<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
METRIS COMPANIES INC.
(Exact name of the Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 41-1849591
(State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
</TABLE>
600 SOUTH HIGHWAY 169
SUITE 1800
ST. LOUIS PARK, MN 55426
(612) 525-5020
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Z. JILL BARCLIFT, ESQ.
VICE PRESIDENT, ASSISTANT SECRETARY AND GENERAL COUNSEL
600 SOUTH HIGHWAY 169
SUITE 1800
ST. LOUIS PARK, MN 55426
(612) 525-5020
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPY TO:
Richard G. Clemens, Esq.
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
(312) 853-7000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE, AS
DETERMINED BY MARKET CONDITIONS.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) UNIT (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Subordinated Debt Securities
Common Stock, $.01 par value
Total....................................... $750,000,000 100% $750,000,000 $221,250
</TABLE>
(1) Such indeterminate number or amount of Subordinated Debt Securities and
Common Stock (including preferred stock purchase rights, if any, appurtenant
thereto) of Metris Companies Inc. as may from time to time be issued at
indeterminate prices. The amount registered is in United States dollars or
the equivalent thereof in any other currency, currency unit or units, or
composite currency or currencies.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. The aggregate offering price of the Debt Securities
and Common Stock registered hereby will not exceed $750,000,000.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 7, 1998
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. ANY SALE OF
THESE SECURITIES MUST BE ACCOMPANIED BY A SUPPLEMENT TO THIS PROSPECTUS.
<PAGE>
PROSPECTUS
$750,000,000
METRIS COMPANIES INC.
[LOGO]
SUBORDINATED DEBT SECURITIES AND COMMON STOCK
We may use this Prospectus from time to time to offer subordinated debt
securities, consisting of debentures, notes and other unsecured evidences of
indebtedness (the "Debt Securities"), and shares of Common Stock ("Common
Stock") of Metris Companies Inc., a Delaware corporation ("Metris" or the
"Company"). We will refer to the Debt Securities and Common Stock as the
"Securities."
The aggregate initial offering price of the Securities may not exceed
$750,000,000 (or its equivalent in any other currency or units based on or
relating to foreign currencies). We have included the specific terms of the
particular Securities for which this Prospectus is being delivered in an
accompanying Prospectus Supplement. Such terms include: (i) in the case of Debt
Securities, the specific designation, aggregate principal amount, denomination
(which may be in United States dollars, or the equivalent thereof in any other
currency or in units based on or relating to foreign currencies), maturity,
premium, if any, interest rate (which may be fixed or variable), time and method
of calculating interest, if any, place or places where principal, premium, if
any, and interest, if any, on such Debt Securities will be payable, the
currencies or currency units in which principal, premium, if any, and interest,
if any, on such Debt Securities will be payable, any terms of redemption or
conversion, any sinking fund provisions, the purchase price, any listing on a
securities exchange or quotation on a national quotation system, the method of
distribution and other special terms; and (ii) in the case of Common Stock, the
number of shares offered, the initial offering price, market price and dividend
information and the method of distribution.
We may issue the Debt Securities in registered form or bearer form, or both. In
addition, we may issue all or a portion of the Debt Securities of any series in
permanent registered global form which will be exchangeable only under certain
conditions for definitive Debt Securities.
The Common Stock is quoted on The Nasdaq Stock Market (the "NASDAQ") under the
symbol "MTRS."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN ANY OF THE SECURITIES OFFERED HEREBY.
We may sell the Securities to or through underwriters, dealers or agents or
directly to purchasers, or through a combination of these methods. The
accompanying Prospectus Supplement sets forth the names of any underwriters,
dealers or agents involved in the sale of the Securities for which this
Prospectus is being delivered and any applicable fee, commission or discount
arrangements.
------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR HAS PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------------------------------------
The date of this Prospectus is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Where You Can Find More Information......................... 1
The Company................................................. 2
Selected Consolidated Financial and Operating Data.......... 5
Ratio of Earnings to Fixed Charges.......................... 6
Risk Factors................................................ 7
Use of Proceeds............................................. 13
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 14
Business.................................................... 31
Description of Debt Securities.............................. 42
General................................................. 42
Payment, Registration, Transfer and Exchange............ 43
Global Debt Securities.................................. 44
Consolidation, Merger or Sale by the Company............ 46
Events of Default, Notice and Certain Rights on
Default................................................ 46
Option to Defer Interest Payments....................... 48
Modification of the Indenture........................... 48
Subordination Under the Indenture....................... 49
Defeasance and Covenant Defeasance...................... 51
The Trustee............................................. 51
Description of Capital Stock................................ 52
General................................................. 52
Common Stock............................................ 52
Preferred Stock......................................... 53
Certain Provisions of the Company's Certificate and
By-laws................................................ 53
Plan of Distribution........................................ 55
Validity of Securities...................................... 56
Experts..................................................... 56
</TABLE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN CONTAIN
"FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT THE COMPANY'S BELIEFS AND EXPECTATIONS, ARE FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES AND, THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO THE RISK FACTORS DISCUSSED LATER IN THIS DOCUMENT. SEE
"RISK FACTORS." READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE
IMPORTANT FACTORS.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires the Company to file reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC"). You may inspect and
copy such reports, proxy statements and other information at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the regional offices of the SEC located at 7
World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain
more information about the public reference facilities by calling the SEC at
1-800-SEC-0330. In addition, such reports, proxy statements and other
information may be accessed electronically by means of the SEC's Web site at
http://www.sec.gov.
The Company has filed a Registration Statement related to the offering
described in this Prospectus. As allowed by SEC rules, this Prospectus does not
contain all of the information which you can find in the Registration Statement.
You are referred to such Registration Statement and its exhibits, which may be
inspected or obtained as indicated above. This Prospectus is qualified in its
entirety by such other information.
The Exchange Act allows the Company to "incorporate by reference"
information into this Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be a part of
this Prospectus, except for any information superseded by information contained
herein. This Prospectus incorporates by reference the following documents that
have been previously filed with the SEC:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1997;
2. Quarterly Report on Form 10-Q for the period ended March 31, 1998;
and
3. Quarterly Report on Form 10-Q for the period ended June 30, 1998.
This Prospectus also incorporates by reference additional documents that may
be filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act between the date of this Prospectus and the date our offering is
completed.
You may obtain copies of such documents which are incorporated by reference
in this Prospectus (other than exhibits thereto which are not specifically
incorporated by reference therein), without charge, upon written or oral request
to Metris Companies Inc., 600 South Highway 169, Suite 1800, St. Louis Park,
Minnesota 55426, Attention: Director, Investor Relations (telephone number (612)
525-4820).
You should rely only on the information contained or incorporated by
reference in this Prospectus. We have not authorized anyone to provide you with
information that is different from what is contained in this Prospectus. You
should not assume that the information contained in the Prospectus is accurate
as of any date other than the date of such Prospectus, and neither the mailing
of the Prospectus to stockholders nor the issuance of any securities hereunder
shall create any implication to the contrary. This Prospectus does not
constitute an offer to buy or sell any securities in any jurisdiction where it
is unlawful to do so.
1
<PAGE>
THE COMPANY
GENERAL
The Company is an information-based direct marketer and provider of consumer
credit products and fee-based services and extended service plans primarily to
moderate income consumers and customers of third party clients. The Company's
consumer credit products are primarily unsecured credit cards issued by its
subsidiary, Direct Merchants Credit Card Bank, National Association ("Direct
Merchants Bank"). The Company's customers and prospective customers include (i)
individuals who are not customers of Fingerhut Corporation but for whom credit
bureau information is available ("External Prospects"), (ii) existing customers
of Fingerhut Corporation ("Fingerhut Customers"), and (iii) customers of third
party clients. The Company markets its fee-based services, including debt waiver
programs, card registration, extended service plans, membership clubs and
insurance and fee-based services provided by third parties to its credit card
customers, Fingerhut Customers and customers of third parties.
The Company was incorporated in the State of Delaware on August 20, 1996,
and is currently an 83% owned indirect subsidiary of Fingerhut Companies, Inc.,
a database marketing company that sells a broad range of products and services
("FCI"). The Company became a publicly held company in October 1996 after
completing an initial public offering. FCI has filed a ruling request with the
Internal Revenue Service to distribute to its stockholders as a tax-free
dividend all of the shares of the Company it holds (the "Spin Off"). The Company
understands that such distribution is expected to occur sometime during the Fall
of 1998, should FCI receive a favorable ruling request from the Internal Revenue
Service and subject to the approval of the Board of Directors of FCI. The
Company's principal direct and indirect subsidiaries are Metris Direct, Inc.
(formerly known as Fingerhut Financial Services Corporation), Metris Direct
Services, Inc., Direct Merchants Bank, Metris Funding Co. and Metris
Receivables, Inc.
The Company's principal executive offices are located at 600 South Highway
169, Suite 1800, St. Louis Park, Minnesota 55426, telephone number (612)
525-5020.
SPIN OFF AND THE FINGERHUT DATABASE
The Company believes that upon consummation of the Spin Off, it will then be
able to pursue expansion of its business and operations without certain
limitations that exist as a result of FCI's ownership of the Company, including
limitations on the Company's ability to issue additional common equity. The
Company also believes that upon consummation of the Spin Off, it will be able to
more effectively develop relationships with retailers other than Fingerhut
Corporation, a wholly owned subsidiary of FCI ("Fingerhut"), with respect to its
extended service plans because the Company will no longer be viewed as
affiliated with a competitor of such retailers. In addition, the Company will be
able to elect, subject to certain limitations, to amend its Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation" or
"Certificate") to eliminate the detailed restrictions (originally adopted to
address certain potential conflicts of interest between the Company and FCI)
concerning the business activities in which the Company is permitted to engage.
Even after the Spin Off, the Company will have various important agreements
and arrangements with FCI and Fingerhut. For example, the Company has a contract
with Fingerhut to use the information in the Fingerhut Database (as defined
herein) to market financial services products, including general purpose credit
cards and fee-based or enhancement services. This contract expires October 2003
and is renewable thereafter upon mutual agreement between Fingerhut and the
Company unless there has been a change in control of the Company. A change of
control (the "Change of Control") is deemed to have occurred if (i) any person
or group (within the meaning of Rule 13d-5 of the Securities Exchange Act of
1934, as in effect), other than FCI, owns beneficially or of record, shares
representing more than 25% of the aggregate ordinary voting power represented by
the issued and outstanding capital stock of the Company; (ii) a majority of the
seats (other than vacant seats) on the Board of Directors of the
2
<PAGE>
Company are at anytime occupied by persons who were neither (a) nominated by
FCI, or by the Board of Directors of the Company nor (b) appointed by directors
so nominated; or (iii) any person or group other than FCI shall otherwise
directly or indirectly have the power to exercise a controlling influence over
management or policies of the Company. The Spin Off will not be deemed to be a
Change of Control, but the Company cannot predict whether a Change of Control
might occur thereafter.
The Fingerhut Database is a database composed of payment, behavioral, and
other data on customers of Fingerhut. As its customers make payments and order
new products, Fingerhut enters a variety of information in the database and
Fingerhut uses this database, along with sophisticated and highly automated
proprietary modeling techniques, to evaluate each customer's creditworthiness.
The Fingerhut Database contains information on more than 30 million individuals,
including approximately 8 million customers who have purchased merchandise from
Fingerhut within the past 24 months. This database contains up to 1,400
potential data items in a customer record, including names, addresses,
behavioral characteristics, general demographic information and other
information provided by the customer. Fingerhut uses information in the
Fingerhut Database, along with sophisticated proprietary credit scoring models,
to produce its proprietary credit scores (the "Fingerhut Scores") for Fingerhut
Customers. The Fingerhut Database also includes Fingerhut's suppression and bad
debt file (the "Fingerhut Suppress File"), which contains information on
approximately 11.5 million individuals about whom it has information relating to
indicators of unacceptably high risk. Fingerhut periodically updates the
information in the Fingerhut Database. Fingerhut does not report its credit
information to the credit bureaus, which means this information is not publicly
available.
Each of the other intercompany agreements between the Company and Fingerhut
or FCI, other than the Tax Sharing Agreement (as defined herein), will remain in
effect after the Spin Off. The only continuing administrative services currently
provided by FCI to the Company are limited treasury, insurance, and information
systems services. Such services are expected to be required on a limited basis
through 1999 and may be extended to 2000. However, each of the intercompany
agreements between the Company and Fingerhut or FCI may terminate early due to a
Change of Control. The Spin Off will not be deemed to be a Change of Control,
but the Company cannot predict whether a Change of Control might occur
thereafter.
Upon consummation of the Spin Off, no individual will hold titles of officer
or director at both FCI and the Company, except for Theodore Deikel, who is
Chairman of the Board and Chief Executive Officer of FCI and will be
Non-Executive Chairman of the Board of the Company.
BUSINESS STRATEGY
The Company conducts its business primarily through two businesses: consumer
credit products ("Consumer Credit Products") and fee-based services and extended
service plans ("Fee-Based Services").
CONSUMER CREDIT PRODUCTS. Through its Consumer Credit Products business,
the Company primarily targets moderate income consumers who the Company believes
have been underserved by traditional providers of financial services,
particularly with respect to the supply of credit and customers of third party
clients. The Company intends to service this market by utilizing the proprietary
databases and credit scoring techniques it has access to or has developed,
together with information from credit bureaus, to determine a potential
customer's creditworthiness and ultimate profitability. Once a prospective
customer is targeted, the Company uses a sophisticated modeling system and
risk-based pricing strategy to assign the annual percentage rate, annual fee and
credit line based upon the expected risk of the individual prospect.
3
<PAGE>
The following are the principal components of the Company's strategy with
respect to its Consumer Credit Products business:
INCREASE THE NUMBER OF NEW CUSTOMERS IN THREE PRIMARY AREAS: (I) EXTERNAL
PROSPECTS; (II) PORTFOLIO ACQUISITIONS; AND (III) FINGERHUT CUSTOMERS.
- EXTERNAL PROSPECTS. Utilizing its proprietary risk, response and
profitability models developed to solicit moderate income consumers who
are not Fingerhut Customers, coupled with the proprietary information
contained in the Fingerhut Suppress File, the Company intends to generate
additional credit card relationships from External Prospects, which may
include the development of marketing alliances with independent third
parties.
- PORTFOLIO ACQUISITIONS. The Company intends to continue to generate
additional credit card accounts through the strategic acquisition of
credit card portfolios of other credit card issuers. Over the past year,
the Company has completed several of these acquisitions and, as of June
30, 1998, External Prospects and portfolio acquisitions represented
approximately 61% of the Company's credit card accounts.
- FINGERHUT CUSTOMERS. Utilizing its proprietary risk, response and
profitability models developed to solicit Fingerhut Customers, coupled
with the proprietary information contained in the Fingerhut Database, the
Company intends to generate additional credit card relationships with
Fingerhut Customers. As of June 30, 1998, Fingerhut Customers represented
approximately 39% of the Company's credit card accounts.
CONTINUE TO USE AND MODIFY RISK-BASED PRICING. The specific pricing for a
prospective customer's credit card offer is determined by that individual's risk
profile at the time of solicitation, a practice known as "risk-based pricing."
If the customer's risk profile changes over time, the specific pricing for that
individual will change. The Company intends to continue to use and modify its
risk-based pricing strategy, enabling it to optimize the profitability of
customer relationships.
CONTINUE TO INVEST IN OPERATIONAL INFRASTRUCTURE TO SUPPORT ACCOUNT
GROWTH. The Company believes an efficient operational infrastructure that can
handle inquiries on accounts, collections on delinquent accounts and all
inquiries from customers is important to serve successfully the customers of its
Consumer Credit Products business. As of June 30, 1998, the Company had two
operations centers which house over 1,200 employees; the Company intends to
expand the second center in the second half of 1998.
FEE-BASED SERVICES. Through its Fee-Based or Enhancement Services business,
the Company intends to continue to optimize the profitability of each customer
relationship by cross-selling additional Fee-Based Services to its existing
credit card accounts, thereby leveraging its account acquisition and
infrastructure costs. In addition, the Company intends to focus on developing
new Fee-Based or Enhancement Services and entering into marketing alliances to
sell its Fee-Based or Enhancement Services to the customers of third parties,
including financial institutions, retailers and other third parties.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
AND OPERATING DATA
The following table sets forth certain financial and operating data of the
Company. The selected consolidated financial data below for each of the five
years ending December 31, 1997 are derived from the Consolidated Financial
Statements of the Company. The selected financial data below for the six-month
periods ended June 30, 1998 and 1997 and certain managed basis information are
derived from unaudited financial information.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE SIX
MONTHS ENDED AS OF OR FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT EPS AND STOCK PRICES)
INCOME STATEMENT DATA (MANAGED
BASIS):(1)
Net Interest Income............ $ 239,567 $ 126,032 $ 306,361 $ 143,491 $ 26,354 $ 487 $ 279
Provision for Loan Losses...... 255,404 122,922 319,299 136,305 26,234
Other Operating Income......... 160,186 92,052 212,869 126,647 52,969 14,238 10,053
Other Operating Expense........ 105,936 66,777 138,048 101,287 45,640 11,222 8,333
Income Before Income Taxes..... 38,413 28,385 61,883 32,546 7,449 3,503 1,999
Tax Rate....................... 38.5% 38.5% 38.5% 38.5% 38.5% 37.3% 36.9%
Net Income..................... $ 23,624 $ 17,457 $ 38,058 $ 20,016 $ 4,581 $ 2,198 $ 1,262
PER COMMON SHARE STATISTICS:
EPS--diluted (2)............... $ 1.18 $ 0 .87 $ 1.88 $ 1.17 $ 0.28 $ 0.14 $ 0.08
Stock Price (period end)....... 63.75 32.81 34.25 24.00
Shares Outstanding (period
end)......................... 19,225 19,225 19,225 19,225 15,967 15,967 15,967
Shares Used to Compute EPS
(diluted).................... 19,938 20,162 20,238 17,129 16,369 16,270 15,967
CREDIT CARD DATA (MANAGED
BASIS):(1)
Total Accounts................. 2,430 1,591 2,293 1,418 703
Period-end Loans............... $3,880,965 $2,124,821 $3,546,936 $1,615,940 $ 543,619
Period-end Assets.............. 3,905,766 2,156,730 3,604,972 1,687,227 622,983 $ 9,856 $ 6,615
Average Loans.................. 3,654,879 1,830,034 2,294,893 1,018,856 183,274
Average Interest-earning
Assets....................... 3,712,783 1,871,866 2,341,451 1,040,924 193,086 6,615 4,531
Average Assets................. 3,798,336 1,882,211 2,355,978 1,078,346 214,363 7,076 5,191
Average Equity................. 186,238 147,980 158,180 92,852 30,083 5,365 3,904
Net Interest Margin (3)........ 13.0% 13.6% 13.1% 13.8% 13.6% 7.4% 6.2%
Return on Average Assets....... 1.3% 1.9% 1.6% 1.9% 2.1% 31.1% 24.3%
Return on Average Equity....... 25.6% 23.8% 24.1% 21.6% 15.2% 41.0% 32.3%
Loan Loss Reserves............. $ 324,157 $ 139,825 $ 244,084 $ 95,669 $ 22,219
Delinquency Ratio (4).......... 7.4% 5.9% 6.6% 5.5% 4.0%
Loan Loss Reserve Ratio........ 8.4% 6.6% 6.9% 5.9% 4.1%
Net Charge-off Ratio (5)....... 9.7% 8.8% 8.3% 6.2% 2.2%
FEE-BASED SERVICES AND EXTENDED
SERVICE PLAN DATA:
Fee-Based Services Revenues.... $ 39,342 $ 24,625 $ 55,502 $ 29,853 $ 6,662 $ 1,994 $ 2,118
Net Extended Service Plan
Revenues..................... 11,760 1,621 7,911 20,420 17,779 12,244 7,935
Warrantable Product Unit
Penetration Rates (6)........ 26.8% 27.0% 26.7% 24.4% 20.4% 15.3% 12.9%
</TABLE>
- ------------------------------
(1) The Company analyzes its financial performance on a managed loan portfolio
basis whereby the income statement and balance sheet are adjusted to reverse
the effects of securitization.
(2) Earnings per share is calculated assuming the Company reorganization
occurred at the beginning of the first year shown.
5
<PAGE>
(3) Includes the Company's actual cost of funds plus costs associated with asset
securitizations, including the interest expense paid to the
certificateholders.
(4) Delinquency ratio represents credit card loans that were at least 30 days
contractually past due at period end as a percentage of period-end managed
loans.
(5) Net charge-off ratio reflects actual principal amounts charged-off, less
recoveries, as a percentage of average managed loans.
(6) Warrantable product sales penetration rates reflect the percentage of
extended service plans sold to total warrantable products sold. Percentages
for all periods presented reflect the inclusion of jewelry and furniture
products as warrantable products even though extended service plans for such
products were not introduced until the middle of 1995.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges for
the Company and its consolidated subsidiaries for the periods indicated. The
Company to date has not issued Preferred Stock; therefore, the ratios of
earnings to combined fixed charges and preferred stock dividends are the same as
the ratios of earnings to fixed charges set forth below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges 3.81 7.78 5.67 8.26 6.88 134.16 N/A
</TABLE>
The computation of the ratio of earnings to fixed charges is based on
applicable amounts of the Company and its consolidated subsidiaries. "Earnings"
consist of earnings from continuing operations before income taxes, plus fixed
charges. "Fixed charges" consist of interest on indebtedness and a portion of
rental expense that is deemed to be representative of the interest factor. The
ratio of earnings to fixed charges is calculated on an owned basis.
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, you
should consider carefully the following risk factors before purchasing
Securities for which this Prospectus is being delivered.
LIMITED OPERATING HISTORY AS A STAND-ALONE ENTITY
The Company was incorporated in 1996 and currently is 83% owned by FCI.
Following the Spin Off, the Company expects to experience significant changes in
its funding and operations. Given the Company's lack of operating history as a
stand-alone entity, there can be no assurance that these changes will not have
an adverse impact on the Company's results of operations, financial condition
and prospects.
RISKS RELATED TO TARGET MARKET OF CONSUMER CREDIT PRODUCTS
The Company targets its Consumer Credit Products to primarily moderate
income consumers, a market segment which lenders historically have not
solicited. As a result, there may be greater uncertainty with respect to the
credit risk and performance of these consumers, as well as expected higher
delinquency and loss rates. There can be no assurance that the Company can
successfully target and evaluate the creditworthiness of these customers so as
to minimize the expected higher delinquencies and losses. In addition, there can
be no assurance that the Company's risk-based pricing system can offset the
negative impact on profitability that these expected greater delinquencies and
losses may have.
Primary risks associated with unsecured lending to moderate income consumers
include: (i) increases in delinquencies and credit losses due to future economic
downturns; (ii) higher default or bankruptcy rates, resulting in accounts being
charged off as uncollectible; (iii) increased fraud by cardholders and third
parties and (iv) diminished interest income due to unfavorable changes in (A)
consumers' attitudes toward financing purchases with debt or (B) cardholder
payment behavior, such as increases in discretionary repayment of account
balances. In addition, general economic factors, such as the rate of inflation,
unemployment levels and interest rates may affect moderate income consumers more
severely than other market segments.
At June 30, 1998, 7.4% of the Company's managed credit card loans were 30
days or more delinquent, compared to 6.6% at December 31, 1997 and 5.5% at
December 31, 1996. Any material increases in delinquencies and losses could have
a material adverse impact on the Company's results of operations, financial
condition and prospects.
LACK OF SEASONING OF CREDIT CARD PORTFOLIO
The average age of a credit card issuer's portfolio of accounts indicates
that portfolio's stability of delinquency and loss levels. For example, a
portfolio containing mostly older accounts generally behaves more predictably
than a newly originated portfolio. 82% of the Company's credit card accounts
were originated within the last 36 months and over 14% were originated within
the last six months. As a result, until the accounts become more seasoned, the
delinquency and loss levels of the Company's newly originated portfolio could
have a negative impact on earnings through net charge-offs, and any material
increases in delinquencies and losses could have a material adverse impact on
the Company's results of operations, financial condition and prospects.
ABILITY TO SUSTAIN AND MANAGE GROWTH; PORTFOLIO ACQUISITIONS
In order to meet its strategic objectives, the Company must continue to
expand its credit card loan portfolio. Continued growth in this area depends
largely on (i) the Company's ability to attract new cardholders, (ii) growth in
both existing and new account balances, (iii) the degree to which the
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Company loses accounts and account balances to competing card issuers, (iv)
levels of delinquencies and losses, (v) the availability of funding, including
securitizations, on favorable terms, (vi) general economic and other factors
such as the rate of inflation, unemployment levels and interest rates, which are
beyond the control of the Company, and (vii) the Company's ability to integrate
successfully acquisitions of portfolios. In connection with such acquisitions,
the Company faces certain risks, including the risks of (a) limited or
unreliable historical information on portfolio customers, (b) unanticipated
attrition of acquired portfolio customers upon transfer to the Company,
resulting in (I) a lower borrowing base upon which to assess fees, (II) higher
costs related to closing accounts, and (III) less potential for Fee-Based
Services revenues because of a then smaller portfolio customer base and (c)
reduced profitability due to lower portfolio performance levels than expected.
The Company's growth is also dependent on the level of marketing
expenditures (including the cost of mailing) used to solicit new customers and
the number of responses received with respect to solicitations for the Company's
consumer credit, fee-based and other financial service products. In addition,
the Company's growth is dependent on its ability to continue to manage such
growth effectively, including the employment and training of new personnel,
expansion of facilities, expansion of management systems and access to
additional capital. The Company cannot give assurances as to the future growth
in its loan portfolio or its ability to manage any such growth.
RISKS RELATED TO FEE-BASED SERVICES
The Company targets its Fee-Based Services to the Company's credit card
customers, Fingerhut Customers and customers of third party clients. Because of
the variety of offers provided and the diversity of the customers targeted,
there is uncertainty as to how many customers will respond to the Company's
offers for these Fee-Based Services. The Company cannot give assurances that it
will not experience higher than anticipated costs in connection with the
internal administration and underwriting of these Fee-Based Services and lower
than anticipated response rates or retention rates.
Furthermore, the Company cannot give assurances that it will be able to grow
the Fee-Based Services business or maintain historical growth and stability
levels if (i) the Company is unable to successfully market Consumer Credit
Products to new customers, (ii) existing customers close accounts voluntarily or
involuntarily, (iii) the Company is unable to expand its business to other third
parties, and (iv) further growth is limited by certain states' additional
regulations.
FUNDING CONSIDERATIONS
The Company depends on cash flow from operations, the issuance of equity and
debt securities, asset securitization and its bank revolving credit facility to
fund its operations. The loss of any of these sources of funding could adversely
affect the Company's ability to operate efficiently. For example, if the Company
breaches any of its covenants in the long-term debt indenture or under the
Revolving Credit Facility (as defined herein), including various financial
covenants, the lenders may terminate the facility. In addition, because of the
Company's limited operating history and relatively unseasoned loan portfolio,
FCI historically has guaranteed the Company's credit facility, as well as
several senior letters of credit and two interest rate swap transactions. Prior
to the Spin Off, all funding and derivative transactions will be refinanced
without a guarantee from FCI. Without such guarantee, the Company's stand-alone
financing will be significantly more expensive, with reduced availability and
more restrictive terms and conditions. Any material increase in the Company's
costs of financing could have an adverse impact on the Company's results of
operations, financial condition and prospects.
The Company also depends heavily upon the securitization of its credit card
loans to fund its operations and, to date, has been able to complete
securitization transactions on terms that it believes are favorable. There can
be no assurance, however, that the securitization market will continue to offer
attractive funding alternatives. Furthermore, the Company's ability to
securitize its assets depends on
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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 presently does not foresee any
significant problems in these areas, any such adverse change could force the
Company to rely on other potentially more expensive funding sources.
In addition, poor performance of the Company's securitized assets, including
increased delinquencies and losses, could result in a downgrade or withdrawal of
the ratings on the outstanding certificates under the Company's securitization
transactions, cause early amortization of such certificates or result in higher
required credit enhancement levels. This could jeopardize the Company's ability
to effect other securitization transactions on acceptable terms, decrease the
Company's liquidity and force the Company to rely on other potentially more
expensive funding sources to the extent available.
INTEREST RATE RISK
The Company's principal market exposure is to changes in market interest
rates. Management seeks to minimize the impact of changes in market interest
rates on the Company's cash flow, asset value and net income primarily by
match-funding assets and secondarily through the use of interest rate
derivatives to match asset and liability repricings. A reduction in market
interest rates may reduce the yield on the Company's assets while fixed rate
funding expenses stay flat, compressing the excess interest spread. A rise in
market interest rates will directly increase floating rate funding expense and
may indirectly impact the payment performance of the Company's customers.
Accordingly, the Company cannot give assurances as to the effect of changes in
market interest rates on the Company's results of operations, financial
condition or prospects.
REGULATION
Various federal and state laws and regulations significantly limit the
activities in which the Company and Direct Merchants Bank are permitted to
engage. In addition, numerous legislative and regulatory proposals are advanced
each year which, if adopted, could adversely affect the Company's profitability
or further restrict the manner in which the Company conducts its activities.
Because of the Company's intercompany agreements with FCI, the Company's
activities are also constrained by the requirements of the Fair Credit Reporting
Act ("FCRA"). Failure to comply with such requirements could result in
termination of such agreements and/or the Company and/or Fingerhut becoming a
consumer reporting agency under the FCRA. The FCRA imposes a number of complex
and burdensome regulatory requirements and restrictions on a consumer reporting
agency, including restrictions on the circumstances under which a consumer
reporting agency may furnish information to others. Accordingly, if Fingerhut
were to become a consumer reporting agency, the FCRA would restrict the
Company's access to the Fingerhut Database. Similarly, if the Company were to
become a consumer reporting agency, the FCRA would restrict its ability to
furnish information to third parties. Such restrictions on the Company's ability
to access the Fingerhut Database or on the Company's ability to furnish
information to third parties could have a significant adverse economic impact on
the Company's results of operations, financial condition and prospects.
Moreover, Direct Merchants Bank is subject to various regulations by the
Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC")
and the Office of the Comptroller of the Currency (the "OCC") which, among other
things, severely limit the nature of the businesses Direct Merchants Bank may
conduct.
CONSUMER AND DEBTOR PROTECTION LAWS
Various federal and state consumer protection laws set forth limitations on
the Company's ability to offer and extend credit. In addition, the United States
Congress and the states may decide to regulate further the credit card industry
by enacting laws or amendments to existing laws to reduce finance
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charges or other fees or charges applicable to credit card and other consumer
revolving loan accounts. These laws may adversely affect the Company's ability
to collect on account balances or maintain established levels of periodic rate
finance charges and other fees and charges with respect to the accounts. In
addition, Congress and the states may decide to regulate further the Company's
Fee-Based Services by either enacting laws or amendments to existing laws or
increasing regulation of such products.
Furthermore, certain existing laws and regulations permit class action
lawsuits on behalf of customers in the event of violations and such class
lawsuits can be very expensive to defend, even without any violation. The
Company is a party to various legal proceedings resulting from its ordinary
business activities. One proceeding, filed in Alabama in April 1998, currently
seeks certification as a class. The Company intends to defend this action
vigorously, but if this action, or any other class action, is determined
adversely, such decision could have a significant adverse economic impact on the
Company's results of operations, financial condition and prospects.
Changes in federal and state bankruptcy and debtor relief laws could also
adversely affect the Company if such changes result in, among other things,
additional administrative expenses and accounts being written off as
uncollectible.
COMPETITION
As a marketer of financial service products, the Company faces competition
from numerous providers of financial services, many of which have greater
resources than the Company. In particular, the Company's credit card business
competes with national, regional and local bank card issuers, as well as other
general purpose credit card issuers. According to published reports, as of May
1998, the 20 largest issuers accounted for over 80% (based on receivables
outstanding) of the market for general purpose credit cards. Many of these
issuers are substantially larger and have more seasoned credit card portfolios
than the Company and often compete for customers by offering lower interest
rates and/or fee levels. In general, customers are attracted to credit card
issuers largely on the basis of price, credit limit and other product features;
customer loyalty is often limited. As a result, there can be no assurance that
the Company will be able to compete successfully in this environment. According
to published reports, as of May 1998, the Company was among the top 25 largest
credit card issuers in the United States, based on managed credit card loan
balances.
Likewise, there are numerous competitors in the Fee-Based Services market,
including insurance companies, financial services institutions and other
membership-based or enhancement consumer services providers, many of which are
larger, better capitalized and more experienced than the Company. Furthermore,
as the Company continues to expand its extended service plan business to the
customers of third-party retailers, it competes with manufacturers, financial
institutions, insurance companies and a number of independent administrators,
many of which have greater operating experience and financial resources than the
Company.
RELATIONSHIP WITH FCI
DATABASE AND SUPPORT
The Company and Fingerhut have entered into a number of agreements for the
purpose of defining the ongoing relationship between them, of which the
following are material to the Company's business: Extended Service Plan
Agreement, Database Access Agreement, Data Sharing Agreement, Co-Brand Credit
Card Agreement, Administrative Services Agreement and Credit Card Registration
Agreement. As previously discussed, the Company relies on its access to the
Fingerhut Database, including the Fingerhut Suppress File. As of June 30, 1998,
Fingerhut Customers in the Fingerhut Database represented 39% of the Company's
credit card accounts and currently all of the Company's customers of its
extended service plan contracts. Until the Company develops its own significant
database and extended
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service plan marketing relationships with other companies, its success will
remain significantly impacted by its exclusive rights to the Fingerhut Database,
its rights to market such service plans to Fingerhut Customers and its right to
be the exclusive provider of certain financial services products. Although the
Company has certain contractual rights to this access, any denial, obstruction
or delay of this access could have a significant adverse economic impact on the
Company's results of operations, financial condition and prospects.
In addition, notwithstanding the Tax Sharing Agreement, under ERISA and
Federal income tax law, each member of a consolidated group (for Federal income
tax and ERISA purposes) is also jointly and severally liable for the Federal
income tax liability, funding and termination liabilities, certain benefit plan
taxes and certain other liabilities of each other member of the consolidated
group. Similar rules may apply under state income tax laws.
POTENTIAL CONFLICTS
The ongoing relationship between the respective businesses of the Company
and FCI may give rise to certain conflicts of interest regarding corporate
opportunities. Because the Company and FCI sell to the same client base, use
direct mail and provide credit, business opportunities that seem attractive to
both of them may arise. While Fingerhut is prohibited under an agreement between
Fingerhut, Direct Merchants Bank and Metris Direct, Inc. (the "Co-Brand Credit
Card Agreement") from issuing a competing, general purpose credit card, it
currently provides closed-end, fixed payment installment contracts and revolving
credit private label credit cards issued by its bank affiliate, Fingerhut
National Bank ("FNB"), to its customers for use in purchasing Fingerhut products
and services. Thus, the Company expects that Fingerhut Customers who are also
Direct Merchants Bank cardholders will generally continue to use Fingerhut
credit for Fingerhut purchases and use their Direct Merchants Bank credit cards
for other purposes after the Spin Off.
Moreover, Fingerhut presently offers various types of credit-related
insurance products in connection with the credit it extends to its customers,
and FNB offers such products in connection with the private label credit cards
it issues. The Company does not, and cannot, offer these products in connection
with credit extended by Fingerhut or FNB because such products can be offered
only by an insurance company or the lender. The Company believes, however, that
these products do not compete with, and have no material effect on, the Company.
To address the potential for conflicts between the Company and FCI, the
Company's Certificate of Incorporation contains detailed provisions concerning
the business activities in which the Company is permitted to engage. The
relevant provisions are intended to permit the Company to continue all
activities in which it currently engages and to expand into certain related
financial services products. For example, the Certificate of Incorporation
allows the Company to provide Consumer Credit Products, Fee-Based Services and a
variety of other financial services products and services, subject to the
limitation that the Company shall not offer any closed-end installment or
revolving credit loans to Fingerhut Customers for the exclusive purchase of
Fingerhut merchandise. Until the day after the third annual stockholder meeting
held after FCI owns less than 51% of the Company's voting stock (e.g.,
approximately May, 2001), the Company may not engage in businesses not
enumerated in the Certificate of Incorporation without the consent of FCI or
authorized by a majority vote of the Company's stockholders. Because these
limitations may restrict the Company's ability to offer new products or
services, there can be no assurance that the Company will be able to compete
effectively in the financial services industry.
Other potential conflicts of interest may arise in the future between the
Company and FCI due to the overlap of the Company's Non-Executive Chairman of
the Board, Theodore Deikel (who is also the Chairman of the Board and Chief
Executive Officer of FCI) and Michael P. Sherman (who is an officer and a
director of the Company and an officer of FCI), although it is his intention to
resign effective upon the
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Spin Off. The Company has not instituted any formal plan or arrangement to
address such potential conflicts of interest and although the directors intend
to exercise reasonable judgment and take such steps as they deem necessary under
the circumstances in resolving any conflict that may occur, there can be no
assurance that any conflicts will be resolved in favor of the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a relatively small number of senior
management and operating personnel and the Company is dependent upon the skills
of its key employees, including Ronald Zebeck, President and Chief Executive
Officer; Douglas McCoy, Senior Vice President, Operations; Robert Oberrender,
Senior Vice President, Chief Financial Officer; Joseph Hoffman, Senior Vice
President, Consumer Credit Marketing; and Douglas Scaliti, Senior Vice
President, Fee-Based Services. The Company does not have employment agreements
with its executive officers and does not maintain key-man life insurance on any
executive officer, but does maintain change of control severance agreements with
its executive officers and certain key employees. The loss of the services of
any key employee could adversely affect the Company's results of operations,
financial condition and prospects. There can be no assurance that the Company
will be successful in retaining its key employees or that it can attract or
retain additional skilled personnel.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and By-laws contain restrictions
that may discourage other persons from attempting to acquire control of the
Company. These restrictions include, without limitation, a Board of Directors
that has staggered terms for its members, certain notice and supermajority
voting provisions and certain "fair price" provisions. The Board of Directors
has the authorization to issue preferred stock in one or more series without the
specific approval of the holders of the Common Stock. Also, only a majority of
the Board of Directors may call a special meeting of stockholders. If the
ownership of the Common Stock ceases to be concentrated in a single holder, in
certain circumstances, these devices may render more difficult or tend to
discourage a change of control of the Company or the removal of incumbent
management, which could reduce the market value of the Common Stock.
RISKS RELATING TO YEAR 2000 COMPLIANCE
The "Year 2000 Problem" is a result of computer systems using two digits
rather than four digits to define the applicable year. The Company, like all
database marketing companies and financial services institutions, is heavily
dependent upon computer systems for all phases of its operations. The Company
processes data through its own systems and obtains data and processing services
from various vendors. The Company, therefore, must concern itself not only with
its own systems, but also with the status of Year 2000 compliance with respect
to those vendors that provide data and processing services to the Company.
Most of the Company's existing information systems are less than three years
old and were originally designed for Year 2000 compliance, but as a cautionary
measure, the Company has begun testing such internal systems for Year 2000
compliance. The Company is also dependent on databases maintained by FCI and
card and statement generation, among other services, provided by First Data
Resources ("FDR"). The Company has created a Year 2000 project team to identify,
address and monitor internal systems and vendor issues related to Year 2000
problems. The project team meets monthly with systems experts at FCI and has
been working closely with its identified material vendors, including FDR, to
determine the impact on the Company's and the vendors' plans for becoming Year
2000 compliant. The project team is striving to obtain test results showing
compliance by vendors by the end of the first quarter of 1999 and has developed
high-level contingency plans to address non-compliance by its material vendors,
which may include replacing vendors.
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Although the Company cannot ensure compliance by all of its vendors on a
timely basis, the Company believes that it is taking appropriate steps to
identify exposure to Year 2000 problems and to address them on a timely basis.
In addition, the Company believes that it has adequate resources to achieve Year
2000 compliance for its systems which currently may not be compliant and that
the costs of Year 2000 compliance will not be material to the Company's
consolidated financial position, results of operations or cash flows. If,
however, compliance with Year 2000 issues is not completed on a timely basis or
is not fully effective, these issues could have a significant adverse economic
impact on the Company's results of operations, financial condition and
prospects.
USE OF PROCEEDS
Unless otherwise indicated in the accompanying Prospectus Supplement, the
net proceeds received by the Company from the sale of the Securities offered
hereby are expected to be used for general corporate purposes. Any specific
allocation of the proceeds to a particular purpose that has been made at the
date of any Prospectus Supplement will be described therein.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA AND THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND RELATED NOTES INCLUDED ELSEWHERE OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
OVERVIEW
The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results of
operations of the Company and its subsidiaries including Metris Direct, Inc.,
Metris Direct Services, Inc., Direct Merchants Bank, Metris Funding Co., and
Metris Receivables, Inc.
GENERAL
CONSUMER CREDIT PRODUCTS
The Company's Consumer Credit Products are primarily unsecured credit cards
issued by Direct Merchants Bank. The primary factors affecting the profitability
of Consumer Credit Products are credit card account and loan growth, interest
spreads on loans, credit card usage, credit quality (delinquencies and
charge-offs), the level of solicitation and marketing expenses, fraud losses,
servicing and other administrative costs. The Company generates interest and
other income through finance charges assessed on outstanding credit card loans,
credit card fees (including annual membership, cash advance, overlimit,
past-due, and other credit card fee income) and interchange income. The
Company's primary related expenses are the costs of funding its loans,
provisions for loan losses and operating expenses including employee
compensation, account solicitation and marketing expenses, and data processing
and servicing expenses.
FEE-BASED SERVICES
To improve its ability to attract more clients for Fee-Based Services, in
1998 the Company consolidated its fee-based services and extended service plan
businesses into one business line. The Company markets Fee-Based Services,
including debt waiver programs, card registration, extended service plans,
membership clubs and third party insurance to its credit card customers,
Fingerhut Customers and other third parties. Profitability for Fee-Based
Services is affected by the response rates to solicitation efforts, the targeted
solicitation plans, the commission rates received from and paid to third
parties, claims rates and claims servicing costs for certain programs, and other
operating expenses.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net income for the six months ended June 30, 1998, was $23.6 million, or
$1.18 per share, an increase of $6.1 million over net income of $17.5 million,
or $.87 per share, for June 30, 1997. The 35% increase in net income was the
result of an increase in net interest income and other operating income
partially offset by increases in the provision for loan losses and other
operating expenses. These increases were largely attributable to the growth in
average managed loans to $3.7 billion for the first six months of 1998 from $1.8
billion for the first six months of 1997, an increase of 100%, and growth in
total credit card accounts to 2.4 million at June 30, 1998, from 1.6 million at
June 30, 1997.
The provision for loan losses on a managed basis was $255.4 million for the
first six months of 1998, compared to $122.9 for the first six months of 1997.
The increase primarily reflects higher credit card
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loan balances as well as an increase in net charge-offs. The managed net
charge-off rate was 9.7% for the first six months of 1998, compared to 8.8% for
the first six months of 1997.
Other operating income on a managed basis increased $68.1 million to $160.2
million, primarily due to credit card fees, interchange and other credit card
income, which increased to $114.3 million for the first six months of 1998, up
66% over $68.8 million for the first six months of 1997. In addition, Fee-Based
Services revenues (including the extended service plan business) increased 95%
to $51.1 million for the first six months of 1998, up from $26.2 million for the
first six months of 1997. 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 $105.9 million for the first six
months of 1998, compared to $66.8 million for the first six months of 1997. The
increase in operating costs was due to continued investments in the
infrastructure of the Company. However, the Company's operating effectiveness as
measured by the Company's managed operating efficiency ratio improved to 26.5%
for the first six months of 1998 from 30.6% for the first six months of 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net income for the year ended December 31, 1997, was $38.1 million, or $1.88
per share, an increase of $18.1 million over net income of $20.0 million, or
$1.17 per share, for 1996. The 90% increase in net income was the result of an
increase in net interest income and other operating income partially offset by
increases in the provision for loan losses and other operating expenses. These
increases were largely attributable to the growth in average managed loans to
$2.3 billion for 1997 from $1.0 billion for 1996, an increase of 125%, and
growth in total credit card accounts to 2.3 million at December 31, 1997, from
1.4 million at December 31, 1996.
The provision for loan losses on a managed basis was $319.3 million in 1997,
compared to $136.3 million in 1996. The increase primarily reflected higher
credit card loan balances as well as an increase in net charge-offs. The managed
net charge-off rate was 8.3% for 1997, compared to 6.2% in 1996.
Other operating income on a managed basis increased $86.2 million to $212.9
million, primarily due to credit card fees, interchange and other credit card
income, which increased to $153.6 million for 1997, up 74% over $88.3 million
for 1996. In addition, Fee-Based Services revenues increased 26% to $63.4
million for 1997, up from $50.3 million for 1996. These increases were primarily
due to the growth in total accounts and outstanding receivables in the managed
credit card loan portfolio.
Other operating expenses increased to $138.0 million in 1997, compared to
$101.3 million in 1996. The increase in operating costs was due to continued
investments in the infrastructure of the Company. However, the Company's
operating effectiveness as measured by the Company's managed operating
efficiency ratio improved to 26.6% in 1997 from 37.5% in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net income for the year ended December 31, 1996, was $20.0 million, or $1.17
per share, an increase of $15.4 million over net income of $4.6 million, or $.28
per share, for 1995. The 337% increase in net income was the result of an
increase in net interest income and other operating income partially offset by
increases in the provision for loan losses and other operating expenses. These
increases were largely attributable to the growth in average managed loans to
$1.0 billion for 1996 from $183 million for 1995, an increase of 456%, and
growth in total credit card accounts to 1.4 million at December 31, 1996 from
0.7 million at December 31, 1995.
The provision for loan losses on a managed basis was $136.3 million in 1996,
compared to $26.2 million in 1995. The increase primarily reflected an increase
in credit card loans as well as an
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increase in net charge-offs consistent with the continued seasoning of the
portfolio. The managed net charge-off rate was 6.2% for 1996, compared to 2.2%
in 1995.
Other operating income on a managed basis increased $73.7 million to $126.6
million, primarily due to credit card fees, interchange and other credit card
income, which increased to $88.3 million for 1996, up 298% over $22.2 million
for 1995. In addition, Fee-Based Services revenues increased 106% to $50.3
million for 1996, up from $24.4 million for 1995. These increases were primarily
due to the growth in total accounts and outstanding receivables in the managed
credit card loan portfolio.
Other operating expenses increased to $101.3 million in 1996, compared to
$45.6 million in 1995. The increase in operating costs was due to continued
investments in the infrastructure of the business to support the growth of the
Company's Consumer Credit Products and Fee-Based Services. However, the
Company's operating effectiveness as measured by the Company's managed operating
efficiency ratio improved to 37.5% in 1996 from 57.5% in 1995.
MANAGED LOAN PORTFOLIO AND THE IMPACT OF CREDIT CARD SECURITIZATIONS
SECURITIZATION
Securitizations of credit card loans have been and are expected to be a
major source of funding for the Company. The effect on the Company's
consolidated financial statements from securitization is to remove credit card
loans sold with limited recourse from the consolidated balance sheet. The
securitization and sale of credit card loans changes the Company's interest in
such loans from lender to servicer, with a corresponding change in how revenues
and expenses are reported in the income statement. For securitized and sold
credit card loans, amounts that otherwise would have been recorded as net
interest income, fee income and provision for loan losses are instead reported
in other operating income as net securitization and credit card servicing
income.
During the first quarter of 1997, the Company implemented Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125
did not have a material effect on the Company's consolidated financial
statements.
MANAGED LOAN PORTFOLIO
The Company analyzes its financial performance on a managed loan portfolio
basis. To do so, the income statement and balance sheet are adjusted to reverse
the effects of securitization. The Company's discussion of revenues, where
applicable, and provision for loan losses includes comparisons to amounts
reported in the Company's consolidated statements of income ("owned basis" or
"on-balance sheet") as well as on a managed basis.
The Company's managed loan portfolio is comprised of credit card loans held
for securitization, retained interests in loans securitized and the investors'
share of securitized credit card loans. The investors' share of securitized
credit card loans is not an asset of the Company, and, therefore, is not
16
<PAGE>
shown on the Company's consolidated balance sheets. The following tables
summarize the Company's managed loan portfolio:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------- ----------------------------
1998 1997 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
DOLLARS IN THOUSANDS
PERIOD-END BALANCES:
Credit card loans:
Loans held for securitization...................... $ 40,539 $ 49,663 $ 8,795 $ 14,164
Retained interests in loans securitized............ 534,159 226,798 471,831 201,165
Investors' interests in securitized loans.......... 3,306,267 1,848,360 3,066,310 1,400,611
------------- ------------- ------------- -------------
Total managed loan portfolio......................... $ 3,880,965 $ 2,124,821 $ 3,546,936 $ 1,615,940
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------
1998 1997 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
DOLLARS IN THOUSANDS
AVERAGE BALANCES:
Credit card loans:
Loans held for securitization...................... $ 44,862 $ 71,205 $ 78,264 $ 28,632
Retained interests in loans securitized............ 502,097 217,393 278,554 121,177
Investors' interests in securitized loans.......... 3,107,920 1,541,436 1,938,075 869,047
------------- ------------- ------------- -------------
Total managed loan portfolio......................... $ 3,654,879 $ 1,830,034 $ 2,294,893 $ 1,018,856
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
17
<PAGE>
IMPACT OF CREDIT CARD SECURITIZATIONS
The following table provides a summary of the effects of credit card
securitizations on selected line items of the Company's statements of income for
each of the periods presented, as well as selected financial information on both
an owned and managed loan portfolio basis:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- -----------------------------------------
DOLLARS IN THOUSANDS 1998 1997 1997 1996 1995
- ---------------------------------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (OWNED BASIS):
Net interest income................. $ 40,978 $ 23,736 $ 57,243 $ 26,088 $ 6,399
Provision for loan losses........... 41,432 17,483 43,989 18,477 4,393
Other operating income.............. 144,803 88,909 186,677 126,222 51,083
Other operating expense............. 105,936 66,777 138,048 101,287 45,640
------------- ------------- ------------- ------------- -----------
Income before income taxes.......... $ 38,413 $ 28,385 $ 61,883 $ 32,546 $ 7,449
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
ADJUSTMENTS FOR SECURITIZATIONS:
Net interest income................. $ 198,589 $ 102,296 $ 249,118 $ 117,403 $ 19,955
Provision for loan losses........... 213,972 105,439 275,310 117,828 21,841
Other operating income.............. 15,383 3,143 26,192 425 1,886
Other operating expense.............
------------- ------------- ------------- ------------- -----------
Income before income taxes.......... $ 0 $ 0 $ 0 $ 0 $ 0
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
STATEMENTS OF INCOME (MANAGED BASIS):
Net interest income................. $ 239,567 $ 126,032 $ 306,361 $ 143,491 $ 26,354
Provision for loan losses........... 255,404 122,922 319,299 136,305 26,234
Other operating income.............. 160,186 92,052 212,869 126,647 52,969
Other operating expense............. 105,936 66,777 138,048 101,287 45,640
------------- ------------- ------------- ------------- -----------
Income before income taxes.......... $ 38,413 $ 28,385 $ 61,883 $ 32,546 $ 7,449
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
OTHER DATA:
OWNED BASIS:
Average interest-earning assets..... $ 604,862 $ 330,430 $ 403,375 $ 171,877 $ 49,644
Return on average assets............ 6.0% 9.1% 7.7% 9.6% 6.5%
Return on average equity............ 25.6% 23.8% 24.1% 21.6% 15.2%
Net interest margin(1).............. 13.7% 14.5% 14.2% 15.2% 12.9%
MANAGED BASIS:
Average interest-earning assets..... $ 3,712,783 $ 1,871,866 $ 2,341,451 $ 1,040,924 $ 193,086
Return on average assets............ 1.3% 1.9% 1.6% 1.9% 2.1%
Return on average equity............ 25.6% 23.8% 24.1% 21.6% 15.2%
Net interest margin(1).............. 13.0% 13.6% 13.1% 13.8% 13.6%
</TABLE>
- ------------------------
(1) Net interest margin is equal to net interest income divided by average
interest-earning assets.
18
<PAGE>
NET INTEREST INCOME
Net interest income consists primarily of interest earned on the Company's
credit card loans less interest expense on borrowings to fund the loans.
Managed net interest income was $239.6 million for the six months ended June
30, 1998, compared to $126.0 million for the same period in 1997. This increase
was primarily due to a $1.8 billion increase in average loans over the same
comparable period in 1997.
Managed net interest income for the year ended December 31, 1997, was $306.4
million compared to $143.5 million for the same period in 1996, an increase of
$162.9 million. This 114% increase was primarily due to a $1.3 billion increase
in average managed loans over the comparable period in 1996. The average yield
on managed interest-earning assets decreased to 18.6% for the year ended
December 31, 1997, from 19.1% for the year ended December 31, 1996. The
acquisition of two credit card portfolios reduced the average yield for the year
ended December 31, 1997 by approximately 0.2%. The remaining reduction in the
average yield was due to increased charge-offs of finance charges in 1997. The
average yield on interest-earning assets on an owned basis decreased to 17.2%
for the year ended December 31, 1997, from 17.6% for the same period in 1996.
Managed net interest income for the year ended December 31, 1996, was $143.5
million compared to $26.4 million for the same period in 1995, an increase of
$117.1 million. This increase was primarily due to a $0.8 billion increase in
average managed loans over the comparable period in 1995. The average yield on
managed interest-earning assets increased to 19.1% for the year ended December
31, 1996, from 18.8% for the year ended December 31, 1995, primarily due to the
increase in average credit card loans as a percentage of total interest-earnings
assets. The average yield on interest-earning assets on an owned basis increased
to 17.6% for the year ended December 31, 1996, from 15.3% for the same period in
1995. This increase was primarily due to an increase in average credit card
loans as a percentage of total interest-earning assets.
The following tables provide an analysis of interest income and expense, net
interest spread, net interest margin and average balance sheet data for the six
months ended June 30, 1998 and 1997 and for the years ended December 31, 1997,
1996 and 1995:
19
<PAGE>
ANALYSIS OF AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE
------------- ----------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
OWNED BASIS
ASSETS:
Interest-earning assets:
Federal funds sold............ $ 28,847 $ 780 5.5% $ 28,286 $ 755 5.4%
Short-term investments........ 29,056 769 5.3% 13,546 358 5.3%
Credit card loans............. 546,959 52,260 19.3% 288,598 26,155 18.3%
------------- ----------- --------- ------------- ----------- ---------
Total interest-earning
assets...................... $ 604,862 $ 53,809 17.9% $ 330,430 $ 27,268 16.6%
Other assets.................. 225,561 77,520
Allowance for loan losses (42,569) (19,126)
------------- -------------
Total assets $ 787,854 $ 388,824
------------- -------------
------------- -------------
LIABILITIES AND EQUITY:
Interest-bearing
liabilities................. $ 280,862 $ 12,831 9.2% $ 103,068 $ 3,532 6.9%
Other liabilities............. 320,754 137,776
------------- -------------
Total liabilities............. $ 601,616 $ 240,844
Stockholders' equity.......... 186,238 147,980
------------- -------------
Total liabilities and
equity...................... $ 787,854 $ 388,824
------------- -------------
------------- -------------
Net interest income and
interest margin (1)......... $ 40,978 13.7% $ 23,736 14.5%
Net interest rate spread
(2)......................... 8.7% 9.7%
MANAGED BASIS
Credit card loans............. $ 3,654,879 $ 344,456 19.0% $ 1,830,034 $ 174,098 19.2%
Total interest-earning
assets...................... 3,712,783 346,005 18.8% 1,871,866 175,211 18.9%
Total interest-bearing
assets...................... 3,389,031 106,438 6.3% 1,644,504 49,179 6.0%
Net interest income and
interest margin (1)......... $ 239,567 13.0% $ 126,032 13.6%
Net interest rate spread
(2)......................... 12.5% 12.9%
</TABLE>
- ------------------------
(1) Net interest margin is computed by dividing annualized net interest income
by average total interest-earning assets.
(2) The net interest rate spread is the annualized yield on average
interest-earning assets minus the annualized funding rate on average
interest-bearing liabilities.
20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- ---------- ---------- --------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED BASIS
ASSETS:
Interest-earning assets:
Federal funds sold....... $ 30,049 $ 1,636 5.4% $ 16,299 $ 867 5.3% $ 8,501 $ 487 5.7%
Short-term investments... 16,509 863 5.2% 5,769 299 5.2% 1,311 75 5.7%
Credit card loans........ 356,817 66,695 18.7% 149,809 29,028 19.4% 39,832 7,054 17.7%
---------- --------- --- ---------- --------- --- --------- ----------- ---
Total interest-earning
assets................. $ 403,375 $ 69,194 17.2% $ 171,877 $ 30,194 17.6% $ 49,644 $ 7,616 15.3%
Other assets............. 113,191 44,829 22,426
Allowance for loan
losses................. (24,169) (7,407) (1,149)
---------- ---------- ---------
Total assets............. $ 492,397 $ 209,299 $ 70,921
---------- ---------- ---------
---------- ---------- ---------
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
Interest-bearing
deposit................ $ 167 $ 7 4.4% $ 1,000 $ 48 4.8% $ 700 $ 36 5.2%
Borrowings............... 149,559 11,944 8.0% 56,708 4,058 7.2% 20,822 1,181 5.7%
---------- --------- --- ---------- --------- --- --------- ----------- ---
Total interest-bearing
liabilities............ $ 149,726 $ 11,951 8.0% $ 57,708 $ 4,106 7.1% $ 21,522 $ 1,217 5.7%
Other liabilities........ 184,491 58,739 19,316
---------- ---------- ---------
Total liabilities........ 334,217 116,447 40,838
Stockholders' equity 158,180 92,852 30,083
---------- ---------- ---------
Total liabilities and
equity................. $ 492,397 $ 209,299 $ 70,921
---------- ---------- ---------
---------- ---------- ---------
Net interest income and
interest margin (1).... $ 57,243 14.2% $ 26,088 15.2% $ 6,399 12.9%
Net interest rate spread
(2).................... 9.2% 10.5% 9.6%
MANAGED BASIS
Credit card loans........ $2,294,893 $ 433,334 18.9% $1,018,856 $ 197,467 19.4% $ 183,274 $ 35,775 19.5%
Total interest-earning
assets................. 2,341,451 435,833 18.6% 1,040,924 198,633 19.1% 193,086 36,337 18.8%
Total interest-bearing
liabilities............ 2,087,801 129,472 6.2% 926,755 55,142 5.9% 164,964 9,983 6.1%
Net interest income and
interest margin (1).... $ 306,361 13.1% $ 143,491 13.8% $ 26,354 13.7%
Net interest rate spread
(2).................... 12.4% 13.2% 12.7%
</TABLE>
- ------------------------------
(1) Net interest margin is computed by dividing net interest income by average
total interest-earning assets.
(2) The interest rate spread is the yield on average interest-earning assets
minus the funding rate on average interest-bearing liabilities.
INTEREST VARIANCE ANALYSIS
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities, in addition to changes in the volume of
interest-earning assets and interest-bearing liabilities. The following tables
present the effects
21
<PAGE>
of changes in average volume and interest rates on individual financial
statement line items on an owned basis:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
1998 VS. 1997
--------------------------------
CHANGE DUE TO*
--------------------------------
DOLLARS IN THOUSANDS INCREASE VOLUME RATE
--------- --------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Federal funds sold............................................................ $ 25 $ 15 $ 10
Short-term investments........................................................ 411 411 0
Credit card loans............................................................. 26,105 24,613 1,492
--------- --------- ----------
Total interest income......................................................... $ 26,541 $ 27,211 $ (670)
INTEREST EXPENSE: 9,299 7,794 1,505
--------- --------- ----------
Net interest income........................................................... $ 17,242 $ 19,417 $ (2,175)
--------- --------- ----------
--------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 VS. 1996 1996 VS. 1995
-------------------------------- -------------------------------
CHANGE DUE TO* CHANGE DUE TO*
-------------------------------- -------------------------------
DOLLARS IN THOUSANDS INCREASE VOLUME RATE INCREASE VOLUME RATE
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Federal funds sold.......................... $ 769 $ 749 $ 20 $ 380 $ 412 $ (32)
Short-term investments...................... 564 562 2 224 230 (6)
Credit card loans........................... 37,667 38,655 (988) 21,974 21,250 724
--------- --------- ---------- --------- --------- ---------
Total interest income....................... $ 39,000 $ 39,694 $ (694) $ 22,578 $ 21,322 $ 1,256
INTEREST EXPENSE:
Interest-bearing deposits................... (41) (37) (4) 12 14 (2)
Borrowings.................................. 7,886 7,364 522 2,877 2,499 378
--------- --------- ---------- --------- --------- ---------
Total interest expense...................... 7,845 7,288 557 2,889 2,506 383
--------- --------- ---------- --------- --------- ---------
Net interest income $ 31,155 $ 32,406 $ (1,251) $ 19,689 $ 18,816 $ 873
--------- --------- ---------- --------- --------- ---------
--------- --------- ---------- --------- --------- ---------
</TABLE>
- ------------------------
* The change in interest due to both volume and rates has been allocated in
proportion to the relationship of the absolute dollar amounts of the change
in each. The changes in income and expense are calculated independently for
each caption in the analysis. The totals for the volume and rate columns are
not the sum of the individual lines.
OTHER OPERATING INCOME
Other operating income contributes substantially to the Company's results of
operations, representing 73%, 73% and 81% of owned revenues for the six months
ended June 30, 1998 and the years ended
22
<PAGE>
December 31, 1997 and 1996, respectively. The following table presents other
operating income on an owned basis:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------
DOLLARS IN THOUSANDS 1998 1997 1997 1996 1995
----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING INCOME:
Net securitization and credit card servicing
income........................................... $ 64,955 $ 44,827 $ 79,533 $ 49,921 $ 16,003
Credit card fees, interchange and other credit card
income........................................... 28,746 17,836 43,731 26,028 10,639
Fee-based services revenues........................ 39,342 24,625 55,502 29,853 6,662
Net extended service plan revenues................. 11,760 1,621 7,911 20,420 17,779
----------- --------- ----------- ----------- ---------
Total.......................................... $ 144,803 $ 88,909 $ 186,677 $ 126,222 $ 51,083
----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- ---------
</TABLE>
Other operating income increased $55.9 million for the six months ended June
30, 1998, over the comparable period in 1997, primarily due to income generated
from the growth in average securitized credit card loans. Additionally,
Fee-Based Services revenues increased by $24.9 million. This increase is driven
by the continued successful performance of the Company's debt waiver product and
the change in operations for the extended service plan business whereby the
Company assumed the responsibility for claims processing and underwriting on
contracts sold on or after January 1, 1997. As a result of this operating
change, all extended service plan revenues and the related operating margins
have been deferred and are recognized over the life of the related extended
service plan contracts. In addition, PurchaseShield-SM- revenues contributed to
the increase in combined Fee-Based Services revenues.
Other operating income increased $60.5 million for the year ended December
31, 1997, over 1996, primarily due to income generated from the growth in
average securitized credit card loans. Additionally, Fee-Based Services revenues
increased 26% to $63.4 million because of the Company's marketing efforts to
cross-sell other products and services to its customers. Specifically, debt
waiver product revenue increased by $22.1 million to $47.6 million for the year
ended December 31, 1997, as the Company continued to add new credit card
customers with debt waiver protection. In addition, interchange revenue
increased over the prior year due to credit card charge volume increasing to
approximately $2.7 billion in 1997 from $1.7 billion in 1996.
Other operating income increased $75.1 million for the year ended December
31, 1996, over 1995, primarily due to income generated from the growth in
average securitized credit card loans. Additionally, Fee-Based Services revenues
increased 106% to $50.3 million as the Company's marketing efforts to cross-sell
other products and services to its customers were successful. Specifically, debt
waiver product revenue increased by $20.6 million to $25.5 million for the year
ended December 31, 1996, as the Company continued to add new credit card
customers with debt waiver protection.
23
<PAGE>
OTHER OPERATING EXPENSE
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------
DOLLARS IN THOUSANDS 1998 1997 1997 1996 1995
----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING EXPENSE:
Credit card account and other product solicitation
and marketing expense............................ $ 21,427 $ 16,477 $ 30,503 $ 29,297 $ 23,089
Employee compensation.............................. 29,672 16,137 35,200 23,068 2,466
Data processing services and communications........ 16,970 9,265 20,087 12,757 3,090
Third-party servicing expense...................... 5,058 5,739 12,711 9,207 5,300
Warranty and debt waiver underwriting and claims
servicing expense................................ 5,420 2,388 6,053 10,024 6,552
Credit card fraud losses........................... 2,320 1,579 3,240 2,276 775
Other.............................................. 25,069 15,192 30,254 14,658 4,368
----------- --------- ----------- ----------- ---------
Total.......................................... $ 105,936 $ 66,777 $ 138,048 $ 101,287 $ 45,640
----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- ---------
</TABLE>
Total other operating expenses include direct and allocated expenses from
FCI for administrative services provided to the Company under an administrative
services agreement between the Company and FCI (the "Administrative Services
Agreement"). Additionally, total other operating expenses reflect the
retroactive effects of additional intercompany agreements and contracts between
the Company and FCI or its subsidiaries.
Total other operating expenses for the six months ended June 30, 1998
increased $39.2 million over the comparable period in 1997, primarily due to
increases in employee compensation, data processing services and communications
and other expenses. Employee compensation increased due to staffing needs to
support the increase in credit card accounts and other functions. The increase
in data processing services and communications expense was largely due to the
increased number of credit card accounts, transaction volumes and loan balances.
The increase in other expenses is primarily due to general growth in the
business lines and building an infrastructure to support the growth.
Total other operating expenses for the year ended December 31, 1997,
increased $36.8 million over 1996, largely due to costs associated with the
growth of the Company's business activities. Also, total other operating
expenses increased due to increases in data processing services and
communications expenses and third-party servicing expenses of $7.3 million and
$3.5 million, respectively. These cost increases were largely due to the growth
in credit card accounts, transaction volumes and loan balances. Employee
compensation also increased $12.1 million to $35.2 million for the year ended
December 31, 1997, due to increased staffing needs to support the increase in
credit card accounts and other functions.
Total other operating expenses for the year ended December 31, 1996,
increased $55.6 million over 1995, largely due to costs associated with the
growth of the Company's business activities. Credit card account and other
product solicitation and marketing expenses rose by $6.2 million over the same
period in the prior year. New credit card account solicitation programs were
implemented in 1996, increasing the number of credit card accounts and loans
outstanding. The Company also incurred increased solicitation costs in its
efforts to increase the penetration of Fee-Based Services sold to the Company's
customers, and customers of third party clients, and extended service plan sales
on warrantable products sold by Fingerhut. Also, total other operating expenses
increased due to increases in data processing services and communications
expenses and third-party servicing expenses of $9.7 million and $3.9 million,
respectively. These cost increases were largely due to the growth in credit card
24
<PAGE>
accounts, transaction volumes and loan balances. Employee compensation also
increased $20.6 million to $23.1 million for the year ended December 31, 1996,
due to increased management incentive plan expenses, increased staffing needs to
support the increase in credit card accounts and the internalization of credit
card collections and other functions.
INCOME TAXES
The Company's provision for income taxes includes both federal and state
income taxes. Applicable income tax expense was $14.8 million and $10.9 million
for the six-month periods ended June 30, 1998 and 1997, respectively, and $23.8
million, $12.5 million and $2.9 million for the years ended December 31, 1997,
1996 and 1995, respectively. This tax expense represents an effective tax rate
of 38.5% for the periods presented.
ASSET QUALITY
The Company's delinquency and net loan charge-off rates at any point in time
reflect, among other factors, the credit risk of loans, the average age of the
Company's various credit card account portfolios, the success of the Company's
collection and recovery efforts, and general economic conditions. The average
age of the Company's credit card portfolio affects the stability of delinquency
and loss rates of the portfolio. The Company continues to focus its resources on
refining its credit underwriting standards for new accounts, and on collections
and post charge-off recovery efforts to minimized net losses. At June 30, 1998,
55% of managed accounts and 47% of managed loans were less than 24 months old.
Accordingly, the Company believes that its loan portfolio will experience
increasing or fluctuating levels of delinquency and loan losses as the average
age of the Company's accounts increases.
This trend is reflected in the change in the Company's net charge-off ratio.
For the six-month period ended June 30, 1998, the Company's net charge-off ratio
stood at 9.7%, compared to 8.8% for the same period in 1997. For the year ended
December 31, 1997, the Company's net charge-off ratio stood at a rate of 8.3%,
compared to 6.2% and 2.2% for the years ended December 31, 1996 and 1995,
respectively. The charge-off ratio for the six months ended June 30, 1998 and
the year ended December 31, 1997 was favorably impacted by the portfolio
acquisitions. The Company believes, consistent with its statistical models and
other credit analyses, that this rate will continue to fluctuate but generally
rise over the next year.
The Company's strategy for managing loan losses to maximize profitability
consists of credit line management, customer purchase authorizations and
risk-based pricing so that an acceptable profit margin is maintained based on
the perceived risk of each credit card account. Under this strategy, interest
rates are established for each credit card account based on its perceived risk
profile. Loan losses are further managed through the offering of credit lines
which are generally lower than is currently standard in the industry. Individual
accounts and their related credit lines are also continually managed using
various marketing, credit and other management processes in order to continue to
maximize the profitability of accounts.
DELINQUENCIES
Delinquencies not only have the potential to affect earnings in the form of
net loan losses, but are also costly in terms of the personnel and other
resources dedicated to their resolution. Delinquency levels are monitored on a
managed basis, since delinquency on either an owned or managed basis subjects
the Company to credit loss exposure. A credit card account is contractually
delinquent if the minimum payment is not received by the specified date on the
cardholder's statement. It is the Company's policy to continue to accrue
interest and fee income on all credit card accounts, except in limited
circumstances, until the account and all related loans, interest and other fees
are charged off. The
25
<PAGE>
following table presents the delinquency trends of the Company's credit card
loan portfolio on a managed portfolio basis:
MANAGED LOAN DELINQUENCY
<TABLE>
<CAPTION>
JUNE 30, % OF JUNE 30, % OF DECEMBER 31, % OF DECEMBER 31, % OF
DOLLARS IN THOUSANDS 1998 TOTAL 1997 TOTAL 1997 TOTAL 1996 TOTAL
---------- ----------- ---------- ----------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Managed loan
portfolio............. $3,880,965 100% $2,124,821 100% $ 3,546,936 100% $ 1,615,940 100%
Loans contractually
delinquent:
30 to 59 days......... 89,583 2.3% 41,650 2.0% 72,114 2.0% 32,114 2.0%
60 to 89 days......... 64,684 1.7% 27,400 1.3% 49,300 1.4% 20,398 1.2%
90 or more days....... 134,346 3.4% 55,794 2.6% 111,166 3.2% 36,857 2.3%
---------- --- ---------- --- -------------- --- -------------- ---
Total............... $ 288,613 7.4% $ 124,844 5.9% $ 232,580 6.6% $ 89,369 5.5%
---------- --- ---------- --- -------------- --- -------------- ---
---------- --- ---------- --- -------------- --- -------------- ---
</TABLE>
The above numbers reflect continued seasoning of the Company's managed loan
portfolio and, in 1997, the ratio was favorably impacted by the portfolio
acquisitions. The Company intends to continue to focus its resources on its
collection efforts to minimize the negative impact to net loan losses that
results from increased delinquency levels.
NET CHARGE-OFFS
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude finance
charges and fees, which are charged against the related income at the time of
charge-off. The following table presents the Company's net charge-offs for the
periods indicated as reported in the consolidated financial statements and on a
managed portfolio basis:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER
30, 31,
---------------------- ----------------------
DOLLARS IN THOUSANDS 1998 1997 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OWNED BASIS:
Average loans outstanding.............. $ 546,959 $ 288,598 $ 356,817 $ 149,809
Net charge-offs........................ 25,662 12,927 29,398 9,327
Net charge-offs as a percentage of
average loans outstanding............ 9.5% 9.0% 8.2% 6.2%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
MANAGED BASIS:
Average loans outstanding.............. $3,654,879 $1,830,034 $2,294,893 $1,018,856
Net charge-offs........................ 176,709 79,572 191,130 62,855
Net charge-offs as a percentage of
average loans outstanding............ 9.7% 8.8% 8.3% 6.2%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained for on-balance sheet loans. For
securitized loans, anticipated losses and related recourse reserves are
reflected in the calculations of net securitization and credit card servicing
income. Provisions for loan losses are made in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable future losses
of principal and earned interest, net of recoveries, inherent in the existing
on-balance sheet loan portfolio.
The provision for loan losses on an owned basis for the six-month periods
ended June 30, 1998 and 1997 was $41.4 million and $17.5 million, respectively.
The provision for the year ended December 31, 1997 totaled $44.0 million
compared to a provision of $18.5 million in 1996. The amount and level of the
26
<PAGE>
provision for loan losses on an owned basis may vary from period to period,
depending on the amount of credit card loans sold and securitized in a
particular period. However, the increase in the periods presented is primarily
reflective of the overall maturation of the portfolio, the increase in
on-balance sheet loans, the increase in delinquent loans and the overall
seasoning of the portfolio. The following table presents the change in the
Company's allowance for loan losses and other ratios on both an owned and a
managed portfolio basis for the periods presented:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- --------------------
DOLLARS IN THOUSANDS 1998 1997 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OWNED BASIS
Balance at beginning of period........................ $ 32,039 $ 12,829 $ 12,829 $ 3,679
Allowance related to assets acquired, net............. 110 806 4,619
Provision for loan losses............................. 41,432 17,483 43,989 18,477
Loans charged off..................................... 26,656 13,205 30,065 9,514
Recoveries............................................ 994 278 667 187
Net loan charge-offs.................................. 25,662 12,927 29,398 9,327
--------- --------- --------- ---------
Balance at end of period.............................. $ 47,919 $ 18,191 $ 32,039 $ 12,829
--------- --------- --------- ---------
--------- --------- --------- ---------
Ending allowance as a percentage of loans............. 8.3% 6.6% 6.7% 6.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
-------------------- --------------------
DOLLARS IN THOUSANDS 1998 1997 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
MANAGED BASIS
Balance at beginning of period.................... $ 244,084 $ 95,669 $ 95,669 $ 22,219
Allowance related to assets acquired, net......... 1,378 806 20,246
Provision for loan losses......................... 255,404 122,922 319,299 136,305
Loans charged off................................. 183,090 81,280 195,535 64,083
Recoveries........................................ 6,381 1,708 4,405 1,228
Net loan charge-offs.............................. 176,709 79,572 191,130 62,855
--------- --------- --------- ---------
Balance at end of period.......................... $ 324,157 $ 139,825 $ 244,084 $ 95,669
--------- --------- --------- ---------
--------- --------- --------- ---------
Ending allowance as a percentage of loans......... 8.4% 6.6% 6.9% 5.9%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Management believes the allowance for loan losses on both an owned and a
managed basis is adequate to cover probable losses in the loan portfolio under
current conditions and expected trends. However, there can be no assurance as to
the future credit losses that may be incurred in connection with the Company's
loan portfolio, nor can there be any assurance that the loan loss allowance that
has been established by the Company will be sufficient to absorb such future
loan losses. Management will continue to monitor the allowance for loan losses
and make additional provisions to the allowance as it deems appropriate and
necessary given the circumstances.
DERIVATIVES ACTIVITIES
The Company uses derivative financial instruments for the purpose of
managing its exposure to changes in market interest rates and has a number of
mechanisms in place to monitor and control both market rate and credit risks
from these derivatives activities. All derivatives strategies and transactions
must be approved by the Company's senior management.
27
<PAGE>
The Company has entered into interest rate cap and swap agreements to hedge
its economic exposure to the impact of fluctuating interest rates associated
with the spread between the floating rate credit card loans owned by the Metris
Master Trust (the "Trust") and the floating and fixed rate certificates issued
by the Trust to fund the loans. In connection with the issuance of the $773
million Trust Series 1998-1 securities in July 1998, the Company entered into
term agreements with bank counterparties in a total notional amount of $753
million effectively capping the index underlying the securities' floating
interest rate at 9.2%. The Company entered into interest rate swap agreements
guaranteed by FCI in April 1996 and May 1997 to effectively hedge the potential
mismatch of the floating rate yield of the Trust assets with the fixed rate of
the Trust Series 1996-1 and 1997-1 certificates by receiving a fixed rate and
paying a floating rate. Total notional amounts of these swap transactions
amounted to $605.5 million for Trust Series 1996-1 and $722.5 million for Trust
Series 1997-1. The Company receives the benefits and bears the obligations of
these swap transactions. The Company is currently working with the bank
counterparties to amend the swaps to remove the FCI guarantees.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's principal market risk is due to changes in market interest
rates. This affects the Company directly in its lending and borrowing
activities, as well as indirectly as interest rates may impact the payment
performance of the Company's cardholders.
To manage the Company's direct risk to market interest rates, management
actively monitors interest rates and the interest sensitive components of the
Company's owned and managed balance sheet to minimize the impact changes in
interest rates have on the fair market of assets, net income and cash flow.
Management seeks to minimize the impact of changes in interest rates on the
Company primarily by matching asset and liability repricings.
The Company's primary owned and managed assets are credit card loans, which
are virtually all priced at rates indexed to the variable Prime Rate. On-balance
sheet loans are funded through a combination of cash flow from operations, the
Company's $300 million bank credit facility, on which pricing is indexed to the
variable London Interbank Offered Rate ("LIBOR") or a Prime Rate, $100 million
in 10% Senior Notes, and stockholders equity. The Company's off-balance sheet
managed loans are owned by the Trust and a bank-sponsored multi-seller
receivables conduit (the "Conduit"), which have committed current funding
indexed to variable commercial paper rates, as well as term funding which is
either directly indexed to LIBOR or at fixed rates. At June 30, 1998,
approximately 40% of the trust funding of off-balance sheet receivables was
funded with fixed rate certificates issued by one of the trusts.
Combining the interest rate swap transactions referred to above with the
total Trust funding, 100% of the funding for the off-balance sheet loan
portfolio is indexed to floating commercial paper and LIBOR rates. On a total
managed receivables basis, 89% of the total managed receivables were funded,
including the impact of the interest rate swap agreements, with floating rate
debt indexed to commercial paper, prime or LIBOR at June 30, 1998.
One approach used by management to quantify interest rate risk is a
sensitivity analysis. This approach calculates the impact on net income from an
instantaneous and sustained change in interest rates by 200 basis points. A 200
basis point increase in interest rates affecting the Company's floating rate
financial instruments, including both debt obligations and loans, will result in
an increase in net income of approximately $4 million relative to a base case
over the next 12 months, while a decrease of 200 basis points will result in a
reduction in net income of approximately $4 million. The Company's use of this
methodology to quantify the market risk of financial instruments should not be
construed as an endorsement of its accuracy or the accuracy of the related
assumptions. In addition, this methodology does not take into account the
indirect impact interest rates may have on the payment performance of
28
<PAGE>
the Company's cardholders. The quantitative information about market risk is
necessarily limited because it does not take into account operating transactions
or other costs associated with managing immediate changes in interest rates.
LIQUIDITY, FUNDING AND CAPITAL RESOURCES
One of the Company's primary financial goals is to maintain an adequate
level of liquidity through active management of assets and liabilities. Because
the pricing and maturity characteristics of the Company's assets and liabilities
change, liquidity management is a dynamic process, affected by changes in short
and long term interest rates. The Company utilizes a variety of financing
sources to manage liquidity, refunding, and interest rate risks. Current funding
sources are committed and/or available by counterparties to the Company through
facilities established by the Company and, prior to 1998, by FCI.
The Company finances the growth of its credit card loan portfolio through
cash flow from operations, asset securitization, bank financing, long-term debt
issuance and equity issuance.
At June 30, 1998 and 1997, the Company has received cumulative net proceeds
of approximately $3.2 billion and $1.8 billion, respectively, from sales of
credit card loans, of which $24.3 million and $9.2 million, respectively, was
deposited in an investor reserve account held for the benefit of the certificate
holders in the Trust or the Conduit. Cash generated from these transactions was
used to reduce short-term borrowings and to fund credit card loan growth.
In September 1996, the Company executed a $300 million, five-year revolving
credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility
is guaranteed by FCI and is further supported by the pledge of the stock of
certain subsidiaries of the Company and certain loans and interest held therein
by the Company. The Revolving Credit Facility contains certain financial
covenants standard for revolving credit facilities of this type, including
minimum net worth, minimum equity to managed assets ratio, maximum leverage and
limitation on indebtedness. At June 30, 1998 and December 31, 1997 and 1996, the
Company had outstanding borrowings of $150 million, $144 million and $50
million, respectively, under the Revolving Credit Facility.
On June 30, 1998, the Company closed a new $200 million, three-year
revolving credit facility and a $100 million five-year term loan. These
agreements will become effective upon consummation of the Spin Off and are not
guaranteed by FCI. The loans will be secured by receivables and subsidiary stock
and guaranteed by certain subsidiaries of the Company.
Financial covenants include, but are not limited to, limitations on minimum
net worth, tangible net worth and net worth plus reserves to managed receivables
and delinquent receivables. The new credit facility will have pricing that is
significantly more expensive than the Revolving Credit Facility.
The Company's lower independent credit ratings after the Spin Off will also
reduce the advance rate on a portion of the sale of receivables to the Trust.
This will require approximately $40 million in additional on-balance sheet
funding by the Company to finance the unsold loans.
In November 1997, the Company privately issued and sold $100 million of 10%
Senior Notes due 2004 pursuant to an exemption under the Securities Act of 1933,
as amended. The net proceeds were used to reduce borrowings under the Revolving
Credit Facility. In March 1998, the Company completed an exchange offer for the
Senior Notes pursuant to a registration statement, and the terms of the new
Senior Notes are identical in all material respects to the original private
issue. The Senior Notes are unconditionally guaranteed on a senior basis,
jointly and severally, by Metris Direct, Inc. (the "Guarantor"). The guarantee
is an unsecured obligation of the Guarantor and ranks pari passu with all
existing and future unsubordinated indebtedness.
29
<PAGE>
The Federal Reserve Act imposes various legal limitations on the extent to
which banks that are members of the Federal Reserve System can finance or
otherwise supply funds to certain of their affiliates. In particular, Direct
Merchants Bank is subject to certain restrictions on any extensions of credit to
the Company or its subsidiaries. Additionally, Direct Merchants Bank is limited
in its ability to declare dividends to the Company. Therefore, Direct Merchants
Bank's investments in federal funds sold are generally not available for the
general liquidity needs of the Company or its subsidiaries. Such restrictions
were not material to the operations of the Company at December 31, 1997 and
1996.
As the portfolio of credit card loans grows, or as the Trust certificates
amortize or are otherwise paid, the Company's funding needs will increase
accordingly. The Company believes that its cash flow from operations, together
with its asset securitization programs, Credit Facility, long-term debt issuance
and equity issuance will provide adequate liquidity to the Company for meeting
anticipated cash needs, although no assurance can be given to that effect.
CAPITAL ADEQUACY
In October 1996, the Company completed an initial public offering of
3,258,333, or 17%, of its common shares, which raised net proceeds of
approximately $47.2 million. This augmented $60.0 million in capital
contributions from FCI and the Company's retention of earnings.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC and monitored by the FDIC and the OCC. At December 31, 1997
and 1996, Direct Merchants Bank exceeded the minimum required capital levels and
was considered a "well-capitalized" depository institution under regulations of
the OCC.
30
<PAGE>
BUSINESS
BUSINESS LINES
The Company currently operates two business lines: (i) Consumer Credit
Products and (ii) Fee-Based Services.
CONSUMER CREDIT PRODUCTS
PRODUCTS. Consumer Credit Products currently are unsecured and secured
credit cards, including the Direct Merchants Bank MasterCard, VISA, Fingerhut
co-branded MasterCard and the Bally co-branded MasterCard. In addition, the
Company has affinity programs with three other partners. In the future, the
Company may offer other co-branded credit cards and may also offer other
Consumer Credit Products either directly or through alliances with other
companies. At June 30, 1998, the Company had approximately 2.4 million credit
card accounts with approximately $3.9 billion in managed credit card loans.
Fingerhut Customers represented approximately 39% of the accounts and
approximately 40% of the managed loans. According to published reports, as of
May 1998, the Company was among the top 25 credit card issuers in the United
States based on managed credit card loan balances.
CREDIT SCORING. The Company acquires a Fingerhut Score for prospective
customers in the Fingerhut Database. The Company also acquires credit bureau
information, including risk scores provided by Fair, Isaac & Company ("FICO
scores"), for all Fingerhut Customers. For those Fingerhut Customers who have
FICO scores, the Company uses the Fingerhut Score to further segment Fingerhut
Customers into narrower ranges within each FICO score subsegment, allowing the
Company to better evaluate credit risk and to tailor its risk-based pricing
accordingly. Additionally, the Fingerhut Score is used to target selected
individuals who have no credit bureau information, and consequently no FICO
scores, allowing the Company to target Fingerhut Customers who would not
typically be solicited by other credit card issuers.
The Company has developed a Proprietary Modeling System for External
Prospects. The Proprietary Modeling System consists of sophisticated models
which produce a credit risk score (a "Proprietary Score") for each prospect. The
Proprietary Score, like the Fingerhut Score, segments External Prospects into
narrower ranges within each FICO score subsegment, allowing the Company to
better evaluate individual credit risk and to tailor its risk-based pricing
accordingly. The Company also uses this segmentation to exclude certain
individuals from its marketing solicitations.
The Company generates External Prospects from lists obtained directly from
the major credit bureaus based on criteria established by the Company. The
Company establishes the range of FICO scores it plans to target for a specific
campaign and receives files from the credit bureaus which contain individual
credit records of the External Prospects who fall within this range. The files
are incorporated into the Proprietary Modeling System, which further segments
External Prospects based upon their Proprietary Scores. The mailing lists
generated from the Proprietary Modeling System are then checked against the
Suppress File and any matching names are excluded. The Company currently does
not solicit External Prospects who do not have FICO scores.
The Company believes the Fingerhut Score and its Proprietary Modeling
System, in conjunction with the Suppress File and FICO Scores, allow it to make
prudent decisions in evaluating the credit risk of moderate income consumers.
SOLICITATION. Prospects for solicitation include both Fingerhut Customers
and External Prospects. They are contacted on a nationwide basis primarily
through pre-screened direct mail and telephone solicitations. The Company
receives responses to its prescreened solicitations, performs fraud screening,
verifies name and address changes, and obtains any information which may be
missing from the application. Applications are then sent to third party data
entry providers, which key the application information and process the
applications based on the criteria provided by the Company. The Company
31
<PAGE>
then makes the credit decisions and approves, denies or begins exception
processing. The Company processes exceptions for, among other things, derogatory
credit bureau information and fraud warnings. Exception applications are
processed manually by credit analysts based on policies approved by the
Company's credit committee.
PRICING. The Company's strategy to maximize customer profitability relies
on its risk-based pricing. The specific pricing for a credit card offer is
primarily based on the prospect's risk profile prior to solicitation. A prospect
is evaluated to determine credit needs, credit risk, and existing credit
availability. A customized offer is developed that includes the most appropriate
product, brand, pricing, and credit line. The Company currently offers over 100
different pricing structures on its credit card products, with annual fees
ranging from $0 to $75 and annual percentage rates ranging from prime plus 6.4%
to prime plus 18.4%, excluding the Key and Mercantile portfolio acquisitions.
After credit card accounts are opened, the Company actively monitors customers'
internal and external credit performance and periodically recalculates behavior,
revenues, attrition and bankruptcy predictors. As customers evolve through the
credit lifecycle and are regularly rescored, the lending relationship can evolve
to include more competitive (or more restrictive) pricing and product
configurations.
AGE OF PORTFOLIO. The following table sets forth, as of June 30, 1998, the
number of total accounts and amount of outstanding loans based upon the age of
the managed accounts:
<TABLE>
<CAPTION>
LOANS
NUMBER OUTSTANDING PERCENTAGE OF
OF PERCENTAGE OF (DOLLARS IN LOANS
AGE SINCE ORIGINATION ACCOUNTS ACCOUNTS THOUSANDS) OUTSTANDING
- ------------------------------ -------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
0-6 Months.................... 349,426 14.4% $ 207,438 5.3%
7-12 Months................... 392,934 16.2% 602,583 15.5%
13-18 Months.................. 254,342 10.4% 435,944 11.2%
19-24 Months.................. 337,692 13.9% 580,337 15.0%
25-36 Months.................. 660,992 27.2% 1,236,415 31.9%
37+ Months.................... 434,658 17.9% 818,248 21.1%
-------- ------- ------------ -------
Total................... 2,430,044 100.0% $ 3,880,965 100.0%
-------- ------- ------------ -------
-------- ------- ------------ -------
</TABLE>
GEOGRAPHIC DISTRIBUTION. The Company solicits credit card customers on a
national basis and, therefore, maintains a geographically diversified portfolio.
The following table shows the distribution of total accounts and amount of
outstanding loans by state, as of June 30, 1998:
<TABLE>
<CAPTION>
LOANS
NUMBER OUTSTANDING PERCENTAGE OF
OF PERCENTAGE OF (DOLLARS IN LOANS
STATE ACCOUNTS ACCOUNTS THOUSANDS) OUTSTANDING
- ------------------------------ -------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Texas......................... 277,583 11.4% $ 462,031 11.9%
California.................... 270,323 11.1% 474,557 12.2%
Florida....................... 174,500 7.2% 282,268 7.3%
New York...................... 157,500 6.5% 249,472 6.4%
Ohio.......................... 93,834 3.9% 144,778 3.7%
Illinois...................... 80,975 3.3% 131,167 3.4%
Pennsylvania.................. 88,902 3.7% 134,404 3.5%
Missouri...................... 71,511 2.9% 112,943 2.9%
Mississippi................... 66,097 2.7% 93,339 2.4%
All Others (1)................ 1,148,819 47.3% 1,796,006 46.3%
-------- ------- ------------ -------
Total................... 2,430,044 100.0% $ 3,880,965 100.0%
-------- ------- ------------ -------
-------- ------- ------------ -------
</TABLE>
- ------------------------
(1) No other state accounts for more than 2.5% of loans outstanding.
32
<PAGE>
THE ADAPTIVE CONTROL SYSTEM. The Company uses FDR's adaptive control system
(the "Adaptive Control System"), which uses statistical models and basic account
financial information to regularly assign credit line increases and decreases to
individual customers, as well as to determine the systematic collection steps to
be taken at the various stages of delinquency. The Adaptive Control System
manages the authorization of most transactions; in addition, it implements the
collections strategies determined by the Company to be used for delinquent
accounts and non-delinquent accounts that have balances above their assigned
credit line (referred to as "overlimit" accounts).
CREDIT LINES. Once an account is approved, an initial credit line is
established based on the individual's risk profile using automated screening and
credit scoring techniques. This process results in a portfolio (excluding
portfolio acquisitions) with average credit lines that are below the industry
average due to the higher average risk elements inherent in the Company's target
market. The Company may elect, at any time and without prior notice to the
cardholders to preclude or restrict further credit card use by the cardholders
usually as a result of poor payment performance or the Company's concern over
the creditworthiness of the cardholders. Credit lines are managed based on the
results of the behavioral scoring analysis in accordance with criteria
established by the Company.
The following tables set forth information with respect to account balance
and credit limit ranges of the Company's managed portfolio, as of June 30, 1998:
<TABLE>
<CAPTION>
LOANS
NUMBER OUTSTANDING PERCENTAGE OF
OF PERCENTAGE OF (DOLLARS IN LOANS
CREDIT LIMIT RANGE ACCOUNTS ACCOUNTS THOUSANDS) OUTSTANDING
- ------------------------------ -------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
$1,000 or Less................ 262,363 10.8% $ 149,471 3.9%
$1,001 - 2,000................ 600,321 24.7% 684,219 17.6%
$2,001 - 3,500................ 653,914 26.9% 1,097,595 28.3%
$3,500 - 5,000................ 571,941 23.5% 1,222,252 31.5%
Over $5,000................... 341,505 14.1% 727,428 18.7%
-------- ------- ------------ -------
Total............... 2,430,044 100.0% $ 3,880,965 100.0%
-------- ------- ------------ -------
-------- ------- ------------ -------
</TABLE>
<TABLE>
<CAPTION>
LOANS PERCENTAGE
NUMBER OUTSTANDING OF
OF PERCENTAGE OF (DOLLARS IN LOANS
ACCOUNT BALANCE RANGE ACCOUNTS ACCOUNTS THOUSANDS) OUTSTANDING
- ------------------------------ -------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Credit Balance................ 31,112 1.3% $ -2,608 0.0%
No Balance.................... 385,491 15.9% 0 0.0%
$1,000 or Less................ 653,456 26.9% 294,309 7.6%
$1,001 - 2,000................ 549,881 22.6% 825,294 21.3%
$2,001 - 3,500................ 505,146 20.8% 1,333,451 34.3%
Over $3,500................... 304,958 12.5% 1,430,519 36.8%
-------- ------- ------------ -------
Total............... 2,430,044 100.0% $ 3,880,965 100.0%
-------- ------- ------------ -------
-------- ------- ------------ -------
</TABLE>
DELINQUENCY, COLLECTIONS AND CHARGE-OFFS. The Company considers an account
delinquent if a payment due is not received by the Company within 25 days from
the closing date of the statement. Collection activities are determined by the
Adaptive Control System, which continually monitors all delinquent accounts. The
collections function is handled internally. Accounts that become 60 days
contractually delinquent are closed, but not necessarily charged off. Accounts
are charged off and taken as a loss either within 60 days after formal
notification of bankruptcy or at the end of the month during which they become
contractually 180 days past due. Accounts identified as fraud losses are
immediately reserved for and charged off no later than 90 days after the last
activity. Charged-off accounts are
33
<PAGE>
referred to the Company's recovery unit for coordination of collection efforts
to recover the amounts owed. When appropriate, accounts are placed with external
collection agencies or attorneys.
SERVICING, BILLING AND PAYMENT. The Company has established a relationship
with FDR for cardholder processing services. FDR is a subsidiary of First Data
Corporation, a provider of information processing and related services including
cardholder processing (services for financial institutions which issue credit
cards to cardholders), and merchant processing (services for financial
institutions which make arrangements with merchants for the acceptance of credit
cards as methods of payment). FDR provides data processing, credit card
reissuance, monthly statements, inbound customer service telephone calls and
interbank settlement for the Company. Effective February 1998, the Company
extended its processing services agreement with FDR for an additional six years,
expiring 2006. Applications processing and back office support for mail
inquiries and fraud management are handled internally by the Company. In
addition, the Company handles in-bound customer service telephone calls for
certain acquired portfolios.
The Company generally assesses periodic finance charges on an account if the
cardholder has not paid the balance in full from the previous billing cycle.
These finance charges are based upon the average daily balance outstanding on
the account during the monthly billing cycle. Payments by cardholders to the
Company on the accounts are processed by a third party servicer and applied
first to any billed and unpaid fees, next to billed and unpaid finance charges
and then to billed and unpaid transactions in the order determined by the
Company. If a payment in full is not received prior to 25 days after the
statement cycle date (the "Pay By Date"), finance charges are imposed on all
purchases from the date of the transaction to the statement cycle date. Finance
charges are also imposed on each cash advance from the day such advance is made
until the advance is paid in full. The finance charge is applied to the average
daily balance. For most cardholders, if the entire balance on the account is
paid by the due date a finance charge on purchases is not imposed.
The Company assesses an annual fee on some credit card accounts. The Company
may waive the annual membership fees, or a portion thereof, in connection with
the solicitation of new accounts depending on the credit terms offered, which
are determined by the prospect's risk profile prior to solicitation or when the
Company determines a waiver to be necessary in order to be competitive. In
addition to the annual fee, the Company may charge accounts certain other fees
including: (i) a late fee with respect to any unpaid monthly payment if the
Company does not receive the required minimum monthly payment by the Pay By
Date, (ii) a cash advance fee for each cash advance, (iii) a fee with respect to
each check submitted by a cardholder in payment of an account which is not
honored by the cardholder's bank, and (iv) an overlimit charge if, at any time
during the billing cycle, the total amount owed exceeds the cardholder's credit
line by at least $30.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, the Company reserves
the right to change or terminate certain terms, conditions, services and
features of the account (including periodic finance charges, late fees, returned
check charges and any other charges or the minimum payment), subject to the
conditions set forth in the account agreement.
Monthly billing statements are sent to cardholders by FDR on behalf of the
Company. When an account is established, it is assigned a billing cycle.
Currently, there are 20 billing cycles and each such cycle has a separate
monthly billing date based on the respective business day the cycle represents
in each calendar month. Each month, a statement is sent to all accounts with an
outstanding balance greater than $1. Cardholders must make a minimum monthly
payment of the greater of $10, 2.0% of the outstanding balance, the finance
charge or the balance of the account if the balance is less than $10. If the
minimum payment is not collected within 25 days after the statement cycle date,
the account is considered delinquent.
34
<PAGE>
Most merchant transactions by cardholders are authorized online. The
remaining transactions generally are low dollar amounts, typically below $50.
All authorizations are handled through the Adaptive Control System.
FEE-BASED SERVICES
In 1998, the Company consolidated the fee-based services and extended
service plan businesses into one business line. The Company currently sells a
variety of these Fee-Based Services to its credit card customers, Fingerhut
Customers and customers of third parties, including (i) debt waiver protection
for unemployment, disability, and death, (ii) programs such as card
registration, PurchaseShield (or purchase protection) and club memberships,
(iii) extended service plans and (iv) third-party insurance. In addition, the
Company develops customized targeted mailing lists, using both the Company's and
Fingerhut's databases, for external companies to use in their own financial
services product solicitation efforts that do not directly compete with those of
the Company.
The Company currently markets the following programs:
ACCOUNT PROTECTION PLUS-TM-. The Company has developed a proprietary debt
waiver program that protects customers from interest charges on the Company's
credit cards in the event that they become disabled, unemployed, or deceased. In
the event of unemployment or disability, the customer's account is "frozen" for
up to six months, with no payments due or interest accruing during this time. In
the event of death, the amount due, up to the credit limit, is waived and the
account is closed. Because this is an internally administered program, the
Company is responsible for all of the program's associated costs.
ACCOUNT BENEFIT PLUS-TM-. This debt waiver program forgives the customer's
balance due up to the credit limit in the event of death.
EXTENDED SERVICE PLANS. Extended service plans provide warranty coverage
beyond the manufacturer's warranty. In general, the Company's extended service
plans provide customers with the right to have their covered purchases repaired,
replaced, or in certain circumstances, the purchase price of the product
refunded, within certain parameters determined by the Company. Within the
warranty industry, extended service plans are available for a wide variety of
products including consumer electronics and appliances, furniture, jewelry,
automotives and household mechanical systems such as heating, plumbing and
electrical systems. The Company currently provides extended service plans for
consumer electronics and appliances, furniture, and jewelry ("Warrantable
Products") purchased from Fingerhut and consumer electronics and appliances
purchased from a third party retailer.
ServiceEdge-TM- is the Company's extended service plan for consumer
electronics and other electro-mechanical items. ServiceEdge customers have the
right to have their purchases repaired or replaced in the event of electrical or
mechanical failure or defects in materials and workmanship for coverable events
after the manufacturer's warranty expires. The Company's extended service plan
program for furniture is called Quality Furniture Care. The services provided to
Quality Furniture Care customers include stain cleaning, structural defect or
damage repair, or replacement if the merchandise cannot be repaired. Quality
Jewelry Care-Registered Trademark- is the Company's extended service plan for
jewelry. The services provided to Quality Jewelry Care customers include repair,
soldering, ring sizing, prong retipping and cleaning, for which the Company has
third party jewelers to perform such services.
Most of the Company's extended service plans continue for two years from the
date of the product purchase (three to five years in limited cases). The
customer pays the retail company a one-time fee for this coverage based on the
price of the product, the term of coverage and the loss risk of the product.
Customers may also be offered the opportunity to renew their coverage in
one-year extensions, presently up to six years from the date of purchase, upon
payment of an additional fee for each renewal.
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Through the end of 1996, claims risk and claims processing for
electro-mechanical items were the responsibility of a third party. The Company
is responsible for claims risk and claims processing for furniture and jewelry.
At the beginning of 1997, the Company internalized the claims processing
operations related to extended service plans for electro-mechanical items and
has incurred the resulting claims risk for extended service plans sold on or
after January 1, 1997.
PURCHASESHIELD-SM-. During 1997, the Company developed a new Fee-Based
Service, PurchaseShield, which offers various levels of purchase protection to
its members. Eligible purchases made on a member's applicable credit card is
protected with the following benefits: warranty extension, sale price protection
and product return guarantee and repair rebate. In addition, PurchaseShield
offers its members a household repair rebate that can be used on certain
existing in-home electro-mechanical item repairs. Because this is an internally
administered program, the Company receives all revenues and is responsible for
all of the program's associated costs. The Company currently offers purchase
protection to its credit card customers and credit card customers of third party
clients.
CARD REGISTRATION. Card registration protects members from fraudulent
charges if their credit cards are lost or stolen and provides emergency cash and
airline tickets, change of address notification and lost or stolen card
notification, valuable property and document registration, a messaging service
and car rental discounts. The Company currently offers card registration
services to its credit card customers and customers of third parties. The
Company internalized this program in September 1996 and is responsible for all
of its associated costs and revenues. Prior to September 1996, the Company had
an agreement with a third party vendor to offer card registration services to
its credit card customers.
ACCIDENTAL DEATH INSURANCE. The Company earns a fee from a third-party
insurance company for the marketing and billing of the third party's accidental
death insurance program. The Company markets the insurance program to its credit
card customers. Although the Company markets the program, the third-party
insurance company fulfills and underwrites the policies.
MEMBERSHIP CLUBS. The Company currently has a cooperative marketing
arrangement with several third parties to market the third parties' memberships
in clubs that do not compete with the Company's clubs, in conjunction with its
new credit card account acquisitions. The Company's current arrangement with
these third parties and the marketing of the Company's own Fee-Based Services in
conjunction with new credit card account acquisitions enable the Company to
acquire new credit card customers at a reduced cost. Additionally, the Company
has other arrangements with third parties, which it assumed from acquired credit
card portfolios, that provide it with revenue from ongoing membership fees
billed to the Company's acquired credit card holders.
TAILORED LIST DEVELOPMENT. The Company currently works with several
companies to develop targeted mailing lists and earns revenue for each name that
is solicited by these companies from the Company's customer databases. The
Company also earns revenue from the sale of advertising space included in its
monthly billing statements.
COMPETITION
As a marketer of Consumer Credit Products, the Company faces competition
from numerous providers of financial services, many of which have greater
resources than the Company. In particular, the Company competes with national,
regional and local bank card issuers as well as other general purpose credit
card issuers, such as American Express and Discover. In general, customers are
attracted to credit card issuers largely on the basis of price, credit limit and
other product features; as a result, customer loyalty is often limited. However,
the Company believes that its strategy of focusing on an underserved market and
its access to information from the Fingerhut Database, not available to other
credit card issuers, will allow it to more effectively compete in the market for
moderate income cardholders.
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There are numerous competitors in the Fee-Based Services market, including
insurance companies, financial services institutions and other membership-based
or enhancement consumer services providers, many of which are larger, more
capitalized and more experienced than the Company. During the term of an
agreement with Fingerhut, the Company has the exclusive right to use the
Fingerhut Database to market these services to Fingerhut Customers through
October 31, 2003. During the term of an agreement between Fingerhut and the
Company, Fingerhut will offer its customers extended service plans administered
only by the Company through October 31, 2003. As the Company continues to expand
its business to market extended service plans to the customers of third-party
retailers, it will compete with manufacturers, financial institutions, insurance
companies and a number of independent administrators, many of which have greater
operating experience and financial resources than the Company.
REGULATION
THE COMPANY AND DIRECT MERCHANTS BANK
Direct Merchants Bank is a limited purpose credit card bank chartered as a
national banking association. It is a member of the Federal Reserve System. Its
deposits are insured by the Bank Insurance Fund which is administered by the
FDIC and it is subject to comprehensive regulation and periodic examination by
the OCC, its primary regulator. It is also subject to regulation by the Board of
Governors of the Federal Reserve System and the FDIC, as back-up regulators.
Direct Merchants Bank is not a "bank" as defined under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), because it (i) engages only in credit card
operations, (ii) does not accept demand deposits or deposits that the depositor
may withdraw by check or similar means for payment to third parties or others,
(iii) does not accept any savings or time deposit of less than $100,000, except
for deposits pledged as collateral for extensions of credit, (iv) maintains only
one office that accepts deposits and (v) does not engage in the business of
making commercial loans. As a result, the Company is not a bank holding company
under the BHCA. If Direct Merchants Bank failed to meet the credit card bank
criteria described above, Direct Merchants Bank's status as an insured bank
would make the Company subject to the provisions of the BHCA. The Company
believes that becoming a bank holding company would limit the Company's ability
to pursue future opportunities.
EXPORTATION OF INTEREST RATES AND FEES
Under current judicial interpretations of federal law, national banks such
as Direct Merchants Bank may charge interest at the rate allowed by the laws of
the state where the bank is located and may "export" those interest rates on
loans to borrowers in other states, without regard to the laws of such other
states.
In 1996, the Supreme Court of the United States held that national banks may
also impose late payment fees allowed by the laws of the state where the
national bank is located on borrowers in other states, without regard to the
laws of such other states. The Supreme Court based its opinion largely on its
deference to a regulation adopted by the OCC that includes certain fees,
including late fees, overlimit fees, annual fees, cash advance fees and
membership fees, within the term "interest" under the provision of the National
Bank Act that has been interpreted to permit national banks to export interest
rates. As a result, national banks such as Direct Merchants Bank may export such
fees.
DIVIDENDS AND TRANSFERS OF FUNDS
There are various federal law limitations on the extent to which Direct
Merchants Bank can finance or otherwise supply funds to the Company and its
affiliates through dividends, loans or otherwise. These limitations include:
minimum regulatory capital requirements; restrictions concerning the payment of
dividends out of net profits or surplus; and Sections 23A and 23B of the Federal
Reserve Act governing
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transactions between a bank and its affiliates. In general, Federal law
prohibits a national bank such as Direct Merchants Bank from making dividend
distributions on common stock if the dividend would exceed net profits of a
specified period. In addition, Direct Merchants Bank must get OCC approval for a
dividend if such distributions are not paid out of available earnings or if the
distribution would cause the bank to fail to meet applicable capital adequacy
standards. Finally, although not a regulatory restriction, the terms of the
amended and restated Revolving Credit Facility prohibit the payment of dividends
in certain circumstances. See "Description of Capital Stock--Common Stock."
COMPTROLLER OF THE CURRENCY
CAPITAL ADEQUACY. The Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the Federal banking agencies to implement systems
for "prompt corrective action" for insured depository institutions that are not
at least adequately capitalized. FDICIA imposes progressively more restrictive
constraints on operations, management and capital distributions, depending upon
the category in which an institution is classified. Failure to meet the capital
requirements could also subject a bank to a regulatory directive requiring it to
raise capital.
In addition, FDICIA requires the banking agencies to prescribe certain
non-capital standards for safety and soundness relating generally to operations
and management, asset quality and executive compensation. FDICIA also provides
that regulatory action may be taken against a bank that does not meet such
standards.
The OCC, Direct Merchants Bank's primary federal regulator, has adopted
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leveraged capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier I capital ratio of at least 6 percent, a total capital ratio of at
least 10 percent and a leverage ratio of at least 5 percent and not be subject
to a capital directive order. An "adequately capitalized" institution must have
a Tier I capital ratio of at least 4 percent, a total capital ratio of at least
8 percent and a leverage ratio of at least 4 percent (3 percent in some cases).
Under these guidelines, Direct Merchants Bank is considered well capitalized.
The OCC's risk-based capital standards explicitly consider a bank's exposure
to declines in the economic value of its capital due to changes in interest
rates when evaluating a bank's capital adequacy. Interest rate risk is the
exposure of a bank's current and future earnings and equity capital arising from
adverse movements in interest rates. The evaluation will be made as a part of
the institution's regular safety and soundness examination.
DEPOSIT INSURANCE. FDICIA requires the FDIC to implement a system of
risk-based premiums for deposit insurance pursuant to which the premiums paid by
a depository institution will be based on the probability that the FDIC will
incur a loss in respect of such institution. The FDIC has adopted a system that
imposes insurance premiums based upon a matrix that takes into account a bank's
capital level and supervisory rating. Given Direct Merchants Bank's capital
level and supervisory rating, Direct Merchants Bank pays the lowest rate on
deposit insurance premiums.
Under FDICIA, only "well capitalized" and "adequately capitalized" banks may
accept brokered deposits. "Adequately capitalized" banks, however, must first
obtain a waiver from the FDIC before accepting brokered deposits and such
deposits may not pay rates that significantly exceed the rates paid on deposits
of similar maturity from the bank's normal market area or the national rate on
deposits of comparable maturity, as determined by the FDIC, for deposits from
outside the bank's normal market area. Direct Merchants Bank may accept brokered
deposits as part of its funding; however, it does not presently rely on brokered
deposits to fund its operations.
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LENDING ACTIVITIES
Direct Merchants Bank's activities as a credit card lender are also subject
to regulation under various federal consumer protection laws including the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Community Reinvestment Act (the "CRA") and the Soldiers' and
Sailors' Civil Relief Act. Regulators are authorized to impose penalties for
violations of these statutes and, in certain cases, to order Direct Merchants
Bank to pay restitution to injured cardmembers. Cardholders may also bring
actions for certain alleged violations of such regulations. Federal and state
bankruptcy and debtor relief laws also affect Direct Merchants Bank's ability to
collect outstanding balances owed by cardholders who seek relief under these
statutes.
The OCC's CRA regulations subject limited purpose banks, including Direct
Merchants Bank, to a "community development" test for evaluating required CRA
performance. The community development performance of a limited purpose bank is
evaluated pursuant to various criteria involving community development lending,
qualified investments and community development services.
LEGISLATION
From time to time legislation has been proposed in Congress to limit
interest rates that could be charged on credit card accounts; however, the
Company does not anticipate any serious effort by Congress to enact such a
limitation in the current session of Congress.
INVESTMENT IN THE COMPANY AND DIRECT MERCHANTS BANK
Certain acquisitions of capital stock may be subject to regulatory approval
or notice under federal law. Investors are responsible for insuring that they do
not directly or indirectly acquire shares of capital stock of the Company in
excess of the amount which can be acquired without regulatory approval.
INTER-STATE TAXATION
Several states have passed legislation which attempts to tax the income from
interstate financial activities, including credit cards, derived from accounts
held by local state residents. Based on current interpretations of the
enforceability of such legislation, coupled with the volume of its business in
these states, the Company believes that this will not materially affect Direct
Merchants Bank.
FAIR CREDIT REPORTING ACT
The FCRA regulates "consumer reporting agencies." Under the FCRA, an entity
risks becoming a consumer reporting agency if it furnishes "consumer reports" to
third parties. A "consumer report" is a communication of information which bears
on a consumer's creditworthiness, credit capacity, credit standing or certain
other characteristics and which is collected or used or expected to be used to
determine the consumer's eligibility for credit, insurance, employment or
certain other purposes. The FCRA explicitly excludes from the definition of
"consumer report" a report containing information solely as to transactions or
experiences between the consumer and the entity making the report. An entity may
share consumer reports with any of its affiliates so long as that entity
provides consumers with an appropriate disclosure opportunity to opt out of such
"affiliate sharing."
It is the objective of the Company to conduct their operations in a manner
which would fall outside the definition of "consumer reporting agency" under the
FCRA. If the Company (or Fingerhut) were to become a consumer reporting agency,
however, the Company would be subject to a number of complex and burdensome
regulatory requirements and restrictions, including restrictions that could make
it difficult for the Company to use information from the Fingerhut Database and
to furnish information to third parties. Such restrictions could have a
significant adverse economic impact on the Company's results of operations,
financial condition and prospects.
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EMPLOYEES
As of June 30, 1998, the Company had over 1,600 employees located in
Arizona, Illinois, Maryland, Minnesota, Oklahoma, and Utah. None of the
Company's employees are represented by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the persons
who currently serve as executive officers of the Company. Each executive officer
serves at the discretion of the Board of Directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Ronald N. Zebeck.......................... 43 President, Chief Executive Officer and Director
William J. Brennan........................ 61 Senior Vice President, Sales and Account Management
Patrick J. Fox............................ 43 Senior Vice President, Business Development
Joseph A. Hoffman......................... 40 Senior Vice President, Consumer Credit Marketing
Douglas B. McCoy.......................... 51 Senior Vice President, Operations
Robert W Oberrender....................... 38 Senior Vice President, Chief Financial Officer
Douglas L. Scaliti........................ 40 Senior Vice President, Fee-Based Services
Z. Jill Barclift.......................... 40 Vice President, General Counsel
Jean C. Benson............................ 30 Vice President of Finance, Corporate Controller
David R. Reak............................. 39 Vice President, Credit Risk
Paul T. Runice............................ 39 Vice President, Treasurer
</TABLE>
Ronald N. Zebeck has been the President and Chief Executive Officer and a
director of the Company since January 1997. Mr. Zebeck has been President of
Metris Direct, Inc. since March 1994 and has served as Chief Executive Officer
of Direct Merchants Bank since August 1995. Prior to joining the Company, Mr.
Zebeck was Managing Director, GM Card Operations of General Motors Corporation
from 1991 to 1993, Vice President, Marketing and Strategic Planning of Advanta
Corporation (Colonial National Bank USA) from 1987 to 1991, Director of
Strategic Planning of TSO Financial (later Advanta Corporation) from 1986 to
1987 and held various credit card and credit-related positions at Citibank
affiliates from 1976 to 1986.
William J. Brennan has been Senior Vice President, Sales and Account
Management of the Company since June 1997. Prior to joining the Company, Mr.
Brennan was Senior Vice President of Member Relations for MasterCard
International Inc. from 1989 to 1997 and he spent 12 years with First Interstate
Bancorp, holding Senior Vice President positions in both its bankcard and retail
banking operations. Prior to that, he was Senior Vice President of Operations at
Diners Club Inc. for 10 years.
Douglas B. McCoy has been Senior Vice President, Operations of the Company
since December 1996 and was Vice President, Operations of Metris Direct, Inc.
from January 1995 to November 1996. In addition, Mr. McCoy has been President of
Direct Merchants Bank since July, 1995. Prior to joining the Company, he was
Vice President, Credit Administration of USAA Federal Savings Bank from
September 1984 to January 1995, Assistant Vice President, Credit Administration
of Bank of Oklahoma from July 1984 to September 1984, Assistant Vice President,
Operations of First National Bank of Tulsa from May 1982 to July 1984 and
Assistant Vice President, Credit Card Marketing of The Bank of New Orleans from
April 1978 to April 1982.
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Robert W. Oberrender became Senior Vice President, Chief Financial Officer
of the Company in January 1997. Mr. Oberrender previously was Vice President,
Chief Financial Officer of the Company from August 1996 to December 1996, Vice
President, Treasurer of FCI from July 1994 to July 1996 and Assistant Treasurer
of FCI from February 1993 until July 1994. Prior to joining the Company, he was
Vice President, Corporate Finance & Banking Group of Chemical Bank (now The
Chase Manhattan Bank) for more than five years.
Patrick J. Fox has been Senior Vice President, Business Development since
March 1998. Mr. Fox brings to Metris nearly 20 years of experience in credit
card marketing, product management and sales. Prior to joining Metris, Mr. Fox
held executive positions in the credit card group of Bank of America. Most
recently he was the Director of Product Management and Business Development.
Previous to Bank of America, Mr. Fox held various marketing and sales management
positions with Bank One, Comerica Bank and Citibank.
Joseph A. Hoffman has been Senior Vice President, Consumer Credit Marketing
since April 1998. He has nearly 20 years of credit card marketing experience.
Prior to joining the Company, Mr. Hoffman was Vice President of Marketing at
Advanta, where he held a variety of positions including Directors of Brand
Management and Affinity and Co-Brand Marketing. Before that, Mr. Hoffman was
Vice President, Area Director, in Citibank's Card Product Group, which he joined
in 1980. During his fourteen-year tenure with Citibank, Mr. Hoffman held a
variety of Marketing and Operations positions with Citibank's Bankcard and
Private Label businesses.
Douglas L. Scaliti has been Senior Vice President, Fee-Based Services of the
Company since March 1998. Mr. Scaliti previously was Senior Vice President,
Marketing of the Company, Vice President, Marketing of the Company from August
1996 to November 1996 and held that same position at Metris Direct, Inc. since
September 1994. Prior to joining the Company, he held several positions at
Advanta Corporation (Colonial National Bank USA) in its marketing and operations
area, including Senior Marketing Manager, Credit Cards from 1987 to 1994,
Operations Consultant, Profit Improvement from 1985 to 1987 and Credit
Operations Manager from 1982 to 1985. Mr. Scaliti also serves on the First Data
Resources Market Area Advisory Group.
Z. Jill Barclift has been Vice President, General Counsel of the Company
since December 1996 and was Assistant General Counsel from April 1996 to
December 1996. Prior to joining the Company, Ms. Barclift held various positions
at Household International, Inc. and Household Credit Services, Inc. from
October 1989 to April 1996, most recently as Associate General Counsel. Prior to
that, she was Senior Counsel at Dean Witter Financial Services, Inc. from
January 1984 to October 1989.
Jean C. Benson has been Vice President of Finance, Corporate Controller of
the Company since July 1998 and has been Corporate Controller since August 1996.
Prior to joining the Company, Ms. Benson held various finance positions at the
Company and FCI since October 1994. Prior to that, she held various positions at
Deloitte & Touche LLP (public accounting), specializing in the financial
services industry from 1990 to 1994.
David R. Reak has been Vice President, Credit Risk of the Company since
October 1996. Mr. Reak was previously Senior Director, Credit Risk of Metris
Direct, Inc. from December 1995 to October 1996. Prior to joining the Company,
he had several positions at American Express Travel Related Services Company,
including Senior Manager, Credit Risk Management Europe and Middle East from
1994 to December 1995, Senior Manager, Credit Risk Management U.S. Consulting
Group from 1992 to 1994, and Project Manager, Credit Research and Analysis from
1990 to 1992.
Paul T. Runice has been Vice President, Treasurer since February 1998. Prior
to joining the Company, Mr. Runice was with the Bank of America N.T. & S.A. for
nine years, most recently as Vice President in the U.S. Corporate Finance Group.
Prior to Bank of America, he was employed by Grand Metropolitan, Inc. and The
Pillsbury Company as Manager of Treasury Operations, as well as in corporate
development and financial analysis roles.
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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.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities offered hereby, consisting of notes, debentures and
other evidences of indebtedness, are to be issued in one or more series
constituting subordinated Debt Securities ("Subordinated Debt"). Unless
otherwise specified in the applicable Prospectus Supplement, the Debt Securities
will be issued pursuant to an indenture described below (the "Indenture")
between the Company and the trustee identified therein (the "Indenture
Trustee"), the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
The statements herein relating to the Debt Securities and the following
summaries of certain general provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Indenture (as it may be amended or supplemented
from time to time), including the definitions therein of certain terms
capitalized in this Prospectus. All article and section references appearing
herein are to articles and sections of the Indenture and whenever particular
Sections or defined terms of the Indenture (as it may be amended or supplemented
from time to time) are referred to herein or in a Prospectus Supplement, such
Sections or defined terms are incorporated herein or therein by reference.
GENERAL
The Debt Securities will be unsecured obligations of the Company. The
Indenture does not limit the aggregate amount of Debt Securities which may be
issued thereunder, nor does it limit the incurrence or issuance of secured or
other unsecured debt of the Company. The Debt Securities issued under the
Indenture will be subordinate in right of payment, to the extent and in the
manner set forth in the Indenture, to all Senior Indebtedness of the Company.
See "--Subordination under the Indenture."
Reference is made to the applicable Prospectus Supplement which will
accompany this Prospectus for a description of the specific series of Debt
Securities being offered thereby, including, but not limited to, the following:
(i) the title of such Debt Securities; (ii) any limit upon the aggregate
principal amount of such Debt Securities; (iii) the date or dates on which the
principal of and premium, if any, on such Debt Securities will mature or the
method of determining such date or dates; (iv) the rate or rates (which may be
fixed or variable) at which such Debt Securities will bear interest, if any, or
the method of calculating such rate or rates; (v) the date or dates from which
interest, if any, will accrue or the method by which such date or dates will be
determined; (vi) the date or dates on which interest, if any, will be payable
and the record date or dates therefor; (vii) the place or places where principal
of, premium, if any, and interest, if any, on such Debt Securities will be
payable; (viii) the right, if any, of the Company to defer payment of interest
on Debt Securities and the maximum length of any such deferral period; (ix) the
period or periods within which, the price or prices at which, the currency or
currencies (including currency unit or units) in which, and the terms and
conditions upon which, such Debt Securities may be redeemed, in whole or in
part, at the option of the Company; (x) the obligation, if any, of the Company
to redeem or purchase such Debt Securities pursuant to any sinking fund or
analogous provisions or upon the happening of a specified event and the period
or periods within which, the price or prices at which and the other terms and
conditions upon which, such Debt Securities shall be redeemed or purchased, in
whole or in part, pursuant to such obligations; (xi) the denominations in which
such Debt Securities are authorized to be issued if other than $1,000 and any
integral multiple thereof, in the case of registered Debt Securities and if
other than $5,000 and any integral multiple thereof, in the case of bearer Debt
Securities; (xii) if other than Dollars, the currency or currencies (including
currency units) in which Debt Securities may be denominated and/or the currency
or currencies (including currency units) in which principal of, premium, if any,
and interest, if any, on such Debt Securities will be payable and whether the
Company or the holders of any such Debt Securities may elect to receive payments
in respect of such Debt Securities in a currency or currency unit other than
that in which such Debt
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Securities are stated to be payable; (xiii) if other than the principal amount
thereof, the portion of the principal amount of such Debt Securities which will
be payable upon declaration of the acceleration of the maturity thereof or the
method by which such portion shall be determined; (xiv) the person to whom any
interest on any such Debt Security shall be payable if other than the person in
whose name such Debt Security is registered on the applicable record date; (xv)
any addition to, or modification or deletion of, any Event of Default or any
covenant of the Company specified in the Indenture with respect to such Debt
Securities; (xvi) the application, if any, of such means of defeasance or
covenant defeasance as may be specified for such Debt Securities; (xvii) whether
such Debt Securities are to be issued in whole or in part in the form of one or
more temporary or permanent global securities and, if so, the identity of the
depositary for such global security or securities; (xviii) under what
circumstances, if any, the Company will pay additional amounts on the Debt
Securities of that series held by a Person who is not a U.S. Person in respect
of taxes or similar charges withheld or deducted ("Additional Amounts") and, if
so, whether the Company will have the option to redeem such Debt Securities
rather than pay such Additional Amounts (and the terms of any such option); and
(xix) any other special terms pertaining to such Debt Securities. Unless
otherwise specified in the applicable Prospectus Supplement, the Debt Securities
will not be listed on any securities exchange. (Section 3.01.)
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities will be issued in fully-registered form without coupons. Where Debt
Securities of any series are issued in bearer form, the special restrictions and
considerations, including special offering restrictions and special Federal
income tax considerations, applicable to any such Debt Securities and to payment
on and transfer and exchange of such Debt Securities will be described in the
applicable Prospectus Supplement. Bearer Debt Securities will be transferable by
delivery. (Section 3.05.)
Debt Securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time of
issuance is below market rates. Certain Federal income tax consequences and
special considerations applicable to any such Debt Securities, or to Debt
Securities issued at par that are treated as having been issued at a discount,
will be described in the applicable Prospectus Supplement.
If the purchase price of any of the Debt Securities is payable in one or
more foreign currencies or currency units or if any Debt Securities are
denominated in one or more foreign currencies or currency units or if the
principal of, premium, if any, or interest, if any, on any Debt Securities is
payable in one or more foreign currencies or currency units, or by reference to
commodity prices, equity indices or other factors, the restrictions, elections,
certain Federal income tax considerations, specific terms and other information
with respect to such issue of Debt Securities and such foreign currency or
currency units or commodity prices, equity indices or other factors will be set
forth in the applicable Prospectus Supplement. In general, holders of such
series of Debt Securities may receive a principal amount on any principal
payment date, or a payment of premium, if any, on any premium interest payment
date or a payment of interest on any interest payment date, that is greater than
or less than the amount of principal, premium, if any, or interest otherwise
payable on such dates, depending on the value on such dates of the applicable
currency, commodity, equity index or other factor.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus Supplement, payments
in respect of the Debt Securities will be made in the designated currency at the
office or agency of the Company maintained for that purpose as the Company may
designate from time to time. (Section 9.02.) Unless otherwise indicated in the
applicable Prospectus Supplement, payment of any installment of interest on Debt
Securities in registered form will be made to the person in whose name such Debt
Security is registered at the close of business on the regular record date for
such interest. (Section 3.07 (a).)
Payment in respect of Debt Securities in bearer form will be made in the
currency and in the manner designated in the applicable Prospectus Supplement,
subject to any applicable laws and regulations, at
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such paying agencies outside the United States as the Company may appoint from
time to time. The paying agents outside the United States initially appointed by
the Company for a series of Debt Securities will be named in the Prospectus
Supplement. The Company may at any time designate additional paying agents or
rescind the designation of any paying agents, except that, if Debt Securities of
a series are issuable as Registered Securities, the Company will be required to
maintain at least one paying agent in each Place of Payment for such series and,
if Debt Securities of a series are issuable as Bearer Securities, the Company
will be required to maintain a paying agent in a Place of Payment outside the
United States where Debt Securities of such series and any coupons appertaining
thereto may be presented and surrendered for payment. (Section 9.02.)
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities in registered form will be transferable or exchangeable at the agency
of the Company maintained for such purpose as designated by the Company from
time to time. (Sections 3.05 and 9.02.) Debt Securities may be transferred or
exchanged without service charge, other than any tax or other governmental
charge imposed in connection therewith. (Section 3.05.)
GLOBAL DEBT SECURITIES
Unless otherwise specified in the applicable Prospectus Supplement, the Debt
Securities of a series may be issued in whole or in part in the form of one or
more fully registered global securities (a "Registered Global Security") that
will be deposited with a depository (the "Depository") or with a nominee for the
Depository identified in the applicable Prospectus Supplement. In such a case,
one or more Registered Global Securities will be issued in a denomination or
aggregate denominations equal to the portion of the aggregate principal amount
of outstanding Debt Securities of the series to be represented by such
Registered Global Security or Securities. (Section 3.03.) Unless and until it is
exchanged in whole or in part for Debt Securities in definitive certificated
form, a Registered Global Security may not be registered for transfer or
exchange except as a whole by the Depository for such Registered Global Security
to a nominee of such Depository or by a nominee of such Depository to such
Depository or another nominee of such Depository or by such Depository or any
such nominee to a successor Depository for such series or a nominee of such
successor Depository and except in the circumstances described in the applicable
Prospectus Supplement. (Section 3.05.)
The specific terms of the depository arrangement with respect to any portion
of a series of Debt Securities to be represented by a Registered Global Security
will be described in the applicable Prospectus Supplement. Unless otherwise
specified in the applicable Prospectus Supplement, the Company expects that the
following provisions will apply to such depository arrangements.
Ownership of beneficial interests in a Registered Global Security will be
limited to participants or persons that may hold interests through participants
(as such term is defined below). Upon the issuance of any Registered Global
Security, and the deposit of such Registered Global Security with or on behalf
of the Depository for such Registered Global Security, the Depository will
credit, on its book-entry registration and transfer system, the respective
principal amounts of the Debt Securities represented by such Registered Global
Security to the accounts of institutions ("participants") that have accounts
with the Depository or its nominee. The accounts to be credited will be
designated by the underwriters or agents engaging in the distribution of such
Debt Securities or by the Company, if such Debt Securities are offered and sold
directly by the Company. Ownership of beneficial interests by participants in
such Registered Global Security will be shown on, and the transfer of such
beneficial interests will be effected only through, records maintained by the
Depository for such Registered Global Security or by its nominee. Ownership of
beneficial interests in such Registered Global Security by persons that hold
through participants will be shown on, and the transfer of such beneficial
interests within such participants will be effected only through, records
maintained by such participants. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
certificated
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form. The foregoing limitations and such laws may impair the ability to transfer
beneficial interests in such Registered Global Security.
So long as the Depository for a Registered Global Security, or its nominee,
is the registered owner of such Registered Global Security, such Depository or
such nominee, as the case may be, will be considered the sole owner or holder of
the Debt Securities represented by such Registered Global Security for all
purposes under the applicable Indenture. Unless otherwise specified in the
applicable Prospectus Supplement and except as specified below, owners of
beneficial interests in such Registered Global Security will not be entitled to
have Debt Securities of the series represented by such Registered Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of Debt Securities of such series in certificated form and
will not be considered the holders thereof for any purposes under the relevant
Indenture. (Section 3.08.) Accordingly, each person owning a beneficial interest
in such Registered Global Security must rely on the procedures of the Depository
and, if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a holder
under the relevant Indenture. The Depository may grant proxies and otherwise
authorize participants to give or take any request, demand, authorization,
direction, notice, consent, waiver or other action which a holder is entitled to
give or take under the relevant Indenture. The Company understands that, under
existing industry practices, if the Company requests any action of holders or if
any owner of a beneficial interest in such Registered Global Security desires to
give any notice or take any action which a holder is entitled to give or take
under the relevant Indenture, the Depository would authorize the participants to
give such notice or take such action, and such participants would authorize
beneficial owners owning through such participants to give such notice or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
Unless otherwise specified in the applicable Prospectus Supplement, payments
with respect to principal, premium, if any, and interest, if any, on Debt
Securities represented by a Registered Global Security registered in the name of
a Depository or its nominee will be made to such Depository or its nominee, as
the case may be, as the registered owner of such Registered Global Security.
The Company expects that the Depository for any Debt Securities represented
by a Registered Global Security, upon receipt of any payment of principal,
premium or interest, will immediately credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Registered Global Security as shown on the records
of such Depository. The Company also expects that payments by participants to
owners of beneficial interests in such Registered Global Security held through
such participants will be governed by standing instructions and customary
practices, as is now the case with the securities held for the accounts of
customers registered in "street names," and will be the responsibility of such
participants. None of the Company, the Indenture Trustee or any agent of the
Company or the Indenture Trustee shall have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
interests of a Registered Global Security, or for maintaining, supervising or
reviewing any records relating to such beneficial interests. (Section 3.08.)
Unless otherwise specified in the applicable Prospectus Supplement, if the
Depository for any Debt Securities represented by a Registered Global Security
is at any time unwilling or unable to continue as Depository or ceases to be a
clearing agency registered under the Exchange Act and a duly registered
successor Depository is not appointed by the Company within 90 days, the Company
will issue such Debt Securities in definitive certificated form in exchange for
such Registered Global Security. In addition, the Company may at any time and in
its sole discretion determine not to have any of the Debt Securities of a series
represented by one or more Registered Global Securities and, in such event, will
issue Debt Securities of such series in definitive certificated form in exchange
for all of the Registered Global Security or Securities representing such Debt
Securities. (Section 3.05.)
The Debt Securities of a series may also be issued in whole or in part in
the form of one or more bearer global securities (a "Bearer Global Security")
that will be deposited with a depository, or with a
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nominee for such depository, identified in the applicable Prospectus Supplement.
Any such Bearer Global Security may be issued in temporary or permanent form.
(Section 3.04.) The specific terms and procedures, including the specific terms
of the depository arrangement, with respect to any portion of a series of Debt
Securities to be represented by one or more Bearer Global Securities will be
described in the applicable Prospectus Supplement.
CONSOLIDATION, MERGER OR SALE BY THE COMPANY
Unless otherwise specified in the applicable Prospectus Supplement, the
Company shall not consolidate with or merge with or into any other corporation
or sell its assets substantially as an entirety, unless: (i) the corporation
formed by such consolidation or into which the Company is merged or the
corporation which acquires its assets is organized and existing under the laws
of the United States or any state thereof; (ii) the corporation formed by such
consolidation or into which the Company is merged or which acquires the
Company's assets substantially as an entirety expressly assumes all of the
obligations of the Company under the Indenture and the Debt Securities; (iii)
immediately after giving effect to such transaction, no Default or Event of
Default exists and is continuing; and (iv) if, as a result of such transaction,
properties or assets of the Company would become subject to an encumbrance which
would not be permitted by the terms of any series of Debt Securities, the
Company or the successor corporation, as the case may be, shall take such steps
as are necessary to secure such Debt Securities equally and ratably with all
indebtedness secured thereunder. Upon any such consolidation, merger or sale,
the successor corporation formed by such consolidation, or into which the
Company is merged or to which such sale is made, shall succeed to, and be
substituted for the Company under the Indenture. (Section 7.01.)
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
The Indenture provides that, if an Event of Default specified therein occurs
with respect to the Debt Securities of any series and is continuing, the
Indenture Trustee for such series or the holders of 25% in aggregate principal
amount of all of the outstanding Debt Securities of that series, by written
notice to the Company (and to the Indenture Trustee for such series, if notice
is given by such holders of Debt Securities), may declare the principal of (or,
if the Debt Securities of that series are Original Issue Discount Securities or
Indexed Securities, such portion of the principal amount specified in the
Prospectus Supplement) and accrued interest on all the Debt Securities of that
series to be due and payable (provided, with respect to any Debt Securities
issued under the Indenture, that the payment of principal and interest on such
Debt Securities shall remain subordinated to the extent provided in the
Indenture). (Section 5.02.)
Unless otherwise specified in the applicable Prospectus Supplement, Events
of Default with respect to Debt Securities of any series are defined in the
Indenture as being: (i) default in payment of any interest on any Debt Security
of that series or any coupon appertaining thereto or any additional amount
payable with respect to Debt Securities of such series as specified in the
applicable Prospectus Supplement when the same becomes due and payable and the
same continues for 30 days; (ii) default in payment of principal, or premium, if
any, at maturity or on redemption or otherwise, or in the making of a mandatory
sinking fund payment of any Debt Securities of that series when due; (iii)
default for 60 days after notice to the Company by the Indenture Trustee for
such series, or by the holders of 25% in aggregate principal amount of the Debt
Securities of such series then outstanding to the Company and the Indenture
Trustee, in the performance of any other agreement or covenant (other than an
agreement or covenant for which non-compliance is elsewhere specifically dealt
with in this paragraph) in the Debt Securities of that series, in the Indenture
or in any supplemental indenture or board resolution referred to therein under
which the Debt Securities of that series may have been issued; (iv) a default
under any mortgage, agreement, indenture or instrument under which there may be
issued, or by which there may be evidenced any Debt of the Company, whether
existing now or in the future, in an aggregate principal amount then outstanding
of $25 million or more, which default (a) shall constitute a failure to pay any
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portion of the principal of such Debt when due and payable after the expiration
of an applicable grace period with respect thereto or (b) shall result in such
Debt becoming or being declared due and payable, and such acceleration shall not
be rescinded or annulled, or such Debt shall not be paid in full within a period
of 30 days after there has been given, to the Company by the Indenture Trustee
or to the Company and the Indenture Trustee by the holders of at least 25% in
aggregate principal amount of the Outstanding Debt Securities of such series
PROVIDED that such Event of Default will be remedied, cured or waived if the
default that resulted in the acceleration of such other indebtedness is
remedied, cured or waived; and (v) certain events of bankruptcy, insolvency or
reorganization of the Company. (Section 5.01.) The definition of "Event of
Default" in the Indenture specifically excludes a default under a secured debt
under which the obligee has recourse (exclusive of recourse for ancillary
matters such as environmental indemnities, misapplication of funds, costs of
enforcement, etc.) only to the collateral pledged for repayment, and where the
fair market value of such collateral does not exceed two percent of Total Assets
(as defined in the Indenture) at the time of the default. Events of Default with
respect to a specified series of Debt Securities may be added to the Indenture
and, if so added, will be described in the applicable Prospectus Supplement.
(Sections 3.01 and 5.01(7).)
At any time after a declaration of acceleration has been made with respect
to Debt Securities of any series but before a judgment or decree for payment has
been obtained by the Indenture Trustee, the Holders of a majority in principal
amount of Outstanding Debt Securities of that series may rescind any declaration
of acceleration and its consequences, provided that all payments due (other than
those due as a result of acceleration) have been made and all Events of Default
have been cured or waived. (Section 5.02.)
The Indenture provides that the Indenture Trustee will, within 90 days after
the occurrence of a Default with respect to the Debt Securities of any series,
give to the holders of the Debt Securities of that series notice of all Defaults
known to it unless such Default shall have been cured or waived; provided that
except in the case of a Default in payment on the Debt Securities of that
series, the Indenture Trustee may withhold the notice if and so long as a
committee of its Responsible Officers in good faith determines that withholding
such notice is in the interests of the holders of the Debt Securities of that
series. (Section 6.06.) "Default" means any event which is, or after notice or
passage of time or both, would be, an Event of Default. (Section 1.01.)
The Indenture provides that the holders of a majority in aggregate principal
amount of the Debt Securities of each series affected (with each such series
voting as a class) may, subject to certain limited conditions, direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee, or exercising any trust or power conferred on the Indenture
Trustee. (Section 5.08.)
The Indenture includes a covenant that the Company will file annually with
the Indenture Trustee a certificate as to the Company's compliance with all
conditions and covenants of the Indenture. (Section 9.05.)
The holders of a majority in aggregate principal amount of any series of
Debt Securities by notice to the Indenture Trustee for such series may waive, on
behalf of the holders of all Debt Securities of such series, any past Default or
Event of Default with respect to that series and its consequences except a
Default or Event of Default in the payment of the principal of, premium, if any,
or interest, if any, or any Additional Amounts on any Debt Security, and except
in respect of an Event of Default resulting from the breach of a covenant or
provision of either Indenture which, pursuant to the applicable Indenture,
cannot be amended or modified without the consent of the holders of each
outstanding Debt Security of such series affected. (Section 5.07.)
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OPTION TO DEFER INTEREST PAYMENTS
If provided in the applicable Prospectus Supplement, the Company shall have
the right at any time and from time to time during the term of any series of
Subordinated Debt to defer the payment of interest on such series for such
number of consecutive interest payment periods as may be specified in the
applicable Prospectus Supplement (each, an "Extension Period"), subject to the
terms, conditions and covenants, if any, specified in such Prospectus
Supplement, provided that such Extension Period may not extend beyond the stated
maturity of such Subordinated Debt. Certain material United States Federal
income tax consequences and special considerations applicable to any such
Subordinated Debt will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, at the
end of such Extension Period, the Company shall pay all interest then accrued
and unpaid together with interest thereon compounded semiannually at the rate
specified for the Subordinated Debt of such series to the extent permitted by
applicable law ("Compound Interest"); PROVIDED, that during any such Extension
Period, (i) the Company shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its capital stock (other than (a)
purchases or acquisitions of Common Stock of the Company in connection with the
satisfaction by the Company of its obligations under any employee or agent
benefit plans or the satisfaction by the Company of its obligations pursuant to
any contract or security outstanding on the date of such event requiring the
Company to purchase Common Stock of the Company, (b) as a result of a
reclassification of the Company's capital stock or the exchange or conversion of
one class or series of the Company's capital stock for another class or series
of the Company's capital stock, (c) the purchase of fractional interests in
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) dividends or distributions in Common Stock of the Company (or rights to
acquire capital stock) or repurchases or redemptions of capital stock solely
from the issuance or exchange of capital stock or (e) redemptions or repurchases
of any rights outstanding under a stockholder rights plan), (ii) the Company
shall not make any payment of interest, principal or premium, if any, on or
repay, repurchase or redeem any debt securities issued by the Company that rank
PARI PASSU in right of payment with or junior to the Subordinated Debt of such
series, and (iii) the Company shall not make any guarantee payments with respect
to the foregoing. Prior to the termination of any such Extension Period, the
Company may further defer payments of interest by extending the interest payment
period; PROVIDED, HOWEVER, that, such Extension Period may not extend beyond the
maturity of the Subordinated Debt of such series. Upon the termination of any
Extension Period and the payment of all amounts then due, the Company may
commence a new Extension Period, subject to the terms set forth in this section.
No interest during an Extension Period, except at the end thereof, shall be due
and payable, but the Company may prepay at any time all or any portion of the
interest accrued during an Extension Period. The Company shall give the holders
of the Subordinated Debt of such series subject to the Extension Period notice
of its selection of such Extension Period ten Business Days prior to the earlier
of (i) the Interest Payment Date for the series of Subordinated Debt subject to
the Extension Period or (ii) the date upon which the Company is required to give
notice to the applicable self-regulatory organization or to holders of the
Subordinated Debt of such series subject to the Extension Period of the record
or payment date of such related interest payment.
MODIFICATION OF THE INDENTURE
Unless otherwise specified in the applicable Prospectus Supplement, the
Indenture contains provisions permitting the Company and the Indenture Trustee
to enter into one or more supplemental indentures without the consent of the
holders of any of the Debt Securities in order (i) to evidence the succession of
another corporation to the Company and the assumption of the covenants and
obligations of the Company under the Indenture and the Debt Securities by a
successor to the Company; (ii) to add to the covenants of the Company or
surrender any right or power of the Company; (iii) to add
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additional Events of Default with respect to any series of Debt Securities; (iv)
to add or change any provisions to such extent as necessary to permit or
facilitate the issuance of Debt Securities in bearer form; (v) to change or
eliminate any provision affecting only Debt Securities not yet issued; (vi) to
establish the form or terms of Debt Securities; (vii) to evidence and provide
for successor Indenture Trustee; (viii) if allowed without penalty under
applicable laws and regulations, to permit payment in respect of Debt Securities
in bearer form in the United States; (ix) to correct any defect or supplement
any inconsistent provisions or to make any other provisions with respect to
matters or questions arising under the Indenture, provided that such action does
not adversely affect the interests of any holder of Debt Securities of any
series; or (x) to cure any ambiguity or correct any mistake. The Indenture also
permits the Company and the Indenture Trustee thereunder to enter into such
supplemental indentures to modify the subordination provisions contained in the
Indenture except in a manner adverse to any outstanding Debt Securities.
(Section 8.01.)
Unless otherwise specified in the applicable Prospectus Supplement, the
Indenture also contains provisions permitting the Company and the Indenture
Trustee, with the consent of the holders of a majority in aggregate principal
amount of the outstanding Debt Securities of each series affected by such
supplemental indenture (with the Debt Securities of each series voting as a
class), to execute supplemental indentures adding any provisions to or changing
or eliminating any of the provisions of the Indenture or any supplemental
indenture or modifying the rights of the holders of Debt Securities of such
series, except that, without the consent of the holder of each Debt Security so
affected, no such supplemental indenture may: (i) change the time for payment of
principal or premium, if any, or interest or any Additional Amounts on any Debt
Security; (ii) reduce the principal of, or any installment of principal of, or
premium, if any, or interest or any Additional Amounts on any Debt Security, or
change the manner in which the amount of any of the foregoing is determined;
(iii) reduce the amount of premium, if any, payable upon the redemption of any
Debt Security; (iv) reduce the amount of principal payable upon acceleration of
the maturity of any Original Issue Discount or Index Security; (v) change the
currency or currency unit in which any Debt Security or any premium or interest
or any Additional Amounts thereon is payable; (vi) impair the right to institute
suit for the enforcement of any payment on or with respect to any Debt Security;
(vii) reduce the percentage in principal amount of the outstanding Debt
Securities affected thereby the consent of whose holders is required for
modification or amendment of the Indenture or for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults; (viii)
change the obligation of the Company to maintain an office or agency in the
places and for the purposes specified in the Indenture; (ix) modify the
provisions relating to the subordination of outstanding Debt Securities of any
series in a manner adverse to the holders thereof; or (x) modify the provisions
relating to waiver of certain defaults or any of the foregoing provisions.
(Section 8.02.)
SUBORDINATION UNDER THE INDENTURE
The Indenture provides that any Subordinated Debt issued thereunder are
subordinate in right of payment to all Senior Indebtedness to the extent
provided in the Indenture. (Section 12.01.) The Indenture defines the term
"Senior Indebtedness" as: (i) all indebtedness of the Company, whether
outstanding on the date of the Indenture or thereafter created, incurred or
assumed, which is for money borrowed, or evidenced by a note or similar
instrument given in connection with the acquisition of any business, properties
or assets, including securities; (ii) any indebtedness of others of the kinds
described in the preceding clause (i) the payment of which the Company is
responsible or liable as guarantor or otherwise; and (iii) amendments, renewals,
extensions and refundings of any such indebtedness, unless in any instrument or
instruments evidencing or securing such indebtedness or pursuant to which the
same is outstanding. The Senior Indebtedness shall continue to be Senior
Indebtedness and entitled to the benefits of the subordination provisions
irrespective of any amendment, modification or waiver of any term of the Senior
Indebtedness or extension or renewal of the Senior Indebtedness. Senior
Indebtedness does not include (a) any indebtedness of the Company to any of its
subsidiaries, (b) liabilities incurred in the ordinary course of business of the
Company, (c) any indebtedness which by
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its terms is expressly made PARI PASSU in right of payment with or subordinated
to any other Subordinated Debt. (Section 12.02.)
If (i) the Company defaults in the payment of any principal, interest, if
any or premium, if any, or any Additional Amounts on any Senior Indebtedness
when the same becomes due and payable, whether at maturity or at a date fixed
for prepayment or declaration or otherwise or (ii) an event of default occurs
with respect to any Senior Indebtedness permitting the holders thereof to
accelerate the maturity thereof and written notice of such event of default
(requesting that payments on Subordinated Debt cease) is given to the Company by
the holders of Senior Indebtedness, then unless and until such default in
payment or event of default shall have been cured or waived or shall have ceased
to exist, no direct or indirect payment (in cash, property or securities, by
set-off or otherwise) shall be made or agreed to be made on account of the
Subordinated Debt or interest thereon or in respect of any repayment,
redemption, retirement, purchase or other acquisition of Subordinated Debt.
(Section 12.04.)
In the event of (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relating
to the Company or its property, (ii) any proceeding for the liquidation,
dissolution or other winding-up of the Company, voluntary or involuntary,
whether or not involving insolvency or bankruptcy proceedings, (iii) any
assignment by the Company for the benefit of creditors or (iv) any other
marshaling of the assets of the Company, all Senior Indebtedness (including,
without limitations interest accruing after the commencement of any such
proceeding, assignment or marshaling of assets) shall first be paid in full or
provision must be made for such payment in cash or cash equivalents or otherwise
in a manner satisfactory to the holders of Senior Indebtedness before any
payment or distribution, whether in cash, securities or other property, shall be
made by the Company on account of Subordinated Debt. In any such event, any
payment or distribution, whether in cash, securities or other property (other
than securities of the Company or any other corporation provided for by a plan
of reorganization or readjustment, the payment of which is subordinate, at least
to the extent provided in the subordination provisions of the Indenture with
respect to the indebtedness evidenced by Subordinated Debt, to the payment of
all Senior Indebtedness at the time outstanding and to any securities issued in
respect thereof under any such plan of reorganization or readjustment), which
would otherwise (but for the subordination provisions) be payable or deliverable
in respect of Subordinated Debt (including any such payment or distribution
which may be payable or deliverable by reason of the payment of any other
indebtedness of the Company being subordinated to the payment of Subordinated
Debt) shall be paid or delivered directly to the holders of Senior Indebtedness,
or to their representative or trustee, in accordance with the priorities then
existing among such holders until all Senior Indebtedness shall have been paid
in full. (Section 12.03.) No present or future holder of any Senior Indebtedness
shall be prejudiced in the right to enforce subordination of the indebtedness
evidenced by Subordinated Debt by any act or failure to act on the part of the
Company. (Section 12.11.)
Senior Indebtedness shall not be deemed to have been paid in full unless the
holders thereof shall have received cash, securities or other property equal to
the amount of such Senior Indebtedness then outstanding. Upon the payment in
full of all Senior Indebtedness, the holders of Subordinated Debt shall be
subrogated to all the rights of any holders of Senior Indebtedness to receive
any further payments or distributions applicable to the Senior Indebtedness
until all Subordinated Debt shall have been paid in full, and such payments or
distributions received by any holder of Subordinated Debt, by reason of such
subrogation, of cash, securities or other property which otherwise would be paid
or distributed to the holders of Senior Indebtedness, shall, as between the
Company and its creditors other than the holders of Senior Indebtedness, on the
one hand, and the holders of Subordinated Debt, on the other, be deemed to be a
payment by the Company on account of Senior Indebtedness, and not on account of
Subordinated Debt. (Section 12.06.)
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The Indenture provides that the foregoing subordination provisions, insofar
as they relate to any particular issue of Subordinated Debt, may be changed
prior to such issuance. Any such change would be described in the applicable
Prospectus Supplement relating to such Subordinated Debt.
DEFEASANCE AND COVENANT DEFEASANCE
If indicated in the applicable Prospectus Supplement, the Company may elect
either (i) to defease and be discharged from any and all obligations with
respect to the Debt Securities of or within any series (except as otherwise
provided in the relevant Indenture) ("defeasance") or (ii) to be released from
its obligations with respect to certain covenants applicable to the Debt
Securities of or within any series ("covenant defeasance"), upon the deposit
with the Indenture Trustee (or other qualifying trustee), in trust for such
purpose, of money and/or Government Obligations which through the payment of
principal, interest, premium, if any, and any Additional Amounts in accordance
with their terms will provide money in an amount sufficient, without
reinvestment, to pay the principal of, any premium or interest on and any
Additional Amounts on such Debt Securities and any coupons appertaining thereto
on the Maturity or redemption, as the case may be, and any mandatory sinking
fund or analogous payments thereon. As a condition to defeasance or covenant
defeasance, the Company must deliver to the Indenture Trustee an Opinion of
Counsel to the effect that the Holders of such Debt Securities will not
recognize income, gain or loss for Federal income tax purposes as a result of
such defeasance or covenant defeasance and will be subject to Federal income tax
on the same amounts and in the same manner and at the same times as would have
been the case if such defeasance or covenant defeasance had not occurred. Such
Opinion of Counsel, in the case of defeasance under clause (i) above, must refer
to and be based upon a ruling of the Internal Revenue Service or a change in
applicable Federal income tax law occurring after the date of the relevant
Indenture. (Article IV.) If indicated in the applicable Prospectus Supplement,
in addition to obligations of the United States or an agency or instrumentality
thereof, Government Obligations may include obligations of the government or an
agency or instrumentality of the government issuing the currency or currency
unit in which Debt Securities of such series are payable. (Section 3.01.)
In addition, with respect to the Indenture, in order to be discharged no
event or condition shall exist that, pursuant to certain provisions described
under "--Subordination under the Indenture" above, would prevent the Company
from making payments of principal of (and premium, if any) and interest, if any,
and any Additional Amounts on Subordinated Debt at the date of the irrevocable
deposit referred to above. (Section 4.06.)
The Company may exercise its defeasance option with respect to such Debt
Securities notwithstanding its prior exercise of its covenant defeasance option.
If the Company exercises its defeasance option, payment of such Debt Securities
may not be accelerated because of a Default or an Event of Default. (Section
4.04.) If the Company exercises its covenant defeasance option, payment of such
Debt Securities may not be accelerated by reason of a Default or an Event of
Default with respect to the covenants to which such covenant defeasance is
applicable. However, if such acceleration were to occur by reason of another
Event of Default, the realizable value at the acceleration date of the money and
Government Obligations in the defeasance trust could be less than the principal
and interest then due on such Debt Securities, in that the required deposit in
the defeasance trust is based upon scheduled cash flow rather than market value,
which will vary depending upon interest rates and other factors.
THE TRUSTEE
Unless otherwise specified in the applicable Prospectus Supplement, a
trustee of national reputation will be the Indenture Trustee under the
Indenture. The Company may also maintain banking and other commercial
relationships with the Trustee and its affiliates in the ordinary course of
business.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description does not purport to be complete and is qualified
in its entirety by reference to the Company's Certificate of Incorporation and
By-laws.
GENERAL
Under the Certificate of Incorporation, the Company's authorized capital
stock consists of 100,000,000 shares of Common Stock, par value $.01 per share,
and 10,000,000 shares of preferred stock (the "Preferred Stock"), par value $.01
per share. The following description is a summary and is qualified in its
entirety by the provisions of the Company's Certificate and By-laws, which are
included as exhibits to the Company's Registration Statement of which this
Prospectus is a part.
COMMON STOCK
DIVIDEND AND VOTING RIGHTS
Holders of Common Stock are entitled to one vote for each share of Common
Stock held on each matter submitted to a vote of stockholders including the
election of directors, and have no preemptive rights to subscribe for additional
shares from the Company. Voting rights are not cumulative, with the result that
holders of more than 50% of the shares of Common Stock are able to elect all of
the Company's directors. Holders of Common Stock are entitled to receive
dividends out of funds legally available therefor when, as and if declared by
the Board of Directors and to receive pro rata the net assets of the Company
legally available for distribution upon liquidation or dissolution. The
Company's Revolving Credit Facility places certain restrictions on the payment
of dividends.
LIQUIDATION AND REDEMPTION RIGHTS
The Company has granted its lenders security interests in a substantial
portion of the Company's assets under the Revolving Credit Facility. Subject to
the prior rights of creditors and the holders of any preferred stock which may
be outstanding from time to time, the holders of the Common Stock are entitled
to share PRO RATA in the distribution of any remaining assets in the event of
liquidation, dissolution or winding up of the Company. The shares of Common
Stock are subject to redemption at Fair Market Value (as defined in the
Certificate) by the Company if the Board determines that such redemption is
necessary to prevent the loss or secure the restatement of any license or
franchise from any governmental agency, which license or franchise is
conditional upon some or all holders meeting certain prescribed qualifications.
OPTIONS TO PURCHASE COMMON STOCK
The Company has granted options to purchase shares of Common Stock to
certain employees and directors pursuant to employee and non-employee director
stock option plans.
OTHER
All shares of Common Stock offered hereby will, when issued, be fully paid
and non-assessable. The Common Stock is listed on the NASDAQ under the symbol
"MTRS."
The Prospectus Supplement relating to an offering of Common Stock will
describe terms relevant thereto, including the number of shares offered, the
initial offering price, market price and dividend information.
52
<PAGE>
PREFERRED STOCK
The Certificate authorizes the issuance of up to 10,000,000 shares of
Preferred Stock. The Company's Board of Directors is authorized to issue
Preferred Stock in one or more series and to fix the voting rights, liquidation
preferences, dividend rights, repurchase rights, conversion rights, redemption
rights and terms and certain other rights and preferences of the Preferred
Stock. No shares of Preferred Stock are issued or outstanding. There is no
current intention to issue any shares of Preferred Stock; however, the Board of
Directors may issue any or all of such shares without approval of the holders of
the Common Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE AND BY-LAWS
The following discussion is a summary of certain provisions of the
Certificate and By-laws of the Company relating to stockholder voting rights,
advance notice requirements and other provisions which may be deemed to have an
"anti-takeover" effect. These and other provisions affect stockholder rights and
should be given careful attention. The following description of certain of these
provisions is necessarily general and is qualified in its entirety by reference
to the Certificate and By-laws, copies of which are included as exhibits to the
Registration Statement of which this Prospectus is a part.
DIRECTORS' LIABILITY
The Certificate provides that, to the fullest extent permitted by the
Delaware General Corporation Law, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
any breach of the director's fiduciary duty as a director to the corporation or
its stockholders. In addition, the By-laws include certain provisions whereby
directors and officers of the Company generally shall be indemnified against
certain liabilities to the fullest extent permitted or required by the Delaware
General Corporation Law. Insofar as these provisions permit indemnification for
liabilities arising under the Securities Act, the Company has been advised that,
in the opinion of the SEC, such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable.
As a result of these provisions, the Company and its stockholders may be
unable to obtain monetary damages from a director for breach of duty of care.
Although stockholders may continue to seek injunctive or other equitable relief
for an alleged breach of fiduciary duty by a director, stockholders may not have
any effective remedy against the challenged conduct if equitable remedies are
unavailable.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CERTIFICATE AND BY-LAWS
Certain provisions of the Company's Certificate and By-laws could have an
anti-takeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Company's Board of Directors
and in the policies formulated by the Board. They are also designed to
discourage an unsolicited takeover of the Company if the Board determines that
such takeover is not in the best interests of the Company and its stockholders.
These provisions, however, could have the effect of discouraging certain
attempts to acquire the Company or remove incumbent management even if some or a
majority of stockholders deemed such an attempt to be in their best interests.
Pursuant to the Certificate, after the Spin Off (referred to therein as the
"Threshold Time"), the Board of Directors of the Company will be divided into
three classes serving staggered three-year terms. Such Directors may now be
removed from office only for cause and only by the affirmative vote of the
holders of a majority of the then outstanding shares of voting stock together as
a single class. Vacancies on the Board of Directors may be filled only by the
remaining directors and not by the stockholders.
53
<PAGE>
The By-laws establish an advance notice procedure, to take effect after the
Threshold Time, for the nomination, other than by or at the direction of the
Board of Directors, of candidates for election as directors as well as for other
stockholder proposals to be considered at the annual meeting of stockholders. In
general, notice must be received by the Company not less than 50 days nor more
than 75 days prior to the meeting and must contain certain specified information
concerning the persons to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.
Certain transactions with the Company may be subject to Section 203 of the
Delaware General Corporation Law. Section 203 prohibits certain "business
combinations" between an "interested stockholder" and a corporation for three
years after a stockholder becomes interested, unless one of the statute's
exceptions applies. Section 203 (c) (5) defines an interested stockholder as a
person, broadly defined to include a group, who owns at least 15% of a company's
outstanding voting stock. The statute defines business combinations expansively
to include any merger or consolidation of, with, or caused by the interested
stockholder. Section 203 (a) provides three exceptions to the business
combination prohibition. First, there is no constraint if the interested
stockholder obtains prior board approval for the business combination or the
transaction resulting in ownership of 15% of the target's voting stock. Second,
the statute does not apply if, in completing the transaction that crosses the
15% threshold, the stockholder becomes the owner of 85% of the corporation's
voting stock outstanding as of the time the transaction commenced. The statute
provides that any shares owned by directors who are officers, and shares owned
by certain stock option plans are excluded from the calculation; this exception
applies most particularly to a tender offeror who has less than 15% of the
target's stock and receives tenders that satisfy the 85% requirement. Finally,
the statute does not apply if the interested stockholder's business combination
is approved by the board of directors and affirmed by at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder.
LIMITATIONS ON THE COMPANY'S BUSINESS ACTIVITIES
The Company's Certificate provides that, at any time prior to the date
immediately following the third annual meeting of stockholders to be held after
FCI no longer beneficially owns in the aggregate 51% or more of the Company's
voting stock, the Company shall not, directly or indirectly (through a
subsidiary of, or any other person controlled by, the Company) for its own
account or that of another, engage in managing, selling, distributing,
marketing, administering, leasing or otherwise providing products or services
other than the following: (i) general purpose payment cards including without
limitation, credit cards, secured bank credit cards, prepaid cards, debit cards,
co-branded cards, and affinity bank credit cards; (ii) extended service plans
and warranties; (iii) credit card registration; (iv) car buying services,
shopping club memberships and dining club memberships; (v) insurance products;
(vi) mailing lists and other lists of prospects for solicitation; (vii)
advertising on or accompanying monthly billing statements sent to customers of
the Company; (viii) tax preparation services; (ix) investment products and
services including without limitation deposit products, certificates of deposit,
annuities, and mutual funds; (x) investment and other brokerage services; (xi)
consumer loans and leases including without limitation mobile home financing,
automobile lending and leasing, equity loans and mortgages, and student loans,
provided that the Company shall not offer any closed-end installment or
revolving credit loans to Fingerhut Customers for the exclusive purchase of
Fingerhut merchandise; and (xii) mail-grams, travelers checks, money orders, and
travel services.
In addition to the above specified activities, the Certificate permits the
Company to engage in any other business or activity with the consent of FCI or
majority vote of the stockholders. The Certificate of Incorporation further
provides that no person shall be liable for breach of any fiduciary duty, as a
stockholder of the Company or controlling person of a stockholder or otherwise,
by reason of such person authorizing, or not authorizing, the Company to engage
in any business or activity.
54
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell any of the Securities being offered hereby in any one
or more of the following ways from time to time: (i) through agents; (ii) to or
through underwriters; (iii) through dealers; or (iv) directly to purchasers.
The Prospectus Supplement with respect to the Securities will set forth the
terms of the offering of the Securities, including the name or names of any
underwriters, dealers or agents; the purchase price of the Securities and the
proceeds to the Company from such sale; any underwriting discounts and
commissions or agency fees and other items constituting underwriters' or agents'
compensation; any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers and any securities exchange on which
such Securities may be listed. Any initial public offering price, discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
Offers to purchase Securities may be solicited by agents designated by the
Company from time to time. Any such agent involved in the offer or sale of the
Securities in respect of which this Prospectus is delivered will be named, and
any commissions payable by the Company to such agent will be set forth, in the
applicable Prospectus Supplement. Unless otherwise indicated in such Prospectus
Supplement, any such agent will be acting on a reasonable best efforts basis for
the period of its appointment. Any such agent may be deemed to be an
underwriter, as that term is defined in the Securities Act, of the Securities so
offered and sold.
If Securities are sold by means of an underwritten offering, the Company
will execute an underwriting agreement with an underwriter or underwriters at
the time an agreement for such sale is reached, and the names of the specific
managing underwriter or underwriters, as well as any other underwriters, and the
terms of the transaction, including commissions, discounts and any other
compensation of the underwriters and dealers, if any, will be set forth in the
applicable Prospectus Supplement which will be used by the underwriters to make
resales of the Securities in respect of which this Prospectus is delivered to
the public. If underwriters are utilized in the sale of the Securities in
respect of which this Prospectus is delivered, the Securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at fixed public
offering prices or at varying prices determined by the underwriter at the time
of sale. Securities may be offered to the public either through underwriting
syndicates represented by managing underwriters or directly by the managing
underwriters. If any underwriter or underwriters are utilized in the sale of the
Securities, unless otherwise indicated in the Prospectus Supplement, the
underwriting agreement will provide that the obligations of the underwriters are
subject to certain conditions precedent and that the underwriters with respect
to a sale of Securities will be obligated to purchase all such Securities of a
series if any are purchased.
If a dealer is utilized in the sales of the Securities in respect of which
this Prospectus is delivered, the Company will sell such Securities to the
dealer as principal. The dealer may then resell such Securities to the public at
varying prices to be determined by such dealer at the time of resale. Any such
dealer may be deemed to be an underwriter, as such term is defined in the
Securities Act, of the Securities so offered and sold. The name of the dealer
and the terms of the transaction will be set forth in the Prospectus Supplement
relating thereto.
Offers to purchase Securities may be solicited directly by the Company and
the sale thereof may be made by the Company directly to institutional investors
or others, who may be deemed to be underwriters within the meaning of the
Securities Act with respect to any resale thereof. The terms of any such sales
will be described in the Prospectus Supplement relating thereto.
55
<PAGE>
Agents, underwriters and dealers may be entitled under relevant agreements
to indemnification or contribution by the Company against certain liabilities,
including liabilities under the Securities Act.
Agents, underwriters and dealers may be customers of, engage in transactions
with, or perform services for, the Company and its subsidiaries in the ordinary
course of business.
Securities may also be offered and sold, if so indicated in the applicable
Prospectus Supplement, in connection with a remarketing upon their purchase, in
accordance with a redemption or repayment pursuant to their terms, or otherwise,
by one or more firms ("remarketing firms"), acting as principals for their own
accounts or as agents for the Company. Any remarketing firm will be identified
and the terms of its agreement, if any, with its compensation will be described
in the applicable Prospectus Supplement. Remarketing firms may be deemed to be
underwriters, as such term is defined in the Securities Act, in connection with
the Securities remarketed thereby. Remarketing firms may be entitled under
agreements which may be entered into with the Company to indemnification or
contribution by the Company against certain civil liabilities, including
liabilities under the Securities Act, and may be customers of, engage in
transactions with or perform services for the Company and its subsidiaries in
the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize agents, underwriters or dealers to solicit offers by certain types of
institutions to purchase Securities from the Company at the public offering
prices set forth in the applicable Prospectus Supplement pursuant to delayed
delivery contracts ("Contracts") providing for payment and delivery on a
specified date or dates in the future. A commission indicated in the applicable
Prospectus Supplement will be paid to underwriters, dealers and agents
soliciting purchases of Securities pursuant to Contracts accepted by the
Company.
VALIDITY OF SECURITIES
Unless otherwise indicated in the applicable Prospectus Supplement, the
validity of Securities will be passed upon for the Company by Sidley & Austin,
Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996, and for each of the years in the three-year period ended December 31,
1997, have been incorporated by reference herein in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, which report is
also incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
56
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee.................... $221,250
The Nasdaq Stock Market fee............. 61,000
Legal fees and expenses................. 275,000
Accounting fees and expenses............ 100,000
Printing and engraving expenses......... 200,000
Trustee's fees and expenses............. 20,000
Rating agencies' fees................... 125,000
Blue Sky fees........................... 15,000
Miscellaneous........................... 82,750
--------
Total............................... $1,100,000
--------
--------
</TABLE>
Except for the SEC registration fee, all of the foregoing fees and expenses
are estimates and will vary depending upon the Securities issued pursuant to
this Registration Statement.
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer or director of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe his
conduct was illegal. A Delaware corporation may indemnify officers and directors
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation in the
performance of his duty. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
In accordance with the DGCL, the Certificate of the Company contains a
provision to limit the personal liability of the directors of the Company for
violations of their fiduciary duty. This provision eliminates each director's
liability to the Company or its stockholders for monetary damages except to the
extent provided by the DGCL (i) for any breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under section 174 of the DGCL providing for liability of directors for unlawful
payment of dividends or unlawful stock purchases or redemptions, or (iv) for any
transaction from which a director derived an improper benefit. The effect of
this provision is to eliminate the personal liability of directors for monetary
damages for actions involving a breach of their fiduciary duty of care,
including any such actions involving gross negligence.
The Certificate and the By-laws of the Company provide for indemnification
of the Company's officers and directors to the fullest extent permitted by
applicable law. In addition, after the Spin Off the
II-1
<PAGE>
Company intends to purchase insurance policies which will provide coverage for
its officers and directors in certain situations where the Company cannot
directly indemnify such officers or directors.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement--Debt Securities.
1.2** Form of Underwriting Agreement--Equity Securities.
3.1 Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to Exhibit 3.a.
to the Company's Registration Statement on Form S-1 (File
No. 333-10831).
3.2 Amended and Restated By-laws of the Company are incorporated
herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (File No. 333-52627).
4.1** Form of Certificate for shares of Common Stock of the
Company.
4.2 Indenture by and between the Company and , as
Indenture Trustee, is incorporated herein by reference to
Exhibit to the Company's .
4.3** Indenture by and between the Company and , as
Indenture Trustee, pursuant to which the Subordinated Debt
is to be issued.
4.4** Form of Debt Security. The form or forms of such Debt
Securities with respect to each particular offering will be
filed as an exhibit subsequently included or incorporated by
reference herein.
5.1** Opinion of Sidley & Austin.
10.1 Amended and Restated Credit Agreement among the Company and
the Lenders Named Therein is incorporated herein by
reference to Exhibit 10.18(iii) to the Company's Form 10-Q
for the quarter ended June 30, 1998, filed on August 4,
1998.
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
is incorporated herein by reference to Exhibit 12 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
23.1** Consent of Sidley & Austin (included in Exhibit 5.1 hereto).
23.3* Consent of KPMG Peat Marwick LLP with respect to the
financial statements of the Company.
24.1* Powers of Attorney.
25.1** Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of , as Indenture
Trustee under the Indenture.
</TABLE>
- ------------------------
* Filed herewith.
** To be filed either by amendment or as an exhibit to an Exchange Act Report
and incorporated herein by reference.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-2
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) under the Securities Act of 1933 if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(c) The undersigned Registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period with regard to the
warrants, if any, to set forth the results of the subscription offer, the
transactions by the underwriters during the subscription period, the amount of
unsubscribed securities to be purchased by the underwriters, and the terms of
any subsequent reoffering thereof. If any public offering by the underwriters is
to be made on terms differing from those set forth on the cover page of the
prospectus, a post effective amendment will be filed to set forth the terms of
such offering.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
(e) The undersigned Registrant hereby undertakes that (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (2) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) The undersigned Registrant hereby undertakes to file, if necessary, an
application for the purpose of determining the eligibility of the Trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act of 1939 in
accordance with the rules and regulations prescribed by the Securities and
Exchange Commission under Section 305(b)(2) of such Act.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of St. Louis Park, State of Minnesota, on August 7,
1998.
<TABLE>
<S> <C> <C>
METRIS COMPANIES INC.
By: /s/ Ronald N. Zebeck
------------------------------------------
Ronald N. Zebeck
President, Chief Executive Officer and
Director
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/ RONALD N. ZEBECK Dated: August 7,
------------------------- 1998
Ronald N. Zebeck
President, Chief
Executive Officer and
Director
(Principal Executive
Officer)
By: /s/ ROBERT W. Dated: August 7,
OBERRENDER 1998
-------------------------
Robert W. Oberrender
Sr. Vice President, Chief
Financial Officer
(Principal Financial
Officer)
By: /s/ JEAN C. BENSON Dated: August 7,
------------------------- 1998
Jean C. Benson
Vice President of
Finance, Corporate
Controller
(Principal Accounting
Officer)
By: *
-------------------------
Theodore Deikel
Chairman of the Board of
Directors
By: *
-------------------------
Dudley C. Mecum
Director
By: *
-------------------------
Michael P. Sherman
Director
By: *
-------------------------
Frank D. Trestman
Director
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
By: *
-------------------------
Derek V. Smith
Director
<S> <C> <C>
By: *
-------------------------
Lee R. Anderson
Director
By: *
-------------------------
John A. Cleary
Director
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ Z. JILL BARCLIFT Dated: August 7,
------------------------- 1998
Z. Jill Barclift or
Robert W. Oberrender
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
TO REGISTRATION STATEMENT
ON FORM S-3
METRIS COMPANIES INC.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement--Debt Securities.
1.2** Form of Underwriting Agreement--Equity Securities.
3.1 Amended and Restated Certificate of Incorporation of the Company is incorporated herein by reference to
Exhibit 3.a. to the Company's Registration Statement on Form S-1 (File No. 333-10831).
3.2 Amended and Restated By-laws of the Company are incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-8 (File No. 333-52627)
4.1** Form of Certificate for shares of Common Stock.
4.2 Indenture by and between the Company and , as Indenture Trustee, is incorporated herein by
reference to Exhibit to the Company's .
4.3** Indenture by and between the Company and , as Indenture Trustee, pursuant to which the
Subordinated Debt is to be issued.
4.4** Form of Debt Security. The form or forms of such Debt Securities with respect to each particular
offering will be filed as an exhibit subsequently included or incorporated by reference herein.
5.1** Opinion of Sidley & Austin.
10.1 Amended and Restated Credit Agreement among the Company and the Lenders Named Therein is incorporated
herein by reference to Exhibit 10.18(iii) to the Company's Form 10-Q for the quarter ended June 30,
1998, filed on August 4, 1998.
12.1 Computation of Ratio of Earnings to Combined Fixed Charges is incorporated herein by reference to
Exhibit 12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
23.1** Consent of Sidley & Austin (included in Exhibit 5.1 hereto).
23.3* Consent of KPMG Peat Marwick LLP with respect to the financial statements of the Company.
24.1* Powers of Attorney.
25.1** Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as amended, of
, as Indenture Trustee under the Indenture.
</TABLE>
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* Filed herewith.
** To be filed either by amendment or as an exhibit to an Exchange Act Report
and incorporated herein by reference.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Metris Companies Inc.:
We consent to the use of our report dated January 21, 1998 incorporated
herein by reference and to the reference to our firm under the heading "EXPERTS"
in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
August 6, 1998
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Z. Jill Barclift or Robert W. Oberrender,
his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign a Shelf Registration Statement on Form S-3 with
respect to shares of Common Stock and Subordinated Debt Securities of Metris
Companies Inc., and any and all amendments thereto, including post-effective
amendments, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission and any
necessary state securities commissions or other agencies, granting unto said
attorney-in-fact and agent, full power and authority to do and perform to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or the substitutes for
such attorney-in-fact and agent, or the substitutes for such attorney-in-fact
and agent, duly lawfully do or cause to be done by virtue hereof.
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<CAPTION>
SIGNATURE DATE
- ----------------------------------------------------------------- --------------------------------------------------
<S> <C> <C>
By: /s/ THEODORE DEIKEL Dated: August 7, 1998
-------------------------------------------
Theodore Deikel
CHAIRMAN OF THE BOARD OF DIRECTORS
By: /s/ DUDLEY C. MECUM Dated: August 7, 1998
-------------------------------------------
Dudley C. Mecum
DIRECTOR
By: /s/ MICHAEL P. SHERMAN Dated: August 7, 1998
-------------------------------------------
Michael P. Sherman
DIRECTOR
By: /s/ FRANK D. TRESTMAN Dated: August 7, 1998
-------------------------------------------
Frank D. Trestman
DIRECTOR
By: /s/ DEREK V. SMITH Dated: August 7, 1998
-------------------------------------------
Derek V. Smith
DIRECTOR
By: /s/ LEE R. ANDERSON Dated: August 7, 1998
-------------------------------------------
Lee R. Anderson
DIRECTOR
By: /s/ JOHN A. CLEARY Dated: August 7, 1998
-------------------------------------------
John A. Cleary
DIRECTOR
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