<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 001-12351
-------------------------------------------------------
METRIS COMPANIES INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1849591
- ------------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
600 South Highway 169, Suite 1800, St. Louis Park, Minnesota 55426
- ------------------------------------------------------------------------------
(Address of principal executive offices)
(612) 525-5020
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
As of May 8, 1998, 19,225,000 shares of the registrant's common stock, par value
$.01 per share, were outstanding.
<PAGE>
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
March 31, 1998
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets..........................3
Consolidated Statements of Income....................4
Consolidated Statements of Cash Flows................5
Notes to Consolidated Financial Statements...........6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................................14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...................................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................24
Item 2. Changes in Securities...........................................24
Item 3. Defaults Upon Senior Securities.................................24
Item 4. Submission of Matters to a Vote of Security Holders.............24
Item 5. Other Information...............................................24
Item 6. Exhibits and Reports on Form 8-K................................24
Signatures......................................................25
</TABLE>
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 22,517 $ 21,006
Federal funds sold 38,185 27,089
Short-term investments 2,686 128
------------- ------------
Cash and cash equivalents 63,388 48,223
------------- ------------
Credit card loans:
Loans held for securitization 29,933 8,795
Retained interests in loans securitized 487,506 471,831
Less: Allowance for loan losses 41,466 32,039
------------- ------------
Net credit card loans 475,973 448,587
------------- ------------
Premises and equipment, net 16,301 15,464
Accrued interest and fees receivable 5,570 4,310
Prepaid expenses and deferred charges 20,699 18,473
Deferred income taxes 105,322 80,787
Customer base intangible 34,486 36,752
Other assets 19,021 20,625
------------- ------------
Total assets $ 740,760 $ 673,221
------------- ------------
------------- ------------
Liabilities:
Short-term borrowings $ 130,000 $ 144,000
Long-term debt 100,000 100,000
Accounts payable 29,809 35,356
Other payables due to credit card
securitizations, net 176,423 134,559
Current income taxes payable to FCI 32,526 9,701
Deferred income 58,122 49,204
Accrued expenses and other liabilities 26,810 24,363
------------- ------------
Total liabilities 553,690 497,183
------------- ------------
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 capital 107,059 107,059
Retained earnings 79,819 68,787
------------- ------------
Total stockholders' equity 187,070 176,038
------------- ------------
Total liabilities and stockholders' equity $ 740,760 $ 673,221
------------- ------------
------------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Interest Income: 1998 1997
------------- ------------
<S> <C> <C>
Credit card loans $ 25,885 $ 11,934
Federal funds sold 481 306
Other 421 190
------------- ------------
Total interest income 26,787 12,430
Interest Expense 6,643 1,459
------------- ------------
Net Interest Income 20,144 10,971
Provision for loan losses 20,042 11,054
------------- ------------
Net interest income (expense) after provision for
loan losses 102 (83)
------------- ------------
Other Operating Income:
Net securitization and credit card
servicing income 34,907 26,533
Credit card fees, interchange and other income 13,021 7,602
Fee-based services revenues 19,564 11,824
Net extended service plan revenues 5,004 289
------------- ------------
72,496 46,248
------------- ------------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses 10,150 7,721
Employee compensation 15,088 7,953
Data processing services and communications 8,857 5,011
Third-party servicing expense 2,571 2,970
Warranty and debt waiver underwriting
and claims servicing expense 2,875 1,216
Credit card fraud losses 1,316 899
Other 13,491 7,813
------------- ------------
54,348 33,583
------------- ------------
Income Before Income Taxes 18,250 12,582
Income taxes 7,026 4,844
------------- ------------
Net Income $ 11,224 $ 7,738
------------- ------------
------------- ------------
Earnings Per Share:
Basic $ .58 $ .40
Diluted $ .55 $ .38
Shares used to compute EPS:
Basic 19,225 19,225
Diluted 20,296 20,174
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------- ------------
<S> <C> <C>
Operating Activities:
Net income $ 11,224 $ 7,738
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 20,042 11,054
Depreciation and amortization 8,917 2,382
Net amortization of gain on securitization
of credit card loans 2,449 1,039
Changes in operating assets and liabilities:
Accrued interest and fees receivable (1,260) (407)
Prepaid expenses and deferred charges (6,785) (5,109)
Deferred income taxes (24,535) (9,220)
Accounts payable and accrued expenses (3,100) 10,201
Other payables due to credit card
securitizations, net 38,751 11,947
Current income taxes payable to FCI 22,825 11,768
Deferred income 8,918 5,193
Other 681 (2,614)
------------- ------------
Net cash provided by operating activities 78,127 43,972
------------- ------------
Investing Activities:
Proceeds from sales of loans 33,549 125,000
Net loans originated or collected (80,358) (165,436)
Credit card portfolio acquisition (39,804)
Additions to premises and equipment (1,961) (1,805)
------------- ------------
Net cash used in investing activities (48,770) (82,045)
------------- ------------
Financing Activities:
Decrease in interest-bearing deposit (1,000)
Net (decrease) increase in short-term borrowings (14,000) 47,837
Cash dividends paid (192)
------------- ------------
Net cash (used in) provided by financing activities (14,192) 46,837
------------- ------------
Net increase in cash and cash equivalents 15,165 8,764
Cash and cash equivalents at beginning of period 48,223 32,082
------------- ------------
Cash and cash equivalents at end of period $ 63,388 $ 40,846
------------- ------------
------------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 and
fee-based services and extended service plans primarily to moderate-income
consumers. The Company's business is conducted through Metris Direct, Inc.,
Direct Merchants Credit Card Bank, National Association, Metris Direct Services,
Inc., Metris Funding Co., and Metris Receivables, Inc., each a wholly-owned
direct or indirect subsidiary of MCI.
All significant intercompany balances and transactions have been
eliminated in consolidation. The Company is an 83% owned indirect subsidiary of
Fingerhut Companies Inc. ("FCI").
Interim Financial Statements
The unaudited interim consolidated financial statements and related
unaudited financial information in the footnotes 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 annual
report on Form 10-K for December 31, 1997. 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.
6
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Statements of Cash Flows
Cash paid for interest during the three month periods ended March 31,
1998 and 1997, was $2.0 million and $1.5 million, respectively. Cash paid for
income taxes for the same periods was $8.7 million and $15.0 million,
respectively.
Earnings Per Share
The following table presents the computation of basic and diluted
weighted average shares used in the per share calculations:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
(In thousands, except per share amounts)
Income available to common stockholders $ 11,224 $ 7,738
---------- --------
---------- --------
Weighted average common shares outstanding 19,225 19,225
Adjustments for dilutive securities:
Assumed exercise of outstanding stock options 1,071 949
---------- --------
Diluted common shares 20,296 20,174
---------- --------
---------- --------
Earnings per share:
Basic $ 0.58 $ 0.40
Diluted $ 0.55 $ 0.38
</TABLE>
Extended Service Plans
The Company coordinates the marketing activities for Fingerhut
Corporation's sales of extended service plans. 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 incremental direct acquisition costs are deferred and
recognized over the life of the related extended service plan contracts.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands) 1998 1997
---------- --------
<S> <C> <C>
Balance at beginning of period $32,039 $12,829
Allowance related to assets acquired, net 806
Provision for loan losses 20,042 11,054
Loans charged-off 11,019 5,450
Recoveries 404 118
---------- --------
Net loan charge-offs 10,615 5,332
---------- --------
Balance at end of period $41,466 $19,357
---------- --------
---------- --------
</TABLE>
NOTE 4 - SHORT-TERM BORROWINGS
The Company borrows under a $300 million, five-year revolving credit
facility (the "Revolving Credit Facility"), which is currently guaranteed by
FCI, to fund on-
7
<PAGE>
balance sheet loans and for other general business purposes. At March 31, 1998
and December 31, 1997, the Company had outstanding borrowings of $130 million
and $144 million, respectively, under the Revolving Credit Facility. The
weighted average interest rates on the Revolving Credit Facility borrowings at
March 31, 1998 and December 31, 1997, were 5.9% and 6.5%, respectively.
NOTE 5 - SUBSEQUENT EVENTS
On May 4, 1998, the Company declared a cash dividend in the amount of
$.01 per share, aggregating approximately $.2 million, payable on May 26, 1998,
to shareholders of record as of the close of business on May 15, 1998.
NOTE 6 - LONG-TERM DEBT
In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 (the "Senior Notes") pursuant to an exemption under
the Securities Act of 1933, as amended. In March 1998, the Company completed an
exchange offer for all of the Senior Notes. The terms of the new Senior Notes
are identical in all material respects to the original private issue. The net
proceeds of $97 million were used to pay down borrowings under the Revolving
Credit Facility. The Senior Notes are unconditionally guaranteed on a senior
basis, jointly and severally, by Metris Direct, Inc. (the "Guarantor"), and all
future subsidiaries of the Company that guarantee any of the Company's
indebtedness, including the Revolving Credit Facility. The guarantee is an
unsecured obligation of the Guarantor and ranks pari passu with all existing and
future unsubordinated indebtedness.
Metris Direct, Inc. has various subsidiaries which have not guaranteed
the Senior Notes. The following condensed consolidating financial statements of
the Company, the Guarantor subsidiary and the non-guarantor subsidiaries are
presented for purposes of complying with SEC reporting requirements. Separate
financial statements of Metris Direct, Inc. and the non-guaranteeing
subsidiaries are not presented because management has determined that the
subsidiaries financial statements would not be material to investors.
8
<PAGE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
March 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------------- --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,610 $ (217) $ 61,995 $ $ 63,388
Net credit card loans 1,726 474,247 475,973
Premises and equipment, net 15,126 1,175 16,301
Prepaid expenses and deferred charges 178 15,253 5,268 20,699
Deferred income taxes 3,058 14,742 87,522 105,322
Customer base intangible 1,474 33,012 34,486
Other assets 2,767 7,772 14,052 24,591
Investment in subsidiaries 312,938 314,346 (627,284)
-------------- --------------- -------------- ------------- ------------
Total assets $ 323,751 $ 367,022 $ 677,271 $(627,284) $ 740,760
-------------- --------------- -------------- ------------- ------------
-------------- --------------- -------------- ------------- ------------
Liabilities:
Interest-bearing deposit from
affiliate $ (1,000) $ $ 1,000 $ $
Borrowings/intercompany balances 130,059 (2,854) 2,795 130,000
Long-term debt 100,000 100,000
Other payables due to credit card
securitizations, net 111 176,312 176,423
Current income taxes payable to
(receivable from) FCI (95,982) (3,096) 131,604 32,526
Deferred income 6 35,218 22,898 58,122
Accrued expenses and other liabilities 3,487 24,816 28,316 56,619
-------------- --------------- -------------- ------------
Total liabilities 136,681 54,084 362,925 553,690
Total stockholders' equity 187,070 312,938 314,346 (627,284) 187,070
-------------- --------------- -------------- ------------- ------------
Total liabilities and stockholders'
equity $ 323,751 $ 367,022 $ 677,271 $(627,284) $ 740,760
-------------- --------------- -------------- ------------- ------------
-------------- --------------- -------------- ------------- ------------
</TABLE>
9
<PAGE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents $ 336 $ 390 $ 47,497 $ $ 48,223
Net credit card
loans 8,086 440,501 448,587
Premises and
equipment, net 13,899 1,565 15,464
Prepaid expenses
and deferred
charges 138 15,075 3,260 18,473
Deferred income
taxes 682 12,638 67,467 80,787
Customer base
intangible 1,567 35,185 36,752
Other assets 3,498 6,983 14,454 24,935
Investment in
subsidiaries 349,731 366,977 (716,708)
----------- --------- ----------- ------------ ---------
Total assets $ 364,038 $ 415,962 $ 609,929 $(716,708) $673,221
----------- --------- ----------- ------------ ---------
----------- --------- ----------- ------------ ---------
Liabilities:
Interest-bearing
deposit from
affiliate $ (1,000) $ $ 1,000 $ $
Borrowings/intercompany
balances 177,598 7,975 (41,573) 144,000
Long-term debt 100,000 100,000
Other payables due
to credit card
securitizations,
net 491 134,068 134,559
Current income
taxes payable to
(receivable
from) FCI (90,003) (486) 100,190 9,701
Deferred income 33 35,044 14,127 49,204
Accrued expenses
and other
liabilities 881 23,698 35,140 59,719
---------- --------- --------- ----------
Total liabilities 188,000 66,231 242,952 497,183
Total stockholders'
equity 176,038 349,731 366,977 (716,708) 176,038
---------- --------- --------- ----------- -----------
Total liabilities and
stockholders'
equity $ 364,038 $ 415,962 $ 609,929 $ (716,708) $ 673,221
---------- ---------- ----------- ------------ ----------
---------- ---------- ----------- ------------ ----------
</TABLE>
10
<PAGE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Quarter Ended March 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Credit card loans $ 137 $ $ 25,748 $ $ 25,885
Federal funds sold 481 481
Other 97 324 421
--------- ---------- ----------- --------
Total interest income 234 26,553 26,787
Interest Expense 3,319 4,374 (1,050) 6,643
--------- ---------- ----------- --------
Net Interest Income/(Expense) (3,085) (4,374) 27,603 20,144
Provision for loan losses 50 19,992 20,042
--------- ---------- ----------- --------
Net interest income/(expense)
after provision for loan losses (3,135) (4,374) 7,611 102
--------- ---------- ----------- --------
Other Operating Income:
Net securitization and credit
card servicing income 3,660 31,247 34,907
Credit card fees, interchange and
other income 45 12,976 13,021
Fee-based services revenues 1,550 18,014 19,564
Net extended service plan
revenues 4,548 456 5,004
-------------- ---------- ----------- --------
3,705 6,098 62,693 72,496
-------------- ---------- ----------- --------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses 3,935 6,215 10,150
Employee compensation 13,576 1,512 15,088
Data processing services and
communications 1,360 7,497 8,857
Third-party servicing expense (266) (11,552) 14,389 2,571
Warranty and debt waiver
underwriting and claims
servicing expense 462 2,413 2,875
Credit card fraud losses 12 1,304 1,316
Other 137 5,716 7,638 13,491
---------- ---------- ---------- --------
(117) 13,497 40,968 54,348
---------- ---------- ---------- --------
Income/(Loss) Before Income Taxes
and Equity in Income of
Subsidiaries 687 (11,773) 29,336 18,250
Income taxes 264 (4,649) 11,411 7,026
Equity in income of subsidiaries 10,801 17,925 (28,726)
--------- ---------- ----------- --------- ---------
Net Income/(Loss) $ 11,224 $ 10,801 $ 17,925 $(28,726) $ 11,224
--------- ---------- ----------- --------- ---------
</TABLE>
11
<PAGE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Quarter Ended March 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Credit card loans $ 702 $ $ 11,232 $ $ 11,934
Federal funds sold 306 306
Other 99 91 190
--------------- -------------- --------------- ----------
Total interest income 801 11,629 12,430
Interest Expense 2,019 21 (581) 1,459
--------------- -------------- --------------- ----------
Net Interest Income/(Expense) (1,218) (21) 12,210 10,971
Provision for loan losses 192 10,862 11,054
--------------- -------------- --------------- ----------
Net interest income/(expense)
after provision for loan
losses (1,410) (21) 1,348 (83)
--------------- -------------- --------------- ----------
Other Operating Income:
Net securitization and credit
card servicing income 4,735 21,798 26,533
Credit card fees, interchange
and other income 77 7,525 7,602
Fee-based services
revenues (752) 12,576 11,824
Net extended service plan
revenues 289 289
--------------- -------------- --------------- ----------
4,812 (463) 41,899 46,248
--------------- -------------- --------------- ----------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses 1,731 5,990 7,721
Employee compensation 7,336 617 7,953
Data processing services and 1,006 4,005 5,011
communications
Third-party servicing
expense 8 (3,186) 6,148 2,970
Warranty and debt waiver
underwriting and claims
servicing expense (87) 1,303 1,216
Credit card fraud losses 15 884 899
Other 6,160 1,653 7,813
--------------- -------------- --------------- ----------
23 12,960 20,600 33,583
--------------- -------------- --------------- ----------
Income/(Loss) Before Income Taxes
and Equity in Income of
Subsidiaries 3,379 (13,444) 22,647 12,582
Income taxes 1,301 (5,175) 8,718 4,844
Equity in income of subsidiaries 5,660 13,929 (19,589)
--------------- -------------- --------------- --------------- ----------
Net Income/(Loss) $ 7,738 $ 5,660 $ 13,929 $(19,589) $ 7,738
--------------- -------------- --------------- --------------- ----------
--------------- -------------- --------------- --------------- ----------
</TABLE>
12
<PAGE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Quarter Ended March 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidaed
---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Activities:
Net cash provided by (used in) operating activities $(4,897) $(10,437) $93,461 $ 78,127
-------- --------- ------- --------
Investing Activities:
Proceeds from sales of loans 33,549 33,549
Net loans originated or collected 6,308 (86,666) (80,358)
Additions to premises and equipment (2,306) 345 (1,961)
------- --------- ------- ---------
Net cash provided by (used in) investing activities 6,308 (2,306) (52,772) (48,770)
------- --------- -------- ---------
Financing Activities:
Net (decrease) increase in short-term borrowings (47,540) (10,828) 44,368 (14,000)
Cash dividends paid 6,808 (7,000) (192)
Capital contributions 40,594 22,964 (63,558)
------- --------- -------- ---------
Net cash used in provided by financing activities (138) 12,136 (26,190) (14,192)
------- -------- -------- ---------
Net (decrease) increase in cash and cash equivalents 1,273 (607) 14,499 15,165
Cash and cash equivalents at beginning of
period 337 390 47,496 48,223
------- ------- ------- --------
Cash and cash equivalents at end of period $ 1,610 $ (217) $61,995 $ 63,388
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Quarter Ended March 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Operating Activities:
Net cash provided by (used in) operating
activities $ 92,698 $ (2,578) $(46,148) $ 43,972
-------- --------- --------- --------
Investing Activities:
Proceeds from sales of loans 125,000 125,000
Net loans originated or collected (14,995) (150,441) (165,436)
Credit card portfolio acquisition (39,804) (39,804)
Additions to premises and equipment (1,810) 5 (1,805)
----------- --------- -------- ---------
Net cash (used in) investing activities (14,995) (1,810) (65,240) (82,045)
--------- --------- --------- ---------
Financing Activities:
Decrease in interest-bearing deposit (1,000) (1,000)
Net (decrease) increase in short-term borrowings 51,828 4,406 (8,397) 47,837
Capital contributions (132,852) 132,852
--------- ------------ -------- ----------
Net cash provided by (used in) financing
activities (82,024) 4,406 124,455 46,837
--------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents (4,321) 18 13,067 8,764
Cash and cash equivalents at beginning of period 4,375 84 27,623 32,082
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 54 $ 102 $ 40,690 $ 40,846
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
13
<PAGE>
ITEM 2.
METRIS COMPANIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results
of operations of Metris Companies Inc. and its subsidiaries (collectively,
the "Company"), including Metris Direct, Inc., Direct Merchants Credit Card
Bank, National Association ("Direct Merchants Bank"), Metris Direct Services,
Inc., Metris Funding Co., and Metris Receivables, Inc. This discussion should
be read in conjunction with the following documents for a full understanding
of the Company's financial condition and results of operations: Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's 1997 Annual Report to Shareholders; the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997; and the Proxy
Statement for the 1997 Annual Meeting of Shareholders. In addition, this
discussion should be read in conjunction with the Company's Quarterly Report
on Form 10-Q for the period ending March 31, 1998, of which this commentary
is a part, the condensed consolidated financial statements and the related
notes thereto.
Results of Operations
Net income for the three months ended March 31, 1998, was $11.2
million, or $.55 per share, up 45% from $7.7 million, or $.38 per share for the
first quarter of 1997. The increase in net income is the result of an increase
in net interest income and other operating income partially offset by increases
in the provision for loan losses and other operating expenses. These increases
are largely attributable to the growth in average managed loans to $3.6 billion
for the first quarter 1998 from $1.7 billion for the first quarter 1997, an
increase of 112%.
Managed Loan Portfolio
The Company's managed loan portfolio is comprised of credit card loans
held for securitization, retained interests in loans securitized and the
investors' share of securitized credit card loans. The investors' share of
securitized credit card loans is not an asset of the Company, and therefore, is
not shown on the Company's consolidated balance sheets. The following tables
summarize the Company's managed loan portfolio:
<TABLE>
<CAPTION>
March 31,
----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Dollars in thousands
Period-end balances
Credit card loans:
Loans held for securitization $ 29,933 $ 61,778
Retained interests in loans securitized 487,506 229,265
Investors' interests in securitized loans 3,099,837 1,525,610
---------------- ------------------
Total managed loan portfolio $ 3,617,276 $ 1,816,653
---------------- ------------------
---------------- ------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Dollars in thousands
Average balances
Credit card loans:
Loans held for securitization $ 33,540 $ 36,657
Retained interests in loans securitized 493,565 217,455
Investors' interests in securitized loans 3,094,982 1,456,977
------------------- ------------------
Total managed loan portfolio $ 3,622,087 $ 1,711,089
------------------- ------------------
------------------- ------------------
</TABLE>
Impact of Credit Card Securitizations
The following table provides a summary of the effects of credit card
securitizations on selected line items of the Company's statements of income for
each of the periods presented, as well as selected financial information on both
an owned and a managed loan portfolio basis:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Dollars in thousands
Statements of Income (owned basis):
Net interest income $ 20,144 $ 10,971
Provision for loan losses 20,042 11,054
Other operating income 72,496 46,248
Other operating expense 54,348 33,583
------------------ -------------------
Income before income taxes $ 18,250 $ 12,582
------------------ -------------------
------------------ -------------------
Adjustments for Securitizations:
Net interest income $ 100,891 $ 47,452
Provision for loan losses 105,993 45,168
Other operating income 5,102 (2,284)
Other operating expense
------------------ -------------------
Income before income taxes $ $
------------------ -------------------
------------------ -------------------
Statements of Income (managed basis):
Net interest income $ 121,035 $ 58,423
Provision for loan losses 126,035 56,222
Other operating income 77,598 43,964
Other operating expense 54,348 33,583
------------------ -------------------
Income before income taxes $ 18,250 $ 12,582
------------------ -------------------
------------------ -------------------
Other Data:
Owned Basis:
Average interest-earning assets $ 594,393 $ 291,375
Return on average assets 5.9% 9.1%
Return on average equity 25.0% 21.9%
Net interest margin (1) 13.7% 15.3%
Managed Basis:
Average interest-earning assets $ 3,689,375 $ 1,748,352
Return on average assets 1.2% 1.8%
Return on average equity 25.0% 21.9%
Net interest margin (1) 13.3% 13.6%
</TABLE>
(1) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets.
15
<PAGE>
Net Interest Income
Net interest income consists primarily of interest earned on the
Company's credit card loans less interest expense on borrowings to fund the
loans.
Managed net interest income for the three months ended March 31, 1998,
was $121.0 million compared to $58.4 million for the same period in 1997. This
increase was primarily due to a $1.9 billion increase in average managed loans
over the comparable period in 1997.
The following table provides an analysis of interest income and
expense, net interest spread, net interest margin and average balance sheet data
for the three month periods ended March 31, 1998 and 1997:
Analysis of Average Balances, Interest and Average Yields and Rates
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Owned Basis:
Assets:
Interest-earning assets:
Federal funds sold $ 35,409 $ 481 5.5% $ 23,441 $ 306 5.3%
Short-term investments 31,879 421 5.4% 13,822 190 5.6%
Credit card loans 527,105 25,885 19.9% 254,112 11,934 19.0%
--------- -------- ------ ---------- ------- -----
Total interest-earning
assets $ 594,393 $ 26,787 18.3% $ 291,375 $12,430 17.3%
Other assets 220,918 69,267
Allowance for loan losses (38,908) (16,716)
--------- -----------
Total assets $ 776,403 $ 343,926
--------- -----------
--------- -----------
Liabilities and Equity:
Interest-bearing
liabilities $ 296,089 $ 6,643 9.1% $ 83,745 $ 1,459 7.1%
Other liabilities 298,182 116,857
--------- ----------
Total liabilities 594,271 200,602
Stockholders' equity 182,132 143,324
--------- ----------
Total liabilities and
equity $ 776,403 $ 343,926
--------- -----------
--------- -----------
Net interest income and
interest margin (1) $ 20,144 13.7% $10,971 15.3%
Net interest rate
spread (2) 9.2% 10.2%
Managed Basis:
Credit card loans $3,622,087 $186,054 20.8% $1,711,089 $80,350 19.0%
Total interest-earning
assets 3,689,375 174,859 19.2% 1,748,352 80,846 18.8%
Total interest-bearing
liabilities 3,391,071 53,824 6.4% 1,540,721 22,423 5.9%
Net interest income and
interest margin (1) 121,035 13.3% 58,423 13.6%
Net interest rate
spread (2) 12.8% 12.9%
</TABLE>
(1) Net interest margin is computed by dividing annualized net interest income
by average total interest-earning assets.
(2) The net interest rate spread is the annualized yield on average
interest-earning assets minus the annualized funding rate on average
interest-bearing liabilities.
16
<PAGE>
Other Operating Income
Other operating income contributes substantially to the Company's
results of operations, representing 73% and 79% of owned revenues for the three
months ended March 31, 1998 and 1997, respectively. Fee-based services revenues,
particularly from debt waiver products, continue to provide an increasing
percentage of other operating income. Debt waiver products and other fee-based
services revenues are expected to increase with growth in credit card accounts
and as the Company continues to offer other fee-based services to its customer
base and to customers of its partners. The following table presents other
operating income on an owned basis:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Dollars in thousands
Other Operating Income:
Net securitization and credit card servicing income $ 34,907 $ 26,533
Credit card fees, interchange and other income 13,021 7,602
Fee-based services revenues 19,564 11,824
Net extended service plan revenues 5,004 289
------------ ------------
Total $ 72,496 $ 46,248
------------ ------------
------------ ------------
</TABLE>
Other operating income increased $26.2 million for the three months
ended March 31, 1998, over the comparable period in 1997, primarily due to
income generated from the growth in average securitized credit card loans.
Additionally, fee-based services revenues increased by $7.7 million because of
the Company's marketing efforts to cross-sell other products and services to its
customers. Specifically, debt waiver product revenue increased by $6.7 million
as the Company continued to add new credit card customers with debt waiver
protection.
Net extended service plan revenues increased by $4.7 million in the
first quarter of 1998 compared to the first quarter of 1997. This increase
reflects that the Company assumed responsibility for claims processing and
underwriting on contracts sold on or after January 1, 1997. As a result, all
extended service plan revenues and the related expenses were deferred and
recognized over the life of the related extended service plan contracts. The
extended service plan revenues before accounting deferrals for the first quarter
1998 were consistent with the first quarter of 1997.
Other Operating Expense
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1998 1997
---- ----
<S> <C> <C>
Dollars in thousands
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses $ 10,150 $ 7,721
Employee compensation 15,088 7,953
Data processing services and communications 8,857 5,011
Third-party servicing expense 2,571 2,970
Warranty and debt waiver underwriting
and claims servicing expense 2,875 1,216
Credit card fraud losses 1,316 899
Other 13,491 7,813
-------------- --------------
Total $ 54,348 $ 33,583
-------------- --------------
-------------- --------------
</TABLE>
17
<PAGE>
Total other operating expenses include direct and allocated expenses
from Fingerhut Companies Inc., ("FCI") for administrative services provided to
the Company under the administrative services agreement.
Total other operating expenses for the three months ended March 31,
1998, increased $20.8 million over the comparable period in 1997, primarily due
to employee compensation, data processing services and communications, and other
expenses. Employee compensation increased due to staffing needs to support the
increase in credit card accounts and other functions. The increase in data
processing services and communications expense was largely due to the increased
number of credit card accounts, transaction volumes and loan balances. The
increase in other expenses is primarily due to general growth in the business
lines and building an infrastructure to support the growth.
Income Taxes
The Company's provision for income taxes includes both federal and
state income taxes. Applicable income tax expense was $7.0 million and $4.8
million for the periods ended March 31, 1998 and 1997, respectively. This tax
expense represents an effective tax rate of 38.5% for the three months ended
March 31, 1998 and 1997.
Asset Quality
The Company's delinquency and net loan charge-off rates at any point in
time reflect, among other factors, the credit risk of loans, the average age of
the Company's various credit card account portfolios, the success of the
Company's collection and recovery efforts, and general economic conditions. The
average age of the Company's credit card portfolio affects the stability of
delinquency and loss rates of the portfolio. The Company continues to focus its
resources on refining its credit underwriting standards for new accounts, and on
collections and post charge-off recovery efforts to minimize net losses. At
March 31, 1998, 46% of managed accounts and 40% of managed loans were less than
18 months old. Accordingly, the Company believes that its loan portfolio will
experience increasing or fluctuating levels of delinquency and loan losses as
the average age of the Company's accounts increases.
This trend is reflected in the change in the Company's net charge-off
ratio. For the quarter ended March 31, 1998, the Company's managed net
charge-off ratio was 8.8% compared to 8.5% for the quarter ended March 31, 1997.
The charge-off ratio for the quarter ended March 31, 1998 was favorably impacted
by the purchase accounting related to two portfolio acquisitions reducing the
reported rate by 170 basis points. The Company believes, consistent with its
statistical models and other credit analysis, that this rate will continue to
fluctuate but generally rise over the next year.
The Company's strategy for managing loan losses to maximize
profitability consists of credit line management, risk-based pricing so that an
acceptable profit margin is maintained based on the perceived risk of each
credit card account and continual focus on collections. Under this strategy,
interest rates are established for each credit card account based on its
perceived risk profile. Loan losses are further managed through the offering of
credit lines which are generally lower than is currently standard in the
industry. Individual accounts and their related credit lines are also
continually managed using various marketing, credit and other management
processes in order to continue to maximize the profitability of accounts.
Delinquencies
Delinquencies not only have the potential to affect earnings in the
form of net loan losses, but are also costly in terms of the personnel and other
resources
18
<PAGE>
dedicated to their resolution. Delinquency levels are monitored on a managed
basis, since delinquency on either an owned or managed basis subjects the
Company to credit loss exposure. A credit card account is contractually
delinquent if the minimum payment is not received by the specified date on the
cardholder's statement. It is the Company's policy to continue to accrue
interest and fee income on all credit card accounts, except in limited
circumstances, until the account and all related loans, interest and other fees
are charged-off. The following table presents the delinquency trends of the
Company's credit card loan portfolio on a managed portfolio basis:
Managed Loan Delinquency
<TABLE>
<CAPTION>
March 31, % of March 31, % of
1998 Total 1997 Total
---- ----- ---- -----
<S> <C> <C> <C> <C>
Dollars in thousands
Managed loan portfolio $ 3,617,276 100% $ 1,816,653 100%
Loans contractually delinquent:
30 to 59 days 79,902 2.2% 37,466 2.1%
60 to 89 days 59,245 1.7% 24,820 1.4%
90 or more days 127,606 3.5% 46,418 2.5%
------------------ --------- ------------------ -----------
Total $ 266,753 7.4% $ 108,704 6.0%
------------------ --------- ------------------ -----------
------------------ --------- ------------------ -----------
</TABLE>
The above numbers reflect continued seasoning of the Company's managed
loan portfolio. The ratio for the current year quarter was favorably impacted by
the portfolio acquisitions by approximately 10 basis points. The Company intends
to continue to focus its resources on its collection efforts to minimize the
negative impact to net loan losses that results from increased delinquency
levels.
Net Charge-Offs
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged against the related income at the
time of charge-off. The following table presents the Company's net charge-offs
for the periods indicated as reported in the consolidated financial statements
and on a managed portfolio basis:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Dollars in thousands
Owned basis:
Average loans outstanding $ 527,105 $ 254,112
Net charge-offs 10,615 5,332
Net charge-offs as a percentage
of average loans outstanding (1) 8.2% 8.5%
------------------ ----------------
------------------ ----------------
Managed basis:
Average loans outstanding $ 3,622,087 $ 1,711,089
Net charge-offs 79,017 35,888
Net charge-offs as a percentage of
average loans outstanding (1) 8.8% 8.5%
------------------ ----------------
------------------ ----------------
</TABLE>
(1) Annualized
19
<PAGE>
Provision and Allowance for Loan Losses
The allowance for loan losses is maintained for on-balance sheet loans.
For securitized loans, anticipated losses and related recourse reserves are
reflected in the calculations of net securitization and credit card servicing
income. Provisions for loan losses are made in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable future losses
of principal and earned interest, net of recoveries, inherent in the existing
on-balance sheet loan portfolio.
The provision for loan losses on an owned basis for the three months
ended March 31, 1998, totaled $20.0 million compared to a provision of $11.1
million for the same period last year. The amount and level of the provision for
loan losses on an owned basis may vary from period to period, depending on the
amount of credit card loans sold and securitized in a particular period.
However, the increase for the three month period ended March 31, 1998, as
compared to the three month period ended March 31, 1997, is primarily reflective
of the large increase in on-balance sheet loans and the overall seasoning of the
portfolio. The following table presents the change in the Company's allowance
for loan losses and other ratios on both an owned and a managed portfolio basis
for the periods presented:
Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
1998 1997
---- ----
<S> <C> <C>
Dollars in thousands
Owned Basis:
Balance at beginning of period $ 32,039 $ 12,829
Allowance related to assets acquired, net 806
Provision for loan losses 20,042 11,054
Loans charged-off 11,019 5,450
Recoveries 404 118
---------------- ----------------
Net loan charge-offs 10,615 5,332
---------------- ----------------
Balance at end of period $ 41,466 $ 19,357
---------------- ----------------
---------------- ----------------
Ending allowance as a percent of loans 8.0% 6.7%
---------------- ----------------
---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Dollars in thousands
Managed Basis:
Balance at beginning of period $ 244,084 $ 95,669
Allowance related to assets acquired, net 806
Provision for loan losses 126,035 56,222
Loans charged-off 81,664 36,682
Recoveries 2,647 794
---------------- ----------------
Net loan charge-offs 79,017 35,888
---------------- ----------------
Balance at end of period $ 291,102 $ 116,809
---------------- ----------------
---------------- ----------------
Ending allowance as a percent of loans 8.0% 6.4%
---------------- ----------------
---------------- ----------------
</TABLE>
20
<PAGE>
Liquidity, Funding and Capital Resources
One of the Company's primary financial goals is to maintain an adequate
level of liquidity through active management of assets and liabilities. Because
the pricing and maturity characteristics of the Company's assets and liabilities
change, liquidity management is a dynamic process, affected by changes in short
and long- term interest rates. The Company utilizes a variety of financing
sources to manage liquidity, refunding and interest rate risks. Current funding
sources are committed and/or available by counterparties to the Company through
facilities established by the Company and FCI.
The Company finances the growth of its credit card loan portfolio
through cash flow from operations, asset securitization, bank financing,
long-term debt issuance and equity issuance.
At March 31, 1998 and 1997 the Company has received cumulative net
proceeds of approximately $3.1 billion and $1.5 billion, respectively, from
sales of credit card loans, of which $21.5 million and $20.0 million ,
respectively, was deposited in an investor reserve account held for the benefit
of the certificate holders in the Trust or the Conduit. Cash generated from
these transactions was used to reduce short-term borrowings and to fund credit
card loan growth.
The Company borrows under a $300 million, five-year revolving credit
facility (the "Revolving Credit Facility"), which is currently guaranteed by
FCI, to fund on-balance sheet loans and for other general business purposes. At
March 31, 1998 and December 31, 1997, the Company had outstanding borrowings of
$130 million and $144 million, respectively, under the Revolving Credit
Facility. The Company expects to refinance the existing Revolving Credit
Facility prior to the proposed Spin-Off from Fingerhut on an unguaranteed basis,
although no assurance can be given to that effect.
In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 pursuant to an exemption under the Securities Act of
1933, as amended. The net proceeds were used to reduce borrowings under the
Revolving Credit Facility. In March 1998, the Company completed an exchange
offer for the Senior Notes. The terms of the new Senior Notes are identical in
all material respects to the original private issue. The Senior Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Metris
Direct, Inc., and all future subsidiaries of the Company that guarantee any of
the Company's indebtedness, including the Revolving Credit Facility. The
guarantee is an unsecured obligation of Metris Direct, Inc. and ranks pari passu
with all existing and future unsubordinated indebtedness.
Newly Issued Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way public enterprises report
information about operating segments in annual financial statements and interim
financial reports. SFAS 131 is effective for fiscal years beginning after
December 15, 1997. The Company is evaluating the effect the adoption of this
statement will have on the reporting of its financial information.
Year 2000
The "Year 2000" problem is a result of computer programs using two
digit years instead of four digit years. Year 2000 could have an impact on the
operations of the Company if not properly addressed.
21
<PAGE>
The Company, like all database marketing companies and financial
services institutions, is heavily dependent upon computer systems for all phases
of its operations. The Company processes data through its own systems and
obtains data and processing services from various vendors. The Company,
therefore, must concern itself not only with its own systems but also with the
status of Year 2000 compliance with respect to those vendors that provide data
and processing services to the Company. The Company created a Year 2000 project
team to identify, address and monitor internal systems and vendor issues related
to the Year 2000 problem.
Most of the Company's existing information systems are less than three
years old and were originally designed for Year 2000 compliance. However, the
Company is dependent on databases maintained by FCI and card and statement
generation, among other services, provided by First Data Resources ("FDR"). The
project team meets monthly with systems experts at FCI to determine where the
Company's and FCI's systems overlap and to determine what steps are necessary to
ensure compliance. The project team is monitoring ongoing testing by FCI to
determine compliance with respect to those matters which impact the Company. The
project team also has been in constant contact with FDR with respect to its
programs for Year 2000. The project team receives quarterly reviews from FDR
concerning its efforts to become Year 2000 compliant and also receives interim
reports as to specific issues. The Company believes that FDR will address the
Year 2000 problems on a timely basis. However, the Company continues to closely
monitor the progress of FDR.
In April 1998, the project team sent questionnaires to many of its
identified material vendors to determine the impact on the Company and the
vendors' plans for becoming year 2000 compliant. The project team's goal is to
obtain test results showing compliance by vendors by the end of first quarter
1999. The project team has developed high level contingency plans to address
noncompliance by its material vendors, which may include replacing vendors.
Although the Company cannot ensure compliance by all of its vendors on
a timely basis, the Company believes that it is taking appropriate steps to
identify exposure to Year 2000 problems and to address them on a timely basis.
In addition, the Company believes that it has adequate resources to achieve Year
2000 compliance for its systems which may not be compliant. Moreover, the
Company believes that the costs of Year 2000 compliance will not be material to
the Company's consolidated financial position, results of operations or cash
flows.
22
<PAGE>
Forward-Looking Statements
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These statements include
statements regarding intent, belief or current expectations of the Company and
its management. Stockholders and prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements. Among the factors that could cause actual results to differ
materially from those indicated by such forward-looking statements are the
Company's limited operating history as a stand-alone entity; the Company's
limited experience with respect to originating and servicing credit card
accounts, including limited delinquency, default and loss experience; the lack
of seasoning of its credit card portfolio, which makes the predictability of
delinquency and loss levels more difficult; risks associated with unsecured
credit transactions, particularly to moderate income consumers; interest rate
risks; dependence on the securitization of the Company's credit card loans to
fund operations; general economic conditions affecting consumer income which may
increase consumer bankruptcies, defaults and delinquencies; state and federal
laws and regulations, including consumer and debtor protection laws; and the
highly-competitive industry in which the Company operates. Each of these factors
is more fully discussed in Exhibit 99 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997. Reference to this Cautionary
Statement or Exhibit 99 in the context of a forward-looking statement or
statements shall be deemed to be a statement that any one or more of these
factors may cause actual results to differ materially from those anticipated in
such forward-looking statement or statements.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk exposures that
affect the quantitative and qualitative disclosures presented in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Part II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.2 Amended and Restated By-laws (Incorporated by
reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-8 (File No.
333-52627), filed on May 14, 1998).
10.8* (ii) Amendment, dated May 12, 1998 (Incorporated
by reference to Exhibit 4.3 to the
Registrant's Registration Statement on
Form S-8 (File No. 333-52627), filed on May
14, 1998).
10.21 (iii) Subordination, Non-Disturbance & Attornment
Agreement, dated March 17, 1998
(iv) Tenant Estoppel Certificate, dated
March 3, 1998, to State Farm Life Insurance
Company
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 10(iii)(A) of Item 601 of Regulation S-K.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METRIS COMPANIES INC.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
Principal financial officer: Senior Vice President, May 12, 1998
Chief Financial Officer
/s/ Robert W. Oberrender
- ---------------------------
Robert W. Oberrender
Principal accounting officer: Senior Director of Finance, May 12, 1998
Corporate Controller
/s/ Jean C. Benson
- ---------------------------
Jean C. Benson
</TABLE>
25
<PAGE>
This instrument was prepared by
and upon recordation should be
returned to:
James A. Cole, Esquire
Venable, Baetjer and Howard, LLP
2 Hopkins Plaza, Suite 1800
Baltimore, MD 21201
SUBORDINATION, NON-DISTURBANCE & ATTORNMENT AGREEMENT
THIS SUBORDINATION, NON-DISTURBANCE & ATTORNMENT AGREEMENT ("Agreement")
made and entered into this _______ day of ____________________ 1997, by and
among MC LEAN RIDGE I - 100 CORPORATION, a Maryland corporation, whose mailing
address is c/o Nottingham Village, Inc., 100 West Pennsylvania Avenue, Towson,
Maryland 21204 (the "Landlord"), METRIS DIRECT, INC., a Minnesota corporation,
whose mailing address is 600 South Highway 169, Interchange Tower, Suite 1800,
St. Louis Park, Minnesota 55426-1222 (the "Tenant"), and STATE FARM LIFE
INSURANCE COMPANY, an Illinois corporation, whose mailing address is One State
Farm Plaza, Bloomington, Illinois 61710 ("State Farm");
WITNESSETH:
WHEREAS, Nottingham Village, Inc. and Tenant have heretofore entered into a
certain lease (the "Lease") dated March 28, 1997 as amended by the First
Amendment to Lease Agreement dated October 15, 1997 between Nottingham Village,
Inc. and Tenant, with respect to and governing the terms of Tenant's use and
occupancy of a portion of certain real estate and improvements legally described
on EXHIBIT A attached hereto and made a part hereof (the "Premises"); and
WHEREAS, all of the right, title and interest of Nottingham Village, Inc.
in and to the Lease was assigned to Landlord By Assignment of Leases made as of
even date herewith; and
WHEREAS, State Farm, as a condition to making a loan to Landlord in the
principal amount of $3,350,000 (the "Loan"), which is to be secured by an
Indemnity Deed of Trust and Security Agreement executed by Landlord to and in
favor of State Farm (the "Deed of Trust") constituting a first lien upon and
encumbering the Premises, and further secured by an Indemnity Assignment of
Rents and Leases executed by Landlord to and in favor of State Farm (the
"Assignment of Rents and Leases") assigning to State Farm all leases of and all
rents derived from the Premises, has required the execution of this Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and to induce State Farm to make said Loan and to accept said
Deed of Trust upon said Premises as security for the Loan and in consideration
of the sum of One Dollar ($1.00) by each of the parties hereto paid to the
other, receipt and sufficiency of which are hereby acknowledged, the parties
hereto do hereby covenant, stipulate and agree as follows:
1. The Lease, and any and all modifications thereof and amendments
thereto, all of Tenant's rights thereunder and Tenant's leasehold interest and
estate in the Premises shall be and are hereby made junior, inferior,
subordinate and subject in all respects to the lien and encumbrance of the Deed
of Trust on the Premises and to all renewals, modifications, consolidations,
replacements and extensions of the Deed of Trust, to the full extent of the
principal sum secured thereby, all interest thereon and all other sums due or
hereafter becoming due thereunder.
2. Tenant agrees that it shall promptly deliver or mail to State Farm a
copy of each written notice given by Tenant to Landlord of a default by the
Landlord under the Lease. Tenant further agrees that if, within the time
provided in the Lease to cure defaults thereunder, State Farm, at its option,
shall elect to perform or cause to be performed the obligations with respect to
which landlord is in default under the Lease, as specified in such written
notice, any right of Tenant to terminate the Lease by reason or on account of
such default of Landlord shall cease and be null and void.
3. Tenant is advised and hereby acknowledges that the Deed of Trust,
Assignment of Rents and Leases and other documents which evidence and secure the
Loan (collectively the "Loan Documents") grant and provide to State Farm the
right to collect rents and other sums payable under the Lease (collectively, the
"Rents") directly from Tenant upon the occurrence of an Event of Default by
Landlord under the Loan Documents, and Tenant hereby agrees that upon Tenant's
receipt from State Farm of written notice of the occurrence of any Event of
default by Landlord under the Loan Documents, Tenant shall thereafter pay all
Rents directly to State Farm (or as State Farm shall direct).
4. State Farm agrees that in the event it should become necessary for
State Farm to foreclose the Deed of Trust, and provided that Tenant is not in
default of its obligations under the Lease, Tenant shall be entitled to continue
in possession of the Premises undisturbed. State Farm further agrees that
unless required by law, State Farm will not join Tenant as a defendant in any
such foreclosure proceedings, and if such joinder is required by law, State Farm
will not to seek to terminate the Lease or Tenant's possession of the Premises.
5. It is further agreed that in the event that State Farm should succeed
to the interest of the Landlord under the Lease, State Farm agrees to be bound
to the Tenant under the Lease and the Tenant agrees from and after such event to
attorn to State Farm or the purchaser at any foreclosure sale. It is further
agreed that all rights and obligations of the parties under the Lease shall
thereafter continue as though the interest of the Landlord in the
2
<PAGE>
Premises had not been terminated or such foreclosure proceedings had not been
brought and thereupon Tenant shall have the same rights and remedies against
State Farm for the breach of the Lease that the Tenant might have had under the
Lease against the Landlord; it being expressly provided, however, that State
Farm shall not be:
(a) liable for any act or omission of any prior landlord under the
Lease (including the Landlord); provided State Farm shall be subject to any
other remedies of Tenant under the Lease, including but not limited to any
offsets which Tenant may be entitled to exercise against rent or other
amounts paid or to be paid under the Lease;
(b) bound by any rent or additional rent which the Tenant might have
paid in advance for more than the current month to any prior landlord
(including the Landlord);
(c) bound by any amendment or modification of the Lease made after
the date of this Agreement without State Farm's prior written consent; or
(d) liable for any security deposit(s), unless actually received from
any prior landlord (including the Landlord).
6. Tenant agrees that notwithstanding anything to the contrary contained
in this Agreement, in the Lease or in any other instrument, any interest of the
Tenant in or under any option to purchase or right of first refusal of, or with
respect to all or any part of the Premises is hereby specifically subordinated
to the rights of State Farm under the Deed of Trust and other Loan Documents and
such option to purchase or right of the first refusal shall not be binding upon
State Farm, its successors and assigns.
7. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and shall also bind and benefit the heirs, legal representatives,
successors and assigns of the respective parties hereto, and all covenants,
conditions and agreements herein contained shall be construed as running with
the title to the land comprising the Premises.
8. Landlord and Tenant hereby waive to the fullest extent permitted by
applicable law, the right to trial by jury in any action. proceeding or
counterclaim field by any party, whether in contract, tort or otherwise relating
directly or indirectly to this Agreement or any acts or omissions of the
Landlord and Tenant in connection therewith or contemplated thereby.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed as of the date and year first above written.
3
<PAGE>
WITNESS: MC LEAN RIDGE I - 100 CORPORATION, a Maryland
corporation
By: [SEAL]
- ---------------------- --------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
WITNESS: METRIS DIRECT, INC., a Minnesota corporation
/s/ Teresa L. Thomas By: /s/ Z. Jill Barclift [SEAL]
- ---------------------- --------------------------------------------
Name (Print): Z. Jill Barclift
----------------------------------
Title (Print): Vice President, General Counsel
--------------------------------
and Assistant Secretary
--------------------------------
Authorized Representative
WITNESS: STATE FARM LIFE INSURANCE COMPANY
By: [SEAL]
- ---------------------- ---------------------------------------------------
Its:
-------------------------------------------------
Address:
One State Farm Plaza
Bloomington Illinois 61710
Corporate Law-Investments E-10
Attn: (Name of Attorney)
4
<PAGE>
STATE OF )
--------------------------
) to wit:
CITY/COUNTY OF )
-------------------
I HEREBY CERTIFY that on this _______ day of ______________ , 1998 before
me, a Notary Public for the State and County aforesaid, personally appeared
________________________________________ , known to me or satisfactorily proven
to be the person whose name is subscribed to the foregoing instrument, who
acknowledged that he is the __________________________ of MC LEAN RIDGE I - 100
CORPORATION, a Maryland corporation, and on behalf of said corporation did
acknowledge that he, as such officer, being authorized so to do, executed the
foregoing instrument for the purposes therein contained by signing the name of
the corporation by himself as such officer.
IN WITNESS WHEREOF, I have set my hand and Notarial Seal the day and year
first above written.
--------------------------------------------
Notary Public
My Commission Expires:
---------------------
STATE OF MINNESOTA )
-----------------
) to wit:
CITY/COUNTY OF HENNEPIN )
------------
I HEREBY CERTIFY that on this 17th day of March, 1998, before me, a Notary
Public of the State of Minnesota, personally appeared Z. Jill Barclift, who
acknowledged herself to be an officer of METRIS DIRECT, INC. (the "Corporation")
and that she, as such officer, being authorized to do so, executed the foregoing
instrument for the purposes therein contained by signing the name of the
Corporation by herself as its Vice President, General Counsel and Assistant
Secretary.
WITNESS my hand and Notarial Seal.
[SEAL] /s/ Katrina M. Ganz
------------------------------------------
Notary Public
My Commission Expires: Jan. 31, 2000
5
<PAGE>
STATE OF )
) to wit:
CITY/COUNTY OF )
I HEREBY CERTIFY that on this _______ day of _______________, 1998, before
me, a Notary Public of the State of _______________, personally appeared _______
________________________________, who acknowledged himself to be ______________
of STATE FARM LIFE INSURANCE COMPANY (the "Corporation") and that he, as such
______________________________, being authorized to do so, executed the
foregoing instrument for the purposes therein contained by signing the name of
the Corporation by himself as _________________________.
WITNESS my hand and Notarial Seal.
--------------------------------------------
Notary Public
My Commission Expires:
----------------------
6
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
Beginning for the same at an iron pin and cap set on the southwestern side
of Sandpiper Circle, 60 foot wide, at the division line between Lot 100 and Lot
103, said point of beginning being designated 202, shown on a Plat entitled
"Lots 100, 101, 102, 103, 104A & 105 White Marsh Business Community Section 'D'
& Section 'G'" dated September 12, 1997, recorded among the Plat Records of
Baltimore County, Maryland in Plat Book 70 folio 5, running thence leaving said
point of beginning, binding on part of the southwestern side of said Sandpiper
Circle and reversing the bearing on said Plat,
1) South 33 degrees 00 minutes 42.0 seconds East 334.96 feet to an iron
pin and cap set at the point designated 207 on said Plat, thence leaving the
southwestern side of said Sandpiper Circle, binding on the cut-off leading to
the northerly side of Corporate Drive, 60 foot wide and reversing the bearing on
said Plat,
2) South 11 degrees 59 minutes 18.0 seconds West 26.36 feet to an iron
pin and cap set at the point designated 206 on said Plat, thence binding on part
of the northerly side of said Corporate Drive, shown on said Plat,
3) northwesterly by a curve to the right having a radius of 870.00 feet
for a distance of 969.35 feet, said curve being subtended by a chord bearing
North 87 degrees 53 minutes 14.5 seconds West 919.98 feet to an iron pin and cap
set at the point designated 10 on said Plat, thence binding on the northerly
side of the Corporate Drive cul-de-sac, variable width, shown on said Plat,
4) northwesterly by a curve to the right having a radius of 60.00 feet
for a distance of 52.56 feet, said curve being subtended by a chord bearing
North 30 degrees 52 minutes 19.4 seconds West 50.90 feet to an iron pin and cap
set at division corner of Lot 100 and Lot 101 and designated 205 on said Plat,
thence leaving the northerly side of said Corporate Drive cul-de-sac, binding on
the division lines between said Lot 100 and Lot 101 and reversing the bearings
on said Plat, the two following courses:
5) North 30 degrees 10 minutes 44.0 seconds East 195.38 feet to an iron
pin and cap set at the point designated 204 on said Plat and
6) North 54 degrees 31 minutes 57.4 seconds East 103.70 feet to an iron
pin and cap set at the point designated 203 on said Plat, thence binding on the
division line between said Lot 100 and Lot 103 and reversing the bearing on said
Plat,
7) North 90 degrees 00 minutes 00 seconds East 585.78 feet to the point
of beginning.
7
<PAGE>
BEING all that parcel of land containing 7.2157+- acres and shown and
designated as Lot 100 on a plat entitled "Lots 100, 101, 102, 103, 104A & 105,
White Marsh Business Community, Section D& Section G", which plat is recorded
among the Land Records of Baltimore County, Maryland in Plat Book 70, Folio 5.
The improvements on such parcel of land are known as Nos. 8012-8020
Corporate Drive.
8
<PAGE>
TENANT ESTOPPEL CERTIFICATE
March 3, 1998
State Farm Life Insurance Company
One State Farm Plaza, E-10
Bloomington, Illinois 61710
Corporate Law - Investments E-10
Attn: Larry Rottunda, Esquire
Re: Lease dated March 28, 1997 between Nottingham Village, Inc. (Landlord)
and Metris Direct, Inc. (Tenant) as amended by First Amendment to
Lease Agreement dated October 15, 1997 between Landlord and Tenant for
Premises consisting of 51,600+- square feet of space situate within
that office/industrial building known as 8012-8020 Corporate Drive,
Baltimore, MD 21236 and located on a parcel of land shown and
designated as Lot 100 on a plat entitled "White Marsh Business
Community, Section D & Section G", which plat is recorded among the
Land Records of Baltimore County, Maryland in Plat Book 70, Folio 5.
Gentlemen:
The undersigned, Metris Direct, Inc. ("Tenant"), the tenant under the
above-described lease, a copy of which is attached hereto as EXHIBIT A,
("Lease") provides this Tenant Estoppel Certificate to you as conclusive
evidence of the matters set forth herein concerning the above-referenced Lease
and the Premises.
As of the date hereof, the undersigned hereby certifies the following:
1. That the Lease supersedes, in all respects, all prior written or oral
agreements between Landlord and Tenant with respect to the Premises
and there are no agreements, understandings, warranties, or
representations between Landlord and Tenant with respect to the Lease
or the Premises except as expressly set forth in the copy of the Lease
(including all amendments thereto, if any) attached hereto as EXHIBIT
A.
2. That, as of the date hereof, the Lease has not been changed, amended,
modified, supplemented or superseded except as set forth in the copy
of the Lease (including all amendments thereto, if any) attached
hereto as EXHIBIT A.
3. That the Lease remains in full force and effect and there are no known
existing defaults by Tenant under the Lease.
<PAGE>
4. That the improvements and space required by the Lease to be delivered
to Tenant have been satisfactorily completed and delivered by
Landlord, and have been accepted by the Tenant.
5. That the Premises are currently occupied and open for the use by
Tenant, its customers, employees and invitees.
6. That Tenant's interest in the Lease and the Premises demised therein,
or any part thereof, has not been sublet, transferred or assigned.
7. That all duties of an inducement nature required of the Landlord under
the Lease have been fulfilled by Landlord and Tenant is fully
obligated to pay rent and all other charges coming due under the
Lease.
8. That the commencement date of the term of the Lease was September 1,
1997 and the expiration date of the term of the Lease is September 30,
2007.
9. That the monthly Basic Rent under and as defined in the Lease of
$43,000 commenced on September 1, 1997 and the last monthly payment of
Basic Rent in the amount of $43,000 was made by Tenant on March 3,
1998. No monthly rental has been prepaid nor has Tenant been given
any free rent, partial rent, rebates, rent rebates or concessions,
other than one month's free rent for the period ended September 30,
1997. Tenant has no claims, defenses or offsets against any rents
payable under the Lease.
10. That a security deposit consisting of a letter of credit in the amount
of $1,500,000 has been deposited with Landlord. Tenant agrees to look
solely to the Landlord for return of the security deposit unless the
Landlord has deposited the security deposit with you.
11. That Landlord, to the best of our knowledge, has fully performed all
of its obligations under the Lease and there are no known
circumstances existing under which Landlord may be deemed in default
merely upon the service of notice or passage of time, or both.
12. That Landlord has not given its consent to Tenant (for example, to
sublease or to alter the Premises) to take any action which, pursuant
to the Lease, requires Landlord's consent.
2
<PAGE>
13. That Tenant has not received any notice of a prior sale, transfer,
assignment, pledge or other hypothecation of the Premises or the Lease
or of the rents provided for therein.
14. That Tenant has not filed, and is not currently the subject of any
filing, voluntary or involuntary, for bankruptcy or reorganization
under any applicable bankruptcy or creditors rights laws.
15. That Tenant is a Minnesota duly organized validly existing and in good
standing under the laws of Minnesota.
In issuing this Estoppel Certificate Tenant understands that you will rely
thereon in your funding of a $3,350,000 mortgage loan to Landlord secured by
certain real estate which includes the Premises.
METRIS DIRECT, INC.
TENANT
By: /s/ Z. Jill Barclift
--------------------------------------
Name (Print): Z. Jill Barclift
----------------------------
Title (Print): Vice President, General
---------------------------
Counsel and Assistant
---------------------------
Secretary
---------------------------
Authorized Representative
3
<PAGE>
EXHIBIT A
(Attached hereto is a copy of the Lease, including
all amendments thereto, if any.)
<PAGE>
EXHIBIT 11
METRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Earnings Per Share
<TABLE>
<CAPTION>
In thousands, except per share amounts Quarter Ended March 31,
1998 1997
<S> <C> <C>
BASIC:
Net income available to common
stockholders $11,224 $ 7,738
--------- ---------
--------- ---------
Weighted average number of common shares
outstanding 19,225 19,225
Net income per share $.58 $.40
DILUTED:
Net income available to common
stockholders $11,224 $7,738
--------- ---------
--------- ---------
Weighted average number of common shares
outstanding 19,225 19,225
Net effect of assumed exercise of stock
options based on treasury stock method
using average market price 1,071 949
--------- ---------
20,296 20,174
--------- ---------
Net income per share $.55 $.38
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 22,517
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 38,185
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 517,439
<ALLOWANCE> 41,466
<TOTAL-ASSETS> 740,760
<DEPOSITS> 0
<SHORT-TERM> 130,000
<LIABILITIES-OTHER> 323,690
<LONG-TERM> 100,000
0
0
<COMMON> 192
<OTHER-SE> 186,878
<TOTAL-LIABILITIES-AND-EQUITY> 740,760
<INTEREST-LOAN> 25,885
<INTEREST-INVEST> 481
<INTEREST-OTHER> 421
<INTEREST-TOTAL> 26,787
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 6,643
<INTEREST-INCOME-NET> 20,144
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 54,348
<INCOME-PRETAX> 18,250
<INCOME-PRE-EXTRAORDINARY> 11,224
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,224
<EPS-PRIMARY> .58
<EPS-DILUTED> .55
<YIELD-ACTUAL> 18.3
<LOANS-NON> 0
<LOANS-PAST> 18,254
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 32,039
<CHARGE-OFFS> 11,019
<RECOVERIES> 404
<ALLOWANCE-CLOSE> 41,466
<ALLOWANCE-DOMESTIC> 41,466
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
