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Filed pursuant to Rule 424(b)(3)
File No. 333-43771
File No. 333-43771-01
PROSPECTUS
METRIS COMPANIES INC.
[LOGO]
OFFER TO EXCHANGE ITS 10% SENIOR NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING 10% SENIOR NOTES DUE 2004
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON MARCH 9, 1998, UNLESS EXTENDED.
Metris Companies Inc., a Delaware corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus (as
the same may be amended or supplemented from time to time, the "Prospectus") and
in the accompanying Letter of Transmittal (which together constitute the
"Exchange Offer"), to exchange up to $100,000,000 aggregate principal amount of
its 10% Senior Notes Due 2004 (the "New Notes") which have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (as defined herein) of which this Prospectus constitutes
a part, for a like principal amount of its outstanding 10% Senior Notes Due 2004
(the "Old Notes"), of which $100,000,000 aggregate principal amount is
outstanding.
The terms of the New Notes are identical in all material respects to the terms
of the Old Notes, except that (i) the New Notes have been registered under the
Securities Act and therefore will not be subject to certain restrictions on
transfer applicable to the Old Notes and will not be entitled to registration
rights, and (ii) the New Notes will not provide for any liquidated damages
thereon. In that regard, the Old Notes provide that, if the Exchange Offer is
not consummated by April 5, 1998, the Company will be obligated to pay
liquidated damages to each holder of the Old Notes in an amount equal to $0.192
per week per $1,000 principal amount of the Old Notes held by such holder
commencing on April 6, 1998 until the Exchange Offer is consummated. See
"Description of the Old Notes." The New Notes are being offered for exchange in
order to satisfy certain obligations of the Company and the Guarantor (as
defined herein) under the Exchange and Registration Rights Agreement dated as of
November 7, 1997 (the "Registration Rights Agreement") between the Company,
Metris Direct, Inc., as guarantor (the "Guarantor"), and the Initial Purchasers
(as defined herein) of the Old Notes. The New Notes will be issued under the
same Indenture (as defined herein) as the Old Notes and the New Notes and the
Old Notes will constitute a single series of debt securities under the
Indenture. Pursuant to the Exchange Offer, the Guarantor is also exchanging its
guarantee of the payment obligations under the Old Notes (the "Old Guarantee")
for a like guarantee of the New Notes (the "New Guarantee" and together with the
Old Guarantee, the "Guarantees") which have also been registered under the
Securities Act. In the event that the Exchange Offer is consummated, any Old
Notes which remain outstanding after consummation of the Exchange Offer and the
New Notes issued in the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount of Notes (as defined herein) have taken certain
actions or exercised certain rights under the Indenture. The New Notes and the
Old Notes are sometimes collectively referred to herein as the "Notes." See
"Description of the New Notes" and "Description of the Old Notes."
SEE "RISK FACTORS" COMMENCING ON PAGE 20 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY HOLDERS WHO TENDER OLD NOTES IN THE EXCHANGE OFFER.
Interest on the New Notes is payable semiannually on May 1 and November 1 of
each year (each, an "Interest Payment Date"), commencing on the first such date
following the original issuance date of the New Notes. The New Notes will mature
on November 1, 2004. The New Notes are not entitled to any sinking fund. The New
Notes are redeemable at the option of the Company prior to maturity, in whole or
in part, at any time on or after November 1, 2001, at the redemption prices set
forth herein, plus accrued and unpaid interest thereon, if any, to the
redemption date. See "Description of the New Notes--Optional Redemption." In
addition, upon the occurence of a Change of Control, the Company will be
required to make an offer to repurchase the New Notes at a price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest
thereon, if any, to the date of purchase. See "Description of the New
Notes--Change of Control."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is February 2, 1998.
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FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE COMMON STOCK BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH COMMON STOCK MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS"
WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2) BANKS,
SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT
COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND
PROFIT SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH THE
CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH ON A CONSOLIDATED
BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL STATEMENTS
(WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY OUTSIDE
ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE FOREGOING, (3)
ANY CORPORATION, PARTNERSHIP OR ORGANIZATION (OTHER THAN A CORPORATION,
PARTNERSHIP OR ORGANIZATION FORMED FOR THE SOLE PURPOSE OF PURCHASING THE
SECURITIES OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF
THE SECURITIES OFFERED HEREBY, (4) ANY NATURAL PERSON WHO (A) HAS INCOME OF
$65,000 AND A NET WORTH OF $250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH
CASE, EXCLUDING HOME, HOME FURNISHINGS AND PERSONAL AUTOMOBILES), OR (5) ANY
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED UNDER RULE 144A OF THE SECURITIES
ACT.
The New Notes will be unconditionally guaranteed on a senior basis, jointly
and severally, by the Guarantor, and all future subsidiaries of the Company that
guarantee any of the Company's indebtedness (the "Future Guarantors" and
together with the Guarantor, the "Guarantors"), including the Revolving Credit
Facility (as defined herein). The New Guarantee will be unsecured obligations of
the Guarantors and will rank PARI PASSU with all existing and future
unsubordinated Indebtedness (as hereinafter defined) of such Guarantors. The
Notes will be effectively subordinated in right of payment to all secured
Indebtedness of the Company and the Guarantors to the extent of the value of the
assets securing any such Indebtedness. As of September 30, 1997, on a pro forma
basis after giving effect to the offering of the Old Notes and the application
of the net proceeds therefrom, the aggregate principal amount of the Company's
outstanding unsubordinated Indebtedness would have been approximately $153
million (excluding unused commitments of $247 million under the Revolving Credit
Facility), all of which is secured Indebtedness. See "Description of the New
Notes--Ranking--Subsidiary Guarantees."
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance of the Securities and Exchange
Commission (the "Commission") as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter and there can be no assurance that the staff
of the Division of Corporation Finance of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the staff of the
Division of Corporation Finance, and subject to the two immediately following
sentences, the Company believes that New Notes issued pursuant to this Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than a holder who is a broker-dealer)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any holder of Old Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing New Notes, or any broker-dealer who purchased Old Notes from the
Company to resell pursuant to Rule 144A under the Securities Act ("Rule 144A")
or any other available exemption under the Securities Act, (a) will not be able
to rely on the interpretations of the
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staff of the Division of Corporation Finance of the Commission set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Notes unless such sale is
made pursuant to an exemption from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes acquired for its own account as a
result of market-making or other trading activities and exchanges such Old Notes
for New Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes. See "The Exchange Offer--Resales of New Notes."
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company or
the Guarantor or, if it is such an affiliate, such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable, (ii) any New Notes to be received by it are being acquired in
the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
See "The Exchange Offer--Resales of New Notes."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer during the period referred to below in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
or other trading activities. The Company has agreed that for a period of 90 days
after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Prior to the Exchange Offer, there has been only a limited secondary market
and no public market for the Old Notes. The New Notes will be a new issue of
securities for which there currently is no market. Although the Initial
Purchasers have informed the Company that they each currently intend to make a
market in the New Notes, they are not obligated to do so, and any such market
making may be discontinued at any time without notice. Accordingly, there can be
no assurance as to the development or liquidity of any market for the New Notes.
The Company currently does not intend to apply for listing of the New Notes on
any securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the holders of Old Notes will continue to be
subject to the existing restrictions upon transfer thereof and the Company will
have no further obligation to such holders (other than under certain limited
circumstances) to provide for registration under the Securities Act of the Old
Notes held by them. To the extent that Old Notes are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. See "Risk Factors--Consequences of a Failure to Exchange Old
Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
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RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New York
City time, on March 9, 1998 (such time on such date being hereinafter called the
"Expiration Date"), unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). Tenders of Old Notes may be withdrawn at
any time on or prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain events and
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement. Old Notes may be tendered in whole or in part
in a principal amount of $1,000 and integral multiples thereof, provided that if
any Old Note is tendered for exchange in part, the untendered principal amount
thereof must be $1,000 or any integral multiple of $1,000 in excess thereof. The
Company has agreed to pay all expenses of the Exchange Offer. See "The Exchange
Offer--Fees and Expenses." Each New Note will bear interest from the most recent
date to which interest has been paid or duly provided for on the Old Note
surrendered in exchange for such New Note or, if no such interest has been paid
or duly provided for on such Old Note, from November 7, 1997. Holders of the Old
Notes whose Old Notes are accepted for exchange will not receive accrued
interest on such Old Notes for any period from and after the last Interest
Payment Date to which interest has been paid or duly provided for on such Old
Notes prior to the original issue date of the New Notes or, if no such interest
has been paid or duly provided for, will not receive any accrued interest on
such Old Notes, and will be deemed to have waived the right to receive any
interest on such Old Notes accrued from and after such Interest Payment Date or,
if no such interest has been paid or duly provided for, from and after November
7, 1997. This Prospectus, together with the Letter of Transmittal, is being sent
to all registered holders of Old Notes as of February 5, 1998.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with this
Exchange Offer. See "Use of Proceeds From Sale of Old Notes" and "Plan of
Distribution."
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY
OR ITS SUBSIDIARIES SINCE THE DATE HEREOF.
4
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information...................................................................................... 6
Incorporation of Certain Documents by Reference............................................................ 6
Summary.................................................................................................... 7
Risk Factors............................................................................................... 20
Use of Proceeds from Sale of Old Notes..................................................................... 28
Capitalization............................................................................................. 29
Selected Consolidated Financial Information................................................................ 30
Description of Credit Arrangements......................................................................... 32
The Exchange Offer......................................................................................... 34
Description of the New Notes............................................................................... 43
Description of the Old Notes............................................................................... 67
Certain United States Federal Income Tax Considerations.................................................... 68
Plan of Distribution....................................................................................... 69
Validity of New Notes...................................................................................... 70
Experts.................................................................................................... 70
</TABLE>
5
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (The "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: 7 World Trade Center, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and copies of
such material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such information may also be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov). Such reports, proxy
statements and other information can also be inspected at the offices of the
National Association of Securities Dealers, 1735 K Street N.W., Washington, D.C.
20006, which supervises the Nasdaq National Market on which the Common Stock is
traded.
No separate financial statements of the Guarantor have been included herein.
The Company and the Guarantor do not consider that such financial statements
would be material to the holders of the Notes. However, the Guarantor's
financial information has been included in a note to the Company's consolidated
financial statements. The Company does not expect that the Guarantor will file
reports under the Exchange Act with the Commission.
This Prospectus constitutes a part of the Registration Statement filed by
the Company and the Guarantor with the Commission under the Securities Act. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Notes. Any statements contained herein concerning
the provisions of any document are not necessarily complete, and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated in this Prospectus by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(ii) the Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 (as
amended by Form 10-Q/A filed November 18, 1997); and
(iii) the Company's Current Reports on Form 8-K dated October 15, 1997
and November 7, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Exchange Offer of the Notes shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from and
after the respective dates of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person
(including any beneficial owner) to whom a copy of this Prospectus has been
delivered, on the written or oral request of any such person, a copy of any or
all of the documents referred to above which have been or may be incorporated in
this Prospectus by reference, other than exhibits to such documents for which
the Company may impose a copying charge. Requests for such copies should be
directed to Robert W. Oberrender, Senior Vice President, Chief Financial
Officer, Metris Companies Inc., 600 South Highway 169, Suite 1800, St Louis
Park, Minnesota 55426 (612) 525-5020.
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE
INDICATES, REFERENCES TO THE COMPANY REFER TO METRIS COMPANIES INC. AND ITS
SUBSIDIARIES. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE,"
"FORECAST," "PROJECT" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" CONSTITUTE CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING RISKS AND UNCERTAINTIES,
WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY
Metris Companies Inc. is an information-based direct marketer of consumer
credit products, fee-based products and services and extended service plans to
moderate income consumers. Management believes the moderate income market (i.e.,
households with annual incomes of $15,000 to $35,000) which currently represents
31% of all U.S. households, is underserved by the traditional providers of many
of the Company's products and services. The Company's strategy is to first
establish a customer relationship through the issuance of a general purpose
credit card, and then to expand this customer relationship by cross-selling
additional fee-based products and services. The Company provides credit to this
market by utilizing a risk-based pricing strategy based on proprietary databases
and credit scoring systems. The Company's agreements with Fingerhut Companies,
Inc. ("FCI") or its subsidiaries provide for the use of the proprietary database
(the "Fingerhut Database") of Fingerhut Corporation ("Fingerhut") to market the
Company's products and services, including general purpose credit cards. The
Fingerhut Database contains demographic, behavioral and payment history
information on more than 30 million individuals, the majority of whom are
moderate income consumers. The Fingerhut Database also includes Fingerhut's
"suppress" file (the "Suppress File"), which contains information on
approximately 8 million individuals about whom it has information relating to
fraud and similar indicators of unacceptably high risk. Fingerhut does not
report its credit information to the credit bureaus, which means this
information is not publicly available. The Company's management believes this
access to the Fingerhut Database and the ability to utilize Fingerhut's
proprietary credit scoring models, as well as its own proprietary scoring
models, give it a competitive advantage in targeting and lending to moderate
income consumers.
The Company's consumer credit products are primarily unsecured credit cards,
including the Fingerhut co-branded MasterCard-Registered Trademark- and the
MasterCard and Visa-Registered Trademark- issued by the Company's subsidiary,
Direct Merchants Credit Card Bank, National Association ("Direct Merchants
Bank"). The Company's customers and prospects include both Fingerhut's existing
customers ("Fingerhut Customers") and individuals who are not Fingerhut
Customers but for whom credit bureau information is available ("External
Prospects"). Once a prospective customer is targeted, the Company uses its
proprietary credit scoring models and a risk-based pricing strategy to assign
the annual fee, annual percentage rate and credit line based upon the expected
risk of the individual prospect. As of September 30, 1997, as a result of the
risk profile that is typical of the Company's customers, approximately 80% of
the existing credit card accounts carry an annual fee, annual percentage rates
range from 15.0% to 26.2%, and the average initial credit line is approximately
$1,800 (excluding the accounts of the credit card portfolio of Key Bank USA,
National Association that was acquired by the Company in September 1997).
Management believes this average initial credit line is below the industry
average.
The Company finances the growth in its credit card loans primarily through a
commonly used form of asset backed securitization known as a master trust (the
"Metris Master Trust"). As the Company generates credit card loans, it sells a
portion of the loans to the Metris Master Trust. The trust is authorized to sell
multiple series and classes of certificates of beneficial ownership interests in
the loans
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and other assets that are part of the trust. Both the loans and the certificates
held by third parties are removed from the Company's balance sheet for financial
and regulatory accounting purposes. Following a sale, the Company receives daily
excess cash flow distributions from the trust for the difference between the
interest and fees received from the obligors on the loans and the interest on
the asset-backed certificates paid to investors, net of losses and expenses. The
Company received excess cash flow of $229.0 million and $151.0 million from the
trust for the nine months ended September 30, 1997 and the year ended December
31, 1996, respectively. As of September 30, 1997, the Company had received
cumulative net proceeds of approximately $2.3 billion from the securitization of
credit card loans, of which $14.7 million was deposited in an investor reserve
account for the benefit of the trust's certificateholders. With respect to the
portion of credit card loans the Company does not securitize, such loans remain
on the Company's consolidated balance sheet, and the Company earns a net
interest margin on such loans.
Metris markets its fee-based products and services, including debt waiver
programs, card registration, third party insurance and membership clubs to its
credit card customers, Fingerhut Customers and customers of other third party
partners. As a result of the Company's direct marketing and cross-selling
efforts, approximately 60% of the Company's credit card customers have purchased
one or more fee-based products. As an additional service, the Company develops
highly tailored marketing lists, derived from its proprietary database, for
third parties. Cash flow from sales of fee-based products and services to the
Company's credit card customers is generated through the collection of credit
card loans described above, as the fees for these products and services are
billed to cardholders on their monthly statement. Card registration fees
generated from customers of Household Credit Services, Inc. ("Household") as
described below are received on a monthly basis. Card registration fees
generated from customers of Bank of America, N.A. ("Bank of America") as
described below are received on a daily basis.
The Company also provides extended service plans on certain categories of
products that extend service coverage beyond the manufacturer's warranty.
Although these plans historically have been available only on consumer
electronics, jewelry and furniture sold by Fingerhut, the Company may offer
plans on additional types of products in the future. Through focused marketing,
the Company increased the percentage of Warrantable Products (as defined herein)
sold that are covered by its plans from 15% in 1994 to approximately 27% in the
first nine months of 1997. Management believes that opportunities for growth in
extended service plans exist through further increasing the percentage of
Fingerhut's Warrantable Products sold with an extended service plan, identifying
new Warrantable Product categories for Fingerhut products, and marketing
extended service plans through channels other than Fingerhut. In this regard, in
April 1997, the Company introduced Purchase Shield-Registered Trademark-, an
extended warranty service, whereby Metris Direct, Inc. and Direct Merchants Bank
have offered to Direct Merchants Bank credit card holders (including holders of
the Fingerhut co-branded credit card) extended service plans on approved
purchases made with such credit cards while such customer is an active member of
the Purchase Shield-Registered Trademark- program. In addition, the Company is
engaged in an active sales effort to sign up outside third party credit card
issuers. The Company currently receives cash from sales of extended service
plans on a daily basis from Fingerhut. This payment represents aggregate plan
fees paid by customers, net of returns and Fingerhut commissions. The Company's
principal executive office is located at 600 South Highway 169, Suite 1800, St.
Louis Park, Minnesota 55426, telephone number (612) 525-5020.
BACKGROUND
Metris is a Delaware corporation incorporated on August 20, 1996, and is
currently an 83% owned indirect subsidiary of FCI. The Company became a publicly
held company in October 1996 after completing an initial public offering.
8
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FCI is a database marketing company that sells a broad range of products and
services via catalogs, telemarketing, television and other media. Its principal
subsidiaries are the Company, Fingerhut and Figi's Inc. Fingerhut has been in
the direct mail marketing business for over 45 years and sells a broad range of
general merchandise, products and services to moderate income consumers.
Fingerhut's merchandise includes a broad mix of brand name and private label
products. Fingerhut makes substantially all of its sales using proprietary
closed-end credit, offering extended payment terms on all purchases under
fixed-term, fixed payment installment contracts.
Metris has entered into a number of intercompany agreements (the
"Intercompany Agreements") with FCI or its subsidiaries, including the Tax
Sharing Agreement, the Co-brand Credit Card Agreement, the Data Sharing
Agreement, the Extended Service Plan Agreement, the Database Access Agreement
and the Administrative Services Agreement. In addition to providing the Company
use of the Fingerhut Database for the marketing of financial service products,
the Intercompany Agreements provide for continued access to information about
Fingerhut Customers, for marketing of extended service plans and for a variety
of administrative and other services during the term (generally expiring in
2003) of these agreements. Additionally, FCI has guaranteed the Company's $300
million revolving credit facility (the "Revolving Credit Facility").
FCI has filed an application with the Internal Revenue Service for a
tax-free distribution of all of its ownership in Metris. See "--Recent
Developments--Proposed Spin Off."
BUSINESS STRATEGY
The Company's business strategy is to continue its growth by targeting new
customers through the issuance of credit cards and expanding its customer
relationships through the sale of additional products and services. The
principal components of the Company's strategy are the following:
- INCREASE THE NUMBER OF FINGERHUT CUSTOMERS USING THE COMPANY'S PRODUCTS
AND SERVICES. The Company's strategy is to continue to use its proprietary
risk, response and profitability models to solicit existing and future
Fingerhut Customers for credit cards, and to focus its cross-selling
activities in order to increase the volume of fee-based services and
extended service plans purchased by these customers.
- IDENTIFY AND SOLICIT ADDITIONAL EXTERNAL PROSPECTS FOR CREDIT CARDS. The
Company intends to continue adding moderate income consumers who are
currently not Fingerhut Customers through the use of its own internally
developed risk models. The Company has developed its own proprietary
credit risk modeling system (the "Proprietary Modeling System"). By
incorporating credit information from its own customer history and from
the major credit bureaus into this Proprietary Modeling System and
eliminating those individuals contained in the Suppress File, the Company
expects to continue to generate additional customer relationships from
External Prospects.
- CROSS-SELL MULTIPLE PRODUCTS AND SERVICES TO EACH CUSTOMER. The Company
intends to maximize the profitability of each customer relationship by
cross-selling additional products, thereby leveraging its account
acquisition costs and infrastructure. Currently, the Company focuses its
cross-selling efforts on selling fee-based products to its credit card
customers and credit card customers of third parties.
- USE RISK-BASED PRICING. The specific pricing for a prospective credit card
customer offer is determined by the prospective customer's risk profile
and expected responsiveness prior to solicitation. After the customer has
responded, the customer's credit bureau score is updated before the
customer is approved and assigned a credit line. This practice is known as
"risk-based pricing." Management believes the use of risk-based pricing
allows it to maximize the profitability of customer relationships.
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- ACCESS ADDITIONAL CUSTOMERS BY ESTABLISHING RELATIONSHIPS WITH THIRD
PARTIES. The Company will seek to access additional customers for the
Company's products and services by establishing relationships with third
parties whose customers fit the Company's target market profile. In
January 1997, the Company began to offer card registration services to the
Visa and MasterCard customers of Household, a subsidiary of Household
International, Inc., under a long-term marketing alliance with Household.
In April 1997, the Company introduced a co-branded MasterCard with Bally
Total Fitness which will primarily be marketed to qualified Bally Total
Fitness members. In the third quarter of 1997, the Company began to offer
card registration services to the Visa and MasterCard customers of Bank of
America under a long-term marketing alliance with Bank of America.
- PURSUE ACQUISITIONS OF CREDIT CARD PORTFOLIOS. The Company will continue
to pursue acquisitions of credit card portfolios and/or other businesses
whose customers fit the Company's product and target market profile or
which otherwise strategically fit with the Company's business. In
September 1997, the Company acquired a $317 million credit card portfolio
from Key Bank USA, National Association. In addition, in October 1997, the
Company acquired a $405 million credit card portfolio from Mercantile Bank
National Association.
RECENT DEVELOPMENTS
RECENT OPERATING RESULTS
Net income for the fourth quarter ended December 31, 1997 was $10.1 million,
or $.50 per share, up 89% from $5.3 million, or $.28 per share, for the fourth
quarter ended December 31, 1996. Net income for the year ended December 31, 1997
was $38.1 million, or $1.88 per share, up 90% from $20.0 million or $1.17 per
share, for the same period in 1996.
The managed net interest margin was 12.3% for the fourth quarter of 1997
compared with 13.4% for the third quarter of 1997 and 13.2% for the fourth
quarter of 1996. Financing costs as a percentage of borrowings for the fourth
quarter of 1997 were 6.4%, compared to 6.2% in the third quarter of 1997 and
6.2% for the fourth quarter of 1996. Short term borrowings at December 31, 1997
were $144 million.
The managed credit card loan portfolio grew by 32%, or $863.0 million,
during the fourth quarter of 1997 bringing the portfolio to $3.5 billion at
December 31, 1997. In addition, credit card accounts grew to approximately 2.3
million accounts at December 31, 1997.
The managed loan loss reserve at December 31, 1997 was $244.1 million, or
105% of loans 30 or more days past due. This compares to a managed loan loss
reserve of $190.6 million at September 30, 1997, or 112% of loans 30 days or
more past due. The managed net charge-off rate was 7.6% for the fourth quarter
of 1997, compared to 8.7% for the third quarter of 1997 and 7.2% for the fourth
quarter of 1996. The managed delinquency rate (over 30 days) was 6.6% at
December 31, 1997, compared to 6.4% at September 30, 1997 and 5.5% at December
31, 1996. These changes are primarily related to the favorable impact of the
portfolio acquisitions and the continued seasoning of the credit loan portfolio.
Other operating income for the fourth quarter of 1997 on a managed basis
increased $22.2 million to $66.6 million, primarily due to credit card fees and
interchange and other credit card income, which increased to $46.7 million, up
43% over $32.7 million in the fourth quarter of 1996. In addition, fee-based
product revenues increased 76% to $16.4 million for the fourth quarter of 1997,
up from $9.3 million for the fourth quarter of 1996. Other operating income for
the year ended December 31, 1997 was $212.9 million compared to $126.6 million
for the same period in 1996. These increases were primarily due to the growth in
accounts and outstanding receivables in the managed credit card loan portfolio.
Other operating expenses were $43.4 million in the fourth quarter of 1997,
up from $32.9 million in the fourth quarter of 1996. The managed operating
efficiency ratio improved to 25.8% in the fourth quarter of 1997 from 35.7% in
the fourth quarter of 1996. Other operating expenses were $138.0 million
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for the year ended December 31, 1997, compared to $101.3 million for the same
period in 1996, with the managed operating efficiency ratio improving to 26.6%
from 37.5% in the prior year.
PROPOSED SPIN OFF
On October 9, 1997, FCI announced that its Board of Directors had approved
the filing of an application with the Internal Revenue Service (the "IRS") for a
ruling on a tax-free distribution of FCI's stock of the Company (the "Spin
Off"). FCI filed the ruling request with the IRS on October 23, 1997. The
proposed Spin Off of the Company would be subject to receipt of a favorable
ruling from the IRS, to approval of Fingerhut's Board of Directors and to market
conditions. If approved, the Spin Off would be expected to be completed during
1998. There can be no assurance that the Spin Off will be consummated.
In the event the proposed Spin Off is consummated, the Company believes that
it will be able to pursue expansion of its business and operations without
certain limitations that currently exist as a result of FCI's ownership of the
Company, including limitations on the Company's ability to issue additional
common equity. Following the Spin Off, the Company believes that it will be able
more effectively to develop relationships with retailers other than 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,
following the Spin Off, the Company will seek to amend its Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") to eliminate
the detailed provisions concerning the business activities in which the Company
is permitted to engage, which provisions were originally adopted to address
certain potential conflicts of interest between FCI and the Company. For a
discussion of the Company's relationship with FCI, see "Risk Factors--Potential
Conflicts of Interest; Relationship with FCI."
If the proposed Spin Off is consummated, the Company will be required to
negotiate with its lenders to refinance the Revolving Credit Facility, which is
currently guaranteed by FCI and is terminable by the lenders in the event FCI
owns less than 51% of the Company's common stock. While the Company believes
that it will be able to obtain stand-alone financing, no assurance can be given
that it will be able to do so on terms as favorable as the Revolving Credit
Facility. Any such stand-alone financing is expected to result in higher funding
costs than currently available under the Revolving Credit Facility. See "Risk
Factors--Need to Refinance Revolving Credit Facility."
Each of the Intercompany Agreements, other than the Tax Sharing Agreement,
will remain in effect after the Spin Off is consummated. Although the
Administrative Services Agreement remains in effect in the event of the Spin
Off, it is expected that, following consummation of the Spin Off, the only
continuing administrative services to be provided by FCI to the Company will be
treasury, tax, insurance and information systems, and that such services will
continue to be provided for no longer than 18 months following the Spin Off. The
Company believes that the impact of providing or procuring these administrative
services without the assistance previously provided by FCI will result in higher
costs to the Company but will not be material to the Company's financial
condition or results of operations.
Following the Spin Off, no individual will hold titles of officer or
director at both FCI and the Company, except for Theodore Deikel, who will be
Chairman of the Board, Chief Executive Officer and President of FCI and
non-executive Chairman of the Board of the Company.
Consummation of the Spin Off will not constitute a Change of Control of the
Company as defined in the Indenture. See "Description of the New Notes--Change
of Control."
Until such time as the proposed Spin Off may be consummated, FCI will
continue to effectively control all matters affecting the Company through its
ability to elect all the directors of the Company, including the adoption of
amendments to the Company's Certificate of Incorporation, any determination with
respect to the acquisition or disposition of assets, future issuances of the
Company's common
11
<PAGE>
stock or other securities of the Company, the Company's incurrence of debt, and
any dividend payable on the common stock.
REORGANIZATION OF THE COMPANY
On December 23, 1997, the Company consummated a corporate reorganization,
after giving effect to which the Guarantor became the only direct subsidiary of
the Company and all other subsidiaries of the Company became direct subsidiaries
of the Guarantor.
METRIS DIRECT, INC.
The Guarantor markets and provides extended service plans to customers of an
affiliate. The Guarantor also markets fee based products including debt waiver
products, credit card registration, third party insurance and membership clubs
to credit card customers of an affiliate and other third parties. In addition,
the Guarantor performs certain credit card operations for an affiliate. The
Guarantor's principal executive office is located at 600 South Highway 169,
Suite 1800, St. Louis Park, Minnesota 55426, telephone number (612) 525-5020.
RISK FACTORS
Prospective investors should carefully consider all the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors under "Risk Factors" for risks involved with an investment in the Notes.
12
<PAGE>
THE EXCHANGE OFFER
On November 7, 1997, the Company issued $100,000,000 principal amount of Old
Notes. The Old Notes were sold pursuant to exemptions from, or in transactions
not subject to, the registration requirements of the Securities Act and
applicable state securities laws. Chase Securities, Inc., Bear, Stearns & Co.
Inc. and NationsBanc Montgomery Securities, Inc. (the "Initial Purchasers"), as
a condition to their purchase of the Old Notes, required that the Company and
the Guarantor agree to commence the Exchange Offer following the Offering. The
New Notes will evidence the same class of debt as the Old Notes and will be
issued pursuant to, and be entitled to the benefits of, the Indenture.
<TABLE>
<S> <C>
THE EXCHANGE OFFER................ Up to $100,000,000 aggregate principal amount of New
Notes are being offered in exchange for a like aggregate
principal amount of Old Notes. Old Notes may be tendered
for exchange in whole or in part in a principal amount
of $1,000 and integral multiples thereof, provided that
if any Old Note is tendered for exchange in part, the
untendered principal amount thereof must be $1,000 or
any integral multiple of $1,000 in excess thereof. The
Company is making the Exchange Offer in order to satisfy
its obligations under the Registration Rights Agreement
relating to the Old Notes. For a description of the
procedures for tendering Old Notes, see "The Exchange
Offer-- Procedures for Tendering Old Notes."
EXPIRATION DATE................... 5:00 p.m., New York City time, on March 9, 1998 (such
time on such date being hereinafter called the
"Expiration Date") unless the Exchange Offer is extended
by the Company (in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is extended). See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
CONDITIONS TO THE EXCHANGE OFFER.. The Exchange Offer is subject to certain conditions,
which may be waived by the Company in its sole
discretion. The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes being
tendered. See "The Exchange Offer-- Conditions to the
Exchange Offer."
The Company reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and
from time to time, (i) to delay the acceptance of the
Old Notes for exchange, (ii) to terminate the Exchange
Offer if certain specified conditions have not been
satisfied, (iii) to extend the Expiration Date of the
Exchange Offer and retain all Old Notes tendered
pursuant to the Exchange Offer, subject, however, to the
right of holders of Old Notes to withdraw their tendered
Old Notes, or (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any respect.
See "The Exchange Offer--Expiration Date; Extensions;
Amendments."
WITHDRAWAL RIGHTS................. Tenders of Old Notes may be withdrawn at any time on or
prior to the Expiration Date by delivering a written
notice of such withdrawal to the Exchange Agent in
conformity with certain procedures set forth below under
"The Exchange Offer-- Withdrawal Rights."
</TABLE>
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<TABLE>
<S> <C>
PROCEDURES FOR TENDERING OLD
NOTES........................... Tendering holders of Old Notes must complete and sign a
Letter of Transmittal in accordance with the
instructions contained therein and forward the same by
mail, facsimile or hand delivery, together with any
other required documents, to the Exchange Agent, either
with the Old Notes to be tendered or in compliance with
the specified procedures for guaranteed delivery of Old
Notes. Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect tenders by
book-entry transfer. Holders of Old Notes registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee are urged to contact such
person promptly if they wish to tender Old Notes
pursuant to the Exchange Offer. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Letters of Transmittal and certificates representing Old
Notes should not be sent to the Company. Such documents
should only be sent to the Exchange Agent. Questions
regarding how to tender and requests for information
should be directed to the Exchange Agent. See "The
Exchange Offer--Exchange Agent."
RESALES OF NEW NOTES.............. The Company is making the Exchange Offer in reliance on
the position of the staff of the Division of Corporation
Finance of the Commission as set forth in certain
interpretive letters addressed to third parties in other
transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance
that the staff of the Division of Corporation Finance of
the Commission would make a similar determination with
respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these
interpretations by the staff of the Division of
Corporation Finance, and subject to the two immediately
following sentences, the Company believes that New Notes
issued pursuant to this Exchange Offer in exchange for
Old Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such
holder's business and that such holder is not
participating, and has no arrangement or understanding
with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New
Notes. However, any holder of Old Notes who is an
"affiliate" of the Company or who intends to participate
in the Exchange Offer for the purpose of distributing
the New Notes, or any broker-dealer who purchased the
Old Notes from the Company to resell pursuant to Rule
144A or any other available exemption under the
Securities Act, (a) will not be able to rely on the
interpretations of the staff of the Division of
Corporation Finance of the
</TABLE>
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<TABLE>
<S> <C>
Commission set forth in the above-mentioned interpretive
letters, (b) will not be permitted or entitled to tender
such Old Notes in the Exchange Offer and (c) must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection with
any sale or other transfer of such Old Notes unless such
sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any
broker-dealer holds Old Notes acquired for its own
account as a result of market-making or other trading
activities and exchanges such Old Notes for New Notes,
then such broker-dealer must deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resales of such New Notes. See "The
Exchange Offer-- Resales of New Notes."
Each holder of Old Notes who wishes to exchange Old
Notes for New Notes in the Exchange Offer will be
required to represent that (i) it is not an "affiliate,"
as defined under Rule 405 of the Securities Act, of the
Company or the Guarantor or, if it is such an affiliate,
such holder will comply with the registration and
prospectus delivery requirements of the Securities Act
to the extent applicable, (ii) any New Notes to be
received by it are being acquired in the ordinary course
of its business, (iii) it has no arrangement or
understanding with any person to participate in a
distribution (within the meaning of the Securities Act)
of such New Notes, and (iv) if such holder is not a
broker-dealer, such holder is not engaged in, and does
not intend to engage in, a distribution (within the
meaning of the Securities Act) of such New Notes. See
"The Exchange Offer--Resales of New Notes."
Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with
any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of
market-making or other trading activities. The Company
has agreed that for a period ending 90 days after the
Expiration Date, it will make this Prospectus available
to any broker-dealer for use in connection with such
sale. See "Plan of Distribution."
EXCHANGE AGENT.................... The exchange agent with respect to the Exchange Offer is
The First National Bank of Chicago (the "Exchange
Agent"). The addresses, and telephone and facsimile
numbers of the Exchange Agent are set forth in "The
Exchange Offer-- Exchange Agent" and in the Letter of
Transmittal.
</TABLE>
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USE OF PROCEEDS................... The Company will not receive any cash proceeds from the
issuance of the New Notes offered hereby. See "Use of
Proceeds From Sale of Old Notes."
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS....... Holders of Old Notes should review the information set
forth under "Certain United States Federal Income Tax
Considerations" prior to tendering Old Notes in the
Exchange Offer.
</TABLE>
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and therefore may not be offered, sold or otherwise transferred
except in compliance with the registration requirements of the Securities Act
and any other applicable securities laws, or pursuant to an exemption therefrom
or in a transaction not subject thereto, and in each case in compliance with
certain other conditions and restrictions, including the Company's and the
Trustee's right in certain cases to require the delivery of opinions of counsel,
certifications and other information prior to any such transfer. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exceptions). The Company currently does
not intend to register under the Securities Act any Old Notes which remain
outstanding after consummation of the Exchange Offer (subject to such limited
exceptions, if applicable).
To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. In addition, although the Old Notes have been designated for trading
in the Private Offerings, Resales and Trading through Automated Linkages
("PORTAL") market, to the extent that Old Notes are tendered and accepted in
connection with the Exchange Offer, any trading market for Old Notes which
remain outstanding after the Exchange Offer could be adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will constitute a single series of debt securities under
the Indenture and, accordingly, will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture. See "Description of the New Notes--General."
The Old Notes provide that, if the Exchange Offer is not consummated by
April 5, 1998, the Company will be obligated to pay liquidated damages to each
holder of the Old Notes in an amount equal to $0.192 per week per $1,000
principal amount of the Old Notes held by such holder, commencing April 6, 1998,
until the Exchange Offer is consummated. See "Description of the Old Notes."
Following consummation of the Exchange Offer, the Old Notes will not be entitled
to any liquidated damages thereon. The New Notes will not be entitled to any
such liquidated damages thereon.
THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions relating to the Old Notes.
The New Notes will bear interest from the most recent date to which interest has
been paid on the Old Notes or, if no interest has been paid on the Old Notes,
from November 7, 1997. Accordingly, registered holders of New Notes on the
relevant record date for the first Interest Payment Date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid, from November 7, 1997. Old Notes accepted for exchange will cease
to accrue
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<PAGE>
interest from and after the date of consummation of the Exchange Offer. Holders
whose Old Notes are accepted for exchange will not receive any payment in
respect of interest on such Old Notes otherwise payable on any Interest Payment
Date the record date for which occurs on or after consummation of the Exchange
Offer.
<TABLE>
<S> <C>
SECURITIES OFFERED................ Up to $100,000,000 aggregate principal amount of the
Company's 10% Senior Notes Due 2004 which have been
registered under the Securities Act. The New Notes will
be issued and the Old Notes were issued under an
Indenture dated as of November 7, 1997 (the "Indenture")
between the Company, the Guarantor and The First
National Bank of Chicago, as trustee (the "Trustee").
The New Notes and any Old Notes which remain outstanding
after consummation of the Exchange Offer will constitute
a single series of debt securities under the Indenture
and, accordingly, will vote together as a single class
for purposes of determining whether holders of the
requisite percentage in outstanding principal amount
thereof have taken certain actions or exercised certain
rights under the Indenture. See "Description of the New
Notes--General." The terms of the New Notes are
identical in all material respects to the terms of the
Old Notes, except that (i) the New Notes have been
registered under the Securities Act and therefore are
not subject to certain restrictions on transfer
applicable to the Old Notes and will not be entitled to
registration rights or other rights under the
Registration Rights Agreement, and (ii) the New Notes
will not provide for any liquidated damages thereon. See
"The Exchange Offer-- Purpose of the Exchange Offer,"
"Description of the New Notes" and "Description of the
Old Notes."
MATURITY.......................... November 1, 2004.
INTEREST PAYMENT DATES............ May 1 and November 1 of each year, commencing on the
first such date following the original issuance of the
New Notes.
DENOMINATIONS..................... The New Notes will be issued in minimum denominations of
$1,000 and integral multiples of $1,000 in excess
thereof.
SINKING FUND...................... None.
OPTIONAL REDEMPTION............... The Company may not redeem the Notes prior to November
1, 2001. On or after such date, the Company may redeem
the Notes, in whole or in part, at the redemption prices
set forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. See
"Description of the New Notes-- Optional Redemption."
CHANGE OF CONTROL................. Upon the occurrence of a Change of Control, the Company
will be required to make an offer to repurchase the
Notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if
any, to the date of purchase. See "Description of the
New Notes--Change of Control."
RANKING........................... The Notes will constitute senior unsecured obligations
of the Company and will rank PARI PASSU with all senior
Indebtedness of the Company. The Notes will be
effectively subordinated in
</TABLE>
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<S> <C>
right of payment to all secured Indebtedness of the
Company and the Guarantors to the extent of the value of
the assets securing any such Indebtedness and to any
Indebtedness of subsidiaries of the Company that are not
Guarantors. As of September 30, 1997, on a pro forma
basis after giving effect to the Offering and the
application of the net proceeds therefrom, the aggregate
principal amount of the Company's outstanding
Indebtedness would have been $153 million (excluding
unused commitments of $247 million under the Revolving
Credit Facility). See "Description of the New
Notes--Ranking."
GUARANTEES........................ The Notes will be guaranteed on a senior basis, jointly
and severally, by each of the Guarantors. The Guarantees
will be senior unsecured obligations of the Guarantors.
Metris Direct, Inc., the only Guarantor as of the Issue
Date, has also guaranteed all obligations of the Company
under the Revolving Credit Facility. The Notes will not
be secured by any of the assets of the Company or its
subsidiaries. The Indebtedness incurred under the
Revolving Credit Facility is secured by a pledge of the
capital stock of certain of the Company's subsidiaries
and by a lien against certain accounts receivable and
interests held therein by the Company. See "Description
of the New Notes--Subsidiary Guarantees."
RESTRICTIVE COVENANTS............. The indenture under which the Notes will be issued (the
"Indenture") will limit, to the extent described herein,
(i) the incurrence of additional Indebtedness by the
Company and its Restricted Subsidiaries (as defined),
(ii) the payment of dividends on, and redemption of,
capital stock of the Company and its Restricted
Subsidiaries, (iii) investments, (iv) sales of assets,
(v) transactions with affiliates, (vi) consolidations,
mergers and transfers of all or substantially all of the
Company's assets and (vii) the creation of certain
liens. The Indenture will also prohibit certain
restrictions on distributions from Restricted
Subsidiaries. However, all of these limitations and
prohibitions are subject to a number of important
qualifications and exceptions. See "Description of the
New Notes--Certain Covenants."
ABSENCE OF MARKET FOR THE NEW
NOTES........................... The New Notes will be a new issue of securities for
which there currently is no market. Although the Initial
Purchasers have informed the Company that they each
currently intend to make a market in the New Notes, they
are not obligated to do so, and any such market making
may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the New
Notes. The Company currently does not intend to apply
for listing of the New Notes on any securities exchange
or for quotation through the National Association of
Securities Dealers Automated Quotation System.
</TABLE>
FOR FURTHER INFORMATION REGARDING THE NEW NOTES, SEE "DESCRIPTION OF THE NEW
NOTES."
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary consolidated financial data for the
Company. Income before income taxes, net income, extended service plan revenues,
fee-based product revenues, total debt and stockholders' equity presented below
as of December 31, 1995 and 1996 and for each of the years in the three-year
period ended December 31, 1996, have been derived from the audited financial
statements and the notes thereto. Such data as of December 31, 1994, have been
derived from the audited financial statements of the Company not included
herein. All other summary consolidated financial information presented below are
unaudited, and reflect, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of such data. The results for the nine months ended September 30, 1997, are not
necessarily indicative of the results to be expected for the entire year. The
summary consolidated financial information should be read in conjunction with
"Description of Credit Arrangements," the Company's Consolidated Financial
Statements (including related notes thereto) included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 and the
quarterly report on Form 10-Q for the quarter ended September 30, 1997
incorporated by reference herein and the Company's Consolidated Financial
Statements (including related notes thereto) included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
----------------------------------- ------------
1994 1995 1996 1996
--------- ---------- ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (MANAGED)(1):
Net interest income........................................................... $ 487 $ 26,354 $ 143,391 $ 95,940
Provision for loan losses..................................................... 26,234 136,305 85,814
Other operating income........................................................ 14,238 52,969 126,647 82,168
Other operating expenses...................................................... 11,222 45,640 101,287 68,398
Income before income taxes.................................................... 3,503 7,449 32,546 23,896
Net income.................................................................... 2,198 4,581 20,016 14,696
CREDIT CARD DATA (MANAGED)(1):
Total accounts................................................................ 703 1,418 1,117
Period-end loans.............................................................. $ 543,619 $ 1,615,940 $ 1,276,687
Period-end assets............................................................. $ 9,856 622,983 1,687,227 1,330,819
Average loans................................................................. 183,274 1,018,856 890,067
Average interest earning assets............................................... 6,615 193,086 1,040,924 909,414
Average assets................................................................ 7,076 214,363 1,078,346 946,425
CREDIT QUALITY DATA (MANAGED)(1):
Net charge-off ratio(2)....................................................... 2.2% 6.2% 5.6%
Loan loss reserve............................................................. $ 22,219 $ 95,669 $ 70,635
Loan loss reserve ratio(3).................................................... 4.1% 5.9% 5.5%
Delinquency ratio(4).......................................................... 4.0% 5.5% 5.2%
Ratio of loan loss reserves to delinquent receivables(5)...................... 103% 107% 107%
PROFITABILITY RATIOS (MANAGED)(1):
Net interest margin(6)........................................................ 7.4% 13.7% 13.8% 14.1%
Return on average assets...................................................... 31.1% 2.1% 1.9% 2.1%
Return on average equity...................................................... 41.0% 15.2% 21.6% 25.0%
Ratio of other operating expenses to average loans............................ 24.9% 9.9% 7.7%
Operating efficiency ratio(7)................................................. 50.8% 28.4% 26.6% 26.7%
EXTENDED SERVICE PLAN DATA:
Net extended service plan revenues(8)......................................... $ 12,244 $ 17,779 $ 20,420 $ 13,789
Warrantable product unit penetration rates(9)................................. 15.3% 20.4% 24.4% 24.3%
FEE-BASED PRODUCTS AND SERVICES DATA:
Fee-based product revenues.................................................... $ 1,994 $ 6,662 $ 29,853 $ 20,549
CAPITALIZATION:
Total debt.................................................................... $ 63,482 $ 54,163 $ 53,385
Stockholders' equity.......................................................... $ 6,737 71,318 138,718 86,014
Ratio of stockholders' equity to managed assets............................... 68.4% 11.4% 8.2% 6.5%
Ratio of stockholders' equity plus reserves to managed assets................. 68.4% 15.0% 13.9% 11.8%
<CAPTION>
1997
------------
<S> <C>
INCOME STATEMENT DATA (MANAGED)(1):
Net interest income........................................................... $ 204,838
Provision for loan losses..................................................... 210,919
Other operating income........................................................ 146,233
Other operating expenses...................................................... 94,633
Income before income taxes.................................................... 45,519
Net income.................................................................... 27,994
CREDIT CARD DATA (MANAGED)(1):
Total accounts................................................................ 1,802
Period-end loans.............................................................. $ 2,683,877
Period-end assets............................................................. 2,742,923
Average loans................................................................. 1,979,957
Average interest earning assets............................................... 2,025,808
Average assets................................................................ 2,034,598
CREDIT QUALITY DATA (MANAGED)(1):
Net charge-off ratio(2)....................................................... 8.7%
Loan loss reserve............................................................. $ 190,626
Loan loss reserve ratio(3).................................................... 7.1%
Delinquency ratio(4).......................................................... 6.4%
Ratio of loan loss reserves to delinquent receivables(5)...................... 112%
PROFITABILITY RATIOS (MANAGED)(1):
Net interest margin(6)........................................................ 13.5%
Return on average assets...................................................... 1.8%
Return on average equity...................................................... 24.5%
Ratio of other operating expenses to average loans............................ 4.8%
Operating efficiency ratio(7)................................................. 20.6%
EXTENDED SERVICE PLAN DATA:
Net extended service plan revenues(8)......................................... $ 3,249
Warrantable product unit penetration rates(9)................................. 26.8%
FEE-BASED PRODUCTS AND SERVICES DATA:
Fee-based product revenues.................................................... $ 39,082
CAPITALIZATION:
Total debt.................................................................... $ 153,000
Stockholders' equity.......................................................... 166,166
Ratio of stockholders' equity to managed assets............................... 6.1%
Ratio of stockholders' equity plus reserves to managed assets................. 13.0%
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
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(1) The Company reports its financial performance on an owned loan portfolio
basis in accordance with generally accepted accounting principles. However,
the Company manages its business and 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. The Company believes
the presentation of its Summary Consolidated Financial Information on a
managed basis is a more meaningful presentation of its financial
performance.
(2) The net charge-off ratio represents actual principal amounts charged off,
less recoveries, as a percentage of average loans, annualized for the nine
month periods.
(3) The loan loss reserve ratio represents loan loss reserves at period-end as a
percentage of period-end loans.
(4) The delinquency ratio represents credit card loans that were at least 30
days contractually past due at period-end as a percentage of period-end
loans.
(5) The ratio of loan loss reserves to delinquent receivables represents loan
loss reserves at period-end as a percentage of credit card loans that were
at least 30 days contractually past due at period-end.
(6) The net interest margin represents net interest income divided by average
interest earning assets and includes the Company's actual cost of funds plus
all costs associated with asset securitizations, including the interest
expense paid to the certificateholders and amortization of the discount and
fees, annualized for the nine month periods.
(7) The operating efficiency ratio represents total operating expenses less
credit card account and other product solicitation and marketing expenses as
a percentage of net interest income and other operating income.
(8) Net extended service plan revenues include revenues from sales of extended
service plans, net of a provision for service plan returns. The Company
began performing administrative services and retained the claims risk for
all extended service plans sold on or after January 1, 1997. As a result,
extended service plan revenues are deferred and recognized over the life of
the related extended service plan contracts. Prior to January 1, 1997, the
Company contracted with a third-party underwriter and claims administrator
to service and absorb the risk of loss for most claims and the revenues
related to these contract sales were recognized immediately.
(9) Warrantable product unit penetration rates reflect the percentage of
extended service plans sold to all Warrantable Products sold. Percentage for
all years presented reflect the inclusion of jewelry and furniture products
as Warrantable Products even though extended service plans for such products
were not introduced until the middle of 1995.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE DECIDING WHETHER TO ACCEPT THE EXCHANGE OFFER.
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF NOTES
The Company is a holding company, the principal assets of which consist of
equity interests in its subsidiaries. The Notes are a direct unsecured
obligation of the Company, which derives substantially all of its revenues from
the operations of its subsidiaries. As a result, the Company will be dependent
on the earnings and cash flow of, and dividends and distributions or advances
from, its subsidiaries to provide the funds necessary to meet its debt service
obligations, including the payment of principal of and interest on the Notes.
The payment of dividends from the subsidiaries to the Company and the payment of
any interest on or the repayment of any principal of any loans or advances made
by the Company to any of its subsidiaries may be subject to statutory
restrictions and are contingent upon the earnings of such subsidiaries. In
particular, Direct Merchants Bank is limited in its ability to declare dividends
to the Company. As a result, earnings of Direct Merchants Bank (principally
comprised of fee income from sales of fee-based products and services, servicing
fees and interchange fees) may not be available to the Company.
The Notes will be senior unsecured obligations of the Company and will rank
PARI PASSU in right of payment to all senior Indebtedness of the Company and
will rank senior in right of payment to all subordinated Indebtedness of the
Company. The Notes will be unconditionally guaranteed, jointly and severally, by
each of the Guarantors. The Guarantees will be senior obligations of the
Guarantors and will rank PARI PASSU in right of payment to all senior
Indebtedness of the Guarantors and will rank senior in right of payment to all
senior Indebtedness of the Guarantors. However, the Notes will be effectively
subordinated to secured Indebtedness of the Company and the Guarantors to the
extent of the value of the assets securing such Indebtedness and to any
Indebtedness of subsidiaries of the Company that are not Guarantors. In the
event of a default on such secured Indebtedness, or a bankruptcy, liquidation or
reorganization of the Company and its subsidiaries, such assets will be
available to satisfy obligations with respect to the secured Indebtedness before
any payment therefrom will be made on the Notes. As of September 30 1997, on a
pro forma basis after giving effect to the offering of the Old Notes and the
application of the net proceeds therefrom, the aggregate principal amount of the
Company's outstanding Indebtedness would have been approximately $153 million
(excluding unused commitments of $247 million under the Revolving Credit
Facility). Metris Direct, Inc., the only Guarantor as of the Issue Date, is also
a guarantor of the Revolving Credit Facility. The Notes will not be secured by
any of the assets of the Company or its subsidiaries. The Indebtedness incurred
under the Revolving Credit Facility is secured by a pledge of the capital stock
of all the Company's subsidiaries except Direct Merchants Bank and by a lien
against certain accounts receivable and interests held therein by the Company.
DEPENDENCE ON FCI AND FINGERHUT
As of September 30, 1997, Fingerhut Customers represented approximately 43%
of the Company's credit card accounts and approximately 44% of the Company's
managed loans. In addition, Fingerhut Customers currently are substantially all
of the Company's customers for extended service plans. Moreover, until the
Company further develops its own database of information based upon its
experience as an independent, stand-alone entity, its success in the credit card
business will remain largely dependent upon its rights to use information in the
Fingerhut Database, particularly with respect to the experience of Fingerhut
with its customers. Similarly, until the Company develops extended service plan
marketing relationships with other companies or through other marketing
channels, its success in the extended service plan business will remain largely
dependent upon its right to provide extended service plans to Fingerhut
Customers and the level of Fingerhut's sales of Warrantable Products. Metris has
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<PAGE>
entered into agreements with FCI or its subsidiaries relating to (i) credit
cards issued to Fingerhut Customers, (ii) use of information in the Fingerhut
Database and (iii) marketing of extended service plans to Fingerhut Customers.
These agreements generally expire in 2003, but may expire earlier upon certain
events of default or bankruptcy. In addition, in the event that a person or
persons other than Fingerhut, or FCI, in the case of the Administrative Services
Agreement, acquires 25% or more of the voting stock of the Company, or in the
case of the Data Sharing Agreement, Direct Merchants Bank, Fingerhut or FCI, as
the case may be, has the right to terminate these agreements. The loss of the
ability to use information from the Fingerhut Database or to market to Fingerhut
Customers prior to the expiration of these agreements would have a significant
adverse economic impact on the Company's results of operations and future
prospects. Significant adverse changes which materially affect Fingerhut's
ability to maintain its database or to continue its catalog sales business would
also have an adverse impact on the Company. Although the Company believes that,
to the extent that it is desirable to do so, it will be able to extend the term
of these Intercompany Agreements, there can be no assurance that it will be able
to do so on terms favorable to the Company or at all.
FCI is a guarantor of the Revolving Credit Facility. Breaches of covenants
contained in the guarantee, including various financial covenants of FCI, would
be events of default under the Revolving Credit Facility. Upon the occurrence of
any such event, the Revolving Credit Facility would be terminable at the option
of the lenders. Such events could have a material adverse impact on the
Company's financial condition and results of operations. To the extent that the
FCI guarantee contains certain financial covenants and the cost of maintaining
availability and borrowing under the Revolving Credit Facility is based on FCI's
credit rating, the Company will be dependent on the financial strength and
performance of FCI. As described above, the Company anticipates that it will be
required to refinance the Revolving Credit Facility. See "--Need to Refinance
Revolving Credit Facility" and "Summary--Recent Developments--Proposed Spin
Off."
LACK OF PRIOR OPERATING HISTORY AS STAND-ALONE ENTITY
FCI's financial services business, including Direct Merchants Bank, has been
consolidated within Metris only since September 1996 and therefore has operated
as a separate operating group for a limited time. In addition, the Company's
management team has operated the Company as a stand-alone entity for a limited
time. A number of significant changes occurred in the funding and operations of
the Company in connection with the consummation of the initial public offering
in October 1996. These changes include the establishment of the Revolving Credit
Facility and the Company's own incentive compensation and stock option plans. As
a result, the historical financial information included in this Offering
Memorandum does not necessarily reflect the financial position and results of
operations of the Company in the future or what the financial position and
results of operations of the Company would have been had it been operated as a
stand-alone entity during all periods presented. Because FCI has guaranteed the
Company's indebtedness (other than the Notes), the Company's historical funding
costs have been lower than will be the case in the absence of such a guarantee.
See "--Need to Refinance Revolving Credit Facility."
Metris has entered into the Administrative Services Agreement, under which
subsidiaries of FCI have agreed to provide a variety of administrative services
to the Company on a transitional basis. Following the termination of the
Administrative Services Agreement, the Company will be required to provide or
procure these administrative services without the assistance previously provided
by FCI. The Company believes that the impact of providing or procuring these
administrative services without the assistance previously provided by FCI will
result in higher costs to the Company but will not be material to the Company's
financial condition or results of operations. See "Summary--Recent
Developments-- Proposed Spin Off."
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<PAGE>
LACK OF SEASONING OF CREDIT CARD PORTFOLIO
The average age of a credit card issuer's portfolio of accounts is an
indicator of the stability of delinquency and loss levels of that portfolio; a
portfolio of older accounts generally behaves more predictably than a newly
originated portfolio. Almost 60% of the Company's credit card accounts were
originated within the last 18 months and approximately 16% were originated
within the last six months. As a result, there can be no assurance as to the
levels of delinquencies and losses, which may affect earnings through net
charge-offs, that can be expected over time with respect to the Company's
portfolio. Until the accounts become more seasoned, it is likely that the levels
of such delinquencies and losses will increase as the average age of the
Company's accounts increases. Any material increases in delinquencies and losses
above management's expectations would have a material adverse impact on the
Company's results of operations and financial condition.
ABILITY TO SUSTAIN AND MANAGE GROWTH
In order to meet its strategic objectives, the Company must continue to
achieve growth in its credit card loan portfolio. In September 1997, the Company
acquired a $317 million credit card portfolio consisting of approximately
260,000 accounts from Key Bank USA, National Association, of which approximately
197,000 accounts are active accounts. In addition, in October 1997, the Company
acquired a $405 million credit card portfolio consisting of approximately
460,000 accounts from Mercantile Bank National Association, of which
approximately 240,000 accounts are active accounts. Continued growth in the
Company's credit card loan portfolio depends on (i) the Company's ability to
attract new cardholders, (ii) growth in both existing and new account balances,
(iii) the degree to which the Company loses accounts and account balances to
competing card issuers, (iv) levels of delinquencies and losses, (v) the
availability of funding (including, but not limited to, securitizations) on
favorable terms, (vi) the continued availability of credit card portfolios for
purchase by the Company at prices and with terms acceptable to the Company and
(vii) general economic and other factors beyond the control of the Company. The
Company's growth is also dependent on the level of the Company's marketing
expenditures used to solicit new customers and the number of responses the
Company receives with respect to solicitations for its consumer credit,
fee-based and other financial service products. Any increases in postal rates
could have a negative impact on the level and cost of direct mail marketing
activities. No assurance can be given as to the future growth in the Company's
loan portfolio or its profitability.
Further growth of the Company will require employment and training of new
personnel, expansion of facilities, expansion of management systems and access
to additional capital. If the Company is unable to manage its growth
effectively, the Company's profitability and its ability to achieve its
strategic objectives may be adversely affected.
RISKS RELATED TO TARGET MARKET
The Company targets its consumer credit products to moderate income
consumers. Lenders historically have not solicited this market to the same
extent as more affluent market segment consumers. As a result, in addition to
higher delinquency and loss rates, there is less historical experience with
respect to the credit risk and performance of moderate income consumers. There
can be no assurance that the Company can successfully target and evaluate the
creditworthiness of moderate income consumers so as to minimize the expected
higher delinquencies and losses or that the Company's risk-based pricing system
can offset the negative impacts the expected higher delinquency and loss
experience for this market segment has on overall profitability. In addition,
there can be no assurance that the Company can profitably price its fee based
products and manage claims and service costs.
Primary risks associated with unsecured lending, especially to the Company's
target market of moderate income consumers, are that (i) delinquencies and
credit losses will increase because of future
22
<PAGE>
economic downturns, (ii) an increasing number of customers will default on the
payment of their outstanding balances or seek protection under bankruptcy laws,
resulting in accounts being charged off as uncollectible, (iii) fraud by
cardholders and third parties will increase and (iv) unfavorable changes in
consumers' attitudes toward financing purchases with debt or in cardholder
payment behavior, such as increases in discretionary repayment of account
balances, will result in diminished interest income. At September 30, 1997 and
December 31, 1996, the Company's managed credit card loans 30 days or more
delinquent were 6.4% and 5.5%, respectively, of managed loans compared to 5.2%
and 4.0%, respectively, at September 30, 1996 and December 31, 1995. A portion
of this increase is to be expected as the Company's portfolio continues to
mature. Additionally, general economic factors, such as the rate of inflation,
unemployment levels and interest rates may affect the Company's target market
customers more severely than other market segments.
LIMITED HISTORY OF CREDIT CARD OPERATIONS
The Company began originating and servicing credit card accounts in March
1995, and thus has limited underwriting and servicing experience, and limited
delinquency, default and loss experience with respect to its credit card
accounts. Although the Company has experienced substantial growth in credit card
loans outstanding, revenues and net earnings, there can be no assurances that
these rates of growth will be sustainable or indicative of future results. In
addition, the Company's results of operations, financial condition and liquidity
depend, to a material extent, on its ability to manage its credit card business
and on the performance of the credit card loans outstanding.
INTEREST RATE RISK
The Company's credit card accounts generally have finance charges set at a
variable rate with a spread above a designated prime rate or other designated
index. Although the Company intends to manage its interest rate risk through
asset and liability management, as the interest rate environment fluctuates the
Company may be adversely affected by changes in its cost of funds as well as in
the relationship between the indices used in the Company's securitizations and
other funding and the indices used to determine the finance charges on account
balances.
NEED TO REFINANCE REVOLVING CREDIT FACILITY
The Company currently borrows under the Revolving Credit Facility to fund
on-balance sheet loans and for other general corporate purposes. The Revolving
Credit Facility, which is guaranteed by FCI, expires in September 2001, but may
be terminated earlier in the event that FCI owns less than 51% of the common
stock of the Company. The Company will be required to negotiate with its lenders
to refinance the Revolving Credit Facility. While the Company believes that it
will be able to obtain stand-alone financing, no assurance can be given that it
will be able to do so on terms as favorable as the Revolving Credit Facility.
Any such stand-alone financing is expected to result in higher funding costs
than currently available under the Revolving Credit Facility. See "Description
of Credit Arrangements."
FUNDING AND SECURITIZATION CONSIDERATIONS
The Company depends heavily upon the securitization of its credit card loans
to fund its operations and to date has been able to complete securitization
transactions on terms that it believes are favorable. There can be no assurance,
however, that the securitization market will continue to offer attractive
funding alternatives. In addition, the Company's ability to securitize its
assets depends on the continued availability of credit enhancement on acceptable
terms and the continued favorable legal, regulatory, accounting and tax
environment for securitization transactions. While the Company does not at
present foresee any significant problems in any of these areas, any such adverse
change could force the Company to rely on other potentially more expensive
funding sources. See "Description of Credit Arrangements."
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<PAGE>
Adverse changes in the performance of the Company's securitized assets,
including increased delinquencies and losses, could result in a downgrade or
withdrawal of the ratings on the outstanding certificates under the Company's
securitization transactions or cause early amortization of such certificates.
This could jeopardize the Company's ability to effect other securitization
transactions on acceptable terms, thereby decreasing the Company's liquidity and
forcing the Company to rely on other funding sources to the extent available.
In addition, upon consummation of the Spin Off, it is anticipated that the
advance rate in the Company's securitization transactions will decrease 2.5
percentage points. In such event, the Company will experience reduced cash flow
from the Metris Master Trust until the retained interest reaches the required
level. Based upon the Company's current level of receivables, the total impact
of the advance rate change would be approximately $60 million.
REGULATION
The activities of Metris are subject to extensive regulation under both
federal and state laws and regulations. Such laws and regulations significantly
limit the activities in which the Company and the Company's credit card
subsidiary, Direct Merchants Bank, will be permitted to engage. Numerous
legislative and regulatory proposals are advanced each year which, if adopted,
could adversely affect the Company's profitability or limit the manner in which
the Company conducts its activities. Moreover, the Company's interactions with
FCI pursuant to certain of the Intercompany Agreements are constrained under
those agreements by the requirements of the Fair Credit Reporting Act ("FCRA").
Failure to comply with such requirements could result in termination of such
agreements and/or the Company and/or Fingerhut becoming a consumer reporting
agency under the FCRA. The FCRA imposes a number of complex and burdensome
regulatory requirements and restrictions on a consumer reporting agency,
including restrictions on the circumstances under which a consumer reporting
agency may furnish information to others. Accordingly, if Fingerhut were to
become a consumer reporting agency, the FCRA would restrict the Company's access
to the Fingerhut Database. Similarly, if the Company were to become a consumer
reporting agency its ability to furnish information to third parties would be
restricted by the FCRA. Such restrictions on the Company's ability to access the
Fingerhut Database and/or on the Company's ability to furnish information to
third parties could have a significant adverse economic impact on the Company's
results of operations and future prospects.
Direct Merchants Bank is also subject to regulation by the Federal Reserve
Board, the Federal Deposit Insurance Corporation and the Office of the
Comptroller of the Currency (the "OCC"). Such regulations include limitations on
the nature of the businesses Direct Merchants Bank may conduct.
CONSUMER AND DEBTOR PROTECTION LAWS
Metris is subject to numerous federal and state consumer protection laws
that impose requirements related to offering and extending credit, and laws
affecting other aspects of the business. The United States Congress and the
states may enact laws and amendments to existing laws to further regulate the
credit card industry or to reduce finance charges or other fees or charges
applicable to credit card and other consumer revolving loan accounts. Such laws,
as well as any new laws or rulings which may be adopted, may adversely affect
the Company's ability to collect on account balances or maintain previous levels
of periodic rate finance charges and other fees and charges with respect to the
accounts, as well as the sale of other products and services. Any failure by the
Company to comply with such legal requirements also could adversely affect its
ability to collect the full amount of the account balances. Changes in federal
and state bankruptcy and debtor relief laws could adversely affect the Company
if such changes result in, among other things, additional administrative
expenses and accounts being written off as uncollectible.
24
<PAGE>
COMPETITION
As a marketer of consumer credit products, Metris faces increasing
competition from numerous providers of financial services, many of which have
greater resources than the Company. In particular, the Company's credit card
business competes with national, regional and local bank card issuers as well as
other general purpose credit card issuers, such as American Express, Discover
Card and Diners Club. Over 6,000 issuers are affiliated with MasterCard alone.
Many general purpose credit card issuers are substantially larger and have more
seasoned credit card portfolios than the Company and often compete for customers
by offering lower interest rates and/or fee levels. In general, customers are
attracted to credit card issuers largely on the basis of price, credit limit and
other product features and customer loyalty is often limited.
As the Company attempts to expand its extended service plan business to the
customers of third-party retailers, it will compete with manufacturers,
financial institutions, insurance companies and a number of independent
administrators, many of which have greater operating experience and financial
resources than the Company.
There are numerous competitors in the fee-based products and services
market, including insurance companies, financial services institutions and other
membership-based consumer services providers, many of which are larger, better
capitalized and more experienced than the Company.
POTENTIAL CONFLICTS OF INTEREST; RELATIONSHIP WITH FCI
CORPORATE OPPORTUNITIES
Until such time as the proposed Spin Off may be consummated, the
relationship between the respective businesses of the Company and FCI may give
rise to certain conflicts of interest regarding corporate opportunities. Because
both the Company and FCI sell to the same client base, use direct mail and
provide credit, business opportunities may arise that either could pursue. While
Fingerhut is prohibited under the Co-Brand Credit Card Agreement between
Fingerhut, Direct Merchants Bank and Metris Direct, Inc. from directly or
indirectly issuing a competing, general purpose credit card, Fingerhut National
Bank offers closed-end and revolving credit private label credit cards to its
customers for use in purchasing Fingerhut products and services. As a result,
and as is the case now, FCI and Metris expect that Fingerhut customers who are
also Metris cardholders will generally continue to use Fingerhut credit for
Fingerhut purchases and use their Metris credit cards for other purposes. In
addition, Fingerhut National Bank offers various types of credit-related
insurance products in connection with the private label credit cards it issues.
To address the potential for conflicts between the Company and FCI, the
Certificate of Incorporation currently contains detailed provisions concerning
the business activities in which the Company is permitted to engage until the
day after the third shareholder meeting held after FCI owns less than 50% of the
Company's voting stock. The Company intends to amend its Certificate of
Incorporation to eliminate any such restrictions on its business in the event
the proposed Spin Off is consummated. See "Summary--Recent
Developments--Proposed Spin Off."
The relevant provisions are intended to permit Metris to continue all
activities in which it currently engages, and to expand into certain related
financial service products. These provisions generally permit the Company to
continue providing consumer credit products, extended service plans, and fee-
based products and services, and a variety of other financial service products
and services, provided that the Company shall not offer any closed-end
installment or revolving credit loans to Fingerhut Customers for the exclusive
purchase of Fingerhut merchandise. The Company may engage in any other business
with the consent of FCI or authorized by a majority vote of its shareholders.
Because these limitations may restrict the Company's ability to offer new
products or services, they may limit the Company's ability to compete.
25
<PAGE>
The Certificate of Incorporation provides that no opportunity, transaction,
agreement or other arrangement to which FCI or an entity in which FCI has an
interest or is a party, shall be a corporate opportunity of the Company unless
such opportunity, transaction, agreement or other arrangement shall have been
initially offered to the Company before it is offered to FCI or such other
entity, and either (i) the Company has an enforceable contractual interest in
such opportunity, transaction, agreement or other arrangement or (ii) the
subject matter of such opportunity, transaction, agreement or other arrangement
is a constituent element of an activity in which the Company is then actively
engaged. Even if the foregoing conditions were met, such fact alone would not
conclusively render such opportunity the property of the Company. The
Intercompany Agreements limit FCI's ability to engage in the financial services
business during the terms of such agreements, except through its ownership of
Common Stock of the Company. The foregoing provisions of the Certificate of
Incorporation of the Company were determined by FCI after consultation with
management of the Company but were not the result of arm's-length negotiations.
OTHER POTENTIAL CONFLICTS OF INTEREST
Conflicts of interest may arise in the future between the Company and FCI in
a number of areas relating to their past and ongoing relationships, including
potential acquisitions of businesses or properties, the election of new or
additional directors, dividends, incurrence of indebtedness, tax matters,
financial commitments, registration rights, administration of benefit plans,
service arrangements, issuances and sales of capital stock of the Company and
public policy matters. In addition, there are overlapping directors and
executive officers between the Company and FCI. The Company has not instituted
any formal plan or arrangement to address potential conflicts of interest that
may arise between the Company and FCI. However, the directors intend to exercise
reasonable judgment and take such steps as they deem necessary under all of the
circumstances in resolving any specific conflict of interest that may occur and
will determine what, if any, specific measures may be necessary or appropriate.
There can be no assurance that any conflicts will be resolved in favor of the
Company.
The Company and Fingerhut have entered into a number of agreements for the
purpose of defining the ongoing relationship between them. Pursuant to these
arrangements, Fingerhut will provide benefits to the Company that it might not
provide to a third party, and there is no assurance that the terms and
conditions of any future arrangements between Fingerhut and the Company will be
as favorable to the Company as in effect now. In addition, notwithstanding the
Tax Sharing Agreement between the Company and FCI, under ERISA and Federal
income tax law each member of a consolidated group (for Federal income tax and
ERISA purposes) is also jointly and severally liable for the Federal income tax
liability, funding and termination liabilities, certain benefit plan taxes and
certain other liabilities of each other member of the consolidated group.
Similar rules may apply under state income tax laws.
DEPENDENCE ON KEY PERSONNEL
The Company's management and operations are dependent upon the skills and
experience of a small number of senior management and operating personnel
including Ronald Zebeck, President and Chief Executive Officer; Douglas McCoy,
Senior Vice President, Operations; Robert Oberrender, Senior Vice President,
Chief Financial Officer; Douglas Scaliti, Senior Vice President, Marketing;
William Brennan, Senior Vice President, Sales and Account Management; and David
Reak, Vice President, Credit Risk. The Company does not have employment
agreements with its executive officers and does not maintain key-man life
insurance on any executive officer. The loss of the services of members of
senior management could have an adverse impact on the Company.
EXTENDED SERVICE PLAN UNDERWRITING
Historically, Metris contracted with a third party to perform services
related to most of its extended service plans and to underwrite the risks
related to performance under those extended service plans for
26
<PAGE>
a fee. The Company terminated this agreement for sales on and after January 1,
1997, and currently administers the extended service plans internally. The
Company retains the risks associated with performance under the extended service
plans entered into on or after January 1, 1997, but has not assumed any risks
already transferred to the third party. There can be no assurance that the
Company will not experience higher than anticipated costs in connection with the
internal administration and underwriting of these plans.
LIMITATION ON CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to make an offer to
purchase all the outstanding Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
purchase. If a Change of Control occurs which also constitutes an event of
default under the Revolving Credit Facility, the lenders thereunder would be
entitled to exercise the remedies available to a secured lender under applicable
law and pursuant to the terms of the Revolving Credit Facility. Accordingly, any
secured claims of such lenders with respect to the assets of the Company will be
prior to any claim of the holders of the Notes with respect to such assets.
There can be no assurance that the Company will have funds available to
repurchase the Notes upon the occurrence of a Change of Control. If the Company
fails to repurchase all the tendered Notes, such failure would constitute an
event of default under the Indenture. See "Description of the New Notes--Change
of Control."
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and therefore may not be offered, sold or otherwise transferred
except in compliance with the registration requirements of the Securities Act
and any other applicable securities laws, or pursuant to an exemption therefrom
or in a transaction not subject thereto, and in each case in compliance with
certain other conditions and restrictions, including the Company's and the
Trustee's right in certain cases to require the delivery of opinions of counsel,
certifications and other information prior to any such transfer. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exceptions). The Company currently does
not intend to register under the Securities Act any Old Notes which remain
outstanding after consummation of the Exchange Offer (subject to such limited
exceptions, if applicable).
To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. In addition, although the Old Notes have been designated for trading
in the PORTAL market, to the extent that Old Notes are tendered and accepted in
connection with the Exchange Offer, any trading market for Old Notes which
remain outstanding after the Exchange Offer could be adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will constitute a single series of debt securities under
the Indenture and, accordingly, will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture. See "Description of the New Notes--General."
The Old Notes provide that, if the Exchange Offer is not consummated by
April 5, 1998, the Company will be obligated to pay liquidated damages to each
holder of the Old Notes in an amount equal to $0.192 per week per $1,000
principal amount of the Old Notes held by such holder, commencing April 6, 1998,
until the Exchange Offer is consummated. See "Description of the Old Notes."
Following consummation of the Exchange Offer, the Old Notes will not be entitled
to any liquidated damages thereon. The New Notes will not be entitled to any
such liquidated damages thereon.
27
<PAGE>
ABSENCE OF PUBLIC MARKET
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. The Old Notes have not been
registered under the Securities Act and will be subject to restrictions on
transferability to the extent that they are not exchanged for the New Notes.
Although the New Notes will generally be permitted to be resold or otherwise
transferred by the holders (who are not affiliates of the Company) without
compliance with the registration requirements under the Securities Act, they
will constitute a new issue of securities with no established trading market.
The Company has been advised by the Initial Purchasers that the Initial
Purchasers presently intend to make a market in the New Notes. However, the
Initial Purchasers are not obligated to do so and any market-making activity
with respect to the New Notes may be discontinued at any time without notice. In
addition, such market-making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offer. Accordingly, no assurance can be given that an active public or other
market will develop for the New Notes or the Old Notes or as to the liquidity of
or the trading market for the New Notes or the Old Notes. If an active public
market does not develop, the market price and liquidity of the New Notes may be
adversely affected.
If a public trading market develops for the New Notes, future trading prices
of such securities will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the New Notes may trade at a discount.
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with the provisions of Rule 144 under the Securities Act.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
EXCHANGE OFFER PROCEDURES
Issuance of the New Notes in exchange for Old Notes pursuant to the Exchange
Offer will be made only after a timely receipt by the Company of such Old Notes,
a properly completed and duly executed Letter of Transmittal and all other
required documents. Therefore, holders of the Old Notes desiring to tender such
Old Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Old Notes for exchange.
USE OF PROCEEDS FROM SALE OF OLD NOTES
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes in exchange for
Old Notes as described in this Prospectus, the Company will receive Old Notes in
like principal amount. The Old Notes surrendered in exchange for the New Notes
will be retired and cancelled. Accordingly, the issuance of the New Notes will
not result in any change in the indebtedness of the Company.
The net proceeds to the Company from the sale of the Old Notes was
approximately $97 million. The Company has used all of such net proceeds from
the issuance of the Old Notes to repay short-term indebtedness under the
Revolving Credit Facility which was incurred to fund on-balance sheet loans and
for general corporate purposes. The Revolving Credit Facility bears interest at
variable rates (7.85% at November 30, 1997) and will terminate in September
2001.
28
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and the capitalization of
the Company at September 30, 1997, as adjusted to give effect to the sale by the
Company of $100,000,000 aggregate principal amount of the Old Notes on November
7, 1997. The issuance of the New Notes in exchange for the Old Notes pursuant to
the Exchange Offer will have no effect on the capitalization of the Company. See
"Use of Proceeds From Sale of Old Notes."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------
PRO FORMA
--------------------
(IN THOUSANDS)
<S> <C>
Short-term borrowings under Revolving Credit Facility(1).................................... $ 53,000
----------
----------
Long-term debt:
10% Senior Notes Due 2004................................................................. $ 100,000
Shareholders' equity:
Common Stock--$.01 per share: authorized 100,000,000 shares, issued and outstanding
19,225,000 shares....................................................................... 192
Paid-in capital........................................................................... 107,059
Retained earnings......................................................................... 58,915
----------
Total stockholders' equity.............................................................. 166,166
----------
Total capitalization.................................................................. $ 319,166
----------
----------
</TABLE>
- ------------------------
(1) Represents the amount outstanding under the $300 million Revolving Credit
Facility expiring September 2001. As of November 30, 1997, the Company had
$240 million outstanding under the Revolving Credit Facility and had $60
million of additional availability under the Revolving Credit Facility. See
"Description of Credit Arrangements."
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected consolidated financial data for the
Company. Income before income taxes, net income, earnings per share, extended
service plan revenues, fee-based product revenues, total debt, stockholders'
equity and cash flow data presented below as of December 31, 1995 and 1996 and
for each of the years in the three-year period ended December 31, 1996, have
been derived from the audited financial statements and the notes thereto. Such
data as of December 31, 1993 and 1994 and for the period ended December 31,
1993, have been derived from the audited financial statements of the Company not
included herein. All other selected consolidated financial information presented
below are unaudited, and reflect, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of such data. The results for the nine months ended September 30, 1997, are not
necessarily indicative of the results to be expected for the entire year. The
selected consolidated financial information should be read in conjunction with
"Description of Credit Arrangements," the Company's Consolidated Financial
Statements (including related notes thereto) included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 and the
quarterly report on Form 10-Q for the quarter ended September 30, 1997
incorporated by reference herein and the Company's Consolidated Financial
Statements (including related notes thereto) included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ----------- -------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA (MANAGED)(1):
Net interest income............................................... $ 149 $ 279 $ 487 $ 26,354 $ 143,391
Provision for loan losses......................................... 26,234 136,305
Other operating income............................................ 7,630 10,053 14,238 52,969 126,647
Other operating expense........................................... 4,658 8,333 11,222 45,640 101,287
Income before income taxes........................................ 3,121 1,999 3,503 7,449 32,546
Net income........................................................ 1,995 1,262 2,198 4,581 20,016
Earnings per share--fully diluted................................. $ 0.12 $ 0.08 $ 0.14 $ 0.28 $ 1.16
CREDIT CARD DATA (MANAGED)(1):
Total accounts.................................................... 703 1,418
Period-end loans.................................................. $ 543,619 $ 1,615,940
Period-end assets................................................. $ 5,061 $ 6,615 $ 9,856 622,983 1,687,227
Average loans..................................................... 183,274 1,018,856
Average interest-earning assets................................... 2,497 4,531 6,615 193,086 1,040,924
Average assets.................................................... 2,561 5,191 7,076 214,363 1,078,346
CREDIT QUALITY DATA (MANAGED)(1):
Net charge-off ratio(2)........................................... 2.2% 6.2%
Loan loss reserve................................................. $ 22,219 $ 95,669
Loan loss reserve ratio(3)........................................ 4.1% 5.9%
Delinquency ratio(4).............................................. 4.0% 5.5%
Ratio of loan loss reserves to delinquent
receivables(5).................................................. 103% 107%
PROFITABILITY RATIOS (MANAGED)(1):
Net interest margin(6)............................................ 6.0% 6.2% 7.4% 13.7% 13.8%
Return on average assets.......................................... 77.1% 24.3% 31.1% 2.1% 1.9%
Return on average equity.......................................... 99.5% 32.3% 41.0% 15.2% 21.6%
Ratio of other operating expenses to average loans................ 24.9% 9.9%
Operating efficiency ratio(7)..................................... 31.8% 41.0% 50.8% 28.4% 26.6%
EXTENDED SERVICE PLAN DATA:
Net extended service plan revenues(8)............................. $ 5,906 $ 7,935 $ 12,244 $ 17,779 $ 20,420
Warrantable product unit penetration rates(9)..................... 13.3% 12.9% 15.3% 20.4% 24.4%
FEE-BASED PRODUCTS AND SERVICES DATA:
Fee-based product revenues........................................ $ 1,726 $ 2,118 $ 1,994 $ 6,662 $ 29,853
CAPITALIZATION:
Total debt........................................................ $ 63,482 $ 54,163
Stockholders' equity.............................................. $ 3,277 $ 4,539 $ 6,737 71,318 138,718
Ratio of stockholders' equity to managed assets................... 64.8% 68.6% 68.4% 11.4% 8.2%
Ratio of stockholders' equity plus reserves to managed assets..... 64.8% 68.6% 68.4% 15.0% 13.9%
CASH FLOW DATA:
Net cash provided by (used in) operating activities............... $ 3,286 $ 1,380 $ 3,412 $ (2,006) $ 92,976
Net cash used in investing activities............................. (14) (1,384) (3,454) (87,756) (133,702)
Net cash provided by (used in) financing activities............... (3,202) 124,482 38,065
Net (decrease) increase in cash and cash
equivalents..................................................... 69 (4) (42) 34,720 (2,661)
OTHER DATA:
Ratio of earnings to fixed charges(10)............................ 134.2x 6.9x 50.5x
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
INCOME STATEMENT DATA (MANAGED)(1):
Net interest income............................................... $ 95,940 $ 204,838
Provision for loan losses......................................... 85,814 210,919
Other operating income............................................ 82,168 146,233
Other operating expense........................................... 68,398 94,633
Income before income taxes........................................ 23,896 45,519
Net income........................................................ 14,696 27,994
Earnings per share--fully diluted................................. $ 0.89 $ 1.38
CREDIT CARD DATA (MANAGED)(1):
Total accounts.................................................... 1,117 1,802
Period-end loans.................................................. 1,276,687 2,683,877
Period-end assets................................................. 1,330,819 2,742,923
Average loans..................................................... 890,067 1,979,957
Average interest-earning assets................................... 909,414 2,025,808
Average assets.................................................... 946,425 2,034,598
CREDIT QUALITY DATA (MANAGED)(1):
Net charge-off ratio(2)........................................... 5.6% 8.7%
Loan loss reserve................................................. 70,635 190,626
Loan loss reserve ratio(3)........................................ 5.5% 7.1%
Delinquency ratio(4).............................................. 5.2% 6.4%
Ratio of loan loss reserves to delinquent
receivables(5).................................................. 107% 112%
PROFITABILITY RATIOS (MANAGED)(1):
Net interest margin(6)............................................ 14.1% 13.5%
Return on average assets.......................................... 2.1% 1.8%
Return on average equity.......................................... 25.0% 24.5%
Ratio of other operating expenses to average loans................ 7.7% 4.8%
Operating efficiency ratio(7)..................................... 26.7% 20.6%
EXTENDED SERVICE PLAN DATA:
Net extended service plan revenues(8)............................. 13,789 3,249
Warrantable product unit penetration rates(9)..................... 24.3% 26.8%
FEE-BASED PRODUCTS AND SERVICES DATA:
Fee-based product revenues........................................ 20,549 39,082
CAPITALIZATION:
Total debt........................................................ 53,385 153,000
Stockholders' equity.............................................. 86,014 166,166
Ratio of stockholders' equity to managed assets................... 6.5% 6.1%
Ratio of stockholders' equity plus reserves to managed assets..... 11.8% 13.0%
CASH FLOW DATA:
Net cash provided by (used in) operating activities............... $ 70,400 $ 124,751
Net cash used in investing activities............................. (67,378) (204,819)
Net cash provided by (used in) financing activities............... (10,097) 97,451
Net (decrease) increase in cash and cash
equivalents..................................................... (7,075) 17,383
OTHER DATA:
Ratio of earnings to fixed charges(10)............................ 8.5x 7.6x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
30
<PAGE>
- ------------------------------
(1) The Company reports its financial performance on an owned loan portfolio
basis in accordance with generally accepted accounting principles. However,
the Company manages its business and 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. The Company believes
the presentation of its Selected Consolidated Financial Information on a
managed basis is a more meaningful presentation of its financial
performance.
(2) The net charge-off ratio represents actual principal amounts charged off,
less recoveries, as a percentage of average loans, annualized for the nine
month periods.
(3) The loan loss reserves ratio represents loan loss reserves at period-end as
a percentage of period-end loans.
(4) The delinquency ratio represents credit card loans that were at least 30
days contractually past due at period-end as a percentage of period-end
loans.
(5) The ratio of loan loss reserves to delinquent receivables represents loan
loss reserves at period-end as a percentage of credit card loans that were
at least 30 days contractually past due at period-end.
(6) The net interest margin represents net interest income divided by average
interest earning assets and includes the Company's actual cost of funds plus
all costs associated with asset securitizations, including the interest
expense paid to the certificateholders and amortization of the discount and
fees, annualized for the nine month periods.
(7) The operating efficiency ratio represents total operating expenses less
credit card account and other product solicitation and marketing expenses as
a percentage of net interest income and other operating income.
(8) Net extended service plan revenues include revenues from sales of extended
service plans, net of a provision for service plan returns. The Company
began performing administrative services and retained the claims risk for
all extended service plans sold on or after January 1, 1997. As a result,
extended service plan revenues are deferred and recognized over the life of
the related extended service plan contracts. Prior to January 1, 1997, the
Company contracted with a third-party underwriter and claims administrator
to service and absorb the risk of loss for most claims and the revenues
related to these contract sales were recognized immediately.
(9) Warrantable product unit penetration rates reflect the percentage of
extended service plans sold to all Warrantable Products sold. Percentage for
all years presented reflect the inclusion of jewelry and furniture products
as Warrantable Products even though extended service plans for such products
were not introduced until the middle of 1995.
(10) For the purposes of such computation, (i) earnings consist of earnings from
continuing operations before income taxes, plus fixed charges, and (ii)
fixed charges consist of interest and a portion of rental expense deemed
representative of the interest factor. The ratio of earnings to fixed
charges is calculated on an owned basis.
31
<PAGE>
DESCRIPTION OF CREDIT ARRANGEMENTS
REVOLVING CREDIT FACILITY
The Company borrows under the Revolving Credit Facility to fund on-balance
sheet loans and for other general corporate purposes. The Chase Manhattan Bank
("Chase") acts as the Administrative Agent and Issuing Bank under the Revolving
Credit Facility. The Company may borrow up to $300 million on a revolving basis
under the Revolving Credit Facility, provided that the Company may borrow
amounts in excess of $200 million ("Excess Amounts") under the Revolving Credit
Facility only to the extent that the Company has unutilized commitments
allocable to the Metris Master Trust under a liquidity facility of the Fingerhut
Owner Trust (the "Fingerhut Liquidity Agreement") (or any replacement facility)
or cash in connection with a pre-funded asset-backed term security equal to such
Excess Amounts. At September 30, 1997, the Company had outstanding borrowings of
$153 million under the Revolving Credit Facility. Borrowings under the Revolving
Credit Facility bear interest at a rate per annum equal to (at the Company's
option): (i) an adjusted London inter-bank offered rate ("Adjusted LIBOR") plus
.17% to .50% per annum based on the credit rating of FCI's senior unsecured
long-term debt or (ii) an alternate base rate (equal to the highest of Chase's
prime rate, a certificate of deposit rate plus 1% and the Federal Funds
effective rate plus 1/2 of 1%. The weighted average interest rate on the
Revolving Credit Facility borrowings at September 30, 1997 was 7.9%. The
Revolving Credit Facility is guaranteed by FCI and is secured by the pledge of
the stock of certain subsidiaries of the Company and certain accounts receivable
and interests held therein by the Company. The Revolving Credit Facility
contains certain financial covenants standard for revolving credit facilities of
this type, including minimum net worth, minimum equity to managed assets ratio,
maximum leverage and a limitation on indebtedness. The Revolving Credit Facility
also contains customary events of default. In addition, the FCI guarantee
includes certain covenants including interest coverage, leverage and minimum net
worth for FCI. The Revolving Credit Facility expires in September 2001, but may
be terminated earlier in the event that FCI owns less than 51% of the Common
Stock of Metris. See "Risk Factors--Need to Refinance the Revolving Credit
Facility."
SECURITIZATIONS
A significant source of funding for the Company has been the securitization
of credit card loans. At September 30, 1997, the Company had received cumulative
net proceeds of approximately $2.3 billion from sales of credit card loans, of
which $14.7 million was deposited in an investor reserve account held by the
trustee of the Metris Master Trust for the benefit of the Trust's
certificateholders. Cash generated from these transactions was used to reduce
short-term borrowings and to fund credit card loan growth.
The Metris Master Trust was formed pursuant to a pooling and servicing
agreement between Metris Receivables, Inc., as transferor (the "Transferor"),
Direct Merchants Bank, as servicer, and a bank trustee. The Metris Master Trust
currently has three series of certificates outstanding: Series 1995-1 variable
funding certificates with a maximum principal amount of $1,025.2 million (of
which maximum amount $800 million is allocable to the Metris Master Trust under
the Fingerhut Liquidity Agreement), Series 1996-1 with a principal amount of
$655.5 million and Series 1997-1 with a principal amount of $794.8 million. In
connection with the Spin Off, the Company is considering establishing its own
asset-backed commercial paper program similar to the Fingerhut Owner Trust.
Subject to limitations on the number of new accounts that may be added in
any year without rating agency approval, all loans in substantially all Direct
Merchants Bank credit card accounts are transferred to the Metris Master Trust.
The loans transferred to the Metris Master Trust, except for loans in accounts
from acquired portfolios which may be financed through a third party conduit,
include those outstanding in the selected accounts at the time certificates
representing participation interests in the trust are sold, and those arising
under the accounts from time to time. The Company also transfers to the Metris
Master Trust for the benefit of the certificateholders the cash collected in
payment of loans, interest and fees. The credit quality of the loans is
supported by a credit enhancement, generally in the form of a subordinated
interest
32
<PAGE>
in the trust or a cash collateral account. The Company may be required to
designate additional accounts to the extent they are available and transfer
present and future loans relating to such additional accounts to the trust if
the amount of the loans in the trust declines below a minimum dollar amount. All
additional accounts transferred to the trust must meet the same eligibility
standards imposed on the existing accounts. All proceeds of the loans and the
annual fees, cash advance fees, late fees and similar fees received or to be
received for each account are similarly transferred to the trust. Interchange
fees have not been transferred to the trust in the Company's existing
transactions.
Certificates representing beneficial ownership interests in the assets of
the Metris Master Trust are sold to investors. The Transferor receives the
proceeds of the sale and uses the proceeds to purchase more loans from the
Company. The amount of loans transferred to the trust for the benefit of the
certificateholders always exceeds the initial principal amount of the
certificates sold to investors. Consequently, the Company retains an interest in
the trust in an amount equal to the amount of the retained subordinated
certificates of each series held by the Transferor plus the amount equal to the
loans in excess of the principal balance of the certificates. The Company's
interest in the trust varies as the credit card account holders make principal
payments and incur new charges on the designated accounts.
Direct Merchants Bank acts as servicer and receives servicing fees generally
equal to 2% per annum of the certificates sold to investors and collateralized
by the securitized loans. As servicer, Direct Merchants Bank continues to
provide customer service and all other services typically performed for its
customers. Accordingly, its relationship with its credit card customers is not
affected by the securitization.
During the revolving period relating to a series of certificates, the
certificateholders are entitled to receive periodic interest payments at a fixed
rate, a floating rate or a variable rate. The interest rate on the existing
fixed rate certificate is substantially below the yield on the pool of loans.
The existing floating rate certificates are based on a LIBOR calculation and the
existing variable rate certificates are based on a commercial paper cost of
funds rate. Certificates may contain built-in interest rate caps, although the
Metris Master Trust has issued only uncapped certificates to date. The Company
has purchased interest rate caps for certain certificates. Since all of the
Company's credit card accounts currently have variable rates of interest, the
floating rate issuance also has a rate substantially below the yield on the pool
of loans. Cardholder payments in excess of the amount needed to pay the rate of
interest are used to pay the servicing fee, to absorb the investors' share of
credit losses and to pay other master trust expenses, and, finally, paid to the
Transferor.
After the end of the revolving period relating to a series of certificates,
the amortization period for that series commences. Certificateholders are
entitled to receive principal payments either through monthly payments during an
amortization period or in one lump sum after an accumulation period.
Amortization may begin sooner in certain circumstances, including if the
annualized portfolio yield (consisting, generally, of interest, annual fees and
other credit card fees) net of credit losses for a three-month period drops
below the sum of the certificate rate payable to investors and loan servicing
fees during the period or if certain other events occur.
Prior to the commencement of the amortization period relating to a series of
certificates, all principal payments received on the trust receivables are
reinvested in new loans of the selected accounts for the benefit of the trust.
During an amortization period, the investors' share of principal payments are
paid to the certificateholders until they are paid in full. Acceleration of the
amortization period would accelerate the Company's funding requirement with
respect to the underlying loans. The trust will continue in existence until the
earliest of the date on which all certificateholders of all series are repaid
the principal amounts of their certificates, at which time all remaining loans
and funds held in the trust are reassigned to the Transferor, the occurrence of
an insolvency event (as defined therein), and May 26, 2095.
In addition, the Company finances the acquisition of credit card portfolios
by selling undivided ownership interests in these receivables to third party
conduits.
33
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company and the Guarantor
entered into the Registration Rights Agreement with the Initial Purchasers,
pursuant to which the Company and the Guarantor agreed to file and to cause to
become effective with the Commission a registration statement with respect to
the exchange of the Old Notes for debt securities with terms identical in all
material respects to the terms of the Old Notes. A copy of the Registration
Rights Agreement has been filed as an Exhibit to the Registration Statement of
which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company and the Guarantor under the Registration Rights Agreement. The form
and terms of the New Notes are the same as the form and terms of the Old Notes
except that: (i) the New Notes have been registered under the Securities Act and
therefore will not be subject to certain restrictions on transfer applicable to
the Old Notes and will not be entitled to registration and other rights under
the Registration Rights Agreement, and (ii) the New Notes will not provide for
any liquidated damages thereon. In that regard, the Old Notes provide, among
other things, that, if the Exchange Offer is not consummated by April 5, 1997,
the Company will be obligated to pay liquidated damages to each holder of the
Old Notes in an amount equal to $0.192 per week per $1,000 principal amount of
the Old Notes held by such holder commencing on April 6, 1997, until the
Exchange Offer is consummated. Upon consummation of the Exchange Offer, holders
of Old Notes will not be entitled to any liquidated damages thereon or any
further registration rights under the Registration Rights Agreement, except
under limited circumstances. See "Risk Factors--Consequences of a Failure to
Exchange Old Notes" and "Description of the Old Notes."
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company or
the Guarantor or, if it is such an affiliate, such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent possible, (ii) any New Notes to be received by it are being acquired in
the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage in
a distribution (within the meaning of the Securities Act) of such New Notes.
Each broker-dealer that receives New Notes for its own account where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such Participating Broker-Dealer as a result of
market-making or other trading activities. The Company has agreed that for a
period ending 90 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to the
Exchange Offer means any person in whose name the Old Notes are registered on
the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any person whose Old Notes
are held of record by The Depository Trust Company who desires to deliver such
Old Notes by book-entry transfer at The Depository Trust Company.
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TERMS OF THE EXCHANGE
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $100,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date (as defined below) and not properly withdrawn in accordance with
the procedures described below. The Company will issue, promptly after the
Expiration Date, an aggregate principal amount of up to $100,000,000 of New
Notes in exchange for a like principal amount of outstanding Old Notes tendered
and accepted in connection with the Exchange Offer. Holders may tender their Old
Notes in whole or in part in a principal amount of $1,000 and integral multiples
thereof, provided that if any Old Note is tendered for exchange in part, the
untendered principal amount thereof must be $1,000 or any integral multiple of
$1,000 in excess thereof.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered. As of the date of this Prospectus $100,000,000 aggregate
principal amount of the Old Notes is outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for or are
tendered but not accepted in connection with the Exchange Offer will remain
outstanding and be entitled to the benefits of the Indenture, but will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Risk Factors--Consequences
of a Failure to Exchange Old Notes" and "Description of Old Notes."
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Old Notes in connection with the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes in connection with the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER AFTER
READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR
ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on March 9,
1998 unless the Exchange Offer is extended by the Company (in which case the
term "Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i) to
delay the acceptance of the Old Notes for exchange, (ii) to terminate the
Exchange Offer (whether or not any Old Notes have theretofore been accepted for
exchange) if the Company determines, in its sole and absolute discretion, that
any of the events or conditions referred to under "--Conditions to the Exchange
Offer" have occurred or exist or have not been satisfied, (iii) to extend the
Expiration Date of the Exchange Offer and retain all Old Notes tendered pursuant
to the Exchange Offer, subject, however, to the right of holders of Old Notes to
withdraw their
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tendered Old Notes as described under "--Withdrawal Rights," and (iv) to waive
any condition or otherwise amend the terms of the Exchange Offer in any respect.
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, or if the Company waives a material condition of
the Exchange Offer, the Company will promptly disclose such amendment by means
of a prospectus supplement that will be distributed to the registered holders of
the Old Notes, and the Company will extend the Exchange Offer to the extent
required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Company may choose to make any public announcement and
subject to applicable law, the Company shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn (pursuant to the withdrawal rights
described under "--Withdrawal Rights") promptly after the Expiration Date.
In all cases, delivery of New Notes in exchange for Old Notes tendered and
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at The Depositary Trust Company ("DTC"), (ii) the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and (iii) any other documents required by the Letter of
Transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent of the Company's acceptance of such Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Company for the purpose of receiving tenders of Old Notes,
Letters of Transmittal and related documents, and as agent for tendering holders
for the purpose of receiving Old Notes, Letters of Transmittal and related
documents and transmitting New Notes to validly tendering holders. Such exchange
will be made promptly after the Expiration Date. If for any reason whatsoever,
acceptance for exchange or the exchange of any Old Notes tendered pursuant to
the Exchange Offer is delayed (whether before or after the Company's acceptance
for exchange of Old Notes) or the Company extends the Exchange Offer or is
unable to accept for exchange or exchange Old Notes tendered pursuant to the
Exchange Offer, then, without prejudice to the Company's rights set forth
herein, the Exchange Agent may, nevertheless, on behalf of the Company and
subject to Rule 14e-1(c) under the Exchange Act, retain tendered Old Notes and
such Old Notes may not be withdrawn except to the extent tendering holders are
entitled to withdrawal rights as described under "--Withdrawal Rights."
Pursuant to the Letter of Transmittal, a holder of Old Notes will warrant
and agree in the Letter of Transmittal that it has full power and authority to
tender, exchange, sell, assign and transfer Old Notes, that the Company will
acquire good, marketable and unencumbered title to the tendered Old Notes, free
and clear of all liens, restrictions, charges and encumbrances, and the Old
Notes tendered for exchange are not subject to any adverse claims or proxies.
The holder also will warrant and agree that it will, upon
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request, execute and deliver any additional documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment, and transfer of the Old Notes tendered pursuant to the Exchange
Offer.
PROCEDURES FOR TENDERING OLD NOTES
VALID TENDER. Except as set forth below, in order for Old Notes to be
validly tendered pursuant to the Exchange Offer, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must be received by the
Exchange Agent at its address set forth under "--Exchange Agent," and either (i)
tendered Old Notes must be received by the Exchange Agent, or (ii) such Old
Notes must be tendered pursuant to the procedures for book-entry transfer set
forth below and a book-entry confirmation must be received by the Exchange
Agent, in each case on or prior to the Expiration Date, or (iii) the guaranteed
delivery procedures set forth below must be complied with.
If less than all of the Old Notes are tendered, a tendering holder should
fill in the amount of Old Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
BOOK ENTRY TRANSFER. The Exchange Agent will establish an account with
respect to the Old Notes at DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus. Any financial institution that
is a participant in DTC's book-entry transfer facility system may make a book-
entry delivery of the Old Notes by causing DTC to transfer such Old Notes into
the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfers. However, although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other required documents, must in any
case be delivered to and received by the Exchange Agent at its address set forth
under "--Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT
SIGNATURE GUARANTEES. Certificates for the Old Notes need not be endorsed
and signature guarantees on the Letter of Transmittal are unnecessary unless (a)
a certificate for the Old Notes is registered in a name other than that of the
person surrendering the certificate or (b) such registered holder completes the
box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
in the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Old Notes must be duly endorsed or accompanied by a properly executed bond
power, with the endorsement or signature on the bond power and on the Letter of
Transmittal guaranteed by a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as an "eligible guarantor institution," including (as
such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (an "Eligible Institution"),
unless surrendered on behalf of such Eligible Institution. See Instruction 1 to
the Letter of Transmittal.
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GUARANTEED DELIVERY. If a holder desires to tender Old Notes pursuant to
the Exchange Offer and the certificates for such Old Notes are not immediately
available or time will not permit all required documents to reach the Exchange
Agent on or before the Expiration Date, or the procedures for book-entry
transfer cannot be completed on a timely basis, such Old Notes may nevertheless
be tendered, provided that all of the following guaranteed delivery procedures
are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying the Letter of Transmittal, is
received by the Exchange Agent, as provided below, on or prior to
Expiration Date; and
(iii) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof),
with any required signature guarantees and any other documents required
by the Letter of Transmittal, are received by the Exchange Agent within
five New York Stock Exchange trading days after the date of execution of
such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of Transmittal
(or facsimile thereof), together with any required signature guarantees and any
other documents required by the Letter of Transmittal. Accordingly, the delivery
of New Notes might not be made to all tendering holders at the same time, and
will depend upon when Old Notes, book-entry confirmations with respect to Old
Notes and other required documents are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to any
of the procedures described above will constitute a binding agreement between
the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Old Notes will be determined by the Company, in its sole
discretion, whose determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "--Conditions to the Exchange Offer" or any condition or
irregularity in any tender of Old Notes of any particular holder whether or not
similar conditions or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will be
final and binding. No tender of Old Notes will be deemed to have been validly
made until all irregularities with respect to such tender have been cured or
waived. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent nor any other person shall be under any duty to give any
notification of any irregularities in tenders or incur any liability for failure
to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, such person
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should so indicate when signing, and unless waived by the Company, proper
evidence satisfactory to the Company, in its sole discretion, of such person's
authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
REQUIRED REPRESENTATIONS AND ACKNOWLEDGMENTS. By tendering, each holder
will represent to the Company that, among other things, the New Notes acquired
pursuant to the Exchange Offer are being obtained in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the holder, and that neither the holder nor such other person has any
arrangement or understanding with any person to participate in the distribution
of the New Notes. If any Holder or any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company or is engaged in or
intends to engage in, or has an arrangement or understanding with any person to
participate in, a distribution of such New Notes to be acquired pursuant to the
Exchange Offer, such holder or any such other person (i) may not rely on the
applicable interpretation of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
RESALES OF NEW NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance of the Commission as set forth in
certain interpretive letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can be
no assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance, and subject
to the two immediately following sentences, the Company believes that New Notes
issued pursuant to this Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such holder's business and that
such holder is not participating, and has no arrangement or understanding with
any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. However, any holder of Old Notes who is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company or
who intends to participate in the Exchange Offer for the purpose of distributing
New Notes, or any broker-dealer who purchased Old Notes from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the staff
of the Division of Corporation Finance of the Commission set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Notes unless such sale is
made pursuant to an exemption from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes acquired for its own account as a
result of market-making or other trading activities and exchanges such Old Notes
for New Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company, or
the Guarantor, or if it is an affiliate, such holder will comply with the
registration and
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prospectus delivery requirements of the Securities Act to the extent possible
(ii) any New Notes to be received by it are being acquired in the ordinary
course of its business, (iii) it has no arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such New Notes, and (iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer during the period referred to below in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer for its own account as a
result of market-making or other trading activities. The Company has agreed that
for a period of 90 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
Each broker-dealer who participates in the Exchange Offer and who acquired
the Old Notes for its own account as a result of market-making or other trading
activities (a "Participating Broker-Dealer") may indicate on the Letter of
Transmittal that they wish to receive 10 additional copies of this Prospectus
(and any amendment or supplement thereto). Each Participating Broker-Dealer who
surrenders Old Notes pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal, that, upon receipt of notice
from the Company of the occurrence of any event or the discovery of any fact
which makes any statement contained or incorporated by reference in this
Prospectus untrue in any material respect or which causes this Prospectus to
omit to state a material fact necessary in order to make the statements
contained or incorporated by reference herein, in light of the circumstances
under which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of New Notes pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
Prospectus to such Participating Broker-Dealer or the Company has given notice
that the sale of the New Notes may be resumed, as the case may be. If the
Company gives such notice to suspend the sale of the New Notes, it shall extend
the 90-day period referred to above during which Participating Broker-Dealers
are entitled to use this Prospectus in connection with the resale of New Notes
by the number of days during the period from and including the date of the
giving of such notice to and including the date when Participating
Broker-Dealers shall have received copies of the amended or supplemented
Prospectus necessary to permit resales of the New Notes or to and including the
date on which the Company has given notice that the sale of New Notes may be
resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written, telegraphic, telex or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth under "--Exchange Agent" on
or prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if certificates for such Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Old Notes, if different from that of the person who tendered
such Old Notes. If Old Notes have been delivered or otherwise identified to the
Exchange Agent, then prior to the physical release of such Old Notes, the
tendering holder must submit the serial numbers shown on the particular Old
Notes to be withdrawn and the signature on the notice of
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withdrawal must be guaranteed by an Eligible Institution, except in the case of
Old Notes tendered for the account of an Eligible Institution. If Old Notes have
been tendered pursuant to the procedures for book-entry transfer set forth in
"--Procedures for Tendering Old Notes," the notice of withdrawal must specify
the name and number of the account at DTC to be credited with the withdrawal of
Old Notes, in which case a notice of withdrawal will be effective if delivered
to the Exchange Agent by written, telegraphic, telex or facsimile transmission.
Withdrawals of tenders of Old Notes may not be rescinded. Old Notes properly
withdrawn will not be deemed validly tendered for purposes of the Exchange
Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described above under
"--Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Old Notes which have been tendered
but which are withdrawn will be returned to the holder thereof promptly after
withdrawal.
INTEREST ON THE NEW NOTES
Each New Note will bear interest at the rate of 10% per annum from the most
recent date to which interest has been paid or duly provided for on the Old Note
surrendered in exchange for such New Note or, if no interest has been paid or
duly provided for on such Old Note, from November 7, 1997 (the date of original
issuance of such Old Notes). Interest on the New Notes will be payable
semiannually on May 1 and November 1 of each year, commencing on the first such
date following the original issuance date of the New Notes.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided for
on such Old Notes prior to the original issue date of the New Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Old Notes, and will be deemed to have waived the right to
receive any interest on such Old Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after November 7, 1997.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to accept for exchange,
or to exchange, any Old Notes for any New Notes, and, as described below, may
terminate the Exchange Offer (whether or not any Old Notes have theretofore been
accepted for exchange) or may waive any conditions to or amend the Exchange
Offer, if any of the following conditions have occurred or exists or have not
been satisfied:
(i) any injunction, order or decree shall have been issued by any court or
any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(ii) the Exchange Offer will violate any applicable law or any applicable
interpretation of the staff of the Commission.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company in whole or in part at any time and from time to time in
its sole discretion. The failure by the Company at any time to exercise any of
the foregoing rights shall not be deemed a waiver of any such
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right and such right shall be deemed an ongoing right which may be asserted at
any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order is threatened by the Commission or in effect with
respect to the Registration Statement of which this Prospectus is a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
The Exchange Offer is not conditioned on any minimum principal amount of Old
Notes being tendered for exchange.
EXCHANGE AGENT
The First National Bank of Chicago, has been appointed as Exchange Agent for
the Exchange Offer. Delivery of the Letters of Transmittal and any other
required documents, questions, requests for assistance, and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent as follows:
The First National Bank of Chicago
c/o First Chicago Trust Company of New York
14 Wall Street
8th Floor, Window 2
New York, N.Y. 10005
Attention: Corporate Trust Administrator
Telephone: (212) 240-8801
Facsimile: (212) 240-8938 (Eligible Institutions only)
Delivery to other than the above address or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Old Notes, and in handling or tendering for their
customers.
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
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DESCRIPTION OF THE NEW NOTES
GENERAL
The Old Notes were issued and the New Notes are to be issued under the
Indenture dated as of November 7, 1997 ("the Indenture") between the Company,
the Guarantor and The First National Bank of Chicago, as Trustee ("the
Trustee"). The summaries of certain provisions of the Indenture, the Old Notes
and the New Notes set forth below and under "Description of the Old Notes" do
not purport to be complete and are subject to and are qualified in their
entirety by reference to all of the provisions of the Indenture and the forms of
the certificates evidencing the Old Notes and the New Notes, which documents
have been filed or incorporated by reference as exhibits to the Registration
Statement and are incorporated herein by reference. See "Available Information."
Certain capitalized terms used herein are defined in the Indenture. As used in
this "Description of the New Notes," all references to the "Company" shall mean
Metris Companies Inc., excluding, unless the context shall otherwise require,
its subsidiaries.
The Indenture does not limit the aggregate principal amount of debt
securities which may be issued thereunder.
The Old Notes and the New Notes will constitute a single series of debt
securities under the Indenture. If the Exchange Offer is consummated, holders of
the Old Notes who do not exchange their Old Notes for New Notes will vote
together with the holders of New Notes for all relevant purposes under the
Indenture. In that regard, the Indenture requires that certain actions by the
holders thereunder (including acceleration following an Event of Default) must
be taken, and certain rights must be exercised, by specified minimum percentages
of the aggregate principal amount of the outstanding debt securities of the
relevant series. In determining whether holders of the requisite percentage in
principal amount have given any notice, consent or waiver or taken any other
action permitted under the Indenture, any Old Notes which remain outstanding
after the Exchange Offer will be aggregated with the New Notes and the holders
of such Old Notes and New Notes will vote together as a single series for all
such purposes. Accordingly, all references herein to specified percentages in
aggregate principal amount of the outstanding Notes shall be deemed to mean, at
any time after the Exchange Offer is consummated, such percentage in aggregate
principal amount of the Old Notes and New Notes then outstanding.
The New Notes and the Old Notes are sometimes referred to as, collectively,
the "Notes" and, individually, a "Note."
The New Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. The Company has
appointed the Trustee to serve as registrar and paying agent under the Indenture
at its offices in the Borough of Manhattan, City of New York. No service charge
will be made for any registration of transfer or exchange of the Notes, except
for any tax or other governmental charge that may be imposed in connection
therewith.
RANKING
The Old Notes are and the New Notes will be senior unsecured obligations of
the Company, and will rank PARI PASSU in right of payment with all existing and
future senior Indebtedness of the Company and senior in right of payment to all
existing and future subordinated Indebtedness of the Company. The obligations of
the Guarantors under the Subsidiary Guarantees will be senior unsecured
obligations of the respective Guarantors. The Old Notes are and the New Notes
will be effectively subordinated to all existing and future secured Indebtedness
of the Company and to all obligations of any Subsidiaries of the Company which
are not Guarantors, and each Guarantor's obligations under its Subsidiary
Guarantee will be effectively subordinated to all existing and future secured
Indebtedness of such Guarantor.
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The Company and certain of its Subsidiaries are parties to the Revolving Credit
Facility and all borrowings under the Revolving Credit Facility are secured by a
first priority Lien on certain assets of the Company and certain of its
Subsidiaries. As of September 30, 1997, after giving PRO FORMA effect to the
issuance of the Old Notes and the application of the net proceeds therefrom, the
aggregate principal amount of the Company's outstanding Indebtedness would have
been approximately $153 million (excluding unused commitments of $247 million
under the Revolving Credit Facility). The Indenture permits additional
borrowings by the Company and its Subsidiaries in the future, subject to certain
limitations, including without limitation, under the Revolving Credit Facility
and other Credit Facilities. See "--Certain Covenants--Limitation on
Indebtedness and Risk Factors--Holding Company Structure; Effective
Subordination of Notes"
MATURITY, INTEREST AND PRINCIPAL OF THE NEW NOTES
The New Notes will be limited to $100.0 million aggregate principal amount
and will mature on November 1, 2004. Cash interest on the New Notes will accrue
at a rate of 10% per annum and will be payable semi-annually in arrears on each
May 1 and November 1, commencing May 1, 1998, to the holders of record of such
New Notes at the close of business on each April 15 and October 15,
respectively, immediately preceding such interest payment date. Cash interest
will accrue from the most recent interest payment date to which interest has
been paid or duly provided for on the Old Note surrendered in exchange for the
New Note or, if no interest has been paid or duly provided for on such Old Note
from May 1, 1998. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after November 1, 2001, at the redemption prices
(expressed as a percentage of principal amount) set forth below, plus accrued
and unpaid interest thereon, if any, to the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12-month period
beginning on November 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- -------------------------------------------------------------------------------- -------------
<S> <C>
2001............................................................................ 107.50%
2002............................................................................ 105.00%
2003............................................................................ 102.50%
</TABLE>
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time
pursuant to an optional redemption, selection of such Notes for redemption will
be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not then listed on a national securities exchange, on a PRO RATA
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
PROVIDED, HOWEVER, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part. Notice of redemption shall be mailed by first-class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. On and after
the redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption as long as the Company has deposited with the paying agent
for the Notes funds in satisfaction of the applicable redemption price pursuant
to the Indenture.
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SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed on a senior unsecured basis (the "Subsidiary Guarantees")
by the Guarantors. As of the Issue Date, Metris Direct, Inc. will be the only
Guarantor. See "--Certain Covenants--Additional Subsidiary Guarantees." The
obligations of each Guarantor under its Subsidiary Guarantee is limited so as
not to constitute a fraudulent conveyance under applicable law.
Under federal or state fraudulent conveyance statutes or other legal
principles, the Subsidiary Guarantees might be subordinated to existing or
future indebtedness of the Guarantors, or voided or found not be enforceable in
accordance with their terms. If a court in a lawsuit on behalf of an unpaid
creditor of a Guarantor or a representative of creditors, such as a trustee in
bankruptcy, were to find that the Guarantor issued its Subsidiary Guarantee with
actual intent to hinder, delay or defraud creditors, or received less that a
reasonably equivalent value of fair consideration for such Subsidiary Guarantee
and at the time of such incurrence or issuance (a) was insolvent, (b) was
rendered insolvent by reason of such incurrence or issuance, (c) was engaged or
about to engage in a business or transaction for which its remaining assets
constituted unreasonably small capital to carry on its business or (d) intended
to incur, or believed that it would incur, debts (including contingent
obligations) beyond its ability pay such debts as they matured, such court might
permit such Subsidiary Guarantee, and prior payments thereon, to be voided by
such creditor or representative and permit such prior payments to be recovered
from the holders of the Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. Generally, however, a
Guarantor would be considered insolvent if, at the time it issued its Subsidiary
Guarantee either the fair market value (or fair saleable value) of its assets
was less than the amount required to pay its total debts and liabilities
(including contingent liabilities) as they become absolute and matured or it had
incurred debts (including contingent obligations) beyond its ability to repay
such debts as they mature. Among other things, a legal challenge to a Subsidiary
Guarantee on fraudulent conveyance grounds may focus on the benefits, if any,
realized by the Guarantor as a result of the issuance by the Company of the
Notes. To the extent a Subsidiary Guarantee or a Guarantor was voided as a
fraudulent conveyance or held unenforceable for any other reason, the holders of
the Notes would cease to have any claim in respect of such Subsidiary Guarantee
and would be solely creditors of the Company and any other Guarantors, and may
be required to return all amounts received pursuant to such Guarantor's
Subsidiary Guarantee. In such event, the claims of the holders of the Notes
would be subject to the prior payment of all liabilities of the Guarantor. There
can be no assurance that, after providing for all prior claims, there would be
sufficient assets to satisfy the claims of the holders of the Notes.
The Company believes, and each Guarantor believes, that the Subsidiary
Guarantees are being incurred for proper purposes and in good faith, that the
Guarantors received fair consideration for the issuance of the Subsidiary
Guarantees, that each Guarantor is and will be solvent under the foregoing
standards and that it had, has and will have sufficient capital for carrying on
its business and was, is and will be able to pay its debts as they mature. There
can be no assurance, however, that a court would reach the same conclusion.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless, subject to the provisions of the following paragraph, (i) the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor under its Subsidiary
Guarantee pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Notes and the Indenture; (ii) immediately
after giving effect to such transaction, no Default or Event of Default exists;
(iii) such
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Guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth (immediately after giving effect to
such transaction), equal to or greater than the Consolidated Net Worth of such
Guarantor immediately preceding the transaction; and (iv) immediately after
giving effect to such transaction, the Company would have been able to incur at
least $1.00 of additional Indebtedness pursuant to the Consolidated Leverage
Ratio test set forth in the first paragraph of the covenant described below
under the caption "--Certain Covenants--Limitation on Indebtedness".
Notwithstanding the foregoing, any Wholly-Owned Restricted Subsidiary of the
Company may consolidate with or merge into any Guarantor; PROVIDED that the
Guarantor is the surviving corporation, and any Guarantor may consolidate with
or merge into the Company.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will
automatically be released and relieved of its obligations under its Subsidiary
Guarantee; PROVIDED that the Net Cash Proceeds of such sale or other disposition
are applied in accordance with the applicable provisions of the Indenture. See
"--Certain Covenants--Limitation on Asset Sales."
CHANGE OF CONTROL
Following the occurrence of a Change of Control (the date of such occurrence
being the "Change of Control Date"), the Company shall notify the Holders of the
Notes of such occurrence in the manner prescribed by the Indenture and shall,
within 30 days after the Change of Control Date, make an Offer to Purchase all
Notes then outstanding at a purchase price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the Purchase Date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date).
If a Change of Control occurs which also constitutes an event of default
under the Revolving Credit Facility, the lenders under the Revolving Credit
Facility would be entitled to exercise the remedies available to a secured
lender under applicable law and pursuant to the terms of the Revolving Credit
Facility. Accordingly, any claims of such lenders with respect to the assets of
the Company will be prior to any claim of the Holders of the Notes with respect
to such assets to the extent of the security interest therein.
If an Offer to Purchase is made, there can be no assurance that the Company
will have available funds sufficient to pay for all of the Notes that might be
tendered by Holders of Notes seeking to accept the Offer to Purchase. If the
Company fails to repurchase all of the Notes tendered for purchase, such failure
will constitute an Event of Default under the Indenture. See "--Events of
Default--and Remedies."
If the Company makes an Offer to Purchase, the Company will comply with all
applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable Federal or state securities laws and regulations and any applicable
requirements of any securities exchange on which the Notes are listed, and any
violation of the provisions of the Indenture relating to such Offer to Purchase
occurring as a result of such compliance shall not be deemed an Event of Default
or an event that, with the passing of time or giving of notice, or both, would
constitute an Event of Default.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
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<PAGE>
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company) or to
the direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than (A)
dividends, payments or distributions payable solely in Equity Interests
(other than Disqualified Stock) of the Company and (B) dividends, payments
or distributions payable solely to the Company or its Wholly-Owned
Restricted Subsidiaries);
(ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company or other Affiliate of the
Company (other than any such Equity Interests owned by the Company or any
Wholly-Owned Restricted Subsidiary of the Company); or
(iii) make any Restricted Investment;
(all such payments and other actions set forth in clauses (i) through (iii)
above being collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Consolidated Leverage Ratio test
set forth in the first paragraph of the covenant described below under the
caption "--Limitation on Indebtedness;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clause (ii) of the next succeeding paragraph), is less than the sum of
(i) 25% of the aggregate cumulative Consolidated Net Income of the Company
for the period (taken as one accounting period) from and after October 1,
1997 to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by the Company from the issue or sale since the date
of the Indenture of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or convertible debt securities
that have been converted into Disqualified Stock), plus (iii) to the extent
that any Restricted Investment that was made after the date of the Indenture
is sold for cash or otherwise liquidated or repaid for cash, the lesser of
(A) the cash return of capital with respect to such Restricted Investment
(less the cost of disposition, if any) and (B) the initial amount of such
Restricted Investment.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a Subsidiary of the
Company) of, other Equity Interests of the Company (other than
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Disqualified Stock); PROVIDED that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c) (ii) of the preceding paragraph;
(iii) the payment of any dividend by a Restricted Subsidiary of the Company to
the holders of its common Equity Interests on a PRO RATA basis; (iv) the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any Restricted Subsidiary of the Company held
by any member of the Company's (or any of its Restricted Subsidiaries')
management in connection with compensation or severance arrangements; PROVIDED
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any twelve-month
period and no Default or Event of Default shall have occurred and be continuing
immediately after such transaction; (v) payments of withholding taxes due or
payments of exercise prices in connection with exercises of options for common
stock of the Company by any employee or former employee of the Company (or any
Affiliate of the Company) by the tender of common stock owned by such employee
or the withholding of shares of common stock of the Company in connection with
such option exercise as consideration therefor in connection with compensation
arrangements; (vi) any purchase, redemption or other acquisition or retirement
for a nominal amount of Equity Interests issued pursuant to any shareholder
rights plan of the Company, as the same may be adopted or amended from time to
time; (vii) payment of cash in lieu of fractional shares of common stock that
otherwise would be issuable; and (viii) if no Default or Event of Default shall
have occurred and be continuing, the payment of dividends on the Common Stock
not in excess of $0.02 per share (as adjusted for stock splits, stock dividends,
reclassifications and the like) per fiscal quarter.
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greater of (y) the net book value of such Investments at the time
of such designation or (z) the fair market value of such Investments at the time
of such designation. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all non-cash Restricted Payments shall be the fair market
value on the date of the Restricted Payment of the assets or securities proposed
to be transferred or issued by the Company or such Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors of the
Company whose resolution with respect thereto shall be delivered to the Trustee,
such determination to be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than 50 days after the end of
any fiscal quarter (100 days in the case of the last fiscal quarter of the
fiscal year) during which any Restricted Payment is made, the Company shall
deliver to the Trustee an Officers' Certificate stating that all Restricted
Payments made during such fiscal quarter were permitted and setting forth the
basis upon which the calculations required by this covenant were computed,
together with a copy of any opinion or appraisal required by the Indenture.
LIMITATION ON INDEBTEDNESS. The Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "INCUR") any
Indebtedness (including Acquired Debt), and the Company and the Guarantors will
not issue any Disqualified Stock, and the Company will not permit any of its
Restricted Subsidiaries (that are not Guarantors) to issue any shares of
preferred stock; PROVIDED, HOWEVER, that the Company and the Guarantors may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock or the Company's
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Restricted Subsidiaries (that are not Guarantors) may issue shares of preferred
stock if the Consolidated Leverage Ratio of the Company, calculated on a pro
forma basis after giving effect to the incurrence of the additional Indebtedness
to be incurred or the Disqualified Stock or preferred stock to be issued and the
application of the proceeds therefrom, would have been less than 2.0 to 1.
Notwithstanding the preceding paragraph, the Company and its Restricted
Subsidiaries may incur the following Indebtedness (collectively, "PERMITTED
DEBT"):
(i) Indebtedness of the Company under the Credit Agreement and
Guarantees thereof by the Guarantors in an aggregate amount not to exceed
$300.0 million at any time outstanding;
(ii) the Indebtedness of the Company and its Restricted Subsidiaries
existing on the Issue Date;
(iii) Indebtedness of any Restricted Subsidiary of the Company
represented by a Subsidiary Guarantee;
(iv) Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance, defease, renew or replace
any Indebtedness (other than intercompany Indebtedness) that was permitted
by the Indenture to be incurred or that was outstanding on the Issue Date;
(v) intercompany Indebtedness between or among the Company and any of
its Restricted Subsidiaries; PROVIDED, HOWEVER, that (i) if the Company or
any Guarantor is the obligor on such Indebtedness to a Restricted Subsidiary
of the Company that is not a Wholly-Owned Restricted Subsidiary of the
Company, such Indebtedness is expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the Notes or the Subsidiary
Guarantee, as the case may be, and (ii)(A) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than the Company or a Restricted Subsidiary of the
Company and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Restricted Subsidiary of the
Company shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may
be, that was not permitted by this clause (v);
(vi) the issuance by a Restricted Subsidiary of the Company of preferred
stock to the Company or to any of the Guarantors; PROVIDED, HOWEVER, that
any subsequent event or issuance or transfer of any Capital Stock that
results in the owner of such preferred stock, in the case of a Guarantor,
ceasing to be a Restricted Subsidiary of the Company or any subsequent
transfer of such preferred stock to a Person other than the Company or any
of the Guarantors, shall be deemed to be an issuance of preferred stock by
such Restricted Subsidiary that was not permitted by this clause (vi);
(vii) Hedging Obligations that are incurred in the ordinary course of
business;
(viii) Capital Lease Obligations and/or Purchase Money Indebtedness of
the Company or a Restricted Subsidiary of the Company incurred in the
ordinary course of business not to exceed $30.0 million at any time
outstanding;
(ix) the Guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant; and
(x) additional Indebtedness of the Company and the Guarantors in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (x), not to exceed $10.0 million at any time outstanding.
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Notwithstanding anything in the Indenture to the contrary, consummation of a
Securitization shall not be deemed to be the incurrence of Indebtedness or the
issuance of Disqualified Stock or preferred stock by the Company or a Restricted
Subsidiary of the Company.
The Indenture also provides that the Company will not, and will not permit
any Restricted Subsidiary of the Company to, incur any Indebtedness that is
contractually subordinated to any Indebtedness of the Company or any such
Restricted Subsidiary unless such Indebtedness is also contractually
subordinated to the Notes, or the Subsidiary Guarantee of such Restricted
Subsidiary (as applicable), on substantially identical terms; PROVIDED, HOWEVER,
that no Indebtedness shall be deemed to be contractually subordinated to any
other Indebtedness solely by virtue of being unsecured or not guaranteed by any
Restricted Subsidiary of the Company.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (x) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness will be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof.
LIMITATION ON LIENS. The Company will not, and will not permit any of its
Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer
to exist or become effective any Lien of any kind (other than Permitted Liens)
upon any of their property or assets, now owned or hereafter acquired, unless
all payments due under the Indenture and the Notes and, in the case of a
Guarantor, its Subsidiary Guarantee are secured on an equal and ratable basis
(or on a senior basis in the case of subordinated Indebtedness) with the
obligations so secured until such time as such obligations are no longer secured
by a Lien.
LIMITATION ON ASSET SALES. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, directly or indirectly, make any
Asset Sale, unless (i) the Company or such Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of and (ii) at
least 85% of such consideration consists of (A) cash or Cash Equivalents, (B)
properties and assets to be used in the business of the Company and its
Restricted Subsidiaries and/or (C) Equity Interests in any Person which thereby
becomes a Wholly-Owned Restricted Subsidiary of the Company. The amount of any
(i) Indebtedness (other than any subordinated Indebtedness) of the Company or
any Restricted Subsidiary of the Company that is actually assumed by the
transferee in such Asset Sale and from which the Company and the Restricted
Subsidiaries of the Company are fully released shall be deemed to be cash for
purposes of determining the percentage of cash consideration received by the
Company or any of its Restricted Subsidiaries and (ii) notes or other similar
obligations received by the Company or any of its Restricted Subsidiaries from
such transferee that are immediately converted, sold or exchanged (or are
converted, sold or exchanged within thirty days of the related Asset Sale) by
the Company or any of its Restricted Subsidiaries into cash shall be deemed to
be cash, in an amount equal to the net cash proceeds realized upon such
conversion, sale or exchange, for purposes of determining the percentage of cash
consideration received by the Company or any of its Restricted Subsidiaries.
The Company or such Restricted Subsidiary, as the case may be, may (i) apply
the Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof to
repay Specified Senior Indebtedness of the Company or such Restricted Subsidiary
and permanently reduce any related commitment, or (ii) commit in writing to, or,
acquire, construct or improve properties and assets to be used in the business
of the Company and its Restricted Subsidiaries and so apply such Net Cash
Proceeds within 365 days after the receipt thereof.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied within 365 days of such Asset Sale as described in clause (i) or (ii) of
the immediately preceding paragraph (such Net
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Cash Proceeds, the "Unutilized Net Cash Proceeds"), the Company shall, within 20
days after such 365th day, make an Offer to Purchase all outstanding Notes up to
a maximum principal amount (expressed as a multiple of $1,000) of Notes equal to
such Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100% of
the principal amount thereof, plus accrued and unpaid interest thereon, if any,
to the Purchase Date; PROVIDED, HOWEVER, that the Offer to Purchase may be
deferred until there are aggregate Unutilized Net Cash Proceeds equal to or in
excess of $10.0 million, at which time the entire amount of such Unutilized Net
Cash Proceeds, and not just the amount in excess of $10.0 million, shall be
applied as required pursuant to this paragraph.
With respect to any Offer to Purchase effected pursuant to this covenant,
among the Notes, to the extent the aggregate principal amount of Notes tendered
pursuant to such Offer to Purchase exceeds the Unutilized Net Cash Proceeds to
be applied to the repurchase thereof, such Notes shall be purchased PRO RATA
based on the aggregate principal amount of such Notes tendered by each Holder.
To the extent the Unutilized Net Cash Proceeds exceed the aggregate amount of
Notes tendered by the Holders of the Notes pursuant to such Offer to Purchase,
the Company may retain and utilize any portion of the Unutilized Net Cash
Proceeds not applied to repurchase the Notes for any purpose consistent with the
other terms of the Indenture.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act, and any violation of the provisions of the Indenture relating
to such Offer to Purchase occurring as a result of such compliance shall not be
deemed a Default or an Event of Default.
Each Holder shall be entitled to tender all or any portion of the Notes
owned by such Holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal amount and subject to any proration among tendering
Holders as described above.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of the Company to (i)(a) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any Indebtedness owed to the Company or any
of its Restricted Subsidiaries, (ii) make loans or advances to the Company or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) the Indenture,
(b) applicable law, (c) any instrument governing Indebtedness or Capital Stock
of a Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, PROVIDED that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (d) by
reason of customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices, (e) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (f) Permitted Refinancing Indebtedness, PROVIDED that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced, (g) the provisions of any
Securitization that are exclusively applicable to any Securitization Entity, or
(h) in the case of clause (iii) above, restrictions contained in security
agreements securing Indebtedness
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of Guarantors relating to the properties or assets of Guarantors subject to the
Liens created thereby, PROVIDED that such Liens were otherwise permitted to be
incurred under the Indenture.
MERGER, CONSOLIDATION OR SALE OF ASSETS. The Indenture provides that the
Company may not consolidate or merge with or into (whether or not the Company is
the surviving corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions, to another corporation, Person or entity unless
(i) the Company is the surviving corporation or the entity or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of the Company under the Notes and the Indenture pursuant to
a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately before and after such transaction, no Default or Event of Default
exists; and (iv) the Company or the entity or Person formed by or surviving any
such consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) would, at the time of such transaction and
after giving pro forma effect thereto, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Leverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"--Limitation on Indebtedness." Notwithstanding the foregoing, any Wholly-Owned
Restricted Subsidiary of the Company may consolidate with or merge into the
Company; PROVIDED that the Company is the surviving corporation. Notwithstanding
anything in the Indenture to the contrary, consummation of one or more
Securitizations shall not constitute the sale of all or substantially all of the
properties or assets of the Company.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or Guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, a resolution of the Board of Directors of the Company that such
Affiliate Transaction has been approved by a majority of the disinterested
members of the Board of Directors of the Company and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing; PROVIDED that with respect to any contracts or agreements, such dollar
amounts shall be with respect to annual consideration under such contracts or
agreements. The foregoing provisions shall not apply to (i) any agreement in
effect on the Issue Date and any amendments thereto; PROVIDED that any such
amendment shall be no more disadvantageous to the Holders in any material
respect than the original agreement, (ii) any compensation arrangements entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business and consistent with the past practice of the Company or such
Restricted Subsidiary, (iii) transactions between or among the Company and/or
its Restricted Subsidiaries, (iv) any transaction in connection with a
Securitization and (v) Restricted Payments that are permitted by the provisions
of the Indenture described above under the caption "--Limitation on Restricted
Payments."
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ADDITIONAL SUBSIDIARY GUARANTEES. The Company will cause each Restricted
Subsidiary which Guarantees any Indebtedness of the Company to execute and
deliver to the Trustee a Subsidiary Guarantee pursuant to which such Restricted
Subsidiary will Guarantee the Company's payment obligations under the Notes on a
senior unsecured basis, jointly and severally, with any other Guarantors;
PROVIDED, that the foregoing shall not apply to Subsidiaries that (i) have
properly been designated as Unrestricted Subsidiaries in accordance with the
Indenture for so long as they continue to constitute Unrestricted Subsidiaries
or (ii) qualify as Securitization Entities for so long as they continue to
constitute Securitization Entities.
PAYMENTS FOR CONSENT. Neither the Company nor any of its Subsidiaries will,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS. Whether or not required by the rules and regulations of the
Commission, so long as any Notes are outstanding, the Company will furnish to
the Trustee (i) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separately from the financial condition and results of operations
of the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
LIMITATION ON INVESTMENT COMPANY STATUS. The Indenture provides that the
Company and its Subsidiaries shall not take any action, or otherwise permit to
exist any circumstance, that would require the Company to register as an
"investment company" under the Investment Company Act of 1940, as amended.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the Notes; (ii) default in payment when due
of the principal of or premium, if any, on the Notes; (iii) failure by the
Company or any of its Restricted Subsidiaries to comply with its obligations in
the covenants or other agreements described above under the captions "--Change
of Control," "--Certain Covenants-- Limitation on Asset Sales," "--Limitation on
Indebtedness," or "--Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries;" (iv) failure by the Company or any of its
Restricted Subsidiaries for 30 days after notice from the Trustee or the Holders
of at least 25% in aggregate principal amount of the Notes then outstanding to
comply with any of the other covenants or agreements in the Indenture; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by the Company or any of its Restricted Subsidiaries)
whether such Indebtedness now exists, or is created after
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the Issue Date, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or
any of its Restricted Subsidiaries to pay final judgments aggregating in excess
of $5.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in a judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Subsidiary or any group
of Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or the Registration Rights Agreement or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of Notes by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and liquidated damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the
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Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. Dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and liquidated damages on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the Issue Date, there has been a
change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the Holders
of the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound; (vi) the Company must have delivered to the
Trustee an opinion of counsel to the effect that, assuming no intervening
bankruptcy of the Company and that no Holder is an insider of the Company, after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for
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redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the repurchase or redemption of the
Notes (other than provisions relating to the covenants described above under the
caption "--Change of Control" or "--Certain Covenants--Limitation on Asset
Sales"), (iii) reduce the rate of or change the time for payment of interest on
any Note, (iv) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that resulted
from such acceleration), (v) make any Note payable in money other than that
stated in the Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of Notes to
receive payments of principal of or premium, if any, or interest on the Notes,
(vii) waive a repurchase or redemption payment with respect to any Note (other
than a payment required by one of the covenants described above under the
caption "--Change of Control" or "--Certain Covenants--Limitation on Asset
Sales") or (viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign. The Company and its subsidiaries maintain deposit accounts and
conduct other banking transactions with the Trustee in the ordinary course of
business.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall
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occur (which shall not be cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"ASSET SALE" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Company or a Wholly-Owned Restricted Subsidiary of the
Company, in one transaction or a series of related transactions, of (i) any
Equity Interest of any Restricted Subsidiary of the Company; (ii) any material
license, franchise or other authorization of the Company or any Restricted
Subsidiary of the Company; (iii) any assets of the Company or any Restricted
Subsidiary of the Company which constitute substantially all of an operating
unit or line of business of the Company or any Restricted Subsidiary of the
Company; or (iv) any other property or asset of the Company or any Restricted
Subsidiary of the Company outside of the ordinary course of business (including
the receipt of proceeds paid on account of the loss of or damage to any property
or asset and awards of compensation for any asset taken by condemnation, eminent
domain or similar proceedings). For the purposes of this definition, the term
"Asset Sale" shall not include (a) any transaction consummated in compliance
with "--Certain Covenants--Merger, Consolidation or Sale of Assets" above and
the creation of any Lien not prohibited by "--Certain Covenants--Limitation on
Liens" above; PROVIDED, HOWEVER, that any transaction consummated in compliance
with "--Certain Covenants--Merger, Consolidation or Sale of Assets" above
involving a sale, conveyance, assignment, transfer, lease or other disposal of
less than all of the properties or assets of the Company shall be deemed to be
an Asset Sale with respect to the properties or assets of the Company and the
Restricted Subsidiaries of the Company that are not so sold, conveyed, assigned,
transferred, leased or otherwise disposed of in such transaction; (b) sales of
property or equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Company or any
Restricted Subsidiary of the Company, as the case may be; (c) any transaction
consummated in compliance with "--Certain Covenants--Limitation on Restricted
Payments" above; (d) a pledge, or transfer pursuant to a pledge of assets, which
pledge is a Permitted Lien; and (e) sales of Receivables or interests in
Receivables in connection with Securitizations or otherwise in the ordinary
course of business. In addition, solely for purposes of "--Certain
Covenants--Limitation on Asset Sales" above, any sale, conveyance, transfer,
lease or other disposition of any property or asset, whether in one transaction
or a series of related transactions, involving assets
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with a Fair Market Value not in excess of $1.0 million in any fiscal year shall
be deemed not to be an Asset Sale.
"BOARD OF DIRECTORS" means the Board of Directors or other governing body
charged with the ultimate management of any Person, or any duly authorized
committee thereof.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition; (c) certificates of deposit and eurodollar time deposits
with maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million; (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(b) and (c) above entered into with any financial institution meeting the
qualifications specified in clause (c) above; (e) commercial paper rated P-1,
A-1 or the equivalent thereof by Moody's Investors Service, Inc. or Standard &
Poor's Ratings Services, respectively, and in each case maturing within six
months after the date of acquisition; and (f) money market funds, the portfolios
of which are limited to investments described in clauses (a) through (c) above.
"CHANGE OF CONTROL" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company): (i) any
Person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other
than the Permitted Holders, is or becomes the "beneficial owner"or "beneficial
owners" (as defined in Rule 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all shares that any
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time, upon the happening of an event or
otherwise), directly or indirectly, of more than 35% of the total voting power
of the then outstanding Voting Stock the Company; but only in the event that the
Permitted Holders "beneficially own", directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the then outstanding Voting Stock
of the Company than such other Person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of the Company; (ii) the Company consolidates
with, or merges with or into, another Person (other than the Company or a
Wholly-Owned Restricted Subsidiary of the Company) or the Company or its
Restricted Subsidiaries sell, assign, convey, transfer, lease or otherwise
dispose of all or substantially all of the assets of the Company and its
Restricted Subsidiaries (determined on a consolidated basis) to any Person
(other than the Company or a Wholly-Owned Restricted Subsidiary of the Company),
other than any such transaction where immediately after such transaction the
Person or Persons that "beneficially owned" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
immediately prior to such transaction, directly or indirectly, the then
outstanding Voting Stock of the Company "beneficially own" (as so determined),
directly or indirectly, a majority of the total voting power of the then
outstanding Voting Stock of the surviving or
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transferee Person; or (iii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of a majority of the directors of the Company
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the Company
then in office; PROVIDED, HOWEVER, that the occurrence of any of the foregoing
events in connection with the Spin Transaction shall not constitute a "Change of
Control".
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person as of any date
of determination, the sum, without duplication, of (i) the total amount of
Indebtedness of such Person and its Restricted Subsidiaries, plus (ii) the total
amount of Indebtedness of any other Person, to the extent that such Indebtedness
has been Guaranteed by the referent Person or one or more of its Restricted
Subsidiaries, plus (iii) the aggregate liquidation value of all Disqualified
Stock of such Person and all preferred stock of Restricted Subsidiaries of such
Person (other than, in the case of the Company, preferred stock of a Restricted
Subsidiary of the Company held by the Company or a Guarantor), in each case,
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED LEVERAGE RATIO" means, with respect to any Person, as of any
date of determination, the ratio of (i) the Consolidated Indebtedness of such
Person as of such date excluding, however, all Hedging Obligations that
constitute Permitted Debt to (ii) the Consolidated Net Worth of such Person as
of such date.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
PROVIDED that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary of such Person or that is accounted for by the equity
method of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or a Wholly-Owned
Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary
of such Person shall be excluded to the extent that the declaration or payment
of dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, and (iv) the cumulative effect of a
change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Restricted Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Restricted Subsidiaries and in
Persons that are not Restricted Subsidiaries, and (z) all unamortized debt
discount and expense and unamortized deferred financing charges as of such date,
all of the foregoing determined in accordance with GAAP.
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"CREDIT AGREEMENT" means the Revolving Credit Facility, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring, in whole or in
part (including, without limitation, increasing the amount of available
borrowings thereunder (PROVIDED that such increase in borrowings is permitted by
the "Limitation on Indebtedness" covenant above), or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder to
the extent permitted by the Indenture), all or any portion of the Indebtedness
under such agreement or any successor or replacement agreement and whether by
the same or any other agent, lender or group of lenders and whether in the form
of a revolving credit facility or a term loan facility or any combination
thereof.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock that, either (A) by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature or (B) is designated by
the Company (in a resolution of the Board of Directors of the Company delivered
to the Trustee) as Disqualified Stock.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date and consistently applied.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTORS" means each of (i) Metris Direct, Inc. and (ii) any other
Restricted Subsidiary of the Company that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and their respective successors
and assigns.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, interest rate
cap agreements and interest rate or currency collar agreements and related
agreements and (ii) other agreements or arrangements designed to protect such
Person against fluctuations in interest rates, currencies and commodities in the
ordinary course of business.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien (except Liens on Receivables and other assets (including
spread accounts relating to a Securitization)
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incurred in connection with a Securitization) on any asset of such Person
(whether or not such indebtedness is assumed by such Person and the value
thereof being the lesser of the amount of such indebtedness so secured and the
fair market value of such asset that has a Lien placed upon it) and, to the
extent not otherwise included, the Guarantee by such Person of any indebtedness
of any other Person. Notwithstanding the foregoing, the term "Indebtedness"
shall not include (i) obligations pursuant to representations, warranties,
covenants and indemnities or payments to owners of beneficial interests in
Receivables, in each case in connection with a Securitization, (ii) deposit
liabilities of any Restricted Subsidiary of the Company, the deposits of which
are insured by the Federal Deposit Insurance Corporation or any successor
thereto or (iii) guarantees related to the fulfillment of the Company's
obligations to bank card associations in the ordinary course of business. The
amount of any Indebtedness outstanding as of any date shall be (i) the accreted
value thereof, in the case of any Indebtedness that does not require current
payments of interest, and (ii) the principal amount thereof, together with any
interest thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the book value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--Certain
Covenants--Limitation on Restricted Payments."
"ISSUE DATE" means the date of original issuance of the Old Notes.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"NET CASH PROCEEDS" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale, a defeasance of a Securitization and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant
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to sale and leaseback transactions) or (b) the disposition of any securities by
such Person or any of its Restricted Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any
extraordinary or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFER TO PURCHASE" means a written offer (the "Offer") sent by or on behalf
of the Company by first-class mail, postage prepaid, to each holder at his
address appearing in the register for the Notes on the date of the Offer
offering to purchase up to the principal amount of Notes specified in such Offer
at the purchase price specified in such Offer (as determined pursuant to the
Indenture). Unless otherwise required by applicable law, the Offer shall specify
an expiration date (the "Expiration Date") of the Offer to Purchase, which shall
be not less than 20 Business Days nor more than 60 days after the date of such
Offer, and a settlement date (the "Purchase Date") for purchase of Notes to
occur no later than five Business Days after the Expiration Date. The Company
shall notify the Trustee at least 15 Business Days (or such shorter period as is
acceptable to the Trustee) prior to the mailing of the Offer of the Company's
obligation to make an Offer to Purchase, and the Offer shall be mailed by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company. The Offer shall contain all the information required by
applicable law to be included therein. The Offer shall also contain information
concerning the business of the Company and its Subsidiaries which the Company in
good faith believes will enable such Holders to make an informed decision with
respect to the Offer to Purchase (which at a minimum will include (i) the most
recent annual and quarterly financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to in
clause (i) (including a description of the events requiring the Company to make
the Offer to Purchase), (iii) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring the
Company to make the Offer to Purchase and (iv) any other information required by
applicable law to be included therein). The Offer shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state: (1) the Section of the Indenture
pursuant to which the Offer to Purchase is being made; (2) the Expiration Date
and the Purchase Date; (3) the aggregate principal amount of the outstanding
Notes offered to be purchased by the Company pursuant to the Offer to Purchase
(including, if less than 100%, the manner by which such amount has been
determined pursuant to the Section of the Indenture requiring the Offer to
Purchase) (the "Purchase Amount"); (4) the purchase price to be paid by the
Company for each $1,000 aggregate principal amount of Notes accepted for payment
(as specified pursuant to the Indenture) (the "Purchase Price"); (5) that the
Holder may tender all or any portion of the Notes registered in the name of such
Holder and that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal amount; (6) the place or places where Notes are to
be surrendered for tender pursuant to the Offer to Purchase; (7) that interest
on any Note not tendered or tendered but not purchased by the Company pursuant
to the Offer to Purchase will continue to accrue; (8) that on the Purchase Date
the Purchase Price will become due and payable upon each Note being accepted for
payment pursuant to the Offer to Purchase and that interest thereon shall cease
to accrue on and after the Purchase Date; (9) that each Holder electing to
tender all or any portion of a Note pursuant to the Offer to Purchase will be
required to surrender such Note at the place or places specified in the Offer
prior to the close of business on the Expiration Date (such Note being, if the
Company or the Trustee so requires, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or his attorney duly authorized in
writing); (10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or its Paying Agent) receives, not later than the
close of business on the fifth Business Day next preceding the
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Expiration Date, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Note the Holder
tendered, the certificate number of the Note the Holder tendered and a statement
that such Holder is withdrawing all or a portion of his tender; (11) that (a) if
Notes in an aggregate principal amount less than or equal to the Purchase Amount
are duly tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase all such Notes and (b) if Notes in an aggregate principal
amount in excess of the Purchase Amount are tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase Notes having an aggregate
principal amount equal to the Purchase Amount on a PRO RATA basis (with such
adjustments as may be deemed appropriate so that only Notes in denominations of
$1,000 principal amount or integral multiples thereof shall be purchased); and
(12) that in the case of any Holder whose Note is purchased only in part, the
Company shall execute and the Trustee shall authenticate and deliver to the
Holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such Holder, in an aggregate principal
amount equal to and in exchange for the unpurchased portion of the Note so
tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
"PERMITTED HOLDER" means FCI and any of its Affiliates.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Wholly-Owned Restricted Subsidiary of the Company; (b) any Investment in Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (i) such Person
becomes a Wholly-Owned Restricted Subsidiary of the Company or (ii) such Person
is merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly-Owned Restricted Subsidiary of the Company; (d) any Restricted Investment
made as a result of the receipt of non-cash consideration from an Asset Sale
that was made pursuant to and in compliance with the covenant described above
under the caption "--Certain Covenants--Limitation on Asset Sales"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company; (f) Investments by the Company
or any of its Restricted Subsidiaries in the ordinary course of business in
connection with or arising out of Securitizations; (g) Hedging Obligations of
the Company and its Restricted Subsidiaries entered into in the ordinary course
of business; and (h) other Investments by the Company or any of its Restricted
Subsidiaries in any Person (other than an Affiliate of the Company that is not
also a Restricted Subsidiary of the Company) that do not exceed $5.0 million in
the aggregate at any one time outstanding (measured as of the date made and
without giving effect to subsequent changes in value).
"PERMITTED LIENS" means (i) Liens existing on the Issue Date; (ii) Liens to
secure borrowings under the Credit Agreement, PROVIDED that such borrowings were
permitted by the Indenture to be incurred; (iii) Liens on Receivables, related
contract rights, collections on Receivables and the proceeds of all such
property incurred in connection with Securitizations or permitted Guarantees
thereof; (iv) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Restricted Subsidiary of the
Company; PROVIDED that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with the Company or such Restricted
Subsidiary; (v) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company; PROVIDED that such
Liens were in existence prior to the contemplation of such acquisition; (vi)
Liens securing Purchase Money Indebtedness permitted to be incurred under the
Indenture and incurred in the ordinary course of business; PROVIDED, HOWEVER,
that any such Lien may not extend to any other property owned by the Company or
any of its Restricted Subsidiaries at the time the Lien is incurred, and the
Indebtedness secured by the Lien may not be incurred more than 180 days after
the latter of the acquisition or completion of construction of the property
subject to the Lien; PROVIDED, FURTHER, that the amount of Indebtedness secured
by such Liens do not exceed the fair market value of
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the property purchased or constructed with the proceeds of such Indebtedness;
(vii) Liens to secure any Permitted Refinancing Indebtedness incurred to
refinance any Indebtedness secured by any Lien referred to in the foregoing
clauses (i) through (vi); PROVIDED, HOWEVER, that such new Lien shall be limited
to all or part of the same property that secured the original Lien and the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the outstanding principal amount or, if greater, committed amount
of the Indebtedness described under clauses (i) through (vi), as the case may
be, at the time the original Lien became a Permitted Lien; (viii) Liens in favor
of the Company or a Guarantor; (ix) Liens incurred in the ordinary course of
business of the Company or any Restricted Subsidiary of the Company with respect
to obligations that do not exceed $10.0 million in the aggregate at any one time
outstanding; (x) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business (including, without limitation,
lessor Liens on leased assets); (xi) Liens securing Capital Lease Obligations
permitted to be incurred under the Indenture and incurred in the ordinary course
of business; (xii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded; PROVIDED
that any reserve or other appropriate provision as shall be required in
conformity with GAAP in existence at such time shall have been made therefor and
(xiii) certain Liens consisting of restrictions on the use of real property
which do not materially interfere with the property's use.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness or Disqualified
Stock of the Company or any of its Restricted Subsidiaries issued in exchange
for, or the net proceeds of which are used to extend, refinance, renew, replace,
defease, redeem or refund other Indebtedness or Disqualified Stock of the
Company or any of its Restricted Subsidiaries (other than intercompany
Indebtedness); PROVIDED THAT: (i) the principal amount (or accreted value, if
applicable) or liquidation value of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable) or
liquidation value, plus accrued interest or dividends on, the Indebtedness so
extended, refinanced, renewed, replaced, defeased, redeemed or refunded (plus
the amount of reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity date or redemption date,
as the case may be, later than the final maturity date or redemption date, as
the case may be, of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased, redeemed or refunded; (iii)
if the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the Notes on terms at least
as favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness or Disqualified Stock is
incurred or issued, as the case may be, either by the Company or by the
Restricted Subsidiary who is the obligor or issuer, as the case may be, on the
Indebtedness or Disqualified Stock being extended, refinanced, renewed,
replaced, defeased, redeemed or refunded.
"PERSON" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust, joint venture, or a governmental
agency or political subdivision thereof.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the ordinary course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"RECEIVABLES" means credit card, consumer or commercial loans that are
purchased or originated in the ordinary course of business by the Company or any
Subsidiary of the Company.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
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"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"REVOLVING CREDIT FACILITY" means the Revolving Credit and Letter of Credit
Facility Agreement dated as of September 16, 1996 among the Company, the Lenders
named therein, Nationsbank of North Carolina, N.A., as Co-Agent, Bank of America
Illinois, as an Issuing Bank, First Bank National Association, as an Issuing
Bank, Norwest Bank Minnesota, N.A., as an Issuing Bank, and The Chase Manhattan
Bank, as Administrative Agent and an Issuing Bank, as amended.
"SECURITIZATION" means any transaction or series of transactions that have
been or may be entered into by the Company or any of its Subsidiaries in
connection with or reasonably related to a transaction or series of transactions
in which the Company or any of its Subsidiaries may sell, convey or otherwise
transfer, directly or indirectly, to (i) a Securitization Entity or (ii) any
other Person, or may grant a security interest in, any Receivables or any
interests in such Receivables (whether such Receivables are then existing or
arising in the future) and any assets related thereto including, without
limitation, all security interests in any collateral relating thereto, the
proceeds of such Receivables, and other assets which are customarily sold or in
respect of which security interests are customarily granted in connection with
securitization transactions involving such assets.
"SECURITIZATION ENTITY" means any Person (whether or not a Subsidiary of the
Company) established and maintained exclusively for one or more of the following
purposes: (i) purchasing or otherwise acquiring Receivables (together with any
assets related to such Receivables, including, without limitation, all
collateral securing such Receivables, all contracts and all Guarantees or other
obligations in respect of such Receivables, proceeds of such Receivables and
other assets which are customarily transferred in connection with asset
securitization transactions involving Receivables) in connection with a
Securitization, (ii) selling such Receivables (and related assets) to a special
purpose owner trust or other Person in connection with a Securitization, (iii)
issuing asset-backed securities, or beneficial interests in Receivables, (iv)
serving as a corporate general partner (or managing member of a limited
liability company) of another Securitization Entity, (v) investing in and
holding Investments in Securitization Entities issuing securities backed by
Receivables, or (vi) engaging in activities that are incidental to and
necessary, suitable or convenient for the accomplishment of the purposes
specified above, PROVIDED, HOWEVER, that the obligations of such Securitization
Entity are without recourse to the Company and any Restricted Subsidiary of the
Company other than such Securitization Entity. For purposes of this definition,
"without recourse" shall mean that the Indebtedness of such Securitization
Entity and none of the other obligations (contingent or otherwise) of a
Securitization Entity (i) is guaranteed by the Company or any other Restricted
Subsidiary of the Company, (ii) obligates the Company or any other Restricted
Subsidiary of the Company in any way other than pursuant to representations,
warranties, covenants (including any covenant to deliver Receivables in a
pre-funded Securitization) and indemnities entered into in connection with a
Securitization, or (iii) subjects any property or asset of the Company or any
Restricted Subsidiary of the Company other than such Securitization Entity,
directly or indirectly, contingently or otherwise, to the satisfaction thereof,
other than pursuant to representations, warranties, covenants and indemnities
entered into in connection with a Securitization. For purposes of the foregoing,
a Permitted Investment in a Securitization Entity shall not be deemed recourse.
As of the Issue Date, each of the Metris Master Trust, Metris Receivables, Inc.,
Metris Funding Co. and the Fingerhut Owner Trust and Securitization Entities
formed in connection with any Securitization prior to the Issue Date shall be
deemed to satisfy the requirements of this definition.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of the Company that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect
on the date hereof.
"SPECIFIED SENIOR INDEBTEDNESS" means (i) the Indebtedness of any Person,
whether outstanding on the Issue Date or thereafter incurred and (ii) accrued
and unpaid interest (including interest accruing
65
<PAGE>
on or after the filing of any petition in bankruptcy or for reorganization
relating to such Person to the extent post filing interest is allowed in such
proceeding) in respect of (A) Indebtedness of such Person for money borrowed and
(B) Indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable
unless, in the case of either clause (i) or (ii), in the instrument creating or
evidencing the same pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the Notes;
PROVIDED, HOWEVER, that Specified Senior Indebtedness shall not include (1) any
obligation of such Person to any Subsidiary of such Person, (2) any liability
for Federal, state, local or other taxes owed or owing by such Person, (3) any
accounts payable or other liability to trade creditors arising in the ordinary
course of business (including Guarantees thereof or instruments evidencing such
liabilities), (4) any obligations in respect of Capital Stock of such Person or
(5) that portion of any Indebtedness which at the time of incurrence is incurred
in violation of the Indenture.
"SPIN TRANSACTION" means the proposed transaction announced by Fingerhut
Companies, Inc. on October 9, 1997, as such transaction may be effected in the
future.
"STATED MATURITY" means with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that is
designated by the Board of Directors of the Company as an Unrestricted
Subsidiary pursuant to a Board Resolution, but only to the extent that such
Subsidiary: (a) has not at the time of designation, and does not thereafter,
create, incur, assume, guarantee or otherwise become directly or indirectly
liable with respect to any Indebtedness pursuant to which the lender thereof has
recourse to any of the assets of the Company or any of its Restricted
Subsidiaries; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (d) has not otherwise directly or indirectly
provided credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by filing with the Trustee a certified
copy of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"--Certain Covenants--Limitation on Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant
66
<PAGE>
described under the caption "--Certain Covenants--Limitation on Indebtedness,"
the Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the Consolidated Leverage
Ratio test set forth in the first paragraph of the covenant described under the
caption "--Certain Covenants--Limitation on Indebtedness," and (ii) no Default
or Event of Default would be in existence following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly-Owned Restricted
Subsidiaries of such Person.
DESCRIPTION OF THE OLD NOTES
The terms of the Old Notes are identical in all material respects to the New
Notes, except that (i) the Old Notes have not been registered under the
Securities Act, are subject to certain restrictions on transfer and are entitled
to certain registration rights under the Registration Rights Agreement (which
rights will terminate upon consummation of the Exchange Offer, except under
limited circumstances); and (ii) the New Notes will not provide for any
liquidated damages thereon. In that regard, the Old Notes provide that, in the
event that the Exchange Offer is not consummated on or prior to April 5, 1998,
or a shelf registration statement (the "Shelf Registration Statement") with
respect to the resale of the Old Notes is not declared effective within 120 days
after the required filing date therefor (the "Effectiveness Date"), the Company
will be obligated to pay liquidated damages to each holder of the Old Notes in
an amount equal to $0.192 per week per $1,000 principal amount of the Old Notes
held by such holder commencing on April 6, 1998 or the Effectiveness Date, as
the case may be; provided, however, that if the Company reasonably requests
holders of Old Notes to provide certain information called for by the
Registration Rights Agreement for inclusion in any such Shelf Registration
Statement, then Old Notes owned by holders who do not deliver such information
to the Company as required pursuant to the Registration Rights Agreement will
not be entitled to any such liquidated damages. Upon the consummation of the
Exchange Offer or the effectiveness of a Shelf Registration Statement, as the
case may be, liquidated damages will cease to accrue. The New Notes are not
entitled to any such liquidated damages. In addition, the Old Notes and the New
Notes will constitute a single series of debt securities under the Indenture.
See "Description of the New Notes--General." Accordingly, holders of Old Notes
should review the information set forth under "Risk Factors--Consequences of a
Failure to Exchange Old Notes" and "Description of the New Notes."
67
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
considerations to holders of the New Notes who are subject to U.S. net income
tax with respect to the New Notes ( "U.S. persons") and who will hold the New
Notes as capital assets. There can be no assurance that the U.S. Internal
Revenue Service (the "IRS") will take a similar view of the purchase, ownership
or disposition of the New Notes. This discussion is based upon the provisions of
the Internal Revenue Code of 1986, as amended, and regulations, rulings and
judicial decisions now in effect, all of which are subject to change. It does
not include any description of the tax laws of any state, local or foreign
governments or any estate or gift tax considerations that may be applicable to
the New Notes or holders thereof. It does not discuss all aspects of federal
income taxation that may be relevant to a particular investor in light of such
investor's particular investment circumstances or to certain types of investors
subject to special treatment under the federal income tax laws (for example,
dealers in securities or currencies, S corporations, life insurance companies,
tax-exempt organizations, taxpayers subject to the alternative minimum tax and
non-U.S. persons) and also does not discuss New Notes held as a hedge against
currency risks or as part of a straddle with other investments or as part of a
"synthetic security" or other integrated investment (including a "conversion
transaction") comprised of a New Note and one or more other investments, or
situations in which the functional currency of the holders is not the U.S.
dollar.
Holders of Old Notes contemplating acceptance of the Exchange Offer should
consult their own tax advisors with respect to their particular circumstances
and with respect to the effects of state, local or foreign tax laws to which
they may be subject.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes should not be a taxable event to
holders for federal income tax purposes. The exchange of Old Notes for New Notes
pursuant to the Exchange Offer should not be treated as an "exchange" for
federal income tax purposes because the New Notes should not be considered to
differ materially in kind or extent from the Old Notes and because the exchange
will occur by operation of the terms of the Old Notes. If, however, the exchange
of the Old Notes for the New Notes were treated as an exchange for federal
income tax purposes, such exchange should constitute a recapitalization for
federal income tax purposes. Accordingly, the New Notes should have the same
issue price as the Old Notes, and a holder should have the same adjusted basis
and holding period in the New Notes as the holder had in the Old Notes
immediately before the exchange.
INTEREST ON THE NEW NOTES
A holder of a New Note will be required to report interest earned on the New
Note as ordinary interest income for federal income tax purposes in accordance
with the holder's method of tax accounting.
DISPOSITION OF NEW NOTES
A holder's tax basis for a New Note generally will be the holder's purchase
price for the Old Note. Upon the sale, exchange, redemption, retirement or other
disposition of a New Note, a holder will recognize gain or loss equal to the
difference (if any) between the amount realized and the holder's tax basis in
the New Note. Such gain or loss will be short-term, mid-term or long-term
capital gain or loss depending upon whether the New Note has been held for less
than one year, more than one year or more than eighteen months (with certain
exceptions to the characterization as capital gain if the New Note was acquired
at a market discount).
68
<PAGE>
BACKUP WITHHOLDING
A holder of a New Note may be subject to backup withholding at the rate of
31% with respect to interest paid on the New Note and proceeds from the sale,
exchange, redemption or retirement of the New Note, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates that fact or (b) provides a correct taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. A holder
of a New Note who does not provide the Company with the holder's correct
taxpayer identification number may be subject to penalties imposed by the IRS.
A holder of a New Note who is not a U.S. person will generally be exempt
from backup withholding and information reporting requirements, but may be
required to comply with certification and identification procedures in order to
obtain an exemption from backup withholding and information reporting.
Any amount paid as backup withholding will be creditable against the
holder's federal income tax liability.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 90 days after
the Expiration Date, it will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until June 7, 1998, all dealers effecting transactions in the New
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will send
additional copies of this Prospectus and any amendment or Supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. The Company has agreed to pay all expenses incident to the Exchange
Offer (including the expenses of one counsel for the holders of the Notes) other
than commissions or concessions of any broker-dealers and will indemnify the
holders of the Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
69
<PAGE>
VALIDITY OF NEW NOTES
The validity of the New Notes being issued in the Exchange Offer will be
passed upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and December 31, 1995 and for each of the years in the three-year period ended
December 31, 1996 have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in auditing and accounting.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of September 30, 1997, and December 31, 1996 and 1995....................... F-3
Consolidated Statements of Income for the Nine Months Ended September 30, 1997 and 1996, and the Years
Ended December 31, 1996, 1995 and 1994.................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 1997 and
the Years Ended December 31, 1996, 1995 and 1994.......................................................... F-5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996, and the Years
ended December 31, 1996, 1995 and 1994.................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Metris Companies Inc.
We have audited the accompanying consolidated balance sheet of Metris
Companies Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metris
Companies Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 23, 1997, except as to notes 6 and 16 which are as of January 5, 1998
F-2
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
SEPTEMBER 30, -------------- --------------
1997
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks.......................................... $ 11,095 $ 8,902 $ 4,185
Federal funds sold............................................... 38,286 19,001 29,144
Short-term investments........................................... 84 4,179 1,414
-------------- -------------- --------------
Cash and cash equivalents...................................... 49,465 32,082 34,743
-------------- -------------- --------------
Credit card loans:
Loans held for securitization.................................. 14,696 14,164 15,337
Retained interests in loans securitized........................ 344,821 201,165 79,727
Less: Allowance for loan losses.............................. 23,847 12,829 3,679
-------------- -------------- --------------
Net credit card loans.......................................... 335,670 202,500 91,385
-------------- -------------- --------------
Premises and equipment, net...................................... 10,678 5,163 1,476
Accrued interest and fees receivable............................. 3,745 2,942 2,223
Other receivables due from credit card securitizations, net...... 31,597
Prepaid expenses and deferred charges............................ 15,426 4,826 4,517
Deferred income taxes............................................ 62,797 31,528 4,306
Customer base intangible......................................... 39,831 888
Other assets..................................................... 8,053 6,687 4,181
-------------- -------------- --------------
TOTAL ASSETS................................................. $ 525,665 $ 286,616 $ 174,428
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES:
Interest-bearing deposit from affiliate.......................... $ $ 1,000 $ 1,000
Short-term borrowings............................................ 153,000 54,163 63,482
Accounts payable................................................. 27,067 15,583 21,334
Other payables due to credit card securitizations, net........... 107,102 36,619
Current income taxes payable to FCI.............................. 7,180 1,460 5,178
Deferred income.................................................. 46,930 23,183 10,087
Accrued expenses and other liabilities........................... 18,220 15,890 2,029
-------------- -------------- --------------
TOTAL LIABILITIES.............................................. 359,499 147,898 103,110
-------------- -------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 10,000,000 shares
authorized, none issued or outstanding
Common stock, par value $.01 per share; 100,000,000 shares
authorized, 19,225,000 shares issued and outstanding........... 192 192
Paid-in/contributed capital...................................... 107,059 107,220 60,028
Retained earnings................................................ 58,915 31,306 11,290
-------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY..................................... 166,166 138,718 71,318
-------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $ 525,665 $ 286,616 $ 174,428
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------
1997 1996 1996 1995 1994
----------- --------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Credit card loans....................................... $ 42,645 $ 19,583 $ 29,028 $ 7,054 $
Federal funds sold...................................... 1,270 644 867 487
Other................................................... 568 120 299 75 487
----------- --------- ----------- --------- ---------
Total interest income................................. 44,483 20,347 30,194 7,616 487
----------- --------- ----------- --------- ---------
INTEREST EXPENSE:
Deposit................................................. 7 36 48 36
Short-term borrowings................................... 5,923 2,787 4,058 1,181
----------- --------- ----------- --------- ---------
Total interest expense................................ 5,930 2,823 4,106 1,217
----------- --------- ----------- --------- ---------
NET INTEREST INCOME 38,553 17,524 26,088 6,399 487
Provision for loan losses............................... 28,589 10,556 18,477 4,393
----------- --------- ----------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..... 9,964 6,968 7,611 2,006 487
----------- --------- ----------- --------- ---------
OTHER OPERATING INCOME:
Net extended service plan revenues...................... 3,249 13,789 20,420 17,779 12,244
Net securitization and credit card servicing income..... 59,533 33,726 49,921 16,003
Credit card fees, interchange and other credit card
income................................................ 28,324 17,262 26,028 10,639
Fee-based product revenues.............................. 39,082 20,549 29,853 6,662 1,994
----------- --------- ----------- --------- ---------
130,188 85,326 126,222 51,083 14,238
----------- --------- ----------- --------- ---------
OTHER OPERATING EXPENSE:
Credit card account and other product solicitation and
marketing expenses.................................... 22,419 20,898 29,297 23,089 3,739
Employee compensation................................... 24,455 14,885 23,068 2,466 442
Data processing services and communications............. 12,893 8,632 12,757 3,090 109
Third-party servicing expense........................... 7,972 6,700 9,207 5,300 473
Warranty debt waiver underwriting and claims servicing
expense............................................... 4,077 6,842 10,024 6,552 4,109
Credit card fraud losses................................ 2,700 1,723 2,276 775
Other................................................... 20,117 8,718 14,658 4,368 2,350
----------- --------- ----------- --------- ---------
94,633 68,398 101,287 45,640 11,222
----------- --------- ----------- --------- ---------
INCOME BEFORE INCOME TAXES.............................. 45,519 23,896 32,546 7,449 3,503
Income taxes............................................ 17,525 9,200 12,530 2,868 1,305
----------- --------- ----------- --------- ---------
NET INCOME.............................................. $ 27,994 $ 14,696 $ 20,016 $ 4,581 2,198
----------- --------- ----------- --------- ---------
----------- --------- ----------- --------- ---------
EARNINGS PER SHARE:
Primary................................................. $ 1.38 $ .89 $ 1.17 $ .28 $ .14
Fully diluted........................................... $ 1.38 $ .89 $ 1.16 $ .28 $ .14
Weighted average common and common equivalent
shares--fully diluted................................. 20,323 16,514 17,242 16,439 16,270
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PAID-IN/ STOCKHOLDERS'/
COMMON CONTRIBUTED RETAINED DIVISION
STOCK CAPITAL EARNINGS EQUITY
----------- ------------ --------- --------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1993................................... $ $ 28 $ 4,511 $ 4,539
Net income................................................ 2,198 2,198
----- ------------ --------- --------------
BALANCE, DECEMBER 31, 1994.................................. $ $ 28 $ 6,709 $ 6,737
Net Income................................................ 4,581 4,581
Contributions from FCI.................................... 60,000 60,000
----- ------------ --------- --------------
BALANCE, DECEMBER 31, 1995.................................. $ $ 60,028 $ 11,290 $ 71,318
Net income................................................ 20,016 20,016
Company reorganization.................................... 160 (160)
Issuance of Common Stock.................................. 32 47,352 47,384
----- ------------ --------- --------------
BALANCE, DECEMBER 31, 1996.................................. $ 192 $ 107,220 $ 31,306 $ 138,718
Net income (unaudited).................................... 27,994 27,994
Cash dividends--$.01 per share/other (unaudited).......... (161) (385) (546)
----- ------------ --------- --------------
BALANCE, SEPTEMBER 30, 1997 (unaudited)..................... $ 192 $ 107,059 $ 58,915 $ 166,166
----- ------------ --------- --------------
----- ------------ --------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------ ---------------------------------------
1997 1996 1996 1995 1994
------------ ---------- -------------- ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................. $ 27,994 $ 14,696 $ 20,016 $ 4,581 $ 2,198
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses............................ 28,589 10,556 18,477 4,393
Depreciation and amortization........................ 8,572 5,260 7,329 2,808 26
(Gain)/net amortization of gain on securitization of
credit card loans.................................. (1,927) 2,803 6,194 (7,267)
Changes in operating assets and liabilities:
Accrued interest and fees receivable............... (803) 523 (719) (2,223)
Prepaid expenses and deferred charges.............. (15,966) (3,686) (6,045) (6,696) 176
Deferred income taxes.............................. (31,269) (14,886) (27,222) (4,108) (27)
Accounts payable and accrued expenses.............. 13,813 1,615 8,110 20,374 1,198
Other payables/receivables due to/from credit card
securitizations, net............................. 71,928 53,967 61,542 (24,572)
Current income taxes payable to FCI................ 5,720 (2,887) (3,718) 5,051 (86)
Deferred income.................................... 23,747 4,970 13,096 10,084 (69)
Other.............................................. (5,647) (2,531) (4,084) (4,431) (4)
------------ ---------- -------------- ------------ ---------
Net cash provided by (used in) operating activities.... 124,751 70,400 92,976 (2,006) 3,412
------------ ---------- -------------- ------------ ---------
INVESTING ACTIVITIES:
Proceeds from sales of loans........................... 923,750 674,055 952,055 448,555
Net loans originated or collected...................... (755,512) (738,764) (1,081,644) (528,864)
Credit card portfolio acquisition...................... (366,587) (15,469)
Net decrease (increase) in loans to FCI................ 9,375 (3,215)
Additions to premises and equipment.................... (6,470) (2,669) (4,113) (1,353) (239)
------------ ---------- -------------- ------------ ---------
Net cash used in investing activities.................. (204,819) (67,378) (133,702) (87,756) (3,454)
------------ ---------- -------------- ------------ ---------
FINANCING ACTIVITIES:
(Decrease) increase in interest-bearing deposit........ (1,000) 1,000
Net (decrease) increase in short-term borrowings....... 98,836 (10,097) (9,319) 63,482
Net proceeds from issuance of common stock............. 47,384
Cash dividends paid.................................... (385)
Capital contributions from FCI......................... 60,000
------------ ---------- -------------- ------------ ---------
Net cash provided by (used in) financing activities.... 97,451 (10,097) 38,065 124,482
------------ ---------- -------------- ------------ ---------
Net increase (decrease) in cash and cash equivalents... 17,383 (7,075) (2,661) 34,720 (42)
Cash and cash equivalents at beginning of period....... 32,082 34,743 34,743 23 65
------------ ---------- -------------- ------------ ---------
Cash and cash equivalents at end of period............. $ 49,465 $ 27,668 $ 32,082 $ 34,743 $ 23
------------ ---------- -------------- ------------ ---------
------------ ---------- -------------- ------------ ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries (collectively, the "Company"). The
Company is an information-based direct marketer of consumer credit products,
extended service plans, and other fee-based products and services to
moderate-income consumers. The Company's business is conducted through Metris
Direct, Inc., Direct Merchants Credit Card Bank, National Association ("Direct
Merchants Bank") and Metris Receivables, Inc. ("MRI"), each a wholly-owned
direct or indirect subsidiary of MCI.
Prior to September 1996, MCI operated as a division of Fingerhut Companies,
Inc. ("FCI"). During September 1996, FCI reorganized the business through the
formation of MCI. The stock of Metris Direct, Inc., Direct Merchants Bank,
DMCCB, Inc., and MRI, in addition to the assets, liabilities and equity of
certain portions of the retail extended service plan business, was contributed
to the Company from FCI and its subsidiaries. In October 1996, the Company
completed an initial public offering of its common stock (see Note 7).
In early 1995, the Company's need for cash to fund credit card loans and for
other general business purposes exceeded the cash generated by its other
businesses. Consequently, the Company borrowed funds or obtained capital from
FCI to fund its ongoing operation from early 1995 to late 1996. The consolidated
financial statements include an allocation of FCI's interest expense for the
Company's net borrowings from FCI. The consolidated financial statements also
reflect a $60 million allocation of capital from FCI to the Company during 1995.
This capital contribution was made in installments at the beginning of each
month throughout 1995, in order to maintain the Company's equity at a level
sufficient to support the growth in managed assets experienced by the Company
during 1995 (generally at approximately 10% of total managed assets at the end
of each month).
The consolidated financial statements also include an allocation of expenses
for certain data processing and information systems, audit, accounting,
treasury, legal, human resources, customer service and other administrative
support historically provided by FCI and its subsidiaries to the Company. Such
expenses were based on the actual use of such services or were based on other
allocation methods that, in the opinion of management, are reasonable. During
1996, FCI and the Company entered into an administrative services agreement that
covers such expense allocations and the provision of future services using
similar rates and allocation methods for various terms, the latest of which
expires at the end of 1998. The consolidated financial statements also reflect
the retroactive effects of intercompany agreements entered into during 1996,
including co-brand credit card, database access, data sharing and extended
service plan agreements with Fingerhut, and a tax sharing agreement with FCI.
These agreements have terms ranging up to seven years.
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain prior year amounts have been reclassified to conform
with the current year's presentation.
COMPARABILITY OF FINANCIAL STATEMENTS
The Company's consumer credit products business and a substantial portion of
its fee-based products and services business began operations in February 1995
with the opening of Direct Merchants Bank. Therefore, the financial statements
prior to 1995 are not necessarily comparable to the financial statements for
periods ending in 1995 and thereafter.
F-7
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements and related
unaudited financial information in the notes have been prepared in accordance
with generally accepted accounting principles and the rules and regulations of
the Securities and Exchange Commission for interim financial statements. Such
interim financial statements reflect all adjustments, consisting of normal
recurring accruals, which in the opinion of management, are necessary to present
fairly the consolidated financial position of the Company, and the results of
its operations and its cash flows for the interim periods. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto contained in the Company's 1996 annual report to
shareholders and incorporated by reference in the Company's annual report on
Form 10-K. The nature of the Company's business is such that the results of any
interim period may not be indicative of the results to be expected for the
entire year.
PERVASIVENESS OF ESTIMATES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements as well as the reported amount of revenues
and expenses during the reporting periods. Actual results could differ from
these estimates.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting and reporting
policies used in preparing the consolidated financial statements.
FEDERAL FUNDS SOLD
Federal funds sold are short-term loans made to banks through the Federal
Reserve System. It is the Company's policy to make such loans only to banks that
are considered to be in compliance with their regulatory capital requirements.
CREDIT CARD LOANS HELD FOR SECURITIZATION
Credit card loans held for securitization are loans the Company intends to
securitize, generally no later than three months from origination and are
recorded at the lower of aggregate cost or market value.
SECURITIZATION, RETAINED INTERESTS IN LOANS SECURITIZED AND SECURITIZATION
INCOME
The Company securitizes and sells a portion of its credit card loans to both
public and private investors through the Metris Master Trust (the "Trust") and a
third party multi-seller conduit (the "Conduit"). The Company retains
participating interests in the credit card loans (under "Retained interests in
loans securitized") on the consolidated balance sheets. Although the Company
continues to service the underlying credit card accounts and maintains the
customer relationships, these transactions are treated as sales for financial
reporting purposes and the associated loans are not reflected on the
consolidated balance sheets.
F-8
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Beginning in 1997, the sales of these loans have been recorded in accordance
with Statement of Financial Acounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Upon sale, the sold credit card loans are removed from the balance sheet and the
related financial and servicing assets controlled and liabilities incurred are
initially measured at fair value, if practicable. SFAS 125 also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interests, if any, based on their relative fair values at the
date of the transfer. The adoption of SFAS 125 did not have a material effect on
the Company's financial statements.
Prior to January 1, 1997, The sales of these loans were recorded in
accordance with SFAS No. 77, "Reporting by Transferors for Transfers of
Receivables with Recourse". Upon sale, the loans were removed from the balance
sheet, and a gain on sale was recognized for the difference between the carrying
value of the loans and the adjusted sales proceeds. The adjusted sales proceeds
are based on a present value estimate of future cash flows to be received over
the life of the loans, net of certain funding and servicing costs. The resulting
gain was further reduced for estimated loan losses over the life of the related
loans under the limited recourse provisions.
The securitization and sale of credit card loans changes the Company's
interest in such loans from lender to servicer, with a corresponding change in
how revenue is reported in the income statement. For securitized and sold credit
card loans, amounts that otherwise would have been recorded as interest income,
interest expense, fee income and provision for loan losses are instead reported
in other operating income as "Net securitization and credit card servicing
income." The Company has receivables from and payables to the Trust and Conduit
as a result of securitizations, including amounts deposited in an investor
reserve account held by the trustee for the benefit of the Trust's
certificateholders, the excess servicing asset, which represents the net gain
recorded at any point in time for loans sold under the asset securitizations,
net of recourse reserves for securitized loans and normal and excess servicing
fee receivables.
In May 1997, the Metris Master Trust issued Series 1997-1 certificates to
third parties with a principal amount of $794.8 million, generating proceeds of
$792.2 million of which $667.7 million was used to reduce the Class A Variable
Funding Certificates issued under Series 1995-1. The Series 1997-1 certificates
are scheduled to begin accumulating principal collections in March 2001, however
the accumulation period could potentially begin at a later date. The expected
final payment date of these certificates is in April 2002.
ALLOWANCE FOR LOAN LOSSES
Provisions for loan losses are made in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable future losses
of principal and earned interest, net of recoveries, inherent in the existing
on-balance-sheet loan portfolio. In evaluating the adequacy of the allowance for
loan losses, management considers several factors, including: historical
charge-off and recovery activity by age (vintage) of each loan portfolio (noting
any particular trends over recent periods); recent delinquency and collection
trends by vintage; current economic conditions and the impact such conditions
might have on borrowers' ability to repay; the risk characteristics of the
portfolios; and other factors. Significant changes in these factors could affect
the adequacy of the allowance
F-9
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for loan losses in the near term. Credit card accounts are generally charged off
at the end of the month during which the loan becomes contractually 180 days
past due, with the exception of bankrupt accounts, which are charged off
immediately upon formal notification of bankruptcy, and accounts of deceased
cardholders without a surviving, contractually liable individual, or an estate
large enough to pay the debt in full, which are also charged off immediately
upon notification.
DEBT WAIVER PRODUCTS
Direct Merchants Bank offers various debt waiver products to its credit card
customers for which it retains the claims risk. Revenue for such products is
recognized ratably over the coverage period, generally one month, and reserves
are provided for pending claims based on Direct Merchants Bank's historical
experience with settlement of such claims. Revenues recorded for debt waiver
products are included in the consolidated statements of income under "Fee-based
product revenues" and were $33.5 million and $17.0 million for the nine months
ended September 30, 1997 and 1996, respectively, and $25.5 million, $4.8
million, and $0 for the years ended December 31, 1996, 1995 and 1994,
respectively. Unearned revenues and reserves for pending claims are recorded in
the consolidated balance sheets in "Accrued Expenses and Other Liabilities" and
amounted to $3.4 million, $2.5 million and $0.7 million as of September 30,
1997, December 31, 1996 and 1995, respectively.
PREMISES AND EQUIPMENT
Premises, furniture and equipment, and computer hardware and software are
stated at cost and depreciated on a straight-line basis over their estimated
economic useful lives (three to ten years for furniture and equipment, three to
five years for computer hardware, up to five years for software; and over the
shorter of the estimated useful life or the term of the lease for leasehold
improvements). The Company capitalizes software developed for internal use that
represents major enhancements or replacements of operating and management
information systems. Amortization of such capitalized software begins when the
systems are fully developed and ready for implementation. Repairs and
maintenance are charged to expense as incurred.
INTEREST INCOME ON CREDIT CARD LOANS
Interest income on credit card loans is accrued and earned based on the
principal amount of the loans outstanding using the effective-yield method.
Accrued interest which has been billed to the customer but not yet received is
classified on the balance sheet with the related credit card loans. Accrued
interest which has not yet been billed to the customer is estimated and
classified on the balance sheet separate from the loan balance. Interest income
is generally recognized until a loan is charged off. At that time, the accrued
interest portion of the charged off balance is deducted from current period
interest income.
EXTENDED SERVICE PLANS
The Company coordinates the marketing activities for Fingerhut's sales of
extended service plans. Revenues for extended service plans sold, and related
provisions for service contract returns, are recorded at the time of Fingerhut's
shipment to the customer of the related merchandise. The provision
F-10
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for service contract returns charged against revenues for the nine months ended
September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and
1994 amounted to $3.1 million, $2.8 million, $4.5 million, $3.6 million and $2.6
million, respectively. Additionally, the Company reimburses Fingerhut for the
cost of its marketing media and other services utilized in the sales of service
plans, based on contracts sold and on media utilization costs as agreed to by
the Company and Fingerhut. These media cost reimbursements were $2.6 million,
$3.8 million, $4.8 million, $4.2 million, and $2.8 million for the nine months
ended September 30, 1997 and 1996 and for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company began performing administrative services and retained the claims
risk for all extended service plans sold on or after January 1, 1997. As a
result, extended service plan revenues and the related expenses have been
deferred and will be recognized over the life of the related extended service
plan contracts. Prior to January 1, 1997 the Company contracted with a
third-party underwriter and claims administrator to service and absorb the risk
of loss for most claims. These claims servicing contract costs were expensed as
the service contracts were sold, net of the related cost of anticipated service
contract returns. In addition, the revenues related to these contract sales were
recognized immediately.
CREDIT CARD FEES AND ORIGINATION COSTS
Credit card fees include annual membership, late payment, over-credit limit,
returned check, and cash advance transaction fees. These fees are assessed
according to the terms of the related cardholder agreements.
The Company defers direct credit card origination costs associated with
successful credit card solicitations that it incurs in transactions with
independent third parties, and certain other costs that it incurs in connection
with loan underwriting and the preparation and processing of loan documents.
These deferred credit card origination costs are netted against the related
credit card annual fee, if any, and amortized on a straight-line basis over the
cardholder's privilege period, generally 12 months. Net deferred fees were $15.7
million, $14.3 million and $6.0 million as of September 30, 1997, December 31,
1996 and 1995, respectively.
SOLICITATION EXPENSES
Credit card account and other product solicitation costs, including
printing, credit bureaus, list processing costs, telemarketing and postage, are
generally expensed as incurred over the two to three month period during which
the related responses to such solicitation are received.
CREDIT CARD FRAUD LOSSES
The Company experiences credit card fraud losses from the unauthorized use
of credit cards. These fraudulent transactions are expensed when identified,
through the establishment of a reserve for the full amount of the transactions.
These amounts are charged off after 90 days, after all attempts to recover the
amounts from such transactions, including chargebacks to merchants and claims
against cardholders, are exhausted.
F-11
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE RISK MANAGEMENT CONTRACTS
The nature and composition of the Company's assets and liabilities and
off-balance-sheet items expose the Company to interest rate risk. The Company
enters into a variety of interest rate risk management contracts such as
interest rate swap and cap agreements in the management of its interest rate
exposure. These interest rate risk management contracts are designated, and
effective, as synthetic alterations of specific assets or liabilities (or groups
of assets or liabilities) and off-balance-sheet items. The monthly interest rate
differential to be paid or received on these contracts is accrued and included
in "Net securitization and credit card servicing income" on the consolidated
statements of income. Premiums paid for such contracts and the related interest
payable or receivable under such contracts are classified under "Other
payables/receivables due to/from credit card securitization, net," on the
consolidated balance sheets. Premiums paid for interest rate contracts are
recorded at cost and amortized on a straight-line basis over the life of the
contract.
INCOME TAXES
The Company is included in the consolidated federal income tax return and
certain state income tax returns of FCI. Based on a tax sharing agreement
between the Company and FCI, the provisions for federal and state income taxes
are computed based only on the Company's financial results as if the Company
filed its own federal and state income tax returns. Deferred taxes are
determined based on the temporary differences between the financial statement
and tax bases of assets and liabilities that will result in future taxable or
deductible amounts using enacted tax rates that are expected to apply for the
year in which the differences are expected to reverse.
STATEMENTS OF CASH FLOWS
The Company prepares its consolidated statements of cash flows using the
indirect method, which requires a reconciliation of net income to net cash from
operating activities. In addition, the Company nets certain cash receipts and
cash payments from credit card loans made to customers, including principal
collections on those loans. For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash and due from banks, federal funds
sold, short-term investments, (mainly money market funds) and all other highly
liquid investments with original maturities of three months or less.
Cash paid for interest during the nine months ended September 30, 1997 and
1996 and the years ended December 31, 1996, 1995 and 1994 was $5.8 million, $2.8
million, $4.1 million, $1.2 million, and $0 respectively. Cash paid for income
taxes for the same periods was $43.1 million, $31.0 million, $41.6 million, $2.0
million , and $1.6 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-
F-12
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock (see Note 8).
EARNINGS PER SHARE
Earnings per share is computed using net income applicable to common stock
and the weighted average number of common and common equivalent shares
outstanding, after giving retroactive effect to the shares outstanding as if the
Company's reorganization (See Note 1) had occurred at the beginning of the first
period shown. The common equivalent shares outstanding were calculated using the
treasury stock method, using the initial public offering price for the period
prior to the initial public offering. In addition, common equivalent shares
outstanding were calculated assuming that certain options were converted into
shares of the Company's common stock at the beginning of the first period shown.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings Per
Share." This Statement is effective for financial statements issued for periods
ending after December 15, 1997 and supersedes APB Opinion No. 15, "Earnings Per
Share." The Statement replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement and requires companies to
restate prior-period EPS for all periods in which an income statement is
presented. Under FAS 128, basic and diluted earnings per share for the nine
months ended September 30 were:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Income available to common stockholders................................ $ 27,994 $ 14,696
--------- ---------
--------- ---------
Weighted average common shares outstanding............................. 19,225 15,967
Adjustments for dilutive securities:
Assumed exercise of outstanding stock options..........................
Diluted common shares.................................................. 999 519
--------- ---------
20,224 16,486
--------- ---------
--------- ---------
Earnings per share:
Basic.................................................................. $ 1.46 $ 0.92
Diluted................................................................ 1.38 0.89
</TABLE>
CUSTOMER BASE INTANGIBLE
The customer base intangible represents the excess of amounts paid for
portfolio acquisitions over the related credit card loan balances net of
reserves and discounts. The intangible assets are amortized
F-13
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
over the estimated periods of benefit, generally 5 to 7 years, in proportion to
the expected benefits to be recognized.
INTEREST RATE RISK MANAGEMENT CONTRACTS
The Company enters into interest rate cap and swap agreements to hedge its
economic exposure to fluctuating interest rates associated with both the
floating rate and fixed rate certificates issued by the Metris Master Trust. If
a derivative financial instrument or the instrument it is hedging is sold or
terminated, the Company will recognize a gain or loss resulting from the
transaction in the period the derivative is sold or terminated. The Company has
not sold or terminated any derivative financial instruments.
NOTE 3--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------
1997 1996 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of year.................... $ 12,829 $ 3,679 $ 3,679 $
Allowance related to assets acquired, net....... 2,815
Provision for loan losses....................... 28,589 10,556 18,477 4,393
--------- --------- --------- ---------
Loans charged off............................... 20,834 5,816 9,514 720
Recoveries...................................... 448 121 187 6
--------- --------- --------- ---------
Net loan charge-offs............................ 20,386 5,695 9,327 714
--------- --------- --------- ---------
Balance at end of year.......................... $ 23,847 $ 8,540 $ 12,829 $ 3,679
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE 4--PREMISES AND EQUIPMENT
The carrying value of premises and equipment is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- --------------------
1997 1996 1995
-------------- --------- ---------
<S> <C> <C> <C>
Furniture and equipment.................................. $ 5,254 $ 1,013 $ 300
Computer equipment....................................... 480 1,339 1,110
Computer software in development......................... 1,365 1,445 110
Construction in progress................................. 4,377 1,710 48
Leasehold improvements................................... 744 248 74
-------------- --------- ---------
Total.................................................... 12,220 $ 5,755 $ 1,642
Less: Accumulated depreciation and amortization.......... 1,542 592 166
-------------- --------- ---------
Balance at end of year................................... $ 10,678 $ 5,163 $ 1,476
-------------- --------- ---------
-------------- --------- ---------
</TABLE>
F-14
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 4--PREMISES AND EQUIPMENT (CONTINUED)
Depreciation and amortization expense for the nine months ended September
30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 was $950
and $249 and $426, $127, and $26, respectively.
NOTE 5--SHORT TERM BORROWINGS
On September 16, 1996, the Company executed agreements for the following
credit facilities: (1) a $300 million, five-year revolving credit facility for
the Company (the "Revolving Credit Facility"), guaranteed by FCI; and (2) an
amendment to Series 1995-1 under the Metris Master Trust to (a) increase the
Class A Variable Funding Certificate to support a $400 million increase to $1.2
billion (of which the Company may use up to $800 million) of the Fingerhut Owner
Trust Commercial Paper Program in which the Company participates; and (b) issue
$112.6 million of additional asset-backed certificates to support the
aforementioned increase in the Commercial Paper Program.
The Company borrows under the Revolving Credit Facility and from FCI to fund
on-balance sheet loans and for other general business purposes. At September 30,
1997 and December 31, 1996, the Company had outstanding borrowings of $153
million and $50 million, respectively, under the Revolving Credit Facility and
outstanding borrowings from FCI of $4.2 million and $63.5 million at December
31, 1996 and 1995, respectively. The weighted average interest rates on the
Revolving Credit Facility borrowings at September 30, 1997 and December 31, 1996
were 8.5% and 5.9%, respectively. The weighted average interest rates on the
borrowings from FCI were 7.1% at December 31, 1996 and 1995.
The Revolving Credit Facility is guaranteed by FCI and is further supported
by the pledge of the stock of certain subsidiaries of the Company and certain
accounts receivable and interests held therein by the Company. The Revolving
Credit Facility also contains certain financial covenants standard for revolving
credit facilities of this type including minimum net worth, minimum equity to
managed assets ratio, maximum leverage and a limitation on indebtedness. In
addition, the FCI guarantee includes certain covenants including interest
coverage, leverage and minimum net worth for FCI. At September 30, 1997 and
December 31, 1996, the Company and FCI were in compliance with these covenants.
NOTE 6--PORTFOLIO ACQUISITIONS
In September 1997, the Company acquired a $317 million credit card portfolio
from Key Bank USA, National Association. These credit card receivables were
securitized and sold to investors through a third party multi-seller conduit.
The Company retains an interest in the receivables which is financed by
borrowings under the Revolving Credit Facility.
In October 1997, the Company acquired a $405 million credit card portfolio
from Mercantile Bank National Association. This portfolio was also securitized
and sold through the same third party multi-seller conduit. The Company retains
an interest in the receivables which is financed by borrowings under the
Revolving Credit Facility.
NOTE 7--INITIAL PUBLIC OFFERING
In October, 1996, the Company completed an initial public offering of
3,258,333 shares of its common stock at $16 a share. The transaction reduced
FCI's ownership interest in the Company to
F-15
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 7--INITIAL PUBLIC OFFERING (CONTINUED)
approximately 83%. The Company realized net cash proceeds of approximately $47.4
million from the sale of such shares after underwriting discounts, commissions
and expenses of the offering.
NOTE 8--STOCK OPTIONS
In connection with the initial public offering of the Company (see Note 7),
the Company adopted the Metris Companies Inc. Long-Term Incentive and Stock
Option Plan (the "Stock Option Plan"), which permits a variety of stock-based
grants and awards and gives the Company flexibility in tailoring its long-term
compensation programs. It provides that up to 1,860,000 shares of common stock,
subject to adjustment in certain circumstances, are available for awards of
stock options or other stock-based awards. At December 31, 1996, 461,300 shares
were available for grant.
The Compensation Committee has the authority to determine the exercise
prices, vesting dates or conditions, expiration dates and other material
conditions upon which options or awards may be exercised, except that the option
price for Incentive Stock Options ("ISOs") may not be less than 100% of the fair
market value of the Common Stock on the date of grant (and not less than 110% of
the fair market value in the case of an ISO granted to any employee owning more
than 10% of the Common Stock) and the terms of nonqualified stock options may
not exceed 15 years from the date of grant (not more than 10 years for ISOs and
five years for ISOs granted to any employee owning more than 10% of the Common
Stock). Full or part-time employees, consultants or independent contractors to
the Company are eligible to receive nonqualified options and awards (only full
or part-time employees in the case of ISOs).
Effective March 1994, FCI granted the Company's Chief Executive Officer
("CEO") a tandem option (the "Tandem Option") for either (a) 55,000 shares of
FCI's common stock at an exercise price of $15 per share or (b) a 3.3% equity
interest in the portion of the Company that exceeds two times the estimated fair
value of the Company in March 1994. The exercise of either option terminates the
other. In connection with the initial public offering, the 3.3% equity interest
was converted into options for 656,075 shares of the Company's common stock with
an exercise price of $2.76 per share, which vests over five years from the
effective date. Compensation expense of $7.8 million related to these options
was recorded for the year ended December 31, 1996
In addition, at the time of the initial public offering the Company granted
options to purchase an aggregate of 742,625 shares of common stock to officers
and employees of the Company and Fingerhut, and others. Of these, 646,500
options were granted at an exercise price of $16 and the balance were granted at
a below-market exercise price per share, for which expense of $1.2 million was
recorded for the year ended December 31, 1996. All options granted to current
officers and employees of the Company and Fingerhut were at the initial offering
price.
The Company also adopted the Metris Companies Inc. Non-Employee Director
Stock Option Plan (the "Director Plan"). It provides that up to 20,000 shares of
common stock, subject to adjustments in certain circumstances, are available for
awards of stock options. Of these, 10,000 options were granted at an exercise
price of $16. At December 31, 1996, 10,000 shares were available for grant.
F-16
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 8--STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Accordingly, the Company continues to account for stock-based
compensation under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Under the guidelines of Opinion 25,
compensation cost for stock-based employee compensation plans is recognized
based on the difference, if any, between the quoted market price of the stock on
the date of grant and the amount an employee must pay to acquire the stock. Had
compensation cost for these plans been determined based on the fair value
methodology prescribed by SFAS 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Net earnings--as reported............................................... $ 20,016 $ 4,581
Net earnings--pro forma................................................. $ 19,837 $ 4,581
Earnings per share--as reported......................................... $ 1.16 $ .28
Earnings per share--pro forma........................................... $ 1.15 $ .28
</TABLE>
The above pro forma amounts may not be representative of the effects on
reported net earnings for future years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used for grants in 1996: dividend
yield of 0.17%; expected volatility of 25.1%; risk-free interest rate of 6.48%
for the Stock Option Plan and the Director Plan and 6.53% for the Tandem Option
Plan; and expected lives of 6.5 years for the Stock Option Plan and 7 years for
the Tandem Option Plan. There were no options granted in 1995.
Information regarding the Company's stock option plans for 1996, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994
------------------------ ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year........... 656,075 $ 2.76 656,075 $ 2.76
Options exercised................................
Options granted.................................. 752,625 14.31 656,075 $ 2.76
Options canceled/forfeited.......................
----------- --------- ---------
Options outstanding, end of year................. 1,408,700 8.93 656,075 2.76 656,075 2.76
----------- --------- ---------
----------- --------- ---------
Weighted-average fair value of options, granted
during the year................................ 5.87
Weighted-average exercise price of options,
exercisable at end of year..................... 2.76 2.76 2.76
</TABLE>
F-17
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 8--STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------------------
NUMBER WEIGHTED- AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED- AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICE AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE
- -------------------------- ------------ ------------------- ----------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 2.76.................... 752,200 7.04 $ 2.76 376,100 $ 2.76
16.00.................... 656,500 9.83 16.00
</TABLE>
NOTE 9--EMPLOYEE BENEFIT PLANS
Certain employees of the Company are participants in a non-contributory,
defined benefit plan of FCI that covers substantially all employees of FCI. This
plan has a vesting period of five years and provides monthly retirement benefits
based on years of service and level of compensation. FCI's funding policy is to
make annual contributions equal to, or exceeding, the minimum required by the
Employee Retirement Income Security Act of 1974, and plan assets were primarily
invested in an equity fund at December 31, 1996 and 1995. Due to the small
number of the Company's employees with a significant number of years of service,
the actuarial present value of benefit obligations and the plan assets to be
allocated to the Company were immaterial at December 31, 1996 and 1995. Pension
expense allocated to the Company for the years ended December 31, 1996, 1995 and
1994 was $44, $28 and $7, respectively.
Certain employees of the Company are also participants in a defined
contribution plan of FCI. Employer contributions to the plan are discretionary
and are generally determined by the Board of Directors of each of the individual
companies that participate in such plans, but are not to exceed 15% of each
individual's compensation. The cost allocated to the Company for this plan for
the years ended December 31, 1996, 1995 and 1994 was $149, $175 and $30,
respectively.
Employees of Direct Merchants Bank participate in a defined contribution
plan maintained by Direct Merchants Bank that covers substantially all of its
employees. The plan is limited to 401(k) provisions with a partial employer
match. The cost to the Company for this plan for the years ended December 31,
1996, 1995 and 1994 was $6, $9 and $4, respectively.
Effective January 1, 1997, substantially all employees of the Company are
eligible to participate in a defined contribution plan maintained by the
Company.
F-18
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 10--INCOME TAXES
The components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal................................................... $ 38,914 $ 6,238 $ 1,274
State..................................................... 4,035 921 126
Deferred.................................................... (30,419) (4,291) (95)
---------- --------- ---------
$ 12,530 $ 2,868 $ 1,305
---------- --------- ---------
---------- --------- ---------
</TABLE>
A reconciliation of the Company's effective income tax rate compared to the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate...................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............................. 3.2% 3.2% 2.2%
Other, net............................................................. 0.3% 0.3% 0.1%
--- --- ---
Effective income tax rate.............................................. 38.5% 38.5% 37.3%
--- --- ---
</TABLE>
The "other net" tax rate in 1996, 1995 and 1994 was composed of
miscellaneous items, none of which was individually significant.
F-19
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 10--INCOME TAXES (CONTINUED)
The Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred income tax assets resulting from future deductible temporary
differences:
Allowance for loan losses and recourse reserves....................... $ 29,910 $ 8,455
Deferred revenues..................................................... 1,568 243
Other product reserves.................................................. 1,482 518
Other................................................................. 1,265 470
--------- ---------
$ 34,225 $ 9,686
--------- ---------
--------- ---------
Deferred income tax liabilities resulting from future taxable temporary
differences:
Net gain on securitization of credit card loans....................... $ 386 $ 2,694
Deferred solicitation and origination costs........................... 1,692 1,594
Accrued interest on credit card loans................................. 578 1,061
Other................................................................. 41 31
--------- ---------
$ 2,697 $ 5,380
--------- ---------
--------- ---------
</TABLE>
Management believes, based on the Company's history of operating earnings,
expectations for operating earnings in the future, and the expected reversals of
taxable temporary differences, earnings will be sufficient to fully utilize the
deferred tax assets.
NOTE 11--RELATED PARTY TRANSACTIONS
FCI and its various subsidiaries have historically provided significant
financial and operational support to the Company. Direct expenses incurred by
FCI and/or its subsidiaries for the Company, and other expenses, have been
allocated to the Company using various methods (headcount, actual or estimated
usage, etc.). Since the Company has not historically operated as a separate
stand-alone entity for all periods presented, these allocations do not
necessarily represent the expenses and costs that would have been incurred
directly by the Company had it operated on a stand-alone basis. However,
management believes such allocations reasonably approximate market rates for the
services performed. The direct and allocated expenses represent charges for
services such as data processing and information systems, audit, certain
accounting and other similar functions, treasury, legal, human resources,
certain customer service and marketing analysis functions, certain executive
time, and space and property usage allocations. In addition, the Company has
historically managed the sales of credit insurance products for Fingerhut. In
accordance therewith, the Company has allocated back to Fingerhut certain direct
and other expenses using methods similar to those mentioned above. The
historical expenses and cost allocations have been agreed to by the management
of both FCI and the Company, the terms of which are summarized in an ongoing
Administrative Services Agreement between FCI and the Company. This agreement
provides for similar future services using similar rates and cost allocation
methods for various terms, the latest of which expires on December 31, 1998.
F-20
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 11--RELATED PARTY TRANSACTIONS (CONTINUED)
The financial statements also include an allocation of FCI interest expense
for the net borrowings of the Company from FCI, or a net interest credit for the
net cash flows of the Company loaned to FCI in
certain periods. These allocations of interest expense or income for each of the
periods presented were based on the net loans made or borrowings received
between the Company and FCI, plus or minus the effects of intercompany balances
outstanding during such periods. The interest rate used to calculate such
expense or credit during such periods was based on the average short-term
borrowing rates of FCI during the periods presented (see Note 6).
The Company and Fingerhut have also entered into several other agreements
that detail further business arrangements between the companies. The retroactive
effects of these additional intercompany agreements and business arrangements
have been reflected in the consolidated financial statements of the Company. The
agreements entered into include a Co-Brand Credit Card Agreement and a Data
Sharing Agreement, which provides for payment for every Fingerhut co-branded
credit card account booked, as defined, and a payment based on card usage from
such accounts. The parties have also entered into a Database Access Agreement,
which provides the Company with the exclusive right to access and market
financial services products, as defined, to Fingerhut customers, in exchange for
an escalating non-refundable license fee, payable annually, ranging from $0.5
million to $2.0 million, based on the year within the term of the agreement
($1.0 million was paid in January 1997). The agreement also calls for a
solicitation fee per product mailed to a Fingerhut customer, and a suppress file
fee for each consumer name obtained from a third party and matched to the
Fingerhut suppress file before its solicitation.
The Company and Fingerhut have also entered into an Extended Service Plan
Agreement, which provides the company with the exclusive right to provide and
coordinate the marketing of extended service plans to the customers of
Fingerhut. Revenues are received from Fingerhut from such sales, and the Company
reimburses Fingerhut and/or its subsidiaries for certain marketing costs.
Additionally, the Company and FCI have entered into a tax sharing agreement (see
Note 2).
Finally, the Company and FCI entered into a registration rights agreement
under which FCI has the right to require the Company to register under the
Securities Act of 1933, as amended, or to qualify for sale, any securities of
the Company that FCI owns, and the Company will be required to use reasonable
efforts to cause such registration to occur, subject to certain limitations and
conditions. The Company will bear the entire cost of the first three demand
registrations attributable to FCI, and FCI will bear one-half of the costs of
any subsequent demand registrations. These costs include legal fees and expenses
of counsel for the Company, registration fees, printing expenses and other
related costs. FCI, however, will be required to pay any underwriting discounts
and commissions associated with the sale of its securities and the fees and
expenses of its own counsel.
In the ordinary course of business, executive officers of the Company or FCI
may have credit card loans issued by the Company. Pursuant to the Company's
policy, such loans are issued on the same terms as those prevailing at the time
for comparable loans with unrelated persons and do not involve more than the
normal risk of collectibility.
F-21
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 11--RELATED PARTY TRANSACTIONS (CONTINUED)
The following table summarizes the amounts of these direct expense charges
and cost allocations (including net interest income or expense), and the costs
to the Company of the intercompany agreements mentioned above, for each of the
years reflected in the financial statements of the Company:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income......................................... $ $ $ $ $ 487
Net extended service plan revenues...................... 3,249 13,789 20,420 17,779 12,244
Expenses:
Interest expense........................................ 2,496 3,178 1,181
Credit card account and other product solicitation and
marketing expenses.................................... 6,269 6,854 9,335 8,204 3,476
Data processing services and communications............. 1,327 910 1,324 320 7
Third party customer service and collections expenses... 500 473
Other affiliate cost allocations........................ 938 702 950 1,680 1,688
</TABLE>
NOTE 12--COMMITMENTS AND CONTINGENCIES
Commitments to extend credit to consumers represent the unused credit limits
on open credit card accounts. These commitments amounted to $1.8 billion, $1.2
billion and $709.5 million as of September 30, 1997, December 31, 1996 and 1995,
respectively. While these amounts represent the total lines of credit available
to the Company's customers, the Company has not experienced and does not
anticipate all of its customers will exercise their entire available line at any
given point in time. The Company also has the right to increase, reduce, cancel,
alter or amend the terms of these available lines of credit at any time.
The Company leases certain office facilities and equipment under various
cancelable and non-cancelable operating lease agreements that provide for the
payment of a proportionate share of property taxes, insurance and other
maintenance expenses. These leases also may include scheduled rent increases and
renewal options. In addition, certain of these obligations have been guaranteed
by FCI. Rental expense for such operating leases for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994
was $3.0 million and $1.1 million, and $1.1 million, $0.2 million and $0.1
million, respectively.
F-22
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease commitments at December 31, 1996 under cancelable and
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997................................................................................ $ 3,181
1998................................................................................ 2,994
1999................................................................................ 1,675
2000................................................................................ 1,296
2001................................................................................ 195
Thereafter.......................................................................... 16
---------
Total minimum lease payments...................................................... $ 9,357
---------
---------
</TABLE>
NOTE 13--CAPITAL REQUIREMENTS AND DIVIDEND AND LOAN RESTRICTIONS
In the normal course of business, the Company enters into agreements, or is
subject to regulatory requirements, that result in cash, debt and dividend or
other capital restrictions.
The Federal Reserve Act imposes various legal limitations on the extent to
which banks that are members of the Federal Reserve System can finance or
otherwise supply funds to certain of their affiliates. In particular, Direct
Merchants Bank is subject to certain restrictions on any extensions of credit to
or other covered transactions, such as certain purchases of assets, with the
Company or its affiliates. Such restrictions prevent Direct Merchants Bank from
lending to the Company and its affiliates with certain limited exceptions.
Additionally, Direct Merchants Bank is limited in its ability to declare
dividends to the Company in accordance with the national bank dividend policy.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the Office of the Comptroller of the Currency and the Federal Reserve
Board, and monitored by the Federal Deposit Insurance Corporation and the Office
of the Comptroller of the Currency. These regulators consider a range of factors
when determining capital adequacy, such as the organization's size, quality,
liquidity and internal controls. At September 30, 1997, December 31, 1996 and
1995, Direct Merchants Bank's Tier 1 risk-based capital ratio, risk-based total
capital ratio and Tier 1 leverage ratio exceeded the minimum required capital
levels, and Direct Merchants Bank was considered a "well capitalized" depository
institution under regulations of the Office of the Comptroller of the Currency.
NOTE 14--CONCENTRATIONS OF CREDIT RISK
A concentration of credit risk is defined as significant credit exposure
with an individual or group engaged in similar activities or affected similarly
by economic conditions. The Company is active in originating credit card loans
throughout the United States, and no individual or group had a significant
F-23
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 14--CONCENTRATIONS OF CREDIT RISK (CONTINUED)
concentration of credit risk at September 30, 1997 or December 31, 1996. The
following table details the geographic distribution of the Company's retained,
sold and managed credit card loans:
<TABLE>
<CAPTION>
RETAINED SOLD MANAGED
----------- ------------- -------------
<S> <C> <C> <C>
September 30, 1997
- ---------------------------------------------------
California......................................... $ 49,362 $ 319,134 $ 368,496
Florida............................................ 30,358 196,279 226,637
Texas.............................................. 25,964 167,870 193,834
New York........................................... 24,252 156,798 181,050
Ohio............................................... 15,263 98,680 113,943
Illinois........................................... 13,549 87,602 101,151
Pennsylvania....................................... 13,285 85,896 99,181
All Others......................................... 187,484 1,212,101 1,399,585
----------- ------------- -------------
Total............................................ $ 359,517 $ 2,324,360 $ 2,683,877
----------- ------------- -------------
----------- ------------- -------------
December 31, 1996
- ---------------------------------------------------
California......................................... $ 27,053 $ 175,892 $ 202,945
Florida............................................ 17,505 113,819 131,324
New York........................................... 17,034 110,754 127,788
Texas.............................................. 16,480 107,151 123,631
Ohio............................................... 9,409 61,179 70,588
Pennsylvania....................................... 8,654 56,267 64,921
Illinois........................................... 7,989 51,940 59,929
All others......................................... 111,205 723,609 834,814
----------- ------------- -------------
Total.......................................... $ 215,329 $ 1,400,611 $ 1,615,940
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
The Company targets its consumer credit products to moderate income
consumers. Primary risks associated with lending to this market are that they
may be more sensitive to future economic downturns, which may make them more
likely to default on their obligations.
At September 30, 1997, December 31, 1996 and December 31, 1995, all federal
funds sold were made to one bank, which represents a concentration of credit
risk to the Company. The Company is able to monitor and mitigate this risk since
all federal funds are sold on a daily origination and repayment basis and
therefore may be recalled quickly should the credit risk of the counterparty
bank increase above certain limits set by the Company.
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments". Financial instruments
include both assets and liabilities, whether or not recognized in the Company's
consolidated balance sheets, for which it is practicable to estimate fair value.
Additionally, certain
F-24
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
intangible assets recorded on the consolidated balance sheets, such as purchased
credit card relationships, and other intangible assets not recorded on the
consolidated balance sheets (such as the value of the credit card relationships
for originated loans and the franchise values of the Company's various lines of
business) are not considered financial instruments and, accordingly, are not
valued for purposes of this disclosure. The Company believes that there is
substantial value associated with these assets based on current market
conditions, including the purchase and sale of such assets. Accordingly, the
aggregate estimated fair value amounts presented do not represent the entire
underlying value of the Company.
Quoted market prices generally are not available for all of the Company's
financial instruments. Accordingly, in cases where quoted market prices are not
available, fair values were estimated using present value and other valuation
techniques that are significantly affected by the assumptions used, including
the discount rate and estimated future cash flows. Such assumptions are based on
historical experience and assessment regarding the ultimate collectibility of
assets and related interest, and estimates of product lives and repricing
characteristics used in the Company's asset/liability management process. These
assumptions involve uncertainties and matters of judgment, and therefore, cannot
be determined with precision. Thus, changes in these assumptions could
significantly affect the fair-value estimates.
A description of the methods and assumptions used to estimate the fair value
of each class of the Company's financial instruments is as follows:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST AND FEES RECEIVABLE
The carrying amounts approximate fair value due to the short-term nature of
these instruments.
CREDIT CARD LOANS, NET OF ALLOWANCE FOR LOAN LOSSES
Currently, credit card loans are originated with variable rates of interest
that adjust with changing market interest rates. Thus, carrying value
approximates fair value. However, this valuation does not include the value that
relates to estimated cash flows generated from new loans from existing customers
over the life of the cardholder relationship. Accordingly, the aggregate fair
value of the credit card loans does not represent the underlying value of the
established cardholder relationships.
OTHER PAYABLES/RECEIVABLES DUE TO/FROM CREDIT CARD SECURITIZATIONS, NET
The fair value of the excess servicing rights component of other
payables/receivables due to/from credit card securitizations, net, is estimated
by discounting the future cash flows at rates which management believes to be
consistent with those that would be used by an independent third party. However,
because there is no active market for these financial instruments, the fair
values presented may not be indicative of the value negotiated in an actual
sale. The future cash flows used to estimate the fair values of these financial
instruments are adjusted periodically for prepayments on loans sold, net of
anticipated charge-offs over the life of the loans under the recourse
provisions, and allow for the value of normal servicing fees. For the other
components of other payables/receivables due to/from credit card
securitizations, net, the carrying amount is a reasonable estimate of the fair
value.
F-25
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INTEREST-BEARING DEPOSIT AND SHORT-TERM BORROWINGS
Interest-bearing deposit and short-term borrowings are made with variable
rates of interest that adjust with changing market interest rates. Thus,
carrying value approximates fair value.
INTEREST RATE CAP AND SWAP AGREEMENTS
The fair values of interest rate cap and swap agreements were obtained from
dealer quoted prices. These values generally represent the estimated amounts the
Company would receive or pay to terminate the agreements at the reporting dates,
taking into consideration current interest rates and the current
creditworthiness of the counterparties.
The estimated fair values of the Company's financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------- ------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents......... $ 49,465 $ 49,465 $ 32,082 $ 32,082 $ 34,743 $ 34,743
Credit card loans, net............ 335,670 335,670 202,500 202,500 91,385 91,385
Other payables/receivables due
(to)/from credit card
securitizations, net............ (107,102) (107,102) (36,619) (36,619) 31,597 31,597
Interest-bearing deposit.......... 1,000 1,000 1,000 1,000
Short term borrowings............. 153,000 153,000 54,163 54,163 63,482 63,482
Interest rate swap agreements in a
net receivable position......... 14,683 2,657
Interest rate cap agreements...... 3,660 400 4,143 1,989 3,008 1,488
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
The Company has entered into interest rate cap and swap agreements to hedge
its economic exposure to fluctuating interest rates associated with the floating
and fixed rate certificates issued by the Metris Master Trust. Particularly, in
connection with the issuance of the $512.6 million Metris Master Trust Series
1995-1 certificates in May 1995, the Company entered into an eight-year
agreement capping the certificate interest rate at 11.2%. Also, in connection
with the issuance of additional Series 1995-1 certificates related to the
September 1996 amendment of Series 1995-1, the Company entered into additional
six-and two-thirds-year agreements capping the certificates' interest rate at
11.2%. Additionally, the Company entered into two interest rate swap agreements
in April 1996, to synthetically alter the fixed rate of the Metris Master Trust
Series 1996-1 certificates to a floating rate to manage interest rate
sensitivity and better match this rate to the variable interest rate of the
Company's loans that are sold and serviced with limited recourse. Total notional
amounts of these swap transactions amounted to $605.5 million, and exchanged an
obligation to pay a weighted-average fixed rate of 6.26% for a one-month
floating rate based on the prevailing monthly LIBOR rate. This weighted-average
floating rate for
F-26
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
the series 1996-1 certificates was 5.64% at December 31, 1996. The obligations
of the Company and the counterparties under these swap agreements are settled on
a monthly basis.
Interest rate risk management contracts are generally expressed in notional
principal or contract amounts that are much larger than the amounts potentially
at risk for nonpayment by counterparties. Therefore, in the event of
nonperformance by the counterparties, the Company's credit exposure is limited
to the uncollected interest and contract market value related to the contracts
that have become favorable to the Company. Although the Company does not require
collateral from counterparties on its existing agreements, the Company does
control the credit risk of such contracts through established credit approvals,
risk control limits, and the ongoing monitoring of the credit ratings of
counterparties. The Company currently has no reason to anticipate nonperformance
by the counterparties.
NOTE 16--SUBSEQUENT EVENTS
On October 29, 1997, the Company declared a cash dividend in the amount of
$.01 per share, aggregating approximately $.2 million, payable on November 26,
1997, to shareholders of record as of the close of business on November 12,
1997.
In November 1997, the Metris Master Trust issued Series 1997-2 certificates
to third parties with a principal amount of $645.5 million, generating proceeds
of $652.0 million of which $477.9 million was used to reduce the Class A
Variable Funding Certificates issued under Series 1995-1. The Series 1997-2
certificates are scheduled to begin accumulating principal collections in
October 2001, however, the accumulation period could potentially begin at a
later date. The expected final payment date of these certificates is in November
2002.
On November 7, 1997, the Company privately issued and sold $100 million of
its 10% Senior Notes due 2004 (the "Senior Notes") pursuant to an exemption
under the Securities Act of 1933, as amended. The net proceeds of $97 million
were used to pay down borrowings under the Revolving Credit Facility.
The Senior Notes are guaranteed on a senior basis, jointly and severally, by
Metris Direct, Inc. Metris Direct, Inc. has various subsidiaries which have not
guaranteed the Notes. The following suplemental consolidating financial
statements are presented for the purpose of complying with the reporting
requirements of the parent company and the subsidiaries which are guarantors
under the Senior Notes. Supplemental consolidating financial statements as of
and for the year ended December 31, 1994, have not been included as there were
no non-guaranteeing subsidiaries at such time. Separate financial statements of
Metris Direct, Inc. and the non-guaranteeing subsidiaries are not presented
because management has determined that such financial statements would not be
material to investors.
F-27
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
INC. SUBSIDARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from banks................... $ 432 $ 647 $ 10,016 $ $ 11,095
Federal funds sold........................ 38,286 38,286
Short-term investments.................... 3 81 84
----------- ------------ ------------ ------------ -------------
Cash and cash equivalents................. 435 647 48,383 49,465
Credit card loans:
Loans held for securitization............. 3,367 11,329 14,696
Retained interests in loans securitized... 344,821 344,821
Less:Allowance for loan losses............ 31 23,816 23,847
----------- ------------ ------------ ------------ -------------
Net credit card loans..................... 3,336 332,334 335,670
----------- ------------ ------------ ------------ -------------
Premises and equipment, net............... 9,930 748 10,678
Accrued interest and fees receivable...... 5 3,740 3,745
Prepaid expenses and deferred charges..... 240 8,517 6,669 15,426
Deferred income taxes..................... 181 10,273 52,343 62,797
Customer base intangible.................. 1,659 38,172 39,831
Other assets.............................. 1,003 3,021 4,029 8,053
Investment in Subsidaries................. 228,353 242,014 (470,367)
----------- ------------ ------------ ------------ -------------
Total Assets.............................. $ 235,212 $ 274,402 $ 486,418 $ (470,367) $ 525,665
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
LIABILITIES:
Interest-bearing deposit from affiliate... $ (1,000) $ $ 1,000 $ $
Short-term borrowings..................... 153,000 153,000
Accounts payable.......................... (960) 10,134 17,893 27,067
Other payables due to credit card
securitizations, net.................... 186 106,916 107,102
Current income taxes payable to
(receivable) from FCI................... (82,205) (3,642) 93,027 7,180
Deferred income........................... 25 25,878 21,027 46,930
Accrued expenses and other liabilities.... 14,410 3,810 18,220
----------- ------------ ------------ ------------ -------------
Total liabilities......................... 69,046 46,780 243,673 359,499
----------- ------------ ------------ ------------ -------------
STOCKHOLDERS' EQUITY:
Common Stock.............................. 192 1,000 1,000 (2,000) 192
Paid-in capital........................... 107,059 169,488 169,461 (338,949) 107,059
Retained earnings......................... 58,915 57,134 72,284 (129,418) 58,915
----------- ------------ ------------ ------------ -------------
Total stockholders' equity................ 166,166 227,622 242,745 (470,367) 166,166
----------- ------------ ------------ ------------ -------------
Total liabilities and stockholders'
equity.................................. $ 235,212 $ 274,402 $ 486,418 $ (470,367) $ 525,665
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
</TABLE>
F-28
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16----SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
INC. SUBSIDARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from banks....................... $ 215 $ 83 $ 8,604 $ $ 8,902
Federal funds sold............................ 19,001 19,001
Short-term investments........................ 4,160 19 4,179
----------- ------------ ------------ ------------ -------------
Cash and cash equivalents..................... 4,375 83 27,624 32,082
Credit card loans:
Loans held for securitization................. 14,164 14,164
Retained interests in loans securitized....... 14,022 187,143 201,165
Less: Allowance for loan losses............... 111 12,718 12,829
----------- ------------ ------------ ------------ -------------
Net credit card loans......................... 13,911 188,589 202,500
----------- ------------ ------------ ------------ -------------
Premises and equipment, net................... 4,933 230 5,163
Accrued interest and fees receivable.......... 26 2,916 2,942
Prepaid expenses and deferred charges......... 30 620 4,176 4,826
Deferred income taxes......................... 290 569 30,669 31,528
Customer base intangible...................... 888 888
Other assets.................................. 1,187 275 5,225 6,687
Investment in Subsidaries..................... 128,125 131,730 (259,855)
----------- ------------ ------------ ------------ -------------
Total Assets.................................. $ 147,944 $ 138,210 $ 260,317 $ (259,855) $ 286,616
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
LIABILITIES:
Interest-bearing deposit from affiliate....... $ $ $ 1,000 $ $ 1,000
Short-term borrowings/Intercompany balances... 50,172 (2,186) 6,177 54,163
Accounts payable.............................. (383) 4,487 11,479 15,583
Other payables due to credit card
securitizations, net........................ 559 36,060 36,619
Current income taxes payable to/(receivable)
from FCI.................................... (41,277) (6,946) 49,683 1,460
Deferred income............................... 153 2,060 20,970 23,183
Accrued expenses and other liabilities........ 2 13,232 2,656 15,890
----------- ------------ ------------ ------------ -------------
Total liabilities............................. 9,226 10,647 128,025 -- 147,898
----------- ------------ ------------ ------------ -------------
STOCKHOLDERS' EQUITY:
Common Stock.................................. 192 1,000 1,000 (2,000) 192
Paid-in capital............................... 107,220 82,028 82,002 (164,030) 107,220
Retained earnings............................. 31,306 44,535 49,290 (93,825) 31,306
----------- ------------ ------------ ------------ -------------
Total stockholders' equity.................... 138,718 127,563 132,292 (259,855) 138,718
----------- ------------ ------------ ------------ -------------
Total liabilities and stockholders' equity.... $ 147,944 $ 138,210 $ 260,317 $ (259,855) $ 286,616
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
</TABLE>
F-29
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16----SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
INC. SUBSIDARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from banks....................... $ $ $ 4,185 $ $ 4,185
Federal funds sold............................ 29,144 29,144
Short-term investments........................ 1,414 1,414
----------- ------------ ------------ ------------ -------------
Cash and cash equivalents..................... 34,743 34,743
Credit card loans:
Loans held for securitization................. 15,337 15,337
Retained interests in loans securitized....... 79,727 79,727
Less: Allowance for loan losses............... 3,679 3,679
----------- ------------ ------------ ------------ -------------
Net credit card loans......................... 91,385 91,385
----------- ------------ ------------ ------------ -------------
Premises and equipment, net................... 1,455 21 1,476
Accrued interest and fees receivable.......... 2,223 2,223
Other receivables due from credit card
securitizations, net........................ 31,597 31,597
Prepaid expenses and deferred charges......... 99 55 4,363 4,517
Deferred income taxes......................... 414 3,892 4,306
Customer base intangible...................... 1,205 1,205
Other assets.................................. 73 2,903 2,976
Investment in Subsidaries..................... 64,068 56,505 (120,573)
----------- ------------ ------------ ------------ -------------
Total Assets.................................. $ 64,167 $ 58,502 $ 172,332 $ (120,573) $ 174,428
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
LIABILITIES:
Interest-bearing deposit from affiliate....... $ $ $ 1,000 $ $ 1,000
Short-term borrowings/Intercompany balances... $ (11,442) 74,924 63,482
Accounts payable.............................. 4,022 17,312 21,334
Current income taxes payable to/(receivable)
from FCI.................................... (7,151) 688 11,641 5,178
Deferred income............................... 295 9,792 10,087
Accrued expenses and other liabilities........ 1,248 781 2,029
----------- ------------ ------------ ------------ -------------
Total liabilities............................. (7,151) (5,189) 115,450 103,110
----------- ------------ ------------ ------------ -------------
STOCKHOLDERS'/DIVISION EQUITY:
Common Stock.................................. 1,000 1,000 (2,000)
Paid-in capital............................... 60,028 43,503 43,475 (86,978) 60,028
Retained earnings............................. 11,290 19,188 12,407 (31,595) 11,290
----------- ------------ ------------ ------------ -------------
Total stockholders'/division equity........... 71,318 63,691 56,882 (120,573) 71,318
----------- ------------ ------------ ------------ -------------
Total liabilities and stockholders'/division
equity...................................... $ 64,167 $ 58,502 $ 172,332 $ (120,573) $ 174,428
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
</TABLE>
F-30
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
INC. SUBSIDARIES SUBSIDARIES CONSOLIDATED
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Credit card loans...................................... $ 1,054 $ $ 41,591 $ 42,645
Federal funds sold..................................... 1,270 1,270
Other.................................................. 154 2 412 568
----------- ------------ ------------ -------------
Total interest income.................................. 1,208 2 43,273 44,483
INTEREST EXPENSE
Deposit................................................ 7 7
Short-term borrowing................................... 7,466 355 (1,898) 5,923
----------- ------------ ------------ -------------
Total interest expense/(income).................... 7,466 355 (1,891) 5,930
----------- ------------ ------------ -------------
NET INTEREST INCOME/(EXPENSE).......................... (6,258) (353) 45,164 38,553
Provision for possible loan losses..................... 307 28,282 28,589
----------- ------------ ------------ -------------
Net interest income/(expense) after provision.......... (6,565) (353) 16,882 9,964
OTHER OPERATING INCOME
Net extended warranty revenues......................... 3,249 3,249
Net securitization and credit card servicing income.... 10,726 48,807 59,533
Credit card fees, interchange and other credit card
income............................................... 346 (21) 27,999 28,324
Fee-based product revenues............................. (137) 39,219 39,082
----------- ------------ ------------ -------------
TOTAL OTHER OPERATING INCOME....................... 11,072 3,091 116,025 130,188
OTHER OPERATING EXPENSE
Credit card account and other product solicitation and
marketing expenses................................... (978) 23,397 22,419
Employee compensation.................................. 22,617 1,838 24,455
Data processing services and communications............ 2,030 10,863 12,893
Third party servicing expenses......................... 33 (14,087) 22,026 7,972
Warranty and debt waiver underwriting and claims
servicing............................................ 203 3,874 4,077
Credit card fraud losses............................... 64 2,636 2,700
Other.................................................. 184 9,578 10,355 20,117
----------- ------------ ------------ -------------
TOTAL OTHER OPERATING EXPENSE...................... 281 19,363 74,989 94,633
----------- ------------ ------------ -------------
INCOME/(LOSS) BEFORE INCOME TAXES...................... 4,226 (16,625) 57,918 45,519
Income taxes........................................... 1,627 (6,400) 22,298 17,525
----------- ------------ ------------ -------------
NET INCOME/(LOSS)...................................... $ 2,599 $ (10,225) $ 35,620 $ 27,994
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
</TABLE>
F-31
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
INC. SUBSIDARIES SUBSIDARIES CONSOLIDATED
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Credit card loans...................................... $ 38 $ $ 19,545 $ 19,583
Federal funds sold..................................... 644 644
Other.................................................. 120 120
----------- ------------ ------------ -------------
Total interest income.............................. 38 20,309 20,347
INTEREST EXPENSE:
Deposit................................................ 36 36
Short-term borrowing................................... 5,093 (2,391) 85 2,787
----------- ------------ ------------ -------------
Total interest expense/(income).................... 5,093 (2,391) 121 2,823
----------- ------------ ------------ -------------
NET INTEREST INCOME/(EXPENSE).......................... (5,055) 2,391 20,188 17,524
Provision for possible loan losses..................... 20 10,536 10,556
----------- ------------ ------------ -------------
Net interest income/(expense) after provision.......... (5,075) 2,391 9,652 6,968
OTHER OPERATING INCOME:
Net extended warranty revenues......................... 13,789 13,789
Net securitization and credit card servicing income.... 1,976 31,750 33,726
Credit card fees, interchange and other credit card
income............................................... 13 96 17,153 17,262
Fee-based product revenues............................. 1,342 19,207 20,549
----------- ------------ ------------ -------------
TOTAL OTHER OPERATING INCOME....................... 1,989 15,227 68,110 85,326
OTHER OPERATING EXPENSE:
Credit card account and other product solicitation and
marketing expenses................................... 5,805 7,105 7,988 20,898
Employee compensation.................................. 13,811 1,074 14,885
Data processing services and communications............ 8,632 8,632
Third party servicing expenses......................... (2,313) 9,013 6,700
Warranty and debt waiver underwriting and claims
servicing............................................ 4,395 2,447 6,842
Credit card fraud losses............................... 3 1,720 1,723
Other.................................................. 5,985 2,733 8,718
----------- ------------ ------------ -------------
TOTAL OTHER OPERATING EXPENSE...................... 5,808 28,983 33,607 68,398
----------- ------------ ------------ -------------
INCOME/(LOSS) BEFORE INCOME TAXES...................... (8,894) (11,365) 44,155 23,896
Income taxes........................................... (3,424) (4,376) 17,000 9,200
----------- ------------ ------------ -------------
NET INCOME/(LOSS)...................................... $ (5,470) $ (6,989) $ 27,155 $ 14,696
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
</TABLE>
F-32
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
INC. SUBSIDARIES SUBSIDARIES CONSOLIDATED
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Credit card loans...................................... $ 199 $ $ 28,829 $ 29,028
Federal funds sold..................................... 867 867
Other.................................................. 105 194 299
----------- ------------ ------------ -------------
Total interest income.............................. 304 29,890 30,194
INTEREST EXPENSE
Deposit................................................ 48 48
Short-term borrowing................................... 7,272 (2,494) (720) 4,058
----------- ------------ ------------ -------------
Total interest expense/(income).................... 7,272 (2,494) (672) 4,106
----------- ------------ ------------ -------------
NET INTEREST INCOME/(EXPENSE).......................... (6,968) 2,494 30,562 26,088
Provision for possible loan losses..................... 83 18,394 18,477
----------- ------------ ------------ -------------
Net interest income/(expense) after provision.......... (7,051) 2,494 12,168 7,611
OTHER OPERATING INCOME
Net extended warranty revenues......................... 20,420 20,420
Net securitization and credit card servicing income.... 3,859 46,062 49,921
Credit card fees, interchange and other credit card
income............................................... 49 107 25,872 26,028
Fee-based product revenues............................. 1,580 28,273 29,853
----------- ------------ ------------ -------------
TOTAL OTHER OPERATING INCOME....................... 3,908 22,107 100,207 126,222
OTHER OPERATING EXPENSE
Credit card account and other product solicitation and
marketing expenses................................... 5,805 9,563 13,929 29,297
Employee compensation.................................. 22,076 992 23,068
Data processing services and communications............ 1,600 11,157 12,757
Third party servicing expenses......................... 3 (6,757) 15,961 9,207
Warranty and debt waiver underwriting and claims
servicing............................................ 6,463 3,561 10,024
Credit card fraud losses............................... 10 2,266 2,276
Other.................................................. 1 10,116 4,541 14,658
----------- ------------ ------------ -------------
TOTAL OTHER OPERATING EXPENSE...................... 5,819 43,061 52,407 101,287
----------- ------------ ------------ -------------
INCOME/(LOSS) BEFORE INCOME TAXES...................... (8,962) (18,460) 59,968 32,546
Income taxes........................................... (3,450) (7,107) 23,087 12,530
----------- ------------ ------------ -------------
NET INCOME/(LOSS)...................................... $ (5,512) $ (11,353) $ 36,881 $ 20,016
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
</TABLE>
F-33
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
INC. SUBSIDARIES SUBSIDARIES CONSOLIDATED
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Credit card loans...................................... $ $ $ 7,054 $ 7,054
Federal funds sold..................................... 487 487
Other.................................................. 75 75
----------- ------------- ------------- -------------
Total interest income.............................. 7,616 7,616
INTEREST EXPENSE:
Deposit................................................ 36 36
Short-term borrowing................................... 2,145 (919) (45) 1,181
----------- ------------- ------------- -------------
Total interest expense/(income).................... 2,145 (919) (9) 1,217
----------- ------------- ------------- -------------
NET INTEREST INCOME/(EXPENSE).......................... (2,145) 919 7,625 6,399
Provision for possible loan losses..................... 4,393 4,393
----------- ------------- ------------- -------------
Net interest income/(expense) after provision.......... (2,145) 919 3,232 2,006
OTHER OPERATING INCOME:
Net extended warranty revenues......................... 17,779 17,779
Net securitization and credit card servicing income.... 16,003 16,003
Credit card fees, interchange and other credit card
income............................................... 30 10,609 10,639
Fee-based product revenues............................. 1,817 4,845 6,662
----------- ------------- ------------- -------------
TOTAL OTHER OPERATING INCOME....................... 19,626 31,457 51,083
OTHER OPERATING EXPENSE:
Credit card account and other product solicitation and
marketing expenses................................... 11,244 8,289 3,556 23,089
Employee compensation.................................. 1,905 561 2,466
Data processing services and communications............ 34 3056 3,090
Third party servicing expenses......................... 500 4,800 5,300
Warranty and debt waiver underwriting and claims
servicing............................................ 5,854 698 6,552
Credit card fraud losses............................... 775 775
Other.................................................. 3,233 1,135 4,368
----------- ------------- ------------- -------------
TOTAL OTHER OPERATING EXPENSE...................... 11,244 19,815 14,581 45,640
----------- ------------- ------------- -------------
INCOME/(LOSS) BEFORE INCOME TAXES...................... (13,389) 730 20,108 7,449
Income taxes........................................... (5,155) 281 7,742 2,868
----------- ------------- ------------- -------------
NET INCOME/(LOSS)...................................... $ (8,234) $ 449 $ 12,366 $ 4,581
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
</TABLE>
F-34
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
1997 INC. SUBSIDARIES SUBSIDARIES CONSOLIDATED
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.......... $ (40,820) $ 2,447 $ 163,124 $ 124,751
----------- ------------- ------------ -------------
INVESTING ACTIVITIES
Proceeds from sales of loans................................. 923,750 923,750
Net loans originated or collected............................ 10,269 (765,781) (755,512)
Credit card portfolio acquisition............................ (366,587) (366,587)
Additions to premises and equipment.......................... (5,920) (550) (6,470)
----------- ------------- ------------ -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.......... 10,269 (5,920) (209,168) (204,819)
----------- ------------- ------------ -------------
FINANCING ACTIVITIES
Decrease in interest-bearing deposit......................... (1,000) (1,000)
Net (decrease) increase in short-term borrowings............. 102,828 4,037 (8,029) 98,836
Cash dividends paid.......................................... 12,242 (12,627) (385)
Capital contributions........................................ (87,459) 87,459 0
----------- ------------- ------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................... 26,611 4,037 66,803 97,451
----------- ------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents......... (3,940) 564 20,759 17,383
Cash and cash equivalents at beginning of period............. 4,375 83 27,624 32,082
----------- ------------- ------------ -------------
Cash and cash equivalents at end of period................... $ 435 $ 647 $ 48,383 $ 49,465
----------- ------------- ------------ -------------
----------- ------------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
1996 INC. SUBSIDARIES SUBSIDARIES CONSOLIDATED
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..... $ (41,106) $ (1,492) $ 112,998 $ 70,400
----------- ------------- ------------ -------------
INVESTING ACTIVITIES
Proceeds from sales of loans............................ 674,055 674,055
Net loans originated or collected....................... (449) (738,315) (738,764)
Additions to premises and equipment..................... (2,613) (56) (2,669)
----------- ------------- ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES................... (449) (2,613) (64,316) (67,378)
----------- ------------- ------------ -------------
FINANCING ACTIVITIES
Net (decrease)/increase in short-term borrowings........ 36,776 4,373 (51,246) (10,097)
Capital contributions................................... 4,782 (4,782)
----------- ------------- ------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 41,558 4,373 (56,028) (10,097)
----------- ------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents.... 3 268 (7,346) (7,075)
Cash and cash equivalents at beginning of period........ 34,743 34,743
----------- ------------- ------------ -------------
Cash and cash equivalents at end of period.............. $ 3 $ 268 $ 27,397 $ 27,668
----------- ------------- ------------ -------------
----------- ------------- ------------ -------------
</TABLE>
F-35
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
(INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997, AND 1996, IS
UNAUDITED)
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
METRIS COMPANIES INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
1996 INC. SUBSIDARIES SUBSIDARIES CONSOLIDATED
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..... $ (40,660) $ (5,275) $ 138,911 $ 92,976
----------- ------------- ------------ -------------
INVESTING ACTIVITIES
Proceeds from sales of loans............................ 952,055 952,055
Net loans originated or collected....................... (13,994) (1,067,650 (1,081,644)
Additions to premises and equipment..................... (3,898) (215) (4,113)
----------- ------------- ------------ -------------
NET CASH (USED IN) INVESTING ACTIVITIES................. (13,994) (3,898) (115,810) (133,702)
----------- ------------- ------------ -------------
FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings........ 50,172 9,256 (68,747) (9,319)
Net proceeds from issuance of common stock.............. 47,384 47,384
Capital contributions................................... (38,527) 38,527
----------- ------------- ------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 59,029 9,256 (30,220) 38,065
----------- ------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents.... 4,375 83 (7,119) (2,661)
Cash and cash equivalents at beginning of period........ 34,743 34,743
----------- ------------- ------------ -------------
Cash and cash equivalents at end of period.............. $ 4,375 $ 83 $ 27,624 $ 32,082
----------- ------------- ------------ -------------
----------- ------------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
METRIS NON-
COMPANIES GUARANTOR GUARANTOR
1995 INC. SUBSIDARIES SUBSIDARIES CONSOLIDATED
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.... $ (15,525) $ 3,393 $ 10,126 $ (2,006)
----------- ------------- ------------ -------------
INVESTING ACTIVITIES
Proceeds from sales of loans........................... 448,555 448,555
Net loans originated or collected...................... (528,864) (528,864)
Credit card portfolio acquisition...................... (15,469) (15,469)
Net decrease (increase) in loans to FCI................ 9,375 9,375
Additions to premises and equipment.................... (1,326) (27) (1,353)
----------- ------------- ------------ -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.... 8,049 (95,805) (87,756)
----------- ------------- ------------ -------------
FINANCING ACTIVITIES
Increase in interest-bearing deposit................... 1,000 1,000
Net (decrease)/increase in short-term borrowings....... (11,442) 74,924 63,482
Capital contributions.................................. 15,525 44,475 60,000
----------- ------------- ------------ -------------
Net cash provided by financing activities.............. 15,525 (11,442) 120,399 124,482
----------- ------------- ------------ -------------
Net increase in cash and cash equivalents.............. 34,720 34,720
Cash and cash equivalents at beginning of period....... 23 23
----------- ------------- ------------ -------------
Cash and cash equivalents at end of period............. $ $ $ 34,743 $ 34,743
----------- ------------- ------------ -------------
----------- ------------- ------------ -------------
</TABLE>
F-36
