------- ----------- ------------ 2,027,356 2,077,344 1,914,457 ----------- ----------- ------------ Costs and expenses: Product cost 830,423 892,736 854,461 Administrative and selling expenses 723,843 723,279 681,654 Provision for uncollectible accounts 302,239 276,688 229,396 Discount on sale of accounts receivable 77,447 82,392 53,736 Interest expense, net 28,413 25,943 24,284 ----------- ----------- ------------ 1,962,365 2,001,038 1,843,531 ----------- ----------- ------------ Earnings before income taxes and minority interest 64,991 76,306 70,926 Provision for income taxes 23,852 25,448 25,001 ----------- ------------ ----------- Net earnings before minority interest 41,139 50,858 45,925 Minority interest (980) - - ------------ ----------- Net earnings $ 40,159 $ 50,858 $ 45,925 ============ =========== =========== =========== Earnings per share $ .83 $ 1.05 $ .91 =========== =========== =========== Weighted average shares outstanding 48,628,308 48,478,971 50,270,419 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands of dollars) A S S E T S December 27, December 29, 1996 1995 Current assets: ------------ ------------ Cash and cash equivalents $ 61,003 $ 66,109 Customer accounts receivable, net 547,361 464,176 Inventories, net 127,735 156,352 Promotional material 60,871 80,357 Deferred income taxes 166,879 131,035 Other 24,365 23,542 ---------- ---------- Total current assets 988,214 921,571 Property and equipment, net 285,182 279,455 Excess of cost over fair value of net assets acquired, net 42,601 44,047 Customer lists, net 9,801 11,201 Other assets 26,251 24,803 ---------- ---------- $1,352,049 $1,281,077 ========== ========== L I A B I L I T I E S Current liabilities: Accounts payable $ 164,557 $ 185,475 Accrued payroll and employee benefits 46,723 39,872 Other accrued liabilities 77,209 73,337 Revolving credit facility 73,000 115,000 Current portion of long-term debt 84 100,099 Current income taxes payable 60,721 42,380 ---------- ---------- Total current liabilities 422,294 556,163 Long-term debt, less current portion 271,481 146,564 Deferred income taxes 21,744 23,096 Other non-current liabilities 7,692 7,764 ---------- ---------- 723,211 733,587 ---------- ---------- Minority interest 23,437 - S T O C K H O L D E R S ' E Q U I T Y Preferred stock - - Common stock 462 459 Additional paid-in capital 288,793 258,917 Unearned compensation (1,856) - Earnings reinvested 318,002 288,114 ---------- ---------- Total stockholders' equity 605,401 547,490 ---------- ---------- $1,352,049 $1,281,077 ========== ==========
See accompanying Notes to Consolidated Financial Statements. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) For the fiscal year ended December 27, December 29, December 30, 1996 1995 1994 Cash flows from operating activities: ------------ ------------ ------------ Net earnings $ 40,159 $ 50,858 $ 45,925 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 52,464 47,103 37,693 Amortization of unearned compensation 2,922 - - Minority interest in earnings 980 - - Change in assets and liabilities, excluding the effects of business divestitures: Customer accounts receivable, net (83,185) (112,571) 3,662 Inventories, net 28,617 2,696 (7,019) Promotional material and other current assets 18,663 (21,777) (13,010) Accounts payable (20,918) 29,354 32,194 Accrued payroll and employee benefits 6,851 (19) 1,414 Accrued liabilities 3,872 (6,921) 26,599 Current income taxes payable 18,634 1,407 16,464 Deferred and other income taxes (37,196) (12,946) (40,664) Other (5,010) (6,267) (10,869) ----------- ----------- ---------- Net cash provided (used) by operating activities 26,853 (29,083) 92,389 ----------- ----------- ---------- Cash flows from investing activities: Additions to property and equipment (51,855) (94,442) (69,578) Proceeds from business divestitures - - 12,039 ----------- ----------- ---------- Net cash used by investing activities (51,855) (94,442) (57,539) ----------- ----------- ---------- Cash flows from financing activities: Proceeds from long-term debt 125,000 - - Repayments of long-term debt (100,098) (381) (313) Revolving credit facility (42,000) 115,000 - Repurchase of common stock (4,877) (7,862) (8,706) Issuance of common stock 1,881 4,829 1,930 Sale of minority interest in subsidiary 47,384 - - Cash dividends paid (7,394) (7,334) (7,401) ---------- ----------- ---------- Net cash provided (used) by financing activities 19,896 104,252 (14,490) ---------- ----------- ---------- Net (decrease) increase in cash and cash equivalents (5,106) (19,273) 20,360 Cash and cash equivalents at beginning of year 66,109 85,382 65,022 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 61,003 $ 66,109 $ 85,382 ============ ============ ============ 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 $ 293 $ 1,354 $ 1,508 Accrued stock repurchase $ - $ - $ 4,695 Issuance of restricted stock $ 4,778 $ - $ - The Company included in cash and cash equivalents liquid investments with maturities of 15 days or less.
See accompanying Notes to Consolidated Financial Statements. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands of dollars, except share data) Common stock Additional Number of Par paid-in Earnings Unearned shares value capital reinvested compensation Total ---------- ------- ---------- ---------- ------------ ---------- Balance, December 31, 1993 46,148,448 $ 461 $ 254,984 $ 216,944 $ - $ 472,389 Stock repurchase (807,400) (8) (4,493) (8,900) - (13,401) Exercise of stock options 211,025 2 3,033 - - 3,035 Employee stock purchase plan 20,582 1 402 - - 403 Cash dividends paid - - - (7,401) - (7,401) Net earnings - - - 45,925 - 45,925 ----------- ------- --------- ---------- ----------- ---------- 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 forfeitures 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 ========== ======= ========= ========== =========== ==========
See accompanying Notes to Consolidated Financial Statements. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES 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' 17 percent share of the equity in Metris Companies Inc. ("Metris") (see Note 17). At December 27, 1996 and December 29, 1995, 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 27, 1996, December 29, 1995 and December 30, 1994 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 4), 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 1996, 1995 and 1994 amounted to $249.9 million, $295.9 million and $295.2 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. At that time, the accrued interest portion of the charged-off balance is deducted from current period interest income. Certain credit card receivables have been securitized and sold to investors with limited recourse (see Note 4). Upon sale, the receivables are removed from the balance sheet, and a gain on sale is recognized for the difference between the carrying value of the receivables and the adjusted sales proceeds. The adjusted sales proceeds are based on a present value estimate of future cash flows to be received over the life of the receivables, net of certain funding and servicing costs. The resulting gain is reduced by establishing a reserve for estimated probable loan losses under the recourse provisions. Gains on sale, recourse provisions and servicing cash flows of credit card receivables are reported in the accompanying Consolidated Statements of Earnings as "Finance income and other revenues." Earnings Per Share 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. 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 mailed or aired direct response advertising is deferred and expensed over the period during which the orders are expected, generally one to four months. The amount of mailed or aired 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 revenues." 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. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company adopted the provisions of FAS 121 in fiscal 1995. 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 15. Reclassifications Customer allowances, which were previously included in the Consolidated Statements of Earnings under the caption "Administrative and selling expenses," have been reclassified as a reduction of "Net sales" for all periods presented. This reclassification, which totaled $32.6 million for 1995 and $19.9 million for 1994, conforms the Company's presentation to industry practice. Newly Issued Pronouncements In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125 (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement is effective for all such transactions occurring after December 31, 1996, and supersedes and amends several FASB Statements, including Statement of Financial Accounting Standards No. 77 (FAS 77), "Reporting by Transferors for Transfers of Receivables with Recourse." The statement provides consistent standards for distinguishing transfers of financial assets that are sales (such as financial assets sold through a securitization) from transfers that are secured borrowings with a pledge of collateral. The Company has reviewed this statement and believes that it will affect the classification and valuation of certain financial assets and liabilities on its statements of financial position relating to its accounts receivable securitizations, including excess servicing assets, retained interests in receivables securitized and derivative financial instruments related to such financial assets and liabilities. However, the Company does not believe implementation will have an overall material impact on the consolidated financial statements and the Company intends to adopt this statement prospectively, in the first quarter of 1997, as no early or retroactive application is permitted. 3. UNUSUAL ITEMS In the fourth quarter of 1994, the Company recorded an after-tax charge of $19.4 million, or $.39 per share, relating to the cancellation of its proposed 24-hour cable television shopping channel. The $29.9 million pre-tax charge covered the costs of closing down S The Shopping Network and substantially scaling back Infochoice, as well as provisions for corporate streamlining. The charge included $6.8 million for the cost of severance and related employee benefits to approximately 100 employees throughout all levels of the Company and $23.1 million for the write-off and disposition of assets and anticipated costs of fulfilling contractual commitments. These activities were substantially completed at December 27, 1996. A summary of the changes in the Company's reserve for unusual charges is as follows: Administrative Provision for Product and selling uncollectible (In thousands of dollars) costs expenses accounts Total --------- -------------- ------------- --------- Accrued unusual charges at December 30, 1994 $ 5,253 $ 20,771 $ 3,334 $ 29,358 Reserves utilized (2,226) (16,287) (431) (18,944) Reserve adjustments (2,295) (2,761) (2,900) (7,956) --------- --------- --------- Accrued unusual charges at December 29, 1995 732 1,723 3 2,458 Reserves utilized (140) (1,112) (3) (1,255) Reserve adjustments (150) (100) - (250) --------- --------- --------- --------- Accrued unusual charges at December 27, 1996 $ 442 $ 511 $ - $ 953 ========= ========= ========= =========
In December 1993, the Company signed a letter of intent to sell certain assets of Figi's. The effects of the Figi's transaction were recorded in the fourth quarter of 1993. During the fourth quarter of 1994, the intended purchaser of Figi's was unable to complete its financing. As a result, the Company reversed the effects of the sale. This did not have a material impact on 1994 net earnings. 4. SALE OF ACCOUNTS RECEIVABLE Fingerhut Master Trust 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. In May 1995, the Company amended the Series 1994-2 Supplement to extend the life of the Series 1994-2 certificates with amortization periods beginning in May 1999. The Fingerhut Master Trust allowed Fingerhut to sell a greater percentage of its receivables than the Receivables Transfer Agreement it replaced in June 1994. The proceeds from the sale of accounts receivable were $1.280 billion and $1.254 billion at December 27, 1996 and December 29, 1995, respectively. The Company's retained interest in the Fingerhut Master Trust was approximately $171.5 million and $186.1 million as of December 27, 1996 and December 29, 1995, respectively. The retained interest is included in the Company's Consolidated Statements of Financial Position under "Customer accounts receivable, net." "Discount on sale of accounts receivable" is comprised of the interest, discount and administrative and other fees paid or due to the purchasers of the accounts receivable sold. The discount, determined under the Fingerhut Master Trust and the Receivables Transfer Agreement, approximates the prevailing short-term London Inter-Bank Offered Rate (LIBOR) and commercial paper rates for high grade unsecured notes, respectively, plus administrative fees. The rates (including administrative fees) applicable to receivables sold as of December 27, 1996 and December 29, 1995 were 6.0 percent and 6.3 percent, respectively. The Company has included in "Other accrued liabilities" the estimated expenses related to the subsequent collections of the receivables sold ($18.1 million and $19.8 million for 1996 and 1995, respectively). Metris Master Trust In May 1995, the Company established the Metris Master Trust (formerly known as the Fingerhut Financial Services Master Trust). The Metris Master Trust allows the Company to sell, on a continuous basis, an undivided interest in a pool of MasterCard receivables generated or acquired by Direct Merchants Bank. In May 1995, the Metris Master Trust issued the Series 1995-1 variable funding certificates with maximum proceeds of $512.6 million. The Series 1995-1 certificates enter into amortization periods beginning 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 Series 1995-1. The Series 1996-1 certificates enter into amortization periods beginning in August 1998. Net proceeds generated from the sale of MasterCard receivables to the Metris Master Trust were $1.397 billion at December 31, 1996 and $445.3 million at December 31, 1995, of which $17.0 million and $25.8 million, respectively, was deposited in an investor reserve account held by the trustee of the Metris Master Trust for the benefit of the Trust's certificateholders. The Company's retained interest in the Metris Master Trust was $158.4 million and $87.7 million as of December 31, 1996 and December 31, 1995, respectively. The retained interest is included in the Company's Consolidated Statements of Financial Position under "Customer accounts receivable, net." 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 and the Metris Master Trust. Any losses beyond that level are the responsibility of the certificate purchasers. 5. CUSTOMER ACCOUNTS RECEIVABLE Substantially all of the Company's customer accounts receivable were generated by Fingerhut, Direct Merchants Bank and Figi's. Fingerhut uses fixed-term, fixed-payment installment plans with terms up to 36 months (excluding deferred billing periods of generally four to five months) and finance charge rates ranging from 18 percent to 25.9 percent. Direct Merchants Bank grants MasterCard revolving lines of credit which typically include an annual fee and floating rates of interest ranging from 14.7 percent to 24.9 percent. 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. Customer accounts receivable are classified as current assets and include some which are due after one year, consistent with industry practice. Customer accounts receivable, net of amounts sold, consists of the following: (In thousands of dollars) 1996 1995 --------- --------- Customer installment receivables $ 560,931 $ 511,174 Reserve for uncollectible accounts, net of anticipated recoveries (117,296) (106,669) Reserve for returns and exchanges (13,319) (13,442) Other reserves (19,820) (18,571) ---------- ---------- Net collectible amount 410,496 372,492 Unearned finance income (23,969) (24,885) ---------- ---------- Customer installment receivables, net 386,527 347,607 ---------- ---------- Credit card and other receivables, net 176,848 122,567 Reserve for uncollectible accounts, net of anticipated recoveries (12,829) (3,679) Other reserves (3,185) (2,319) ---------- ---------- Credit card and other receivables, net 160,834 116,569 ---------- ---------- Customer accounts receivable, net $ 547,361 $ 464,176 ========== ========== Other reserves for customer installment 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, retained interests in securitized loans, 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 an investor reserve account held by the trustee for the benefit of the Metris Master Trust's certificateholders. In addition, these amounts include the excess servicing asset, which represents the net gain recorded at any point in time for loans sold under the asset securitizations, net of recourse reserves for securitized loans. Other 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. Certain reclassifications were made to the prior year credit card reserves to conform with the current year's presentation, however, these reclassifications had no effect on total reserves or 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. 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following: (In thousands of dollars) 1996 1995 --------- --------- Land and improvements $ 7,444 $ 7,267 Buildings and leasehold improvements 112,173 96,340 Construction in progress 74,828 53,679 Machinery and equipment 130,029 125,148 Software 115,700 107,715 Other, principally furniture and fixtures 19,988 19,377 --------- --------- 460,162 409,526 Less: Accumulated depreciation (111,219) (85,603) Accumulated amortization of software (63,761) (44,468) ---------- --------- Property and equipment, net $ 285,182 $ 279,455 ========== ========== Software amortization expense recorded in 1996, 1995 and 1994 was $19.3 million, $16.8 million and $14.3 million, respectively. During 1994 through 1996, the Company capitalized $62.1 million relating to the construction of the new western distribution center. The remaining construction of this one million square-foot facility in 1997 is projected to cost approximately $1.5 million. Management intends to begin using this facility in the fourth quarter of 1997. FAS 121 requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss must be recognized. Based on management's current plans and best estimates, the undiscounted expected net future cash flows of the western distribution center are greater than its carrying value. Therefore, the capitalized value of the western distribution center is not considered impaired in accordance with FAS 121. 7. 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 27, 1996, the Company had an outstanding revolving credit balance of $23.0 million. At December 29, 1995, the Company had an outstanding revolving credit balance of $115.0 million. The weighted-average interest rate on borrowings was 5.9 percent and 7.1 percent at December 27, 1996 and December 29, 1995, respectively. 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 $29.1 million at December 27, 1996 and $39.0 million at December 29, 1995. 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 to be 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, 1996, Metris had an outstanding revolving credit balance of $50.0 million and the weighted-average interest rate on borrowings was 5.9 percent. 8. LONG-TERM DEBT In September 1996, the Company closed the private placement of $125.0 million of three-year senior notes. In connection with the sale of such senior notes, the Company entered into a registration rights agreement pursuant to which it agreed to file a registration statement with the Securities and Exchange Commission with respect to an offer to exchange such privately placed senior notes for senior notes of the Company with substantially identical terms (the "Senior Notes"). In February 1997, the Company completed an exchange offer whereby substantially all of such unregistered notes were exchanged for registered notes. The amount, interest rate and maturity date of the Senior Notes are identical to the privately placed senior notes. The privately placed senior notes that were tendered in exchange for the Senior Notes have been cancelled. Long-term debt and related maturity dates are as follows: (In thousands of dollars) Maturity date Interest rate 1996 1995 Privately Placed Senior Notes Series A June 1996 9.81% $ - $ 65,000 Series B December 1997 10.12% 25,000 25,000 Series C August 1996 9.74% - 20,000 Series D August 1996 6.96% - 15,000 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 August 2000 6.83% 45,000 45,000 Senior Notes September 1999 7.38% 125,000 - Other indebtedness (due in various installments through November 2014; interest at varying rates ranging from 5.69% to 8.0% at December 27, 1996) 1,565 1,663 ---------- ---------- 271,565 246,663 Current portion of long-term debt (84) (100,099) ---------- ---------- Long-term debt, less current portion $ 271,481 $ 146,564 ========== ==========
Scheduled annual maturities due on long-term debt at December 27, 1996 were as follows: (In thousands of dollars) 1997 $ 84 1998 $ 25,084 1999 $125,067 2000 $ 45,057 2001 $ 14 Thereafter $ 76,259 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 27, 1996 was $109.4 million. 9. 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. Customer accounts receivable, net 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: Currently, credit card receivables are originated with variable rates of interest, with interest rate spreads that differ based on the related risk of such receivables. Thus, 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 receivables does not represent the underlying value of the established cardholder relationships. Sale of accounts receivable The carrying amount of the Company's retained interest in the Fingerhut Master Trust and the Metris Master Trust approximates fair value, as it was determined that "Customer accounts receivable, net" 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. 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: 1996 1995 Carrying Estimated Carrying Estimated (In thousands of dollars) amount fair value amount fair value --------- ---------- --------- ---------- Cash and cash equivalents $ 61,003 $ 61,003 $ 66,109 $ 66,109 Customer accounts receivable, net $ 547,361 $ 547,361 $ 464,176 $ 464,176 Long-term debt $ 271,565 $ 278,218 $ 246,663 $ 259,373 Interest rate swap agreements in a net receivable (payable) position $ - $ 2,683 $ - $ (10,598) Interest rate cap agreements $ 7,291 $ 2,899 $ 6,748 $ 2,848
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 previously associated with the Receivables Transfer Agreement and currently associated with the floating rate certificates issued by the Fingerhut Master Trust and the Metris Master Trust. Any premiums paid for these agreements are amortized to "Discount on sale of accounts receivable" if related to customer installment receivables or "Finance income and other revenues" if related to credit card receivables, where the economic exposure to fluctuating interest rates exists. During 1990, the Company entered into interest rate swap agreements for notional amounts totaling $260.0 million. The agreements exchanged a floating rate, which approximated the prevailing short-term commercial paper rate, for a fixed interest rate of 9.5 percent. On June 30, 1993, $160.0 million of the interest rate swap agreements expired. The remaining $100.0 million expired on June 30, 1994. The Fingerhut Master Trust Series 1994-1 floating rate certificates of $900.0 million contain imbedded interest rate caps ranging from 11.0 percent to 11.7 percent. In December 1994, the Company entered into a $500.0 million one year corridor cap which capped LIBOR at 6.5 percent. This agreement expired December 29, 1995. The Fingerhut Master Trust Series 1994-2 certificates, initially issued in November 1994, required a six-year agreement which effectively capped LIBOR at 11.2 percent on a notional amount varying up to $490.4 million over the life of the agreement. In connection with the 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 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. 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. 10. INTEREST EXPENSE Net interest expense was as follows: (In thousands of dollars) 1996 1995 1994 --------- --------- --------- Interest expense $ 30,073 $ 27,120 $ 25,711 Interest income (1,660) (1,177) (1,427) --------- --------- --------- Net interest expense $ 28,413 $ 25,943 $ 24,284 ========= ========= ========= The Company paid interest of $35.0 million in 1996, $24.2 million in 1995 and $25.1 million in 1994. 11. OPERATING LEASES Rental expense for both cancelable and non-cancelable operating leases, (principally for office and warehouse facilities and computer equipment) for fiscal years 1996, 1995 and 1994 was $35.9 million, $38.6 million and $39.8 million, respectively. Future minimum annual rentals at December 27, 1996, under non-cancelable operating leases are as follows: (In thousands of dollars) 1997 $ 25,552 1998 $ 20,698 1999 $ 13,707 2000 $ 3,001 2001 $ 480 Thereafter $ 93 The Company leased certain office and warehouse facilities (the "properties") from a former affiliated company. Annual rental expense for the properties in 1995 and 1994 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, 1995 and 1994 was $.6 million, $1.9 million and $2.1 million, respectively. 12. 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: (In thousands of dollars) 1996 1995 ------- ------- Actuarial present value of benefit obligations: Vested benefits $18,932 $18,726 Non-vested benefits 2,097 1,676 ------- ------- Accumulated benefit obligation 21,029 20,402 Effect of future compensation increases 9,437 9,289 ------- ------- Projected benefit obligation 30,466 29,691 Plan assets at fair value 24,770 19,855 ------- ------- Unfunded projected benefit obligation 5,696 9,836 Unrecognized prior service cost (1,345) (108) Unrecognized net gain (loss) 6,170 (892) Additional liability 327 32 -------- -------- Accrued pension cost $10,848 $ 8,868 ======== ======== Plan assets at December 27, 1996 and December 29, 1995 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 5.5 percent in 1996 and 1995. Projected benefits have been discounted using rates of 7.75 percent and 7.25 percent for 1996 and 1995, respectively. In determining pension expense, the assumed long-term rate of return on plan assets was 9.5 percent for 1996, 1995 and 1994. 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: (In thousands of dollars) 1996 1995 1994 ------- ------- ------- Benefit earned during the period $ 2,942 $ 1,990 $ 2,460 Interest accrued on projected benefit obligation 2,366 1,828 1,822 Actual return on assets (4,291) (4,360) (262) Deferred gain (loss) 2,519 2,875 (1,038) Amortization of prior service cost 76 7 5 Amortization of net (gain) loss 1 (85) 44 -------- -------- -------- Pension expense for the period $ 3,613 $ 2,255 $ 3,031 ======== ======== ======== 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 1996, 1995 and 1994 was $.9 million, $1.5 million and $1.6 million, respectively. The Company also has several defined contribution plans (some of which have, or are limited to, 401(k) provisions), which together cover substantially all non-union employees. Employer contributions to the plans are discretionary and are determined by the board of directors for each of the individual companies. The maximum contribution allowed is 15 percent of each participant's eligible compensation. The cost to the Company of these plans was $10.8 million, $11.7 million and $11.2 million for 1996, 1995 and 1994, respectively. In 1994, the Company adopted Statement of Financial Accounting Standards No. 112 ("FAS 112"), "Employers' Accounting for Postemployment Benefits." The impact of FAS 112 was not significant to the Company's financial statements. 13. INCOME TAXES The provision for income taxes consisted of the following: (In thousands of dollars) 1996 1995 1994 Currently payable: -------- -------- -------- Federal $ 65,682 $ 36,072 $ 62,645 State 2,537 1,750 1,139 Deferred (44,367) (12,374) (38,783) --------- --------- --------- Provision for income taxes $ 23,852 $ 25,448 $ 25,001 ========= ========= ========= The Company's effective income tax rate differed from the U.S. federal statutory rate as follows: 1996 1995 1994 ----- ----- ----- U.S. federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.0 1.4 .7 Merchandise donations (1.5) (3.1) (2.6) Other, net 1.2 - 2.1 ------ ------ ------ Effective income tax rate 36.7% 33.3% 35.2% ====== ====== ====== The "Other, net" tax rate in 1996, 1995 and 1994 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 27, 1996 and December 29, 1995 were composed of the following: (In thousands of dollars) 1996 1995 Current and long-term deferred income tax assets resulting from future deductible temporary differences are: Accounts receivable reserves $ 234,566 $ 202,706 Yield reserve 14,557 12,493 Inventory obsolescence reserves 6,635 4,611 Other 18,366 21,004 ---------- ---------- Total deferred income tax assets $ 274,124 $ 240,814 ========== ========== Current and long-term deferred income tax liabilities resulting from future taxable temporary differences are: Accelerated depreciation and amortization $ (24,125) $ (26,475) Deferred finance income (97,284) (97,438) Deferred advertising (6,140) (8,421) Other (1,440) (541) ----------- ---------- Total deferred income tax liabilities $ (128,989) $ (132,875) =========== =========== Management believes the Company's prior operating earnings 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 $42.7 million, $37.1 million and $47.3 million during 1996, 1995 and 1994, respectively. 14. RELATED PARTY TRANSACTIONS Related party transactions, detailed by subject and Note reference, are as follows: Operating leases Note 11 Stockholders' equity Note 15 15. STOCKHOLDERS' EQUITY The Company currently has 100,000,000 authorized shares of $.01 par value common stock of which 46,154,880 and 45,949,722 were issued and outstanding as of December 27, 1996 and December 29, 1995, 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. During 1994 through 1996, the Company repurchased 1,380,300 shares of its common stock at prevailing market prices for an aggregate of $21.5 million. 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 500,000 shares are subject to shareholder approval. 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. 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 130,925 were available for grant at December 27, 1996. 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. The Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock Option Plan provides for the granting of 2,250,000 stock options (either incentive stock options or non-qualified stock options), stock appreciation rights or restricted stock to officers and other employees. At December 27, 1996, 143,716 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 1996 and 1995, the Compensation Committee granted a total of 687,973 and 1,401,800 non-qualified options, respectively, substantially all of which become exercisable in three equal annual installments beginning on the first anniversary of the date of grant and will be canceled 10 years after the date of grant. In 1996, 353,917 shares of restricted stock were issued. The grant date fair value of each of these awards was $13.50. Twenty-five percent of the shares vested on March 31, 1996 and, subject to continued employment, 25 percent vests on March 31, 1997 with the remaining 50 percent vesting 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 $3.6 million for the year ended December 27, 1996, which included tax assistance payments made by the Company with respect to the first 25 percent of the awards that vested. 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 cancelled the remaining ungranted shares. 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 27, 1996, 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. 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 granted an executive a tandem option for either (a) 55,000 shares of the Company's common stock at an exercise price of $15.00 per share or (b) a 3.3 percent equity interest in the Financial Services Segment ("Metris") (see Note 19) at an exercise price equal to two times the fair value of that interest at March 1994, adjusted for additional capital contributions to Metris since the initial value date. In connection with Metris' initial public offering, Metris assumed the Company's obligation with respect to the Financial Services Segment equity interest and provided the executive an option to purchase Metris common stock, which vests over five years beginning March 1994. The exercise of either option terminates the other option. The Company has 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: (In thousands of dollars, except per share data) 1996 1995 Net earnings - as reported $ 40,159 $ 50,858 Net earnings - pro forma $ 37,549 $ 49,717 Earnings per share - as reported $ .83 $ 1.05 Earnings per share - pro forma $ .77 $ 1.03 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 1996 and 1995: 1996 1995 Dividend yield 1.1% 1.1% Expected volatility 44.32% 43.42% Risk-free interest rate 6.65% 6.16% Expected lives 7.38 years 7.38 years Information regarding the Company's stock option plans for 1996, 1995 and 1994 is as follows: 1996 1995 1994 Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price Shares Options outstanding, beginning of year 6,833,547 $ 9.88 7,943,878 $ 13.08 8,334,778 Options exercised (109,900) $ 6.55 (471,599) $ 7.16 (211,025) Options granted 968,973 $ 13.44 1,474,800 $ 15.13 484,500 Options canceled/ forfeited (667,735) $ 18.86 (2,113,532) $ 26.20 (664,375) ---------- ----------- ---------- Options outstanding, end of year 7,024,885 $ 9.57 6,833,547 $ 9.88 7,943,878 ========== ======== =========== ======== ========== Weighted-average fair value of options, granted during the year $ 7.28 $ 8.09 Weighted-average exercise price of options, exercisable at end of year $ 7.98 $ 7.87 The following table summarizes information about stock options outstanding at December 27, 1996: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/27/96 Life Price at 12/27/96 Price $ 5.455 3,754,996 3.0 Years $ 5.455 3,754,996 $ 5.455 $ 6.750 to $10.875 314,075 3.3 Years $ 8.659 314,075 $ 8.659 $11.250 to $14.813 1,202,422 8.8 Years $13.461 226,197 $13.504 $15.000 1,540,648 6.6 Years $15.000 907,063 $15.000 $15.063 to $19.938 86,125 6.2 Years $18.070 40,440 $17.958 $21.140 to $35.690 126,619 5.5 Years $24.816 73,004 $24.919 --------- --------- $ 5.455 to $35.690 7,024,885 5,315,775 ========= ========= 16. OTHER DISCLOSURES Administrative and selling expenses included promotional material and advertising expenses of $413.1 million, $488.6 million and $434.2 million for 1996, 1995 and 1994, respectively. Amortization expense relating to the excess of cost over fair value of net assets acquired was $1.4 million for 1996 and $1.3 million for 1995 and 1994. Accumulated amortization was $10.5 million and $9.1 million at December 27, 1996 and December 29, 1995, respectively. Amortization expense relating to customer lists was $1.4 million for 1996, 1995 and 1994. Accumulated amortization was $11.2 million and $9.8 million at December 27, 1996 and December 29, 1995, respectively. 17. 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 1996 Consolidated Statement of Financial Position. 18. 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 31, 1996, 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. 19. SEGMENT OF BUSINESS REPORTING The operations of the Company are divided into the following business segments for financial reporting purposes: Direct-to-the-Consumer Marketing: Sells a broad range of products and services directly to consumers via catalogs, television and other media. Financial Services (Metris Companies Inc.): 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 three core business lines: (1) consumer credit products, which presently consist of credit card lending through various MasterCard credit card products issued by Direct Merchants Bank, (2) sales of extended service plans to the Company's customers, and (3) fee-based products and services, which presently include debt waiver programs, card registration, third-party insurance and membership clubs. Revenues, earnings before income taxes, identifiable assets, capital expenditures and depreciation and amortization pertaining to the business segments in which the Company operates are presented below: (In thousands of dollars) 1996 1995 1994 Revenues Direct-to-the-Consumer Marketing $1,879,493 $2,027,283 $1,898,795 Metris 155,434 58,212 14,725 ---------- ---------- ---------- $2,034,927 $2,085,495 $1,913,520 ========== ========== ========== Earnings before income taxes Direct-to-the-Consumer Marketing $ 32,445 $ 68,857 $ 67,423 Metris 32,546 7,449 3,503 ---------- ---------- ---------- $ 64,991 $ 76,306 $ 70,926 ========== ========== ========== Identifiable assets Direct-to-the-Consumer Marketing $1,100,382 $1,109,135 $1,088,077 Metris 251,667 171,942 9,856 ---------- ---------- ---------- $1,352,049 $1,281,077 $1,097,933 ========== ========== ========== Capital expenditures Direct-to-the-Consumer Marketing $ 47,742 $ 93,089 $ 69,339 Metris 4,113 1,353 239 ---------- ---------- ---------- $ 51,855 $ 94,442 $ 69,578 ========== ========== ========== Depreciation and amortization Direct-to-the-Consumer Marketing $ 54,960 $ 46,976 $ 37,667 Metris 426 127 26 ---------- ---------- ---------- $ 55,386 $ 47,103 $ 37,693 ========== ========== ========== 20. SUBSEQUENT EVENTS On January 23, 1997, the Company declared a cash dividend of $.04 per share, or an aggregate of $1.8 million, payable on February 20, 1997 to shareholders of record as of the close of business on February 10, 1997. In January 1997, the Fingerhut Master Trust issued Series 1997-1 variable funding certificates with maximum proceeds of $417.6 million. The Series 1997-1 certificates enter into amortization periods beginning in May 1998. In February 1997, the Company completed an exchange offer whereby substantially all of the $125.0 million of privately placed notes, which were issued in September 1996, were exchanged for registered notes. Fingerhut Companies, Inc. and Subsidiaries 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 1996 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 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 27, 1996 and December 29, 1995 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 27, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fingerhut Companies, Inc. and Subsidiaries as of December 27, 1996 and December 29, 1995, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 27, 1996 in conformity with generally accepted accounting principles. /KPMG Peat Marwick LLP/ Minneapolis, Minnesota January 22, 1997 Quarterly Financial -- Fiscal Year Summaries (In thousands of dollars, 1996 except per share data) First Second Third Fourth Total Revenues $ 402,941 $ 440,043 $ 441,877 $ 742,495 $2,027,356 Gross margin (a) $ 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 $ (.04) $ .04 $ .18 $ .65 $ .83 1995 First Second Third Fourth Total Revenues $ 402,869 $ 464,587 $ 469,532 $ 740,356 $2,077,344 Gross margin (a) $ 180,695 $ 196,296 $ 194,365 $ 329,635 $ 900,991 Net earnings (b) $ 6,184 $ 5,794 $ 8,553 $ 30,327 $ 50,858 Earnings per share $ .13 $ .12 $ .18 $ .63 $ 1.05
(a) Gross margin is equal to net sales less product cost. (b) Net earnings during 1995 included reserve adjustments for unusual items of $4.5 million, $1.0 million and $2.5 million for the first, third and fourth quarters, respectively. Stock Data The Company's common stock is traded under the symbol "FHT" on the New York Stock Exchange. As of February 28, 1997, there were 685 holders of record of the Company's common stock. 1996 First Second Third Fourth Year Common stock price: 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 1995 First Second Third Fourth Year Common stock price: High $ 17 $ 16-5/8 $ 17-7/8 $ 16-1/8 $ 17-7/8 Low $ 10-7/8 $ 10-7/8 $ 14-7/8 $ 11-1/2 $ 10-7/8 Dividends paid $ .04 $ .04 $ .04 $ .04 $ .16 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 8 for dividend restrictions. Schedule II Fingerhut Companies, Inc. and Subsidiaries Valuation and Qualifying Accounts For the Years Ended December 27, 1996, December 29, 1995 and December 30, 1994 (In thousands of dollars) Additions charged to Balance at cost, Balance at beginning expenses, end Description of period revenues Deductions of period - -------------- ---------- ---------- ---------- ---------- Accounts receivable reserves: 1996 $144,680 $845,595 $823,826 (a) $166,449 1995 $113,383 $851,229 $819,932 (a) $144,680 1994 $112,533 $749,900 $749,050 (a) $113,383 Inventory reserves: 1996 $ 12,303 $ 28,175 $ 21,858 (b) $ 18,620 1995 $ 18,102 $ 22,756 $ 28,555 (b) $ 12,303 1994 $ 19,328 $ 27,913 $ 29,139 (b) $ 18,102 (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, 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 22, 1997, we reported on the consolidated statements of financial position of Fingerhut Companies, Inc. and subsidiaries as of December 27, 1996 and December 29, 1995, 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 27, 1996, as contained in the 1996 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 1996. 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 22, 1997 EX-21 12 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 Metris Companies Inc.(83%) Delaware Direct Merchants Credit Card Bank, National Association National Bank Metris Direct, Inc. Minnesota Metris Receivables, Inc. Delaware Fingerhut Company Store, Inc. Minnesota Wiman Corporation Minnesota Fingerhut National Bank Minnesota 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 27, 1996. EX-23 13 Exhibit 23 Consent of Independent Certified Public Accountants The Board of Directors Fingerhut Companies, Inc.: We consent to incorporation by reference in the registration statement (No. 33-38988 and 33-55871) on Form S-8 of Fingerhut Companies, Inc. and subsidiaries of our reports dated January 22, 1997 relating to the consolidated statements of financial position of Fingerhut Companies, Inc. as of December 27, 1996 and December 29, 1995 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 27, 1996, which reports appear in or are incorporated by reference in the December 27, 1996 annual report on Form 10-K of Fingerhut Companies, Inc. KPMG Peat Marwick LLP Minneapolis, Minnesota March 26, 1997 EX-27 14
5 This schedule contains summary financial information extracted from the consolidated financial statements of Fingerhut Companies, Inc. for the fiscal year ended December 27, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-27-1996 DEC-27-1996 61,003 0 737,779 190,418 127,735 988,214 460,162 174,980 1,352,049 422,294 271,481 0 0 462 604,939 1,352,049 1,652,869 2,027,356 830,423 1,856,505 78,427 302,239 28,413 64,011 23,852 40,159 0 0 0 40,159 .83 .83
EX-99 15 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"). Metris Companies Inc. ("Metris"), an 83% owned subsidiary of the Company, may borrow up to $300 million under its revolving credit facility. All of the available $300 million under this facility is also guaranteed by Fingerhut. In addition, as of December 27, 1996, the Company had outstanding $270 million aggregate principal amount of outstanding senior notes, which are also guaranteed by Fingerhut. 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 experienced a significant increase in postage costs in fiscal 1995. In addition, the Company experienced price increases in 1995 for paper used in the production of its catalogs, which further increased the Company's cost of doing business in 1995 and 1996. 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. 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, Metris' credit card portfolio, as of the date hereof, consists primarily of accounts that have been generated in the last 24 months and, 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. Interest Rate Risk Fingerhut National Bank's closed-end credit card loans and Fingerhut's existing closed-end installment sales contracts are fixed-priced, fixed-term contracts. Fingerhut National Bank's revolving credit card accounts currently have finance charges set at a fixed rate. 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. Fingerhut relies 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. The court entered summary judgment in favor of Fingerhut and dismissed the case, which is subject to appeal. 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 42% in fiscal 1996) 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. -----END PRIVACY-ENHANCED MESSAGE-----