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 June 30, 1999
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 July 30, 1999, 38,574,272 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
<PAGE>
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
June 30, 1999
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets.....................3
Consolidated Statements of Income...............4
Consolidated Statements of Changes in
Stockholders' Equity...................6
Consolidated Statements of Cash Flows...........7
Notes to Consolidated Financial Statements......8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.....................................25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..............................40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................41
Item 2. Changes in Securities......................................41
Item 3. Defaults Upon Senior Securities............................41
Item 4. Submission of Matters to a Vote of Security Holders........41
Item 5. Other Information..........................................42
Item 6. Exhibits and Reports on Form 8-K......................43
Signatures...................................... 44
<PAGE>
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data) (Unaudited)
<TABLE>
June 30, December 31,
1999 1998
---------------- --------------
Assets:
<S> <C> <C>
Cash and due from banks ................................................... $ 23,035 $ 22,114
Federal funds sold ........................................................ 50,148 15,060
Short-term investments .................................................... 2,128 173
----------- -----------
Cash and cash equivalents ............................................ 75,311 37,347
----------- -----------
Retained interests in loans securitized ................................... 1,108,562 753,469
Less: Allowance for loan losses ................................. 475,028 393,283
----------- -----------
Net retained interests in loans securitized .......................... 633,534 360,186
----------- -----------
Loans held for securitization ............................................. 39,757 3,430
Property and equipment, net ............................................... 28,043 21,982
Accrued interest and fees receivable ...................................... 10,646 6,009
Prepaid expenses and deferred charges ..................................... 37,081 59,104
Deferred income taxes ..................................................... 195,160 153,021
Customer base intangible .................................................. 94,075 81,892
Other receivables due from credit card
securitizations, net ................................................... 175,366 185,935
Other assets .............................................................. 49,727 36,813
----------- -----------
Total assets ......................................................... $ 1,338,700 $ 945,719
=========== ===========
Liabilities:
Deposits .................................................................. $ 315,373 $ --
Debt ...................................................................... 239,893 310,896
Accounts payable .......................................................... 52,359 19,091
Current income taxes payable .............................................. 1,007 31,783
Deferred income ........................................................... 139,320 124,892
Accrued expenses and other liabilities .................................... 32,554 26,075
----------- -----------
Total liabilities .................................................... 780,506 512,737
----------- -----------
Stockholders' Equity:
Preferred Stock - Series B, par value $.01 per
share; 10,000,000 shares authorized,
539,866 shares issued and outstanding ............................ -- 201,100
Convertible Preferred Stock - Series C, par value $.01 per share; 10,000,000
shares authorized, 846,650 shares issued
and outstanding ...................................................... 315,377 --
Common stock, par value $.01 per share;
100,000,000 shares authorized, 38,574,272 and 38,519,500 shares issued
and outstanding, respectively 386 193
Paid-in capital ........................................................... 129,544 107,615
Retained earnings ......................................................... 112,887 124,074
----------- -----------
Total stockholders' equity ........................................... 558,194 432,982
----------- -----------
Total liabilities and stockholders' equity ........................... $ 1,338,700 $ 945,719
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data) (Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
1999 1998 1999 1998
---- ---- ---- ----
Interest Income:
<S> ............................... <C> <C> <C> <C>
Credit card loans and retained
interests in loans securitized $ 40,835 $ 26,375 $ 82,112 52,260
Federal funds sold ................ 2,268 299 2,475 780
Other ............................. 433 348 812 769
--------- --------- --------- ---------
Total interest income ........ 43,536 27,022 85,399 53,809
Interest expense .................. 10,061 6,188 19,436 12,831
--------- --------- --------- ---------
Net Interest Income ............... 33,475 20,834 65,963 40,978
Provision for loan losses ......... 15,764 21,390 55,073 41,432
--------- --------- --------- ---------
Net interest income (expense)
after provision for loan
losses ......................... 17,711 (556) 10,890 (454)
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ............. 74,081 30,048 151,079 64,955
Credit card fees, interchange
and other credit card income . 23,920 15,725 45,229 28,746
Fee-based services revenues ....... 38,882 26,534 76,418 51,102
--------- --------- --------- ---------
136,883 72,307 272,726 144,803
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses .......... 26,366 11,277 49,311 21,427
Employee compensation ............. 27,599 14,584 50,917 29,672
Data processing services and
communications .............. 12,329 8,113 22,611 16,970
Third-party servicing expenses .... 4,279 2,487 7,925 5,058
Warranty and debt waiver
underwriting and claims
servicing expenses .......... 4,484 2,545 8,464 5,420
Credit card fraud losses .......... 850 1,004 2,113 2,320
Other ............................. 30,892 11,578 59,120 25,069
--------- --------- --------- ---------
106,799 51,588 200,461 105,936
--------- --------- --------- ---------
Income Before Income Taxes and
Extraordinary Loss ........... 47,795 20,163 83,155 38,413
Income taxes ...................... 19,293 7,763 33,013 14,789
--------- --------- --------- ---------
Income Before Extraordinary Loss .. 28,502 12,400 50,142 23,624
Extraordinary loss from early
extinguishment of debt ...... 50,808 -- 50,808 --
--------- --------- --------- ---------
Net (Loss)/Income ................. (22,306) 12,400 (666) 23,624
Preferred Stock dividends-Series B 2,981 -- 7,506 --
Convertible Preferred Stock
dividends-Series C ............. 2,467 -- 2,467 --
Adjustment for the retirement of
Series B Preferred Stock .... 101,615 -- 101,615 --
--------- --------- --------- ---------
Net (Loss)/Income Applicable To
Common Stockholders ............ $(129,369) $ 12,400 $(112,254) $ 23,624
========= ========= ========= =========
Earnings per share:
Basic - (loss)/income before
extraordinary loss ....... $ (2.03) $ .32 $ (1.59) $ .61
Basic - extraordinary loss ... $ (1.32) -- $ (1.32) $ --
Basic - net (loss)/income .... $ (3.35) $ .32 $ (2.91) $ .61
Diluted - (loss)/income before
extraordinary loss ....... $ (2.03) $ .31 $ (1.59) $ .59
Diluted - extraordinary loss . $ (1.32) -- $ (1.32) --
Diluted - net (loss)/income .. $ (3.35) $ .31 $ (2.91) $ .59
Shares used to compute earnings
per share:
Basic ............................. 38,570 38,450 38,548 38,450
Diluted ........................... 38,570 39,964 38,548 39,876
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except per share data) (Unaudited)
<TABLE>
Total
Preferred Common Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .. $ -- $ 192 $ 107,059 $ 68,787 $ 176,038
Net Income ............... -- -- -- 23,624 23,624
Dividends and Other ...... -- -- -- (384) (384)
--------- --------- --------- --------- ---------
Balance at June 30, 1998 ...... $ $ 192 $ 107,059 $ 92,027 $ 199,278
========= ========= ========= ========= =========
Balance at December 31, 1998 .. $ 201,100 $ 193 $ 107,615 $ 124,074 $ 432,982
Net Loss ................. -- -- -- (666) (666)
Issuance of common stock
under employee benefit
plans ................ -- -- 1,368 -- 1,368
Dividends and other ...... -- -- -- (548) (548)
Retirement of preferred
stock - Series B ..... (208,606) -- -- (101,615) (310,221)
Issuance of preferred
stock - Series C ..... 312,910 -- 122,369 -- 435,279
June 1999 two-for-one
stock split .......... -- 193 (193) -- --
Preferred dividends in
kind - Series B ....... 7,506 -- -- (7,506) --
Preferred dividends in
kind - Series C ...... 2,467 -- -- (2,467) --
--------- --------- --------- --------- ---------
Balance at June 30, 1999 ...... $ 315,377 $ 386 $ 129,544 $ 112,887 $ 558,194
========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
1999 1998
----------- -----------
Operating Activities:
<S> <C> <C>
Net (loss)/income .................................. $ (666) $ 23,624
Adjustments to reconcile net (loss)/income to net
cash provided by operating activities:
Extraordinary loss from early extinguishment of
debt 50,808 --
Depreciation and amortization ................. 38,892 19,093
Change in allowance for loan losses ........... 81,745 80,074
Changes in operating assets and liabilities:
Accrued interest and fees receivable ...... (4,637) (772)
Prepaid expenses and deferred charges ..... (18,279) (18,270)
Deferred income taxes ..................... (42,139) (47,531)
Accounts payable and accrued expenses ..... 43,997 (13,832)
Other receivables due from credit card
securitizations, net ............. 9,780 (7,904)
Current income taxes payable .............. (30,776) 33,986
Deferred income ........................... 14,428 10,541
Other ..................................... (20,087) 264
----------- -----------
Net cash provided by operating activities .......... 123,066 79,273
----------- -----------
Investing Activities:
Proceeds from/repayments of securitized loans ...... 746,270 239,550
Net loans originated or collected .................. (11,331) (237,714)
Credit card portfolio acquisition .................. (1,156,673) (108,164)
Additions to premises and equipment ................ (8,558) (4,078)
----------- -----------
Net cash used in investing activities .............. (430,292) (110,406)
----------- -----------
Financing Activities:
Net increase in debt ............................... 29,000 6,901
Net increase in deposits ........................... 315,373 --
Cash dividends paid ................................ (551) (384)
Net increase in equity ............................. 1,368 --
----------- -----------
Net cash provided by financing activities .......... 345,190 6,517
----------- -----------
Net increase (decrease) in cash and cash equivalents 37,964 (24,616)
Cash and cash equivalents at beginning of period ... 37,347 48,223
----------- -----------
Cash and cash equivalents at end of period ......... $ 75,311 $ 23,607
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<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")
including Direct Merchants Credit Card Bank, N.A. ("Direct Merchants Bank"). The
Company is an information-based direct marketer of consumer credit products and
fee-based services, primarily to moderate-income consumers.
Prior to September 1998, the Company was 83% owned by Fingerhut
Companies, Inc. ("FCI"). On September 25, 1998, FCI distributed the remaining
shares of the Company to shareholders of FCI in a tax free distribution (the
"Spin Off").
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.
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 ("SEC") 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 the fiscal year ended December 31, 1998. 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.
Stock Split
The Company completed a two-for-one stock split effected in the form of
a 100% stock dividend distributed on June 15, 1999. All share and per share
information reflects this stock split.
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.
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Securitization,Retained Interests in Loans Securitized and Securitization Income
The Company securitizes and sells a significant portion of its credit
card loans to both public and private investors through the Metris Master Trust
(the "Trust") and third-party bank sponsored, multi-seller receivables conduits
(the "Conduits"). The Company retains participating interests in the credit card
loans under "Retained interests in loans securitized" on the consolidated
balance sheets. The Company's retained interests in loans securitized are
subordinate to the interests of investors in the Trust and Conduit portfolios.
Although the Company continues to service the securitized 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.
The sales of these loans have been recorded in accordance with
Statement of Financial Accounting 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 No. 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 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 statements of income. 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 various receivables from the Trust or
Conduits and other assets as a result of securitizations, including: amounts
deposited in an investor reserve account held by the Trust for the benefit of
the Trust's security holders; amounts due from interest rate caps, swaps and
floors; accrued interest and fees on the securitized receivables; servicing fee
receivables; and various other receivables. These amounts are reported as "other
receivables due from credit card securitizations, net" on the consolidated
balance sheets. The provision for loan losses reflected on the statements of
income in "Net securitization and credit card servicing income" was $123.3
million and $262.9 million for the three and six month periods ended June 30,
1999, respectively, compared to $108.0 million and $214.0 million for the same
periods of 1998.
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 loan portfolio, effectively reducing the Company's retained interests
in loans securitized to a fair value presentation.
Statements of Cash Flows
Cash paid for interest during the six month periods ended June 30, 1999
and 1998, was $10.1 million and $4.8 million, respectively. Cash paid for income
taxes for the same periods was $105.5 million and $20.0 million, respectively.
The statement of cash flows for the six month period ended June 30,
1999 reflects the noncash adjustments related to the conversion of the Thomas H.
Lee investment in Series B Perpetual Preferred Stock and Senior Notes and the
cancellation of warrants (see note 5). The conversion to Series C Perpetual
Convertible Preferred Stock resulted in noncash reductions in debt and accrued
interest of $100 million and $4.3 million, respectively, offset by an increase
of $104.3 million in equity. The conversion also resulted in the
reclassification of $30.0 million in unamortized fees related to the structuring
of the initial investment. This noncash reclassification decreased both the
amount of prepaid expenses and equity reported on the consolidated balance
sheet.
Earnings Per Share
The following table presents the computation of basic and diluted
weighted average shares used in the per share calculations:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income before extraordinary items .......... $ 28,502 $ 12,400 $ 50,142 $ 23,624
Preferred dividends - Series B ............. 2,981 -- 7,506 --
Preferred dividends - Series C ............. 2,467 -- 2,467 --
Adjustment for the retirement of Series B
preferred stock ....................... 101,615 -- 101,615 --
--------- --------- --------- ---------
Net (loss)/income applicable to common
stockholders before extraordinary items (78,561) 12,400 (61,446) 23,624
--------- --------- --------- ---------
Extraordinary loss from the early
extinguishment of debt ................ 50,808 -- 50,808 --
--------- --------- --------- ---------
Net (loss)/income applicable to common
stockholders .......................... $(129,369) $ 12,400 $(112,254) $ 23,624
========= ========= ========= =========
Weighted average common shares outstanding . 38,570 38,450 38,548 38,450
Adjustments for dilutive securities:
Assumed exercise of outstanding stock
options(1) .............................. -- 1,514 -- 1,426
Assumed conversion of convertible preferred
stock(1) .............................. -- -- -- --
--------- --------- --------- ---------
Diluted common shares ...................... 38,570 39,964 38,548 39,876
========= ========= ========= =========
</TABLE>
(1) For the three month period ended June 30, 1999, there were options and
convertible preferred stock outstanding to purchase 2.4 million and 6.2 million
common shares, respectively. For the six month period ended June 30, 1999, there
were options and convertible preferred stock outstanding to purchase 2.0 million
and 3.1 million common shares, respectively. All of these potential common
shares have been excluded from the computation of diluted earnings per share
because their inclusion would have been anti-dilutive.
Earnings per share:
Basic - (loss)/income before
extraordinary loss ....... $(2.03) $ .32 $(1.59) $ .61
Basic - extraordinary loss ... $(1.32) -- $(1.32) $ --
Basic - net (loss)/income .... $(3.35) $ .32 $(2.91) $ .61
Diluted - (loss)/income before
extraordinary loss ....... $(2.03) $ .31 $(1.59) $ .59
Diluted - extraordinary loss . $(1.32) -- $(1.32) --
Diluted - net (loss)/income .. $(3.35) $ .31 $(2.91) $ .59
<PAGE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period .......... $450,672 $291,102 $393,283 $244,084
Allowance related to assets acquired, net 16,044 1,378 16,044 1,378
Provision for loan losses ............... 15,764 21,390 55,073 41,432
Provision for loan losses (1) ........... 123,347 107,979 262,879 213,972
Loans charged-off ....................... 140,225 101,426 268,387 183,090
Recoveries .............................. 9,426 3,734 16,136 6,381
-------- -------- -------- --------
Net loan charge-offs .................... 130,799 97,692 252,251 176,709
-------- -------- -------- --------
Balance at end of period ................ $475,028 $324,157 $475,028 $324,157
======== ======== ======== ========
(1)Amounts are included in "Net securitization and credit card servicing income."
</TABLE>
NOTE 4 - PORTFOLIO ACQUISITION
On June 30, 1999, Direct Merchants Bank purchased a portion of the
consumer bank card portfolio of GE Capital Consumer Card Co., a unit of General
Electric Company. The acquired credit card portfolio had approximately 485,000
active accounts, which will convert to the Direct Merchants Bank platform later
in 1999, and approximately $1.2 billion in receivables. Direct Merchants Bank
financed the acquisition with a combination of proceeds from the sale of the
portfolio's credit card receivables to one or more conduits and jumbo
certificates of deposit held at Direct Merchants Bank.
NOTE 5 - PRIVATE EQUITY PLACEMENT
On November 13, 1998, the Company entered into agreements with affiliates of the
Thomas H. Lee Company, a private equity firm, (together with its affiliates, the
"Lee Company") to make a total private equity investment of $300 million in the
Company. The Lee Company agreed to purchase 0.8 million shares of Series C
Perpetual Convertible Preferred Stock (the "Series C Preferred"), which are
convertible into common shares at a conversion price of $18.63 per common share
subject to adjustment in certain circumstances. The Series C Preferred has a 9%
dividend payable in additional shares of Series C Preferred and will also
receive any dividends paid on the Company's common stock on an as converted
basis. The cumulative payment-in-kind dividends are effectively guaranteed for a
seven year period. Assuming conversion of the Series C Preferred into common
stock, the Lee Company would initially own approximately 30% of the Company on a
diluted basis. The Series C Preferred entitles the holders to elect four members
to the Company's Board of Directors. The Series C Preferred may be redeemed by
the Company in certain circumstances after December 31, 2001 by paying 103% of
the redemption price of $372.50 and any accrued dividends at the time of
redemption. The Company also has the option to redeem the Series C Preferred
after December 9, 2008 without restriction by paying the redemption price of
$372.50 and any accrued dividends at the time of redemption. The Company
determined that the conversion to the Series C Preferred would result in a
"change in control" in certain of the Company's agreements with FCI and the New
Credit Facility. Therefore, prior to closing the transaction, the Company was
required to either increase the change in control ownership percentage from 30
to 35 or otherwise exempt the Lee Company from the change in control provision.
In order to provide the Company funding for the PNC portfolio
acquisition completed in December 1998 as well as for general corporate purposes
prior to shareholders' approval and the receipt of notice that there was no
regulatory objection to the transaction, the Lee Company agreed to purchase $200
million in Series B Perpetual Preferred Stock (the "Series B Preferred") and
$100 million in 12% Senior Notes due 2006 (the "Lee Senior Notes"). The Company
also issued the Lee Company 7.5 million ten-year warrants to purchase shares of
the Company's common stock for $15 subject to adjustment in certain
circumstances. The Series B Preferred had a 12.5% dividend payable in additional
shares of Series B Preferred for ten years, then converting to a dividend
payable in cash.
On March 12, 1999, shareholders' approved the conversion of the Series
B Preferred and Lee Senior Notes into Series C Preferred. Notice was received on
May 28, 1999, that there was no regulatory objection to the conversion to the
Series C Preferred. On June 1, 1999, the Series B Preferred and the Lee Senior
Notes were extinguished, and the warrants were canceled causing a one-time,
non-cash accounting adjustment. The excess of the fair value of the Series C
Preferred over the carrying value of the Series B Preferred and the Lee Senior
Notes at the time of the conversion was allocated to the Lee Senior Notes and
the Series B Preferred based upon their initial fair values. To arrive at net
income applicable to common stockholders in the calculation of earnings per
share, the amount allocated to the Lee Senior Notes was recognized as an
extraordinary loss from the early extinguishment of debt in the amount of $50.8
million and the amount allocated to the Series B Preferred was recognized as a
reduction of net income applicable to common stockholders in the amount of
$101.6 million. The extraordinary loss attributable to the Lee Senior Notes is
not recorded net of taxes. These adjustments did not have an impact on total
stockholders' equity.
NOTE 6 - SEGMENTS
The Company operates in two principal areas: consumer credit products and
fee-based services. The Company's primary consumer credit products are unsecured
credit cards, including the Direct Merchants Bank MasterCard(R) and Visa(R). The
Company's credit card accounts include customers obtained from the Fingerhut
Database and other customers for whom general credit bureau information is
available.
The Company markets its fee-based services, including (i) debt waiver
protection for unemployment, disability, and death, (ii) membership programs
such as card registration, purchase protection and other club memberships, and
(iii) third-party insurance, directly to its credit card customers and customers
of third parties. The Company currently administers its extended service plans
sold through a third-party retailer, and the customer pays the retailer
directly. In addition, the Company develops customized targeted mailing lists
from information contained in the Company's databases for use by unaffiliated
companies in their own product solicitation efforts that do not directly compete
with those of the Company.
The segment information reported below is presented on a managed basis.
Management uses this basis to review segment performance and to make operating
decisions. To do so, the income statement and balance sheet are adjusted to
reverse the effects of securitizations. Presentation on a managed basis is not
in conformity with generally accepted accounting principles. The elimination
column in the segment table includes adjustments to present the information on
an owned basis as reported in the financial statements of this quarterly report.
The expenses, assets and liabilities attributable to corporate
functions are not allocated to the operating segments, such as employee
compensation, data processing services and communications, third party servicing
expenses, and other expenses including occupancy, depreciation and amortization,
professional fees, and other general and administrative expenses. These expenses
are included in the reconciliation of the income before income taxes (and
extraordinary loss) for the reported segments to the consolidated total. The
Company does not allocate capital expenditures for leasehold improvements,
capitalized software and furniture and equipment to operating segments. There
were no operating assets located outside of the United States for the periods
presented.
The fee-based services operating segment pays a commission to the
consumer credit products segment for successful marketing efforts to the
consumer credit products segment's cardholders at a rate similar to those paid
to the Company's other third parties. The fee-based services segment reports
interest income and the consumer credit products segment reports interest
expense at the Company's weighted average borrowing rate for the excess cash
flow generated by the fee-based services segment and used by the consumer credit
products segment to fund the growth of cardholder balances.
<PAGE>
Three Months Ended June 30,
1999
Consumer Credit Fee-Based
Products Services Reconciliation (a) Consolidated
(In thousands)
Interest income $ 249,740 $ 913 $ (207,117)(b) $ 43,536
Interest expense 71,631 -- (61,570)(c) 10,061
----------- ----------- ----------- -----------
Net interest
income ..... 178,109 913 (145,547) 33,475
Other income ... 75,802 38,882 22,199 136,883
Total income ... 325,542 39,795 (184,918) 180,419
Income before
income taxes
and extra-
ordinary loss 99,864(d) 23,031 (d) (75,100)(e) 47,795
Total assets ... $ 6,443,038 $ 82,100 $(5,186,438)(f) $ 1,338,700
Three Months Ended June 30,
1998
Consumer Credit Fee-Based
Products Services Reconciliation(a) Consolidated
(In thousands)
Interest income $ 171,146 $ 739 $ (144,863)(b) $ 27,022
Interest expense 53,353 -- (47,165)(c) 6,188
----------- ----------- ----------- -----------
Net interest
income ..... 117,793 739 (97,698) 20,834
Other income ... 56,054 26,534 (10,281) 72,307
Total income ... 227,200 27,273 (155,144) 99,329
Income before
income taxes . 36,851 (d) 20,074(d) (36,762)(e) 20,163
Total assets ... $ 3,820,573 $ 36,155 $(3,257,230)(f) $ 599,498
<PAGE>
Six Months Ended June 30,
1999
Consumer Credit Fee-Based
Products Services Reconciliation(a) Consolidated
(In thousands)
Interest income $ 506,769 $ 1,760 $ (423,130)(b) $ 85,399
Interest expense 141,105 -- (121,669)(c) 19,436
-------------- ---------- ------------ ------------
Net interest
income ..... 365,664 1,760 (301,461) 65,963
Other income ... 157,728 76,418 38,580 272,726
Total income ... 664,497 78,178 (384,550) 358,125
Income before
income and extra- .
ordinary loss ... 179,785(d) 43,943(d) (140,573)(e) 83,155
Total assets ... $ 6,443,038 $ 82,100 $(5,186,438)(f) $ 1,338,700
Six Months Ended June 30,
1998
Consumer Credit Fee-Based
Products Services Reconciliation(a) Consolidated
(In thousands)
Interest income $ 346,005 $ 1,357 $ (293,553)(b) $ 53,809
Interest expense 107,795 -- (94,964)(c) 12,831
----------- ----------- ----------- -----------
Net interest
income ..... 238,210 1,357 (198,589) 40,978
Other income ... 109,084 51,102 (15,383) 144,803
Total income ... 455,089 52,459 (308,936) 198,612
Income before
income taxes . 76,751(d) 38,431(d) (76,769)(e) 38,413
Total assets ... $ 3,820,573 $ 36,155 $(3,257,230)(f) $ 599,498
(a) The reconciliation column includes: intercompany eliminations; amounts not
allocated to segments; and adjustments to the amounts reported on a managed
basis to reflect the effects of securitization.
(b) The reconciliation to consolidated owned interest revenue includes the
elimination of $0.9 million, $0.7 million, $1.8 million and $1.4 million of
intercompany interest received by the fee-based services segment from the
consumer credit products segment for the three months ended June 30, 1999 and
1998, and the six months ended June 30, 1999 and 1998, respectively.
(c) The reconciliation to consolidated owned interest expense includes the
elimination of $0.9 million, $0.7 million, $1.8 million, and $1.4 million of
intercompany interest paid by the consumer credit products segment to the
fee-based services segment for the three months ended June 30, 1999 and 1998
and the six months ended June 30, 1999 and 1998, respectively.
(d) Income before income taxes (and extraordinary loss) includes intercompany
commissions paid by the fee-based services segment to the consumer credit
products segment for successful marketing efforts to consumer credit products
cardholders of $0.8 million, $0.2 million, $1.5 million and $1.1 million for
the three months ended June 30, 1999 and 1998 and the six months ended June
30, 1999 and 1998, respectively.
(e) The reconciliation to the owned income before income taxes (and
extraordinary loss) includes: unallocated costs related to employee
compensation; data processing and communications; third party servicing
expenses; and other expenses. The majority of these expenses, although not
allocated for the internal segment reporting used by management, relate to the
consumer credit products segment.
(f) Total assets include the assets attributable to corporate functions not
allocated to operating segments and the removal of investors interests in
securitized loans to present total assets on an owned basis.
NOTE 7 - SUBSEQUENT EVENT
On July 15, 1999, the Company privately issued and sold $150
million of 10.125% Senior Notes due 2006 (the "Senior Notes due 2006") at an
offering price of 95.8% pursuant to the 144(a) exemption of the Securities Act
of 1933, as amended. The net proceeds of $139.4 million will be used for:
repayment of borrowings under the revolving credit facility which was incurred
in part to augment the capital of Direct Merchants Bank. The Senior Notes due
2006 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 New
Credit Facility. The guarantee is an unsecured obligation of the Guarantor and
ranks pari passu with all existing and future unsubordinated indebtedness.
NOTE 8 - DEBT
On June 30, 1998, the Company executed a $200 million, three-year
revolving credit facility and a $100 million five-year term loan (the "New
Credit Facility") with a syndicate of banks and money market mutual funds. This
agreement became effective upon the Spin Off from FCI on September 25, 1998. At
June 30, 1999, the Company was in compliance with all financial covenants under
this agreement. At June 30, 1999 and December 31, 1998, the Company had
outstanding borrowings of $139 million and $110 million, respectively, under the
New Credit Facility. The weighted average interest rates on the borrowings at
June 30, 1999 and December 31, 1998, were 8.0% and 7.9%, respectively.
Beginning in the first quarter 1999, Direct Merchants Bank began
issuing jumbo certificates of deposit ("CDs"). These CDs are issued in
increments of $100,000 and are sold through third party registered deposit
brokers. As of June 30, 1999, $311.8 million of CDs were outstanding with
maturities ranging from six months to two years and fixed interest rates ranging
from 4.95% to 5.85%.
In November 1997, the Company issued and sold $100 million of 10%
Senior Notes due 2004 (the "Senior Notes"). 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 New Credit Facility. The guarantee is
an unsecured obligation of the Guarantor and ranks pari passu with all existing
and future unsubordinated indebtedness. As part of the Thomas H. Lee Company
investment, the Company issued $100 million in Lee Senior Notes which are
similar in all material respects to the Senior Notes. These notes were
extinguished on June 1, 1999 (see Note 5). The Company also has approximately
$0.9 million of debt with local governments to support growth in those areas.
The Company has various indirect 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.
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
June 30, 1999
(Dollars in thousands)
Unaudited
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ................ $ (2,021) $ 818 $ 76,514 $ -- $ 75,311
Net retained interests in loans
securitized ........................... (23) -- 633,557 -- 633,534
Loans held for securitization
533 -- 39,224 -- 39,757
Property and equipment, net .............. -- 23,098 4,945 -- 28,043
Prepaid expenses and deferred charges 90 12,501 24,490 -- 37,081
Deferred income taxes .................... 840 19,204 175,116 -- 195,160
Customer base intangible ................. -- -- 94,075 -- 94,075
Other receivables due from credit card
securitizations, net 12 -- 175,354 -- 175,366
Other assets ............................. 9,554 5,977 44,842 -- 60,373
Investment in subsidiaries ............... 1,005,471 997,739 -- (2,003,210) --
----------- ----------- ----------- ----------- -----------
Total assets ............................. $ 1,014,456 $ 1,059,337 $ 1,268,117 $(2,003,210) $ 1,338,700
=========== =========== =========== =========== ===========
Liabilities:
Deposits ................................. $ (1,000) $ -- $ 316,373 $ -- $ 315,373
Debt ..................................... 423,789 (13,856) (170,040) -- 239,893
Accounts payable ......................... 592 16,129 35,638 -- 52,359
Current income taxes payable.............. 4,176 (15,511) 12,342 -- 1,007
Deferred income .......................... 26,962 42,402 69,956 -- 139,320
Accrued expenses and other liabilities.... 1,743 24,702 6,109 -- 32,554
----------- ----------- ----------- ----------- -----------
Total liabilities ........................ 456,262 53,866 270,378 -- 780,506
Total stockholders' equity ............... 558,194 1,005,471 997,739 (2,003,210) 558,194
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,014,456 $ 1,059,337 $ 1,268,117 $(2,003,210) $ 1,338,700
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 1998
(Dollars in thousands)
Unaudited
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ....... $ (5,007) $ (156) $ 42,510 $ -- $ 37,347
Net retained interests in loans
securitized .................. (97) -- 360,283 -- 360,186
Loans held for securitization
1,876 -- 1,554 -- 3,430
Property and equipment, net ..... -- 18,243 3,739 -- 21,982
Prepaid expenses and deferred
charges ...................... 30,487 17,833 10,784 -- 59,104
Deferred income taxes ........... 1,049 19,427 132,545 -- 153,021
Customer base intangible ........ -- -- 81,892 -- 81,892
Other receivables due from credit
card securitizations, net -- -- 185,935 -- 185,935
Other assets .................... 5,989 6,989 29,844 -- 42,822
Investment in subsidiaries ...... 756,455 774,986 -- (1,531,441) --
----------- ----------- ----------- ----------- -----------
Total assets .................... $ 790,752 $ 837,322 $ 849,086 $(1,531,441) $ 945,719
=========== =========== =========== =========== ===========
Liabilities:
Debt ............................ $ 317,298 $ 15,021 $ (21,423) $ -- $ 310,896
Accounts payable ................ 3,140 3,786 12,165 -- 19,091
Current income taxes payable .... 3,722 (5,692) 33,753 -- 31,783
Deferred income ................. 31,753 47,515 45,624 -- 124,892
Accrued expenses and other
liabilities .................. 1,857 20,237 3,981 -- 26,075
----------- ----------- ----------- ----------- ----------
Total liabilities ............... 357,770 80,867 74,100 -- 512,737
Total stockholders' equity ...... 432,982 756,455 774,986 (1,531,441) 432,982
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity ......... $ 790,752 $ 837,322 $ 849,086 $(1,531,441) $ 945,719
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 1999
(Dollars in thousands)
Unaudited
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Interest Income/(Expense) ......... $ (6,801) $ (404) $ 40,680 $ -- $ 33,475
Provision for loan losses ............. (138) -- 15,902 -- 15,764
----------- ----------- --------- ----------- -----------
Net Interest Income/(Expense) After
Provision for Loan Losses .......... (6,663) (404) 24,778 -- 17,711
----------- ----------- --------- ----------- -----------
Other Operating Income:
Net securitization and credit card
servicing income ................... 1,623 -- 72,458 -- 74,081
Credit card fees, interchange and other
income ............................. 319 34 23,567 -- 23,920
Fee-based services revenues ........... -- 10,628 28,254 -- 38,882
----------- ----------- --------- ----------- -----------
1,942 10,662 124,279 -- 136,883
----------- ----------- --------- ----------- -----------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 8,569 17,797 -- 26,366
Employee compensation ................. -- 24,904 2,695 -- 27,599
Data processing services and
communications ..................... -- 1,758 10,571 -- 12,329
Third-party servicing expenses ........ -- (14,713) 18,992 -- 4,279
Warranty and debt waiver underwriting
and claims servicing expenses ...... -- 595 3,889 -- 4,484
Credit card fraud losses .............. 5 -- 845 -- 850
Other ................................. 848 10,340 19,704 -- 30,892
----------- ----------- --------- ----------- -----------
853 31,453 74,493 -- 106,799
----------- ----------- --------- ----------- -----------
Income/(Loss) Before Income Taxes,
Extraordinary Loss and Equity in
Income of Subsidiaries ............. (5,574) (21,195) 74,564 -- 47,795
Income taxes .......................... (2,284) (7,800) 29,377 -- 19,293
Equity in income of subsidiaries ...... 31,792 45,187 -- (76,979) --
----------- ----------- --------- ----------- -----------
Income/(Loss) Before Extraordinary Loss 28,502 31,792 45,187 (76,979) 28,502
Extraordinary loss from the early
extinguishment of debt ............. 50,808 -- -- -- 50,808
----------- ----------- --------- ----------- -----------
Net (Loss)/Income ..................... $ (22,306) $ 31,792 $ 45,187 $ (76,979) $ (22,306)
=========== ========= ========= =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 1998
(Dollars in thousands)
Unaudited
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Interest Income/(Expense) ......... $ (6,540) $ (44) $ 27,418 $ -- $ 20,834
Provision for loan losses ............. 33 -- 21,357 -- 21,390
----------- --------- --------- ----------- -----------
Net Interest Income/(Expense) After
Provision for Loan Losses .......... (6,573) (44) 6,061 -- (556)
----------- --------- --------- ----------- -----------
Other Operating Income:
Net securitization and credit card
servicing income ................... 2,735 (24) 27,337 -- 30,048
Credit card fees, interchange and other
income ............................. 44 1 15,680 -- 15,725
Fee-based services revenues ........... -- 9,311 17,223 -- 26,534
----------- --------- --------- ----------- -----------
2,779 9,288 60,240 -- 72,307
----------- --------- --------- ----------- -----------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 3,797 7,480 -- 11,277
Employee compensation ................. -- 12,615 1,969 -- 14,584
Data processing services and
communications ..................... -- 1,127 6,986 -- 8,113
Third-party servicing expenses ........ -- (12,284) 14,771 -- 2,487
Warranty and debt waiver underwriting
and claims servicing expenses ...... -- 541 2,004 -- 2,545
Credit card fraud losses .............. 6 -- 998 -- 1,004
Other ................................. 80 2,927 8,571 -- 11,578
----------- --------- --------- ----------- -----------
86 8,723 42,779 -- 51,588
----------- --------- --------- ----------- -----------
Income/(Loss) Before Income Taxes and
Equity in Income of Subsidiaries ... (3,880) 521 23,522 -- 20,163
Income taxes .......................... (1,494) 99 9,158 -- 7,763
Equity in income of subsidiaries ...... 14,786 14,364 -- (29,150) --
----------- --------- --------- ----------- -----------
Net Income/(Loss) ..................... $ 12,400 $ 14,786 $ 14,364 $ (29,150) $ 12,400
=========== ========= ========= =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 1999
(Dollars in thousands)
Unaudited
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Interest Income/(Expense) ......... $ (16,168) $ (512) $ 82,643 $ -- $ 65,963
Provision for loan losses ............. 106 -- 54,967 -- 55,073
------ ------ ------ -------- ------
Net Interest Income/(Expense) After
Provision for Loan Losses .......... (16,274) (512) 27,676 -- 10,890
------ ------ ------ -------- ------
Other Operating Income:
Net securitization and credit card
servicing income ................... 3,415 -- 147,664 -- 151,079
Credit card fees, interchange and other
income ............................. 541 (102) 44,790 -- 45,229
Fee-based services revenues ........... -- 21,722 54,696 -- 76,418
------ ------ ------ -------- ------
3,956 21,620 247,150 -- 272,726
------ ------ ------ -------- ------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 16,730 32,581 -- 49,311
Employee compensation ................. -- 45,914 5,003 -- 50,917
Data processing services and
communications ..................... -- 3,174 19,437 -- 22,611
Third-party servicing expenses ........ -- (30,529) 38,454 -- 7,925
Warranty and debt waiver underwriting
and claims servicing expenses ...... -- 1,942 6,522 -- 8,464
Credit card fraud losses .............. 8 -- 2,105 -- 2,113
Other ................................. 1,248 19,763 38,109 -- 59,120
------ ------ ------ -------- ------
1,256 56,994 142,211 -- 200,461
------ ------ ------ -------- ------
Income/(Loss) Before Income Taxes and
Equity in Income of Subsidiaries ... (13,574) (35,886) 132,615 -- 83,155
Income taxes .......................... (5,389) (13,714) 52,116 -- 33,013
Equity in income of subsidiaries ...... 58,327 80,499 -- (138,826) --
------ ------ ------ -------- ------
Income/(Loss) Before Extraordinary Loss 50,142 58,327 80,499 (138,826) 50,142
Extraordinary loss from the early
extinguishment of debt ............. 50,808 -- -- -- 50,808
------ ------ ------ -------- ------
Net (Loss)/Income ..................... $ (666) $ 58,327 $ 80,499 $ (138,826) $ (666)
========== ========= ======== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 1998
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Interest Income/(Expense) ......... $ (9,625) $ (4,418) $ 55,021 $ -- $ 40,978
Provision for loan losses ............. 83 -- 41,349 -- 41,432
--------- --------- --------- --------- ---------
Net Interest Income/(Expense) After
Provision for Loan Losses .......... (9,708) (4,418) 13,672 -- (454)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................... 6,395 (24) 58,584 -- 64,955
Credit card fees, interchange and other
income ............................. 89 1 28,656 -- 28,746
Fee-based services revenues ........... -- 15,409 35,693 -- 51,102
--------- --------- --------- --------- ---------
6,484 15,386 122,933 -- 144,803
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 7,732 13,695 -- 21,427
Employee compensation ................. -- 26,191 3,481 -- 29,672
Data processing services and
communications ..................... -- 2,487 14,483 -- 16,970
Third-party servicing expenses ........ (266) (23,836) 29,160 -- 5,058
Warranty and debt waiver underwriting
and claims servicing expenses ...... -- 1,003 4,417 -- 5,420
Credit card fraud losses .............. 18 -- 2,302 -- 2,320
Other ................................. 217 8,643 16,209 -- 25,069
--------- --------- --------- --------- ---------
(31) 22,220 83,747 -- 105,936
--------- --------- --------- --------- ---------
Income/(Loss) Before Income Taxes and
Equity in Income of Subsidiaries ... (3,193) (11,252) 52,858 -- 38,413
Income taxes .......................... (1,230) (4,550) 20,569 -- 14,789
Equity in income of subsidiaries ...... 25,587 32,289 -- (57,876) --
--------- --------- --------- --------- ---------
Net Income/(Loss) ..................... $ 23,624 $ 25,587 $ 32,289 $ (57,876) $ 23,624
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ (13,985) $ (11,240) $ 148,291 $ 123,066
----------- ----------- ------------ ----------
Investing Activities:
Proceeds from/repayments of securitized loans
-- -- 746,270 746,270
Net loans originated or collected ................. 1,344 -- (12,675) (11,331)
Credit Card Portfolio Acquisition ................. -- (1,156,673) (1,156,673)
Additions to premises and equipment ............... -- (7,343) (1,215) (8,558)
----------- ----------- ------------ ----------
Net cash provided by (used in) investing activities
1,344 (7,343) (424,293) (430,292)
----------- ----------- ------------ ----------
Financing Activities:
Net increase in deposits .......................... -- -- 315,373 315,373
Net increase (decrease)in debt .................... 205,491 (28,877) (147,614) 29,000
Cash dividends paid ............................... (551) (804) 804 (551)
Net increase in equity ............................ (189,313) 49,238 141,443 1,368
----------- ----------- ------------ ----------
Net cash provided by financing activities ......... 15,627 19,557 310,006 345,190
----------- ----------- ------------ ----------
Net increase in cash and cash equivalents ......... 2,986 974 34,004 37,964
Cash and cash equivalents at beginning of
period ......................................... (5,007) (156) 42,510 37,347
----------- ----------- ------------ ----------
Cash and cash equivalents at end of period ........ $ (2,021) $ 818 $ 76,514 $ 75,311
=========== =========== ============ ==========
</TABLE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 1998
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ 124,403 $ (6,595) $ (38,535) $ 79,273
--------- --------- --------- ---------
Investing Activities:
Proceeds from/repayments of securitized loans ...... -- -- 239,550 239,550
Net loans originated or collected .................. (21,007) -- (216,707) (237,714)
Credit card portfolio acquisition .................. -- -- (108,164) (108,164)
Additions to premises and equipment ................ -- (2,887) (1,191) (4,078)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (21,007) (2,887) (86,512) (110,406)
--------- --------- --------- ---------
Financing Activities:
Net (decrease) increase in debt .................... (23,368) (11,341) 41,610 6,901
Cash dividends paid ................................ 9,616 -- (10,000) (384)
Issuance of common stock ........................... -- (50) 50 --
Net increase in equity ............................. (91,754) 20,371 71,383 --
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (105,506) 8,980 103,043 6,517
--------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents (2,110) (502) (22,004) (24,616)
Cash and cash equivalents at beginning of period 337 390 47,496 48,223
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......... $ (1,773) $ (112) $ 25,492 $ 23,607
========= ========= ========= =========
</TABLE>
<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"). 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 1998 Annual Report to
Shareholders; the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998; and the Proxy Statement for the 1999 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 ended June 30, 1999,
of which this commentary is a part, and the condensed consolidated financial
statements and related notes thereto.
Results of Operations
Income before extraordinary item for the three months ended June 30,
1999, was $28.5 million, or $.54 per share, up 130% from $12.4 million, or $.31
per share for the second quarter of 1998. The increase in income before
extraordinary item 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 $5.2 billion for the second quarter 1999 from
$3.7 billion for the second quarter 1998, an increase of 41%, and growth in
total credit card accounts to 3.4 million at June 30, 1999, from 2.4 million at
June 30, 1998.
Income before extraordinary item for the six months ended June 30,
1999, was $50.1 million, or $.98 per share, up 112% from $23.6 million, or $.59
per share for the first six months of 1998. 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 $5.2 billion for the six months ended June 30, 1999,
from $3.7 billion for the same period in 1998, an increase of 43%. In addition,
credit card charge volume was $2.2 billion for the first half of 1999, a 40%
increase over the same period in 1998.
Net income applicable to common stockholders for the three and six
months ended June 30, 1999 was reduced by the $152.4 million one time, non-cash,
accounting impact from the issuance of the Series C Perpetual Convertible
Preferred Stock, extinguishing the Series B Preferred, the Lee Senior Notes, and
the ten-year warrants. This adjustment reduced reported earnings per share to a
loss of $3.35 and a loss of $2.91 for the three and six month periods ended June
30, 1999, respectively.
Managed Loan Portfolio
The Company analyzes its financial performance on a managed loan
portfolio basis. To do so, the income statement and balance sheet are adjusted
to reverse the effects of securitization. The Company's discussion of revenues,
where applicable, and provision for loan losses includes comparisons to amounts
reported in the Company's consolidated statements of income ("owned basis") as
well as on a managed basis.
The Company's managed loan portfolio is comprised of credit card loans
held for securitization, retained interests in loans securitized and the
investors' share of securitized credit card loans. The investors' share of
securitized credit card loans is not an asset of the Company, and therefore, is
not shown on the Company's consolidated balance sheets. The following tables
summarize the Company's managed loan portfolio:
<TABLE>
June 30, December 31, June 30,
1999 1998 1998
---- ---- ----
(Dollars in thousands)
Period-end balances
Credit card loans:
<S> <C> <C> <C>
Loans held for securitization ............................ $ 39,757 $ 3,430 $ 40,539
Retained interests in loans
securitized .......................................... 1,108,562 753,469 534,159
Investors' interests in
securitized loans .................................... 5,304,338 4,558,143 3,306,267
---------- ---------- ----------
Total managed loan portfolio $6,452,657 $5,315,042 $3,880,965
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Average balances
Credit card loans:
<S> <C> <C> <C> <C>
Loans held for securitization .. $ 59,934 $ 56,059 $ 61,026 $ 44,862
Retained interests in loans
securitized ....................... 791,704 510,258 776,748 502,097
Investors' interests in
securitized loans ............... 4,349,138 3,120,717 4,385,000 3,107,920
--------- --------- --------- ---------
Total managed loan portfolio ...... $5,200,776 $3,687,034 $5,222,774 $ 3,654,879
========== ========== ========== ===========
</TABLE>
<PAGE>
Impact of Credit Card Securitizations
The following table provides a summary of the effects of credit card
securitizations on selected line items of the Company's statements of income for
each of the periods presented, as well as selected financial information on both
an owned and managed loan portfolio basis:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Statements of Income
(owned basis):
<S> <C> <C> <C> <C>
Net interest income .............. $ 33,475 $ 20,834 $ 65,963 $ 40,978
Provision for loan losses ........ 15,764 21,390 55,073 41,432
Other operating income ........... 136,883 72,307 272,726 144,803
Other operating expense .......... 106,799 51,588 200,461 105,936
--------- --------- --------- ---------
Income before income taxes
and extraordinary loss ..... $ 47,795 $ 20,163 $ 83,155 $ 38,413
=========== =========== =========== ===========
Adjustments for Securitizations:
Net interest income .............. $ 145,547 $ 97,698 $ 301,461 $ 198,589
Provision for loan losses ........ 123,347 107,979 262,880 213,972
Other operating income ........... (22,200) 10,281 (38,581) 15,383
Other operating expense
--------- --------- --------- ---------
Income before income taxes
and extraordinary loss ..... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Statements of Income (managed basis):
Net interest income .............. $ 179,022 $ 118,532 $ 367,424 $ 239,567
Provision for loan losses ........ 139,111 129,369 317,953 255,404
Other operating income ........... 114,683 82,588 234,145 160,186
Other operating expense .......... 106,799 51,588 200,461 105,936
--------- --------- --------- ---------
Income before income taxes
and extraordinary loss ..... $ 47,795 $ 20,163 $ 83,155 $ 38,413
=========== =========== =========== ===========
Other Data:
Owned Basis:
Average interest-earning
assets ........................... $ 1,067,431 $ 614,538 $ 978,827 $ 604,862
Return on average assets* ........... 9.5% 6.2% 9.0% 6.0%
Return on average totalequity* ...... 21.7% 25.9% 20.7% 25.6%
Net interest margin (1) ............. 12.6% 13.6% 13.6% 13.7%
Managed Basis:
Average interest-earning
assets ........................... $ 5,416,568 $ 3,735,255 $ 5,363,826 $ 3,712,783
Return on average assets* ........... 2.1% 1.3% 1.8% 1.3%
Return on average total equity*...... 21.7% 25.9% 20.7% 25.6%
Net interest margin (1) ............. 13.3% 12.7% 13.8% 13.0%
</TABLE>
(1) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets
*Before extraordinary item
Risk-Based Pricing
The Company prices credit card offers based on a prospect's risk
profile prior to solicitation. The Company evaluates a prospect to determine
credit needs, credit risk, and existing credit availability and then develops a
customized offer that includes the most appropriate product, brand, pricing and
credit line. After credit card accounts are opened, the Company periodically
monitors customers' internal and external credit performance and periodically
recalculates behavior, revenue, attrition and bankruptcy predictors. As
customers evolve through the credit life cycle and are regularly rescored, the
lending relationship can evolve to include more competitive (or more
restrictive) pricing and product configurations. These analyses consider the
overall profitability of accounts using both credit information and the
profitability from selling fee-based services to the customers.
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 and six month periods ended
June 30, 1999, was $179.0 million and $367.4 million compared to $118.5 million
and $239.6 million for the same periods in 1998. These increases were primarily
due to a $1.5 billion and $1.6 billion increase in average managed loans over
the comparable period in 1998.
Managed net interest margin was 13.3% and 13.8% for the three and six month
periods ended June 30, 1999, respectively, compared to 12.7% and 13.0% for the
same periods in 1998. The second quarter and year-to-date periods of 1999 net
interest margins were favorably impacted by the targeted repricing of the
Company's core portfolio and the repricing of the PNC portfolio. The managed net
interest margin for the three and six month periods ended June 30, 1999 was
negatively impacted by the flat margin realized on the Company's subsidiary bank
deposit program. In anticipation of the funding requirements related to the GE
Capital portfolio acquisition, the Company began issuing certificates of
deposits ("CDs") late in the first quarter of 1999. These funds were invested in
federal funds sold until the closing of the GE Capital portfolio acquisition on
June 30, 1999. The interest rates earned on the federal funds sold were
comparable to the rates paid on the CDs, reducing the net interest margin for
the quarter ended June 30, 1999 compared to the previous quarter ended March 31,
1999. Financing costs as a percent of borrowings for the second quarter and
year-to-date periods of 1999 were 5.8% and 5.9%, respectively, compared with
6.2% and 6.3% in the same periods of 1998.
<PAGE>
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 and six month periods ended June 30, 1999 and 1998:
Analysis of Average Balances, Interest and Average Yields and Rates
<TABLE>
Three Months Ended June 30,
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Owned Basis
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold .......... $ 177,785 $ 2,268 5.1% $ 22,059 $ 299 5.4%
Short-term investments ...... 38,007 433 4.6% 26,162 348 5.3%
Credit card loans and
retained interests in loans
securitized ................ 851,639 40,835 19.2% 566,317 26,375 18.7%
--------- ------- ---- --------- ------- ----
Total interest-earning assets $ 1,067,431 $ 43,536 16.4% $ 614,538 $ 27,022 17.6%
Other assets ................ 594,726 -- -- 317,483 -- --
Allowances for loan losses .. (463,476) -- -- (318,098) -- --
--------- ---------
Total assets ............. $ 1,198,681 -- -- $ 613,924 -- --
=========== ===========
Liabilities and Equity: ..... --
Interest-bearing liabilities:
Deposits .................... $ 185,447 $ 2,562 5.5% $ -- $ -- --
Debt ........................ 316,209 7,499 9.5% 266,396 6,188 9.3%
--------- ------- ---- --------- ------- ----
Total interest-bearing
liabilities .............. $ 501,656 $ 10,061 8.0% $ 266,396 $ 6,188 9.3%
Other liabilities ........... 169,323 -- -- 155,368 -- --
--------- ---------
Total liabilities ........... 670,979 -- -- 421,764 -- --
Stockholders' equity ........ 527,702 -- -- 192,160 -- --
--------- ---------
Total liabilities and equity $ 1,198,681 -- -- $ 613,924 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 33,475 12.6% -- $ 20,834 13.6%
Net interest rate spread (2) -- -- 8.4% -- -- 8.3%
Managed Basis
Credit card loans ........... $ 5,200,776 $ 247,039 19.1% $ 3,687,034 $ 170,499 18.5%
Total interest-earning assets 5,416,568 249,740 18.5% 3,735,255 171,146 18.4%
--------- ------- ---- --------- ------- ----
Total interest-bearing
liabilities .............. 4,850,794 70,718 5.8% 3,387,310 52,614 6.2%
Net interest income and
interest margin (1) ...... -- $ 179,022 13.3% -- $ 118,532 12.7%
Net interest rate spread (2) -- -- 12.7% -- -- 12.2%
</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.
<PAGE>
<TABLE>
Six Months Ended June 30,
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Owned Basis
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold .......... $ 104,933 $ 2,475 4.8% $ 28,847 $ 780 5.5%
Short-term investments ...... 36,119 812 4.5% 29,056 769 5.3%
Credit card loans and
retained interests in loans
securitized ................ 837,775 82,112 19.8% 546,959 52,260 19.3%
------- ------ ---- ------- ------ ----
Total interest-earning assets $ 978,827 $ 85,399 17.6% $ 604,862 $ 53,809 17.9%
Other assets ................ 590,772 -- -- 307,991 -- --
Allowances for loan losses .. (451,796) -- -- (297,287) -- --
-------- --------
Total assets ............. $ 1,117,803 -- -- $ 615,566 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 95,860 $ 2,624 5.5% $ -- $ -- --
Debt ........................ 300,199 16,812 11.3% 280,862 12,831 9.2%
------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities .............. $ 396,059 $ 19,436 9.9% $ 280,862 $ 12,831 9.2%
Other liabilities ........... 233,803 -- -- 148,466 -- --
-------- --------
Total liabilities ........... 629,862 -- -- 429,328 -- --
Stockholders' equity ........ 487,941 -- -- 186,238 -- --
-------- --------
Total liabilities and equity $ 1,117,803 -- -- $ 615,566 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 65,963 13.6% -- $ 40,978 13.7%
Net interest rate spread (2) -- -- 7.7% -- -- 8.7%
Managed Basis
Credit card loans ........... $ 5,222,774 $ 503,482 19.4% $ 3,654,879 $ 344,456 19.0%
Total interest-earning assets 5,363,826 506,769 19.1% 3,712,783 346,005 18.8%
Total interest-bearing
liabilities .............. 4,781,058 139,345 5.9% 3,389,031 106,438 6.3%
Net interest income and
interest margin (1) ...... -- $ 367,424 13.8% -- $ 239,567 13.0%
Net interest rate spread (2) -- -- 13.2% -- -- 12.5%
</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.
<PAGE>
Other Operating Income
Other operating income contributes substantially to the Company's
results of operations, representing 76% of owned revenues for the three and six
month periods ended June 30, 1999. The following table presents other operating
income on an owned basis:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Other Operating Income:
Net securitization and credit
card servicing income .......... $ 74,081 $ 30,048 $151,079 $ 64,955
Credit card fees, interchange and
other income ................... 23,920 15,725 45,229 28,746
Fee-based services revenues ..... 38,882 26,534 76,418 51,102
-------- -------- -------- --------
Total ........................ $136,883 $ 72,307 $272,726 $144,803
======== ======== ======== ========
Other operating income increased $64.6 million and $127.9 million for
the three and six month periods ended June 30, 1999, over the comparable periods
in 1998. These increases are primarily due to the $44.0 million and $86.1
million increases in income generated from net securitization and credit card
servicing income as a result of the increases in average managed loans and the
repricing of fees in the managed credit card loan portfolio. For the three and
six month periods ended June 30, 1999, credit card fees, interchange and other
income increased $8.2 million and $16.5 million over the comparable periods in
1998. These increases were primarily due to the growth in total accounts and
loans in the managed credit card portfolio, and an increase in the credit card
fee structure which occurred in the fourth quarter of 1998.
Additionally, fee-based services revenues increased by $12.3 million
and $25.3 million for the three and six month periods ended June 30, 1999. These
increases are attributed to the Company's debt waiver product and the increases
in membership program revenues resulting from increases in covered receivables
on debt waiver and more account penetration for membership programs.
Other Operating Expense
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses .......... $ 26,366 $ 11,277 $ 49,311 $ 21,427
Employee compensation ........ 27,599 14,584 50,917 29,672
Data processing services and
communications ............ 12,329 8,113 22,611 16,970
Third-party servicing expenses 4,279 2,487 7,925 5,058
Warranty and debt waiver underwriting
and claims servicing expenses 4,484 2,545 8,464 5,420
Credit card fraud losses ..... 850 1,004 2,113 2,320
Other ........................ 30,892 11,578 59,120 25,069
-------- -------- -------- --------
Total ..................... $106,799 $ 51,588 $200,461 $105,936
======== ======== ======== ========
Total other operating expenses for the three and six month periods
ended June 30, 1999 increased $55.2 million and $94.5 million over the
comparable periods in 1998, largely due to costs associated with the growth of
the Company's business activities. Employee compensation increased $13.0 million
and $21.2 million, respectively, for the three and six month periods ended June
30, 1999, due to increased staffing needs to support the increase in credit card
accounts and fee-based services active member growth. Other expenses increased
$19.3 million and $34.1 million for the three and six month periods ended June
30, 1999 due to increased customer base intangible amortization resulting from
the addition of the PNC portfolio and increases in general expenses to support
the growth in credit card and fee-based services accounts. Also, credit card
account and other product solicitation and marketing expenses increased $15.1
million, and $27.9 million over the comparable periods in 1998, largely due to
the increase in fee-based marketing activity and testing and implementation of
other new marketing programs during the first half of 1999.
Income Taxes
The Company's provision for income taxes includes both federal and
state income taxes. Applicable income tax expense was $19.3 million and $33.0
million for the three and six month periods ended June 30, 1999 compared to $7.8
million and $14.8 million for the same periods in 1998. This tax expense
represents an effective tax rate of 39.7% and 38.5% for the six month periods
ended June 30, 1999 and 1998, respectively.
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 June
30, 1999, 63% of managed accounts and 58% of managed loans were less than 36
months old. Accordingly, the Company believes that its loan portfolio will
experience 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 June 30, 1999, the Company's managed net charge-off
ratio was 10.1% compared to 10.6% for the quarter ended June 30, 1998. For the
six months ended June 30, 1999, the net charge off rate stood at 9.7% compared
to 9.7% for the six months ended June 30, 1998. Without the impact of purchase
accounting related to acquired portfolios, the charge-off rate would have been
10.8% and 10.8% for the three and six month periods ended June 30, 1999,
respectively compared to 11.0% and 10.7% for the same periods of 1998. The
Company believes, consistent with its statistical models and other credit
analysis, that this rate will continue to fluctuate over the next year.
The Company's strategy for managing loan losses consists of credit line
management and customer purchase authorizations. Loan losses are further managed
through the offering of credit lines which are generally lower than is currently
standard in the industry. Individual accounts and their related credit lines are
also continually managed using various marketing, credit and other management
processes in order to continue to maximize the profitability of accounts.
Delinquencies
Delinquencies not only have the potential to affect earnings in the
form of net loan losses, but are also costly in terms of the personnel and other
resources dedicated to their resolution. Delinquency levels are monitored on a
managed basis, since delinquency on either an owned or managed basis subjects
the Company to credit loss exposure. A credit card account is contractually
delinquent if the minimum payment is not received by the specified date on the
cardholder's statement. It is the Company's policy to continue to accrue
interest and fee income on all credit card accounts, except in limited
circumstances, until the account and all related loans, interest and other fees
are charged off. The following table presents the delinquency trends of the
Company's credit card loan portfolio on a managed portfolio basis:
Managed Loan Delinquency
<TABLE>
June 30, % of December 31, % of June 30, % of
1999 Total 1998 Total 1998 Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Managed loan portfolio ........ $6,452,657 100.0% $5,315,042 100% $3,880,965 100.0%
Loans contractually delinquent:
30 to 59 days ............ 118,760 1.9% 113,449 2.1% 89,583 2.3%
60 to 89 days ............ 85,426 1.3% 75,049 1.4% 64,684 1.7%
90 or more days .......... 201,168 3.1% 173,812 3.3% 134,346 3.4%
---------- ----- ---------- ----- ---------- -----
Total .................. $ 405,354 6.3% $ 362,310 6.8% $ 288,613 7.4%
========== ===== ========== ===== ========== =====
</TABLE>
The above numbers reflect the continued seasoning of the Company's
managed loan portfolio. Without the impact of purchase accounting related to
acquired portfolio's, delinquency rates would have been 7.6%, 7.4% and 7.6%,
respectively. The Company intends to continue to focus its resources on its
collection efforts to minimize the negative impact to net loan losses that
results from increased delinquency levels.
Net Charge-Offs
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude finance
charges and fees, which are charged against the related income at the time of
charge-off. The following table presents the Company's net charge-offs for the
periods indicated as reported in the consolidated financial statements and on a
managed portfolio basis:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Owned basis:
<S> <C> <C> <C> <C>
Average loans and retained interests in
loans securitized outstanding ......... $ 851,638 $ 566,317 $ 837,774 $ 546,959
Net charge-offs ....................... 21,646 15,047 40,540 25,662
Net charge-offs as a percentage
of average loans outstanding (1) ... 10.2% 10.7% 9.8% 9.5%
========== ========== ========== ==========
Managed basis:
Average loans outstanding ............. $5,200,776 $3,687,034 $5,222,774 $3,654,879
Net charge-offs ....................... 130,799 97,692 252,251 176,709
Net charge-offs as a percentage of
average loans outstanding(1) ....... 10.1% 10.6% 9.7% 9.7%
========== ========== ========== ==========
</TABLE>
(1) Annualized
Provision and Allowance for Loan Losses
The allowance for loan losses is maintained for the retained interests
in loans securitized. For securitized loans, anticipated losses and related
provisions for loan losses 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 loan portfolio.
The provision for loan losses on a managed basis for the three and six
month periods ended June 30, 1999 totaled $139.1 million and $318.0 million,
respectively, compared to a provision of $129.4 million and $255.4 million for
the three and six month periods ended June 30, 1998. The increases for the three
and six month periods ended June 30, 1999, as compared to the three and six
month periods ended June 30, 1998, is primarily reflective of the overall
maturation of the portfolio and the increase in delinquent loans. The following
table presents the change in the Company's allowance for loan losses and other
ratios for the periods presented:
Analysis of Allowance for Loan Losses
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Managed Basis:
<S> <C> <C> <C> <C>
Balance at beginning of period .......... $450,672 $291,102 $393,283 $244,084
Allowance related to assets acquired, net 16,044 1,378 16,044 1,378
Provision for loan losses ............... 139,111 129,369 317,952 255,404
Loans charged-off ....................... 140,225 101,426 268,387 183,090
Recoveries .............................. 9,426 3,734 16,136 6,381
-------- -------- -------- --------
Net loan charge-offs .................... 130,799 97,692 252,251 176,709
-------- -------- -------- --------
Balance at end of period ................ $475,028 $324,157 $475,028 $324,157
======== ======== ======== ========
Ending allowance as a percent of loans .. 7.4% 8.4% 7.4% 8.4%
======== ======== ======== ========
</TABLE>
Derivatives Activities
The Company uses derivative financial instruments for the purpose of
managing its exposure to interest rate risks and has a number of procedures in
place to monitor and control both market and credit risk from these derivatives
activities. All derivatives strategies and transactions are managed by a special
management committee which must make quarterly reports to the Board of
Directors.
Prior to the spin off from Fingerhut Companies, Inc. ("FCI") on
September 25, 1998 ("Spin Off"), the Company had entered into interest rate cap
and swap agreements to hedge the cash flow and earnings impact of fluctuating
market interest rates on the spread between the floating rate loans owned by the
Metris Master Trust (the "Trust") and the floating and fixed rate securities
issued by the Trust to fund the loans. In connection with the issuance of term
asset-backed securities by the Trust, the Company has entered into term interest
rate cap agreements with highly-rated bank counterparties in the same notional
amount of issuance effectively capping the potentially negative impact to the
Trust of increases in the floating interest rate of the securities at
approximately 9.2%. Due to the Spin Off, the Company terminated interest rate
swap agreements guaranteed by FCI related to two trust series fixed rate
asset-backed securities issuances. Proceeds were utilized to purchase interest
rate floor contracts from highly-rated counterparties which did not require a
FCI guaranty. The floors were in the same notional amounts, fixed interest rate
strike rates, and maturities as the previous swaps in order to hedge the
potential impact on the Company's cash flow and earnings of a low market
interest rate environment in which the yield on the Trust's floating rate loans
might decline causing the margin over the fixed rate funding to compress. During
October 1998, the Company terminated the interest rate floors related to one of
the Trust Series. The gain on this termination is being amortized into income
over the remaining life of the securities. The Company also entered into term
interest rate cap agreements in connection with portfolio acquisitions,
effectively capping the potentially negative impact of increases in market
interest rates.
Liquidity, Funding and Capital Resources
The Company finances the growth of its credit card loan portfolio
through cash flow from operations, asset securitization, bank loans, long-term
debt issuance, subsidiary bank deposits, and equity issuance.
Through June 30, 1999 and 1998, the Company had received cumulative net
proceeds of approximately $5.3 billion and $3.3 billion, respectively from sales
of credit card loans to the Trust and Conduits. Cash generated from these
transactions was used to reduce borrowings and to fund credit card loan
portfolio growth. The Company relies upon the securitization of its credit card
loans to fund portfolio growth and, to date, has completed securitization
transactions on terms that it believes are satisfactory. The Company's ability
to securitize its assets depends on the favorable investor demand and legal,
regulatory and tax conditions for securitization transactions, as well as
continued favorable performance of the Company's securitized portfolio of
receivables. Any adverse change could force the Company to rely on other
potentially more expensive funding sources and, in the worst case scenario,
could create liquidity risks if other funding is unavailable.
On June 30, 1998, the Company executed a $200 million, three-year
revolving credit facility and a $100 million five-year term loan (the "New
Credit Facility") with a syndicate of banks and money market mutual funds. This
agreement became effective upon the Spin Off from FCI on September 25, 1998. The
New Credit Facility, which is not guaranteed by FCI, replaced the Company's $300
million, five-year revolving credit facility (the "Old Credit Facility"). The
New Credit Facility is secured by receivables and general intangibles of the
Company and Metris Direct, Inc. and all subsidiary stock other than non-United
States organized corporations and guaranteed by Metris Direct, Inc. Other
subsidiaries may in the future guarantee this credit agreement. Financial
covenants in the New Credit Facility include, but are not limited to,
requirements concerning minimum net worth, minimum tangible net worth to net
managed receivables and tangible net worth plus reserves to delinquent
receivables. At June 30, 1999, the Company was in compliance with all financial
covenants under this agreement. At June 30, 1999 and December 31, 1998, the
Company had outstanding borrowings of $139 million and $110 million,
respectively, under the New Credit Facility. As a result of the Spin Off and the
removal of the FCI guarantee, the Company is no longer able to borrow at an
investment grade rate. The interest rate under the New Credit Facility is higher
than the interest rate under the Old Credit Facility due to the Company's lower
independent credit rating.
Beginning in the first quarter of 1999, Direct Merchants Bank began
issuing jumbo certificates of deposit ("CDs"). These CDs are issued in
increments of $100,000 and are sold through third party registered deposit
brokers. As of June 30, 1999, $311.8 million of CDs were outstanding with
maturities ranging from six months to two years and fixed interest rates ranging
from 4.95% to 5.85%.
In addition to asset securitizations and bank loans, the Company uses
long term debt and equity to fund continued credit card growth. While the
Company planned to issue common equity shares in a public offering after the
Spin Off during the fourth quarter of 1998, volatility in the stock market and
in the Company's stock price caused the Company to seek alternatives to public
issuance through either private issuance of equity or public or private issuance
of equity-like securities. On November 13, 1998, after a review of several
alternatives and discussions with several advisors and investors, the Company
entered into agreements with affiliates of the Thomas H. Lee Company, (the "Lee
Company") to purchase $200 million in Series B Perpetual Preferred Stock (the
"Series B Preferred") and $100 million in 12% Senior Notes due 2006 (the "Lee
Senior Notes"). The Company also issued the Lee Company 7.5 million ten-year
warrants to purchase shares of the Company's common stock for $15, subject to
adjustment in certain circumstances. The Series B Preferred had a 12.5% dividend
payable in additional shares of Series B Preferred for ten years, then
converting to payable in cash. The proceeds from the issuance of the Series B
Preferred and the Lee Senior Notes were used to fund the PNC portfolio
acquisition and for general corporate purposes.
On March 12, 1999, shareholders approved conversion of the Series B
Preferred and Lee Senior Notes into Series C Perpetual Convertible Preferred
stock (the "Series C Preferred"). On May 28, 1999 notice was received that there
was no regulatory objection to the conversion to the Series C Preferred, and the
Series B Preferred and the Lee Senior Notes were converted into 0.8 million
shares of Series C Preferred at a conversion price of $18.63 and the warrants
were canceled. The Series C Preferred has a 9% dividend payable in additional
shares of Series C Preferred and will also receive any dividends paid on the
Company's common stock on an as converted basis. The cumulative payment-in-kind
dividends are effectively guaranteed for a seven-year period. Assuming
conversion of the Series C Preferred into common stock had occurred in the
second quarter of 1999, the Lee Company would have owned approximately 30% of
the Company on a diluted basis.
Converting to the Series C Preferred caused a one-time, non-cash
accounting adjustment for retiring the Series B Preferred and Lee Senior Notes.
The excess of the fair value of the Series C Preferred over the carrying value
of the Series B Preferred and the Lee Senior Notes at the time of the conversion
was allocated to the Lee Senior Notes and the Series B Preferred Stock based
upon their initial fair values. To arrive at net income available to common
stockholders in the calculation of earnings per share, the $50.8 million
allocated to the Lee Senior Notes was recognized as an extraordinary loss from
the early extinguishment of debt and the $101.6 million allocated to the Series
B Preferred was recognized as a reduction of net income applicable to common
stockholders. The extraordinary loss attributable to the Lee Senior Notes was
not recorded net of taxes. These adjustments had no impact on total
stockholders' equity.
On July 15, 1999, the Company privately issued and sold $150
million of 10.125% Senior Notes (the "Senior Notes") due 2006 at an offering
price of 95.8% pursuant to the 144(a) exemption of the Securities Act of 1933,
as amended. The net proceeds of $139.4 million will be used to repay borrowings
under the revolving credit facility, which was incurred in part to augment the
capital of Direct Merchants Bank. The Senior Notes due 2006 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 New Credit Facility. The guarantee is
an unsecured obligation of the Guarantor and ranks pari passu with all existing
and future unsubordinated indebtedness.
As the portfolio of credit card loans grows, or as the Trust and
Conduit certificates amortize or are otherwise paid, the Company's funding needs
will increase accordingly. The Company believes that its cash flow from
operations, asset securitization programs, together with the New Credit
Facility, long term debt issuance, subsidiary bank deposit program and equity
issuance, will provide adequate liquidity to the Company for meeting anticipated
cash needs, although no assurance can be given to that effect.
<PAGE>
Newly Issued Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments. It requires enterprises to
recognize all derivatives as either assets or liabilities in the statement of
financial position and to measure those instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company is evaluating the financial impact the adoption of
this statement will have on in its financial statements.
Year 2000
The "Year 2000 Problem" is a result of software systems or hardware
systems utilizing two digits instead of four digits to define the year. Software
or hardware with only two digit capacity may interpret the year 00 as 1900 when
calculating age, the length of a phone call, the financing period for a loan, or
the expiration of a credit card. The problem is not limited to computers and
computer software. Anything that contains a processor which utilizes date
information needs to be assessed to insure it will work correctly in the Year
2000 (i.e. heating/cooling systems, telephones, elevators, alarm systems, and
vaults with time locks). Vendors must be evaluated to ensure their compliance;
otherwise materials essential to business operation may not be delivered on
time.
The Company, like all database marketing and financial services
companies, depends heavily 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 of vendors which provide data and processing services to the
Company.
Most of the Company's existing information systems are less than three
years old and were originally designed for Year 2000 compliance, but as a
cautionary measure, the Company has been testing such internal systems for Year
2000 compliance. The Company has a Year 2000 project team to identify, address,
and monitor internal computer systems; environmental systems such as
heating/cooling systems, telephones, and elevators; and vendor issues related to
Year 2000 issues. The Company believes that it has adequate resources to achieve
Year 2000 compliance for its systems, which currently may be compliant, and the
evaluation of vendors.
The phases described below are used in managing the Year 2000 project
for the Company. These phases are consistent with the OCC and the Federal
Financial Institutions Examination Council (the "FFIEC") recommendations for
project organization:
The Awareness Phase was completed in October 1997. The goal was to
define the Year 2000 problem and gain executive level support.
The Assessment Phase was completed in March 1998. The goal was to
complete an inventory of possible Year 2000 exposure points to gain an
understanding of the size and complexity of the issue.
The Renovation Phase was completed in June 1999 for mission critical
applications; however, this phase of the project cannot be considered successful
and complete until the systems have been tested and they have experienced the
century and the leap year transitions and any problems have been addressed. The
goal of this phase is code enhancement, hardware and software upgrades, system
replacements, vendor certification and other associated changes.
The Validation and Implementation Phase began in April 1998 with a
targeted completion of mission critical applications by September 1999. Again,
this phase of the project cannot be considered successful and complete until the
systems have experienced the century and the leap year transitions and any
problems have been addressed. The goal of this phase is validation/testing of
items to ensure Year 2000 compliance, implementation of renovated systems, and
certification of Year 2000 compliance by business users.
The following milestones are a part of the Company's plan to achieve
Year 2000 compliance.
------------------------- -----------------------------------------------------
September 30, 1998 Completed development of a proactive customer
awareness program
------------------------- -----------------------------------------------------
------------------------- -----------------------------------------------------
September 30, 1998 Completed organization planning guidelines and
business impact analysis for Year 2000
Business Resumption Contingency Planning
------------------------- -----------------------------------------------------
------------------------- -----------------------------------------------------
December 31, 1998 Contingency planning and validation for Year 2000
Business Resumption Contingency Planning is underway.
------------------------- -----------------------------------------------------
------------------------- -----------------------------------------------------
September 30, 1999 Testing of mission-critical systems and service
providers should be complete and implementation
should be substantially complete.
------------------------- -----------------------------------------------------
------------------------- -----------------------------------------------------
October 31, 1999 Contingency planning and validation for Year 2000
Business Resumption Contingency Planning should be
complete.
- --------------------------------------------------------------------------------
As of June 1999, the project is on schedule. A customer awareness
program has been implemented; a Contingency Planning framework has been
completed and contingency planning efforts are well underway; testing of mission
critical systems was underway by December 1998; and testing of Mission Critical
systems is targeted for completion by September 1999.
The Company is dependent on databases maintained by FCI, and card and
statement generation, among other services, provided by First Data Resources
("FDR"). In addition, the Company is dependent on MasterCard(R) and Visa(R) for
clearinghouse activities associated with credit card use. The project team has
been working with its identified material vendors, including FCI, FDR,
MasterCard, and Visa to determine the status of each vendor's plans for becoming
Year 2000 compliant. The project team is striving to obtain test results showing
Year 2000 compliance by vendors. The project team has developed high level
contingency plans to address non-compliance 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.
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.
The most reasonably likely worst case scenario that may impact the
Company's results of operations, financial condition and prospects is the
failure of FDR, VISA(R)and MasterCard(R) to provide services. The
Company's cardholders would be unable to use their credit cards or otherwise
access their accounts. Due to several unknown contributing factors, and the
scope of the Year 2000 issue, the impact this worst case scenario would have on
the Company's results of operations, financial condition and prospects, is an
uncertainty. The scenarios will be analyzed and addressed in the Company's
contingency plans.
The Company views contingency planning from a remediation and business
resumption perspective. Remediation Contingency Planning refers to mitigating
the risks associated with the failure to successfully complete renovation,
validation, and implementation of mission critical systems and vendor services.
Year 2000 Business Resumption Contingency Planning is the process of identifying
core business processes and critical information systems that support those
processes, and developing plans to enable those processes to be resumed, or
alternatives instituted, in the event of a disruption.
The Company has completed high level Year 2000 Remediation Contingency
plans for mission critical applications and vendors. The contingency plans
include identification of the product/service provided, the current vendor,
other vendors that could provide the product/service, estimated timeline and
cost to convert services to another vendor, and any business reasons why the
backup vendors could not provide the services. These plans are reviewed
periodically for accuracy.
The Company has completed a framework that is used in developing Year
2000 Business Resumption Contingency plans and has begun to document plans for
core business processes. Completion of these plans is targeted for October 1999.
Forward-Looking Statements
This quarterly report contains some forward-looking statements.
Forward-looking statements give our current expectations of future events. You
will recognize these statements because they do not strictly relate to
historical or current facts. Such statements may use words such as "anticipate,"
"estimate," "expect," "project," "intend," "think," "believe," and other words
or terms of similar meaning in connection with any discussion of future
performance of the Company. For example, these include statements relating to
future actions, future performance of current or anticipated products,
solicitation efforts, expenses, the outcome of contingencies such as litigation,
and the impact of the capital markets on liquidity. From time to time, we also
may provide oral or written forward-looking statements in other material
released to the public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors, which can not be predicted with certainty, will be important in
determining future results. Among such factors are the Company's limited
operating history as a stand alone entity, its limited experience in originating
and servicing credit card accounts, the lack of seasoning of its credit card
accounts which renders predictability of delinquencies more difficult, higher
default and bankruptcy rates of the Company's target market of moderate-income
consumers, interest rate risks, risks associated with acquired portfolios,
dependence on the securitization markets, state and federal laws and
regulations, and general economic conditions that can have a major impact on the
performance of loans. In addition, like all companies, the Company must deal
with the uncertainty surrounding the effect of the Year 2000 problem. Each of
these factors and others are more fully discussed under the caption
"Business--Risk Factors" contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. As a result of these factors, no
forward-looking statements can be guaranteed. Actual future results may vary
materially. Also, please note that the factors we provide are those we think
could cause our actual results to differ materially from expected and historical
results. Other factors besides those listed here or in the Company's 10-K for
the year ended December 31, 1998, could also adversely affect the Company.
We undertake no obligations to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosure we make on related
subjects in our periodic filings with the Securities and Exchange Commission.
This discussion is provided to you as permitted by the Private Securities
Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's principal market risk is due to changes in interest
rates. This affects the Company directly in its lending and borrowing
activities, as well as indirectly as interest rates may impact the payment
performance of the Company's cardholders.
To manage the Company's direct risk to market interest rates,
management actively monitors the interest rates and the interest sensitive
components of the Company's owned and managed balance sheet to minimize the
impact changes in interest rates have on the fair value of assets, net income
and cash flow. Management seeks to minimize the impact of changes in interest
rates on the Company primarily by matching asset and liability repricings.
The Company's primary owned and managed assets are credit card loans,
which are virtually all priced at rates indexed to the variable Prime Rate.
Retained interests in loans securitized and loans held for securitization are
funded through a combination of cash flow from operations, the Company's $300
million bank credit facility, $100 million in senior notes, subsidiary bank
deposits, and equity issuance. The $300 million bank credit facility has pricing
that is indexed to the variable London Interbank Offered Rate ("LIBOR") or a
Prime Rate. The Company's securitized loans are owned by the Trust and
bank-sponsored multiseller receivables conduits (the "Conduits"), which have
committed funding indexed to variable commercial paper rates, as well as term
funding which is either directly indexed to LIBOR or at fixed rates. At June 30,
1999, approximately 18.5% of the Trust and Conduit funding of securitized
receivables was funded with fixed rate certificates.
Combining the interest rate floor transactions referred to above with
the Trust and Conduit funding, in a low market interest rate environment, 86% of
the funding for the securitized loan portfolio is indexed to floating commercial
paper and LIBOR rates. In a high market interest rate environment, the
potentially negative impact on earnings of higher interest expense is mitigated
by the fixed rate funding and the interest rate cap contracts described above.
The approach used by management to quantify interest rate risk is a
sensitivity analysis which management believes best reflects the risk inherent
in the Company's business. This approach calculates the impact on net income
from an instantaneous and sustained change in interest rates by 200 basis
points. Assuming no counteractive measures by management, a 200 basis point
increase in interest rates affecting the Company's floating rate financial
instruments, including both debt obligations and loans, will result in an
increase in net income of approximately $20.7 million relative to a base case
over the next 12 months; while a decrease of 200 basis points will result in a
reduction in net income of approximately $15.1 million. The Company's use of
this methodology to quantify the market risk of financial instruments should not
be construed as an endorsement of its accuracy or the accuracy of the related
assumptions. In addition, this methodology does not take into account the
indirect impact interest rates may have on the payment performance of the
Company's cardholders. The quantitative information about market risk is
necessarily limited because it does not take into account operating transactions
or other costs associated with managing immediate changes in interest rates.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company is a party to various legal proceedings resulting from the
ordinary business activities relating to its operations. The Company does not
believe that any such legal proceedings will have a material adverse effect on
its financial position or its operations.
Certain existing laws and regulations permit class action lawsuits on
behalf of customers in the event of violations, and such class lawsuits can be
very expensive to defend, even without any violation. One of these actions, an
Alabama action in the Circuit Court of Greene County (Preston Davis, Sr. et. al.
v. Direct Merchants Credit Card Bank, N.A., et. al. (Civil Action No.CV98-012),
sought damages in an unascertained amount and purported to be a class action,
although no class had been certified. On June 29, 1999, a Stipulation and
Order of Dismissal was filed in the Alabama action.
Item 2. Changes in Securities
During the period covered by this report, the Company issued securities
that were not registered under the Securities Act of 1933 (the "1933 Act"), in
reliance on Section 4(2) of the 1933 Act. The Company exchanged $200 million of
Series B Perpetual Preferred Stock, $100 million Senior Notes and ten year
warrants for $300 million of Series C Perpetual Convertible Preferred Stock on
June 1, 1999. The additional information required by this item is set forth in
"Note 5 - Private Equity Placement" on page 11 of this Form 10-Q for the second
quarter ended June 30, 1999 and is incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) and (c). The Company held its annual meeting of
stockholders on May 11, 1999, and the matters voted on in that
meeting were the following:
The election of the following directors who will serve until
their successors are elected and qualified, or their earlier
death or resignation:
Broker
Director For Against Withheld Abstentions Non-Vote
-------- --- ------- -------- ----------- --------
Lee R. Anderson, Sr. 16,785,542 None 127,516 None None
John A. Cleary 16,781,635 None 133,423 None None
The approval of an increase in the number of shares of the Company's
Common Stock available to be issued pursuant to the Metris Companies
Inc. Non-Employee Director Stock Option Plan from 100,000 to 250,0000
shares.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- ---------
9,383,919 5,389,688 None 8,562 2,133,389
<PAGE>
The approval of the proposal to establish the Metris Companies Inc.
Employee Stock Purchase Plan (ESPP) under which 850,000 shares of
common stock may be sold.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
14,562,837 224,091 None 6,543 2,122,087
The approval of the proposal to establish the Metris Companies Inc.
Management Stock Purchase Plan (MSPP) under which 150,000 shares of
common stock may be sold.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
13,810,122 973,318 None 10,031 2,122,087
The approval of an amended and restated Metris Companies Inc. Annual
Incentive Plan for Designated Corporate Officers. The Amended Annual
Incentive Plan increases the maximum plan payout from $2,000,000 to
$4,000,000 and permits officers receiving bonuses under this plan
instead of the Management Bonus Plan will now be allowed to defer a
portion of their bonuses and have the deferred amounts credited to a
stock purchase account.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
14,000,941 779,991 None 12,538 2,122,088
The approval of the Metris Companies Inc. Amended and Restated
Long-Term Incentive and Stock Option Plan. The Board of Directors
amended the Incentive Stock Plan to extend the term to March 19, 2009
and make technical changes. The proposal approved by the shareholders
disclosed the plan's performance goals for performance awards and set
the limit on cash payment at $6,000,000 for any three year period.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- ----------
9,518,062 5,228,650 None 10,352 2,158,494
Item 5. Other Information
Shareholders desiring to submit proposals for possible inclusion in the
Company's 2000 Proxy Statement must do so on or before December 1, 1999. Such
proposals should be sent to Z. Jill Barclift, Esquire, Executive Vice President,
General Counsel and Secretary, 600 South Highway 169, Suite 1800, St. Louis
Park, Minnesota 55426.
In addition, the Company's Amended and Restated By-Laws establish an
advance notice procedure for stockholder proposals to be brought before any
meeting of stockholders, including proposed nominations of persons for election
to the Board. The Company amended these provisions at its June 1999 Board of
Directors meeting. Stockholders at the 2000 annual meeting may consider
stockholder proposals or nominations brought by a stockholder of record who has
given timely notice thereof in writing to the Secretary of the Company. To be
timely, a stockholder's notice must be delivered to and received at the
principal executive offices of the Company not less than forty-five (45)
calendar days in advance of the mailing date specified in the Company's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be received not later than the close of business on the later of forty-five (45)
calendar days in advance of such meeting or ten (10) calendar days following the
date on which public announcement of the date of the meeting is first made. The
written notice must be given to the Company's Secretary at the address above and
be in proper form. The 2000 annual meeting is expected to be held on Tuesday,
May 11, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Bylaws of the Company.
*10.1 Purchase and Sale Agreement, dated May 10, 1999, between GE
Capital Consumer Credit Card Co. and Direct Merchants Credit
Card Bank, National Association.
10.2 Retention Agreement, dated May 17, 1999, between Ronald N.
Zebeck and Metris Companies Inc.
11. Computation of Earnings Per Share.
27. Financial Data Schedule.
*Portions of the Exhibit have been omitted pursuant to
a request for confidential treatment, which has been
submitted separately to the Securities and Exchange
Commission in accordance with Rule 24b-2 of the
Securities Exchange Act of 1934.
(b) Reports on Form 8-K:
Not applicable
<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.
Signature Title Date
Principal financial officer: Executive Vice President, August 10, 1999
Chief Financial Officer
/s/ David D. Wesselink
David D. Wesselink
Principal accounting officer: Sr. Vice President, Finance, August 10, 1999
Corporate Controller
/s/ Jean C. Benson
Jean C. Benson
AMENDED AND RESTATED BYLAWS
OF
METRIS COMPANIES INC.
ARTICLE I
OFFICES
The corporation may have such offices and places of business, within or
without the State of Delaware, at such locations as the Board of Directors may
from time to time designate, or the business of the corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. Annual Meeting. (a) The corporation shall hold regular
annual meetings of the corporation's stockholders for the election of directors.
The time and place of any such meetings shall be determined by the Board of
Directors and communicated to the stockholders according to the requirements set
forth herein. Subject to paragraph (b) of this Section 1, which paragraph (b)
shall be deemed valid on and after June 1, 1998 and before such date deemed null
and void, any other proper business may be conducted at an annual meeting.
(b) At an annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be (A) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors; (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors; or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to and received at the principal
executive offices of the Corporation not less than forty-five (45) calendar days
in advance of the mailing date specified in the Corporation's proxy statement
released to stockholders in connection with the previous year's annual meeting
of stockholders; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
received not later than the close of business on the later of forty-five (45)
calendar days in advance of such meeting or ten (10) calendar days following the
date on which public announcement of the date of the meeting is first made. A
stockholder's notice to the Secretary shall set forth as to each item of
business the stockholder proposes to bring before the meeting (1) a brief
description of such item and the reasons for conducting such business at the
meeting; (2) the name and address, as they appear on the Corporation's records,
of the stockholder proposing such business; (3) the class and number of shares
of stock of the Corporation which are beneficially owned by the stockholder (for
the purposes of the regulations under Sections 13 and 14 of the Securities
Exchange Act of 1934, as amended); and (4) any material interest of the
stockholder in such business. No business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this paragraph
(b). The Chairman of the meeting at which any business is proposed by a
stockholder shall, as the facts warrant, determine and declare to the meeting
that such business was not properly brought before the meeting in accordance
with the provisions of this paragraph (b), and, in such event, the business not
properly brought before the meeting shall not be transacted.
Section 2. Place of Meeting. All meetings of the stockholders
shall be held at the offices of the corporation or such other place as may be
designated by the Board of Directors.
Section 3. Special Meetings. Special meetings of the stockholders may
be called for any purpose or purposes at any time by the President, a majority
of the entire Board of Directors or by a committee of the Board of Directors
specifically authorized to call such meetings. The business transacted at a
special meeting of stockholders shall be limited to the purpose or purposes for
which such meeting is called, except as otherwise determined by the Board of
Directors or the chairman of the meeting.
Section 4. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by law or by the Certificate of Incorporation, any action
required to be taken, or which may be taken, at any meeting of stockholders may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of at least 80% of the shares of outstanding stock entitled to vote
thereon, provided that prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 5. Voting by Ballot. Unless otherwise provided by law, voting
on any question or in any election may be by voice unless the presiding officer
shall order, or any stockholder shall demand, that voting be by secret ballot.
Section 6. Notice of Meeting. Written or printed notice stating the
place, date, hour and purpose or purposes of any meeting of the stockholders
shall be sent or given to each stockholder entitled to vote at such meeting.
Notice of each meeting of stockholders shall be in such form as is approved by
the Board of Directors and shall state the purpose or purposes for which the
meeting is called, the date and time when and the place where it is to be held,
and shall be delivered personally or mailed not more than sixty (60) days and
not less than ten (10) days before the day of the meeting. Notice may be waived
before, during or after any meeting by any stockholder. The waiver may be oral,
written or by attendance at the meeting; provided, however, that attendance at a
meeting will not constitute a waiver of notice if the stockholder attends the
meeting for the purpose of objecting to the meeting itself or, at the meeting,
objects to the consideration of a particular item prior to the voting thereon.
Section 7. Quorum. Except as otherwise provided by law or the
Certificate of Incorporation, (a) prior to June 1, 1998 the holders of not less
than a majority of the outstanding shares entitled to vote, represented in
person or by proxy, shall constitute a quorum for the transaction of business;
and (b) on or after June 1, 1998 the holders of not less than one-third of the
outstanding shares entitled to vote, represented in person or by proxy, shall
constitute a quorum for the transaction of business; provided, however, that in
the event of an election contest subject to Rule 14a-11 under the Securities
Exchange Act of 1934, the holders of a majority of the outstanding shares
entitled to vote shall constitute a quorum unless otherwise provided by law or
the Certificate of Incorporation. In the absence of a quorum, the holders of a
majority of the shares represented at the meeting may adjourn the meeting from
time to time without further notice except as provided in Section 11 of this
Article.
Section 8. Record Date. For the purpose of determining stockholders
entitled to notice of, or to vote at, any meeting of the stockholders, or any
adjournment thereof, the Board of Directors may fix in advance a date, such date
being not less than 10 days nor more than 60 days immediately preceding the date
on which the particular action requiring such determination of stockholders is
to be taken. For the purpose of determining stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which date shall not precede the
date upon which the resolution fixing such date is adopted and which record date
shall not be more than sixty days preceding the action to be taken.
Notwithstanding the foregoing, the Board of Directors shall set record dates in
such manner as to ensure that the Company shall make such notices to the market
of such record dates as may be required by applicable law. Only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to notice of, and to vote at, such meeting, or to receive payment of
such dividend, or to receive such allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any stock on the
books of the corporation after any such record is fixed as aforesaid.
Section 9. Voting of Shares. Except as otherwise provided by the
Certificates of Designation of the Series B Perpetual Preferred Stock and the
Series C Perpetual Convertible Preferred Stock, each stockholder of record or
the stockholder's legal proxy shall be entitled to one vote for each voting
share standing in the stockholder's name as reflected on the stock transfer
books of the corporation as of the record date. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting may
decide any question properly before the meeting, and shall be the act of the
stockholders unless the vote of a greater number of shares is required by law,
the Certificate of Incorporation or these Bylaws.
Section 10. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by the stockholder's
duly authorized attorney-in-fact. Such proxy shall be filed with an officer of
the corporation or with the duly authorized transfer agent of the corporation at
or before the time of the meeting. A proxy shall be valid for the period
specified in the proxy or, if no expiration date is provided in the proxy, for a
period not to exceed three years from the date of its execution. A proxy's
authority shall not be revoked by the death or incapacity of the maker unless,
before the vote is cast and the authority exercised, written notice of such
death or incapacity is given to the corporation.
Section 11. Adjournment. If any meeting of the stockholders be
adjourned to another time or place, no notice as to such adjourned meeting need
be given other than by announcement at the meeting, at the time of its
adjournment.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Board of Directors. The business and affairs of the
corporation shall be managed by, or under the direction of, its Board of
Directors. The members of the Board of Directors need not be stockholders.
Directors shall possess all qualifications required of them pursuant to the
Certificate of Incorporation.
Section 2. Number and Tenure. (a) The number of directors of the
corporation shall be as determined from time to time by resolution of the Board
of Directors, subject to the provisions of the Certificate of Incorporation.
Each director elected by the stockholders, and each director elected to fill a
vacancy or newly created directorship, shall serve until the next regular
stockholder meeting and until his or her successor is elected and qualified.
Upon the occurrence of the Threshold Time (as defined in Article VII, Section 1
of the Certificate of Incorporation), the directors of the Corporation, other
than those who may be elected pursuant to the terms of any series of Preferred
Stock, shall be classified, with respect to the time for which they severally
hold office, into three classes, designated Classes I, II and III, which shall
be nearly as equal as possible. Class I shall consist of two (2) directors,
Class II shall consist of two (2) directors and Class III shall consist of three
(3) directors. The membership of each class shall be determined by the Board of
Directors. Directors of Class I shall serve for a term which expires at the
first annual meeting of stockholders to be held after the Threshold Time.
Directors of Class II shall serve for a term which expires at the second annual
meeting of stockholders to be held after the Threshold Time. Directors of Class
III shall serve for a term which expires at the third annual meeting of
stockholders to be held after the Threshold Time. At each succeeding annual
meeting of stockholders following such initial classification, the respective
successors of each class shall be elected for three year terms. Notwithstanding
the foregoing, a director's term shall expire on his or her death, resignation,
removal or disqualification.
(b) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (b) shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the Corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (b). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the Corporation in accordance with the provisions
for timeliness contained in Article II, Section 1(b) above. Such stockholders'
notice shall set forth as to each nominee for election or reelection as
director: (1) the name, age, business address and residence address of such
person; (2) the principal occupation or employment of such person; (3) the class
and number of shares of stock of the Corporation which are beneficially owned by
such person (for the purposes of the regulations under Sections 13 and 14 of the
Securities Exchange Act of 1934, as amended); and (4) any other information
relating to such person that would be required to be disclosed in solicitations
or proxies for the election of such person as a director of the Corporation
pursuant to Registration 14A under the Securities Exchange Act of 1934, as
amended, and such person's written consent to being named in any proxy statement
as a nominee and to serving as a director, if elected. The notice must also set
forth as to the stockholder submitting the nomination: (1) the name and address,
as they appear on the Corporation's records; and (2) the class and number of
shares of stock of the Corporation which are beneficially owned by such
stockholder, determined in the same manner as ownership is determined for a
nominee. At the request of the Board of Directors, any person nominated by the
Board of Directors for election as a director shall furnish to the Secretary
that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. The Chairman of the meeting at which a
stockholder nomination is presented shall, if the facts warrant, determine and
declare to the meeting that such nomination was not made in accordance with the
procedures prescribed by this paragraph (b), and, in which event, the defective
nomination shall be disregarded.
Section 3. Vacancies. (a) Except as provided in paragraph (b) below,
any vacancy occurring on the Board of Directors by reason of death, resignation,
removal or disqualification may be filled by the unanimous vote of the remaining
directors, even though less than a quorum, at any regular or special meeting.
Except as provided in paragraph (b) below, vacancies on the Board of Directors
resulting from newly created directorships may be filled only by the unanimous
vote of the directors serving at the time of the increase.
(b) In the event a vacancy occurs on the Board of Directors by reason
of death, resignation, removal or disqualification of a director elected by or
appointed upon the recommendation of the holders of the Series C Perpetual
Convertible Preferred Stock (a "Series C Director"), the remaining Series C
Directors, if any, shall elect a new director to fill such vacancy. If no other
Series C Directors are serving at the time of the death, resignation, removal or
disqualification of a Series C Director, the holders of the Series C Perpetual
Convertible Preferred Stock shall elect a new director to fill such vacancy. If
one or more new directorships are created in connection with the issuance of the
Series C Perpetual Convertible Preferred Stock, each such new director shall be
appointed by the unanimous vote of the directors then in office upon the
recommendation of the holders of a majority of the Series C Perpetual
Convertible Preferred Stock.
Section 4. Resignations. Any director may resign at any time by giving
written notice to the chairman of the Board, if any, or to the president or
secretary, if any, of the corporation. Unless a later date is specified in the
notice as the effective date of resignation, resignation shall take effect on
the date of receipt of the written notice by the corporation. Unless otherwise
specified in such notice, acceptance of the resignation shall not be necessary
to make it effective.
Section 5. Regular and Annual Meetings. The Board of Directors may hold
regular meetings on an annual or other periodic basis. Except as may otherwise
be provided in a resolution of the Board of Directors, or in any notice of such
meeting if the Board of Directors has failed to act on the issue, the annual
meeting of the Board shall be held immediately following the annual meeting of
the stockholders, and regularly scheduled meetings may be held without notice at
such time and place as may be provided by resolution of the Board of Directors.
Notwithstanding the foregoing, the failure of the corporation to hold an annual
or other regularly scheduled meeting shall not affect the status of the
directors or officers, or the status of the corporation to continue as an
operating entity, unless the Board of Directors provides otherwise by
resolution.
Section 6. Special Meetings. Special meetings of the Board of
Directors may be called by the president of the corporation, the chairman of the
Board of Directors, if the Board has elected one of its members to act as its
chairman, or by resolution of the Board of Directors.
Section 7. Notice of Special Meetings. The secretary, or in his or her
absence any other officer of the corporation, shall give each director notice of
the time and place of holding of special meetings of the Board of Directors by
mail at least five days before the meeting, or by telephone, electronic or
facsimile transmission or personal service given at least 24 hours before the
meeting. A director may waive notice of any meeting before, during or after the
meeting, and the waiver may be written, oral or by attendance. The attendance of
a director at any meeting and participation therein shall constitute a waiver of
notice of such meeting unless a director attends such meeting for the express
purpose of objecting to the transaction of any business because the meeting is
not lawfully called or convened, and such director does not thereafter
participate in the meeting. Neither the business to be transacted at, nor the
purpose of, any special meeting of the Board of Directors need be specified in
the notice or waiver of notice for such meeting. No notice need be provided of
any meeting which is adjourned and later reconvened other than by announcement
at the meeting at which adjournment is taken.
Section 8. Place of Meetings; Meetings by Telephone. Meetings of the
Board shall be at the principal office of the corporation or at such other place
as the directors may from time to time determine. A meeting of the Board may be
held by any means of communication through which all person participating in the
meeting may simultaneously hear and converse with each other during the meeting,
including by means of conference telephone or similar communications equipment.
Participation in a meeting by any such means constitutes presence in person at
the meeting.
Section 9. Quorum. At all meetings of the Board, a majority of the
directors shall constitute a quorum for the transaction of business; provided,
however, that if less than all of the directors are present at said meeting, a
majority of the directors present may adjourn the meeting from time to time
without notice other than an announcement at the meeting at which the
adjournment is taken.
Section 10. Act of Board. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless otherwise provided by the Bylaws, by the Certificate of
Incorporation or by law.
Section 11. Absent Director. A director may give advance written
consent or opposition to a proposal to be acted on at a Board meeting. If a
director is not present at the meeting, consent or opposition to a proposal does
not constitute presence for purposes of determining the existence of a quorum,
but consent or opposition shall be counted as a vote in favor of or against the
proposal and shall be entered in the minutes or other record of action at the
meeting, if the proposal acted on at the meeting is substantially the same or
has substantially the same effect as the proposal to which the director has
consented or objected.
Section 12. Action without Meeting. Except as otherwise provided by law
or by the Certificate of Incorporation, any action which is required or may be
taken at a meeting of the Board of Directors or any committee of the Board may
be taken without a meeting if a consent in writing (including a telecopied
transmission), setting forth the action so taken, is signed by a majority of all
the directors or members of the committee entitled to vote with respect to the
subject matter thereof, except as to matters that require stockholder approval,
in which case a consent in writing shall be signed by all of the directors. Such
written action shall be effective on the date when signed by the required number
of directors or committee members, or such other effective date as set forth
therein. When written action is taken by less than all of the directors, all
directors shall be notified immediately of its text and effective date. Failure
to provide the notice, however, shall not invalidate the written action. A
director who does not sign or consent to the written action shall have no
liability for the action or actions taken thereby.
Section 13. Committees. The Board of Directors may, by the affirmative
vote of a majority of the number of directors, designate two or more of their
number to constitute an executive committee, which, to the extent determined by
the Board and allowed by law, shall have and exercise the authority of the Board
in the management of the business of the corporation, subject to the provisions
of the Certificate of Incorporation. Such executive committee shall act only in
the interval between meetings of the Board and shall be subject at all times to
the control and direction of the Board.
The Board of Directors may, by the affirmative vote of a majority of
the number of directors, also appoint one or more natural persons who need not
be Board members to serve on such other committees as the Board may determine.
Such other committees shall have such powers and duties as shall from time to
time be prescribed by the Board. Such other committees shall be subject at all
times to the control and direction of the Board.
A majority of the members of any committee constitutes a quorum for the
transaction of business. All committees shall keep accurate minutes of their
meetings, which minutes shall be made available upon request to members of that
committee and to any director.
Section 14. Chairman of the Board. The directors may elect one of their
members to serve as the chairman of the Board of Directors. The chairman shall
be subject to the control of, and may be removed by, the Board of Directors. He
or she shall perform such duties as may from time to time be assigned by the
Board.
Section 15. Reliance upon Records. Every director, and every member of
any committee of the Board of Directors, shall, in the performance of his or her
duties, be fully protected in relying in good faith upon the records of the
corporation and upon such information, opinions, reports or statements presented
to the corporation by any of its officers or employees, or committees of the
Board of Directors, or by any other person as to matters the director or member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
corporation, including, but not limited to, such records, information, opinions,
reports or statements as to the value and amount of the assets, liabilities
and/or net profits of the corporation, or any other facts pertinent to the
existence and amount of surplus or other funds from which dividends might
properly be declared and paid, or with which the corporation's capital stock
might properly be purchased or redeemed.
Section 16. Interested Directors. A director who is directly or
indirectly a party to a contract or transaction with the corporation, or is a
director or officer of or has a financial interest in any other corporation,
partnership, association or other organization which is a party to a contract or
transaction with the corporation, may be counted in determining whether a quorum
is present at any meeting of the Board of Directors or a committee thereof at
which such contract or transaction is considered or authorized, and such
director may participate in such meeting and vote on such authorization to the
extent permitted by applicable law, including Sections 141(h) and 144 of the
General Corporation Law of the State of Delaware.
Section 17. Compensation. Unless otherwise restricted by the
Certificate of Incorporation, the Board of Directors shall have the authority to
fix the compensation of directors. The directors shall be paid their reasonable
expenses, if any, of attendance at each meeting of the Board of Directors or a
committee thereof and may be paid a fixed sum for attendance at each such
meeting and an annual retainer or salary for services as a director or committee
member. No such payment shall preclude any director from serving the corporation
in any other capacity and receiving compensation therefor.
Section 18. Presumption of Assent. For purposes of any liability as a
director, a director of the corporation who is present at a meeting of the Board
of Directors at which action on any corporate matter is taken shall be presumed
to have assented to the action taken unless (a) he or she objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened and does not thereafter participate in the
meeting; or (b) he or she votes against the action at the meeting.
ARTICLE IV
OFFICERS
Section 1. Election of Officers. The Board of Directors shall, from
time to time, elect one or more persons to exercise the functions of the offices
of president, secretary and chief financial officer. The Board of Directors may,
but shall not be required to, elect a treasurer, controller, secretary and one
or more vice presidents, as it deems necessary or advisable. In addition, the
Board of Directors may elect such other officers and agents as it deems
necessary or advisable, including assistant secretaries and assistant
treasurers. Such officers shall exercise such powers and perform such duties as
are prescribed by these Bylaws or as may be otherwise determined from time to
time by the Board of Directors. Any number of offices or functions of those
offices may be held or exercised by the same person.
Section 2. President. The President shall be the chief executive
officer of the corporation. He shall direct, coordinate and control the
corporation's business and activities and its operating expenses and capital
expenditures and shall have general authority to exercise all the powers
necessary for the chief executive officer of the corporation, all in accordance
with basic policies established by and subject to the control of the Board of
Directors. The President shall also be the chief operating officer of the
corporation. The president shall (a) have general active management of the
business of the corporation; (b) when present, preside at all meetings of the
Board and of the stockholders, unless such duties shall have been assigned to a
Chairman of the Board of Directors; (c) see that all orders and resolutions of
the Board are carried into effect; (d) sign and deliver, in the name of the
corporation, any deeds, mortgages, bonds, contracts or other instruments
pertaining to the business of the corporation, except in cases in which the
authority to sign and deliver is required by law to be exercised by another
person or is expressly delegated by the Certificate of Incorporation, these
Bylaws or by the Board to some other officer or agent of the corporation; (e)
maintain records of and, whenever necessary, certify all proceedings of the
Board and the stockholders; and (f) perform other duties prescribed by the
Board.
Section 3. Chief Financial Officer. The chief financial officer shall
(a) keep accurate financial records for the corporation; (b) deposit all money,
drafts and checks in the name and to the credit of the corporation in the banks
and depositories designated by the Board; (c) endorse for deposit all notes,
checks and drafts received by the corporation as ordered by the Board, making
proper vouchers therefor; (d) disburse corporate funds and issue checks and
drafts in the name of the corporation, as ordered by the Board; (e) render to
the president and the Board, whenever requested, an account of all transactions
by the chief financial officer and of the financial condition of the
corporation; and (f) perform other duties prescribed by the Board or by the
president.
Section 4. Secretary. The secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders, and record all votes
and minutes of all proceedings in a book kept for that purpose, and shall
perform like duties for the standing committees when required. The secretary
shall give or cause to be given notice of all meetings of the stockholders and
of the Board of Directors when notice is required, and shall perform such other
duties as may be prescribed by the Board of Directors or the chief executive
officer. The secretary shall keep in safe custody the seal, if any, of the
corporation, and shall affix the same to any instrument requiring it.
Section 5. Terms of Office. The officers of the corporation shall hold
office for such terms as shall be determined from time to time by the Board of
Directors or until their successors are chosen and qualify in their stead.
Section 6. Compensation. The compensation of all executive officers of
the corporation shall be determined by the Board of Directors.
Section 7. Resignations. An officer may resign at any time by giving
written notice to the corporation. The resignation is effective without
acceptance when the notice is given to the corporation, unless a later effective
date is specified in the notice.
Section 8. Removals. An officer may be removed at any time, with or
without cause, by a resolution approved by the affirmative vote of a majority of
the directors present. Such removal is without prejudice to any contractual
rights of the officer.
Section 9. Vacancies. If the office of any officer or agent becomes
vacant by reason of death, resignation, retirement, disqualification, removal
from office or otherwise, the Board of Directors, may, and in the case of a
vacancy in the office of chief executive officer or chief financial officer
shall, choose a successor or successors who shall hold office for the unexpired
term in respect of which such vacancy occurred.
Section 10. Contract Rights. The election or appointment of a person
as an officer or agent of the corporation does not, of itself, create contract
rights.
ARTICLE V
INDEMNIFICATION
Section 1. Definitions. For purposes of this Article V: (a)
"corporation" shall be deemed to mean the corporation and shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees and agents so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another legal entity shall stand in
the same position under the provisions of this Article V with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued; (b) a "legal
entity" is a corporation, partnership, joint venture, trust or other enterprise;
(c) a "proceeding" is any action, suit, or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, including an action or suit by or
in the right of the corporation to procure a judgment in its favor, and any
appeal in such an action, suit, or proceeding, and any inquiry or investigation
that could lead to such action, suit or proceeding; and (d) a "qualified
position" with respect to any legal entity is a position as a director or an
officer of such legal entity or a position held by a director, officer or
employee of such legal entity which does or might constitute him a fiduciary
with respect to any employee benefit plan for the employees of such legal entity
under any federal or state law regulating employee benefit plans.
Section 2. Mandatory Indemnification. The corporation shall indemnify
each person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is serving in a qualified position with
respect to the corporation or is serving in a similar capacity with respect to
any other legal entity at the request of the corporation, against all expenses
(including attorneys' fees and costs of investigation and litigation),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any such proceeding to the maximum extent permitted
under the General Corporation Law of the State of Delaware (the "Delaware Law",
which term shall be deemed to include the General Corporation Law of the State
of Delaware or any successor statute or section thereof, as now written or
hereafter amended). The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that such person acted in such a manner
as to make him ineligible for indemnification. The right of a person to be
indemnified hereunder shall be a contract right and shall include the right to
be paid by the corporation all expenses incurred in defending any such
proceeding in advance of its final disposition upon compliance with the
provisions of Delaware Law then in effect concerning advancement of expenses.
Section 3. Permissive Indemnification. In addition to the
indemnification provided for in Section 2, the corporation shall have the power
to indemnify or contract in advance to indemnify, to a lesser or the same extent
that indemnification is required under Section 2, any person who was or is a
party or is threatened to be made a party to any proceeding by reason of the
fact that he is serving in any capacity with respect to the corporation or with
respect to any other legal entity at the request of the corporation.
Section 4. Determination that Indemnification is Proper. Any
indemnification under this Article V (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that such indemnification is permitted under Delaware Law, or, in the case of
indemnification under Section 3, is proper because the requirements specified by
the corporation with respect to such indemnification have been met. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum consisting of directors who neither are nor were parties to the
proceeding, (b) if such a quorum is not obtainable or, even though obtainable, a
majority of disinterested directors so directs, by independent legal counsel in
a written opinion or (c) by the stockholders. In making a determination the
directors may rely, as to all questions of law, on the advice of independent
legal counsel.
Section 5. Claims for Indemnification or Advances. If a claim for
indemnification or advancement of expenses hereunder is not paid in full by the
corporation within 60 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim, and if successful in
whole or in part, the claimant shall be entitled to be paid the expenses of
prosecuting such claim. It shall be a defense to any such action that such
indemnification or advancement of costs of defense are not permitted under
Delaware Law, but the burden of proving such defense shall be on the
corporation.
Section 6. Miscellaneous. Every reference in this Article V to persons
who are entitled to indemnification and advancement of expenses shall include
all persons who formerly occupied any of the positions hereinabove set forth in
this Article V, to the extent they would have been entitled to indemnification
and advancement of expenses under the provisions of this Article V if they still
held such positions and their respective heirs, executors and administrators.
Indemnification or advancement of expenses provided pursuant to the foregoing
provisions of this Article V shall not be exclusive of any other rights of
indemnification or advancement of expenses to which any person may be entitled.
Such rights include, but are not limited to, any and all rights under insurance
policies that may be purchased and maintained by the corporation or others,
whether or not the corporation would have the power to indemnify such person in
the particular instance under the provisions of this Article V, but no person
shall be entitled to indemnification by the corporation to the extent he is
indemnified by any other party, including an insurer.
Section 7. Insurance. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer or employee
of the corporation, or is or was serving at the request of the corporation as a
director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power or the obligation to
indemnify him against such liability under the provisions of this Article V.
ARTICLE VI
SHARES
Section 1. Certificates. The interest of each stockholder of the
corporation shall be evidenced by certificates for shares of capital stock in
such form or forms as the appropriate officers of the corporation may from time
to time prescribe, unless it shall be determined by, or pursuant to, a
resolution adopted by the Board of Directors that the shares representing such
interest be uncertificated. If certificated, each stockholder shall be entitled
to a certificate representing his shares of capital stock, signed by the
president or a vice president, and by the secretary or an assistant secretary,
if one has been elected or appointed, and otherwise by the chief financial
officer; provided, however, that where a certificate is countersigned by a
transfer agent or an assistant transfer agent or by a transfer clerk acting on
behalf of the corporation and registered by a registrar, the signatures of said
officers on such certificates for shares may be facsimile. If a person signs or
has a facsimile signature placed upon a certificate while an officer, transfer
agent or registrar of the corporation, the certificate may be issued by the
corporation, even if the person has ceased to have that capacity before the
certificate is issued, with the same effect as if the person had that capacity
at the date of its issue. All certificates for shares shall be consecutively
numbered or otherwise identified, and shall state the name of the corporation,
that it is organized under the laws of the State of Delaware, the name of the
person to whom the shares are issued, the number and class of shares, and the
designation of the series, if any, that the certificate represents. The name of
the person to whom the shares are issued, with the number of shares and date of
issue, shall be entered on the books of the corporation.
Section 2. Transfer of Shares. The shares of stock of the corporation
shall be transferable upon its books only by the persons named in the
certificates or by their attorneys-in-fact or legal representatives duly
authorized in writing, and upon surrender to the corporation of the old stock
certificates, properly endorsed, to the person in charge of the stock and
transfer books and ledgers, or to such other persons as the Board of Directors
may designate, by whom they shall be canceled. New certificates for the shares
shall thereupon be issued to the person entitled to such new certificates. A
record shall be made of each transfer, and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer.
Section 3. Lost Certificate. Any stockholder claiming that a
certificate for shares has been lost, destroyed or wrongfully taken shall make
an affidavit or affirmation of that fact and, if the Board of Directors so
requires, shall: (a) advertise such fact in such manner as the Board of
Directors may require; (b) give to the corporation and its transfer agent and
registrar, if any, a bond of indemnity in open penalty as to amount or in such
other sum as the Board of Directors may direct, in form satisfactory to the
Board of Directors and to the transfer agent and registrar of the corporation,
if any, and with or without such sureties as the Board of Directors with the
approval of the transfer agent and registrar, if any, may prescribe; and (c)
satisfy such other requirements as may be imposed by the Board.
If notice by the stockholder of the loss, destruction or wrongful
taking of a certificate is received by the corporation before the corporation
has received notice that the shares represented by such certificate have been
acquired by a bona fide purchaser, and if the foregoing requirements imposed by
the Board are satisfied, then the Board of Directors shall authorize the
issuance of a new certificate for shares of the same class and series and for
the same number of shares as the one alleged to have been lost or destroyed.
Section 4. Dividends. The Board of Directors may declare and pay
dividends to the extent permitted by statute and the Certificate of
Incorporation.
ARTICLE VII
MISCELLANEOUS
Section 1. Books of Account. The corporation shall keep such books of
account as are required by statute or the Certificate of Incorporation.
Section 2. Corporate Seal. If so directed by the Board of Directors,
the corporation may use a corporate seal. The failure to use such seal, however,
shall not affect the validity of any documents executed on behalf of the
corporation. The seal need only include the word "seal", but it may also
include, at the discretion of the Board of Directors, such additional wording as
is permitted by law.
Section 3. Fiscal Year. The fiscal year of the corporation shall be as
determined by resolution of the Board of Directors.
Section 4. Amendment of Bylaws. The power to adopt, amend or repeal the
Bylaws is vested in the Board. The power of the Board is subject, however, to
the power of the stockholders to amend or repeal Bylaws adopted, amended or
repealed by the Board.
Section 5. Stock of other Corporations or other Interests. Unless
otherwise ordered by the Board of Directors, the chief executive officer, the
secretary, if any, and such other attorneys or agents of the corporation as may
from time to time be authorized by the Board of Directors or the president,
shall have full power and authority on behalf of the corporation to attend, and
to act and vote in person or by proxy at, any meeting of the holders of
securities of any corporation or other entity in which the corporation may own
or hold shares or other securities, and at such meetings shall possess and may
exercise all the rights and powers incident to the ownership of such shares or
other securities which the corporation, as the owner or holder thereof, might
have possessed and exercised if present. The president, the secretary, if any,
or such attorneys or agents, may also execute and deliver, on behalf of the
corporation, powers of attorney, proxies, consents, waivers and other
instruments relating to the shares or securities owned or held by the
corporation.
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
GE CAPITAL CONSUMER CARD CO.
AND
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Dated as of May 10, 1999
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 - DEFINITIONS....................................................1
1.1 Definitions..............................................1
1.2 Construction. ..........................................6
ARTICLE 2 - PURCHASE AND SALE OF ACQUIRED ASSETS...........................7
2.1 Acquired Assets. .......................................7
2.2 Assumed Liabilities. ...................................7
2.3 Purchase Price. ........................................8
2.4 Use of Name and Trademarks...............................8
2.5 Interim Servicing Agreement. ...........................9
2.6 Agreements with Third Parties. .........................9
ARTICLE 3 - THE CLOSING....................................................9
3.1 The Closing. ...........................................9
3.2 Documents and Certificates. ...........................10
3.3 Valuation Date Statement................................10
3.4 Payments on the Closing Date............................11
3.5 Settlement Date Statement. ............................11
3.6 Payments on the Settlement Date. ......................11
3.7 Post Closing Payments (the "Post Closing Payments").....12
3.8 Power of Attorney ......................................12
3.9 Dispute Resolution......................................12
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES................................13
4.1 Representations and Warranties of Seller................13
4.2 Representations and Warranties of Purchaser.............17
4.3 NO OTHER REPRESENTATIONS OR WARRANTIES..................19
ARTICLE 5 - CERTAIN COVENANTS.............................................19
5.1 Mutual Covenants and Agreements.........................19
5.2 Certain Covenants of Seller.............................21
5.3 Covenants of Purchaser..................................23
ARTICLE 6 - CONDITIONS OF CLOSING.........................................24
6.1 Conditions Applicable to Purchaser......................24
6.2 Conditions Applicable to Seller.........................26
ARTICLE 7 - INDEMNIFICATION...............................................27
7.1 Seller's Indemnification Obligations....................27
7.2 Purchaser's Indemnification Obligations.................28
7.3 Definition of Losses....................................28
7.4 Tax Consequences of Indemnification.....................28
7.5 Procedures..............................................28
ARTICLE 8 - TERMINATION...................................................30
8.1 Termination By Either Party.............................30
8.2 Effect of Termination...................................30
ARTICLE 9 - MISCELLANEOUS.................................................31
9.1 Survival of Representations and Warranties..............31
9.2 Notices.................................................31
9.3 Assignment..............................................32
9.4 Entire Agreement........................................32
9.5 Amendments and Waivers..................................32
9.6 Expenses................................................32
9.7 Captions; Counterparts..................................32
9.8 Governing Law...........................................33
9.9 Severability............................................33
Exhibit A.........Interim Servicing Agreement
Exhibit B.........Settlement Date Statement
Exhibit C.........Valuation Date Statement
Exhibit D.........Assignment and Assumption Agreement
Exhibit E.........Opinion of Counsel for Seller
Exhibit F.........Additional Opinion of Counsel for Seller
Exhibit G.........Opinion of Counsel for Purchaser
Schedule 4.1(c)...Consents
Schedule 4.1(g)(i)Copies of forms of Cardholder Agreements
Schedule 4.1(g)(ii)Change of Terms not Implemented
Schedule 4.1(m)...Third Party Agreements Relating to Benefit
or Enhancement Programs
Schedule 4.1(n)...Co-Brand Agreements
Schedule 5.2(d)...Card Enhancements
<PAGE>
SALE AND PURCHASE AGREEMENT
This Sale and Purchase Agreement (the "Agreement") is made and entered into as
of the 10th day of May, 1999 by and between GE Capital Consumer Card Co., an
Ohio state-chartered Bank ("Seller"), and Direct Merchants Credit Card Bank,
National Association, a national banking association ("Purchaser").
WITNESSETH
A. Seller is the owner of unsecured lines of credit accessible by
MasterCard and Visa credit cards.
B. Seller desires to sell, and Purchaser desires to purchase, on the
terms set forth herein, the properties, rights and privileges of Seller in and
to certain credit card accounts and related assets.
C. Purchaser has requested, and Seller has agreed, that Seller will
service the credit card accounts sold and purchased hereunder for an interim
period after the Closing Date.
ARTICLE 1 - DEFINITIONS
1.1 Definitions. Except as otherwise specifically indicated, the following terms
shall have the meanings specified herein.
"Accountants" shall have the meaning specified in Section 3.9(b).
"Accounts" shall mean the credit card accounts that are identified by
name and account number on the computer generated tape of accounts as
of the Cut-Off Time (the "Accounts Tape").
"Accrued Interest" shall mean, as of the relevant date, all accrued but
unposted periodic finance charges on the Accounts, prorated for that
period of the billing cycle on or before such relevant date.
"Acquired Assets" shall have the meaning specified in Section 2.1(a).
"Affiliate" shall mean, with respect to any person, corporation or
entity, any other person, corporation or entity that directly or
indirectly controls, is controlled by or is under common control with,
such person, corporation or entity.
"Agreement" shall have the meaning specified in the first paragraph
hereof.
<PAGE>
"AMGEN Loss Sharing" shall mean Seller's rights and obligations from
and after the Closing Date, under Article VIII of that certain Sale and
Purchase Agreement dated as of June 27, 1997, among American General
Financial Center, a Utah corporation and AGF Funding, Inc., a Delaware
corporation, as sellers, and Seller, as buyer.
"Assignment and Assumption Agreement" shall have the meaning specified
in Section 3.2.
"Assumed Liabilities" shall have the meaning specified in Section 2.2.
"Bank Waiver" shall have the meaning specified in Section 4.2(c).
"Bankrupt" shall mean an Account which fits one or more of the
following descriptions as of the Cut-Off Time:
(i) has been identified on the Seller's processing system
in a type code, credit rating or user status code as
Bankrupt; or
(ii) Seller receives notice that the Cardholder is
bankrupt by conducting the bankruptcy database
match-up in accordance with Section 3.3(a).
"Books and Records" shall mean the following books and records in the
possession of Seller, relating to the Accounts: applications for
Accounts, acceptance certificates for prescreened offers, periodic
statements, credit and collection files, file maintenance data and
correspondence, whether in documentary form or on microfilm,
microfiche, magnetic tape, computer disk or other form.
"Business Day" shall mean each day other than Saturday, Sunday or a day
on which banking institutions in the State of Ohio or the State of
Arizona are authorized or obligated by law or regulation to close.
"Cardholder" shall mean an applicant and/or co-applicant in whose name
an Account was established or is maintained.
"Cardholder Agreement" shall mean an agreement between Seller and a
Cardholder containing the terms and conditions applicable to an
Account, as amended and in effect from time to time.
"Cardholder List" shall mean a list containing the names and most
recent addresses of Cardholders.
"Charge-off" or "Charged-off" shall mean an Account which fits one of
the following descriptions as of the Cut-Off Time:
(i) Accounts which have been identified on the Seller's
processing system in a type code, credit rating or
user status code as charged-off;
(ii) Accounts with balances that are equal to or more than
180 days contractually delinquent; or
(iii) any Accounts that are not statused as charged-off on
the Seller's processing system but should have been
so statused prior to the Cut-Off Time in accordance
with the Policies and Procedures.
"Closing" shall have the meaning specified in Section 3.1.
"Closing Date" shall have the meaning specified in Section 3.1.
"Closing Time" shall have the meaning specified in Section 3.1.
"Co-Brand Agreements" shall mean the agreements set forth on Schedule
4.1(n).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Computer Systems" shall have the meaning specified in Section 4.1(p).
.
"Confidentiality Agreement" shall mean that certain Confidentiality
Agreement dated as of March 9, 1999, between Purchaser and Seller.
"Credit Balances" shall mean all amounts owing by Seller to Cardholders
on Accounts as of the relevant date.
"Credit Card" shall mean a MasterCard or Visa credit card issued by
Seller to a Cardholder or an authorized user or other access device
(including cash advance checks and balance transfer checks) that may be
used from time to time to obtain open-ended credit pursuant to a
Cardholder Agreement.
"Credit Card Marks" shall mean Seller's name and such trademarks and
service marks of Seller as Seller uses in connection with the Accounts
immediately prior to the Closing Date. "Credit Card Receivables" shall
mean all amounts owing, whether or not billed, to Seller by Cardholders
with respect to Accounts as of the relevant date, including extensions
of credit, accrued and posted periodic finance charges, Accrued
Interest, cash advances and any other charges and fees assessed on said
Accounts, less all Credit Balances as of such date.
"Cut-Off Time" shall mean 11:59 p.m. on the day immediately preceding
the Closing Date.
"Deceased" shall mean an Account which fits one or more of the
following descriptions as of the Cut-Off Time:
(i) has been identified on the Seller's processing system
in a type code, credit rating or user status code as
deceased; or
(ii) for which the Cardholder (who is not an authorized
user) has died before the Cut-Off Time and Seller
receives notification of the Cardholder's death by
conducting the deceased database match-up in
accordance with Section 3.3(a).
"Excluded Account" shall mean any Account that is Bankrupt,
Charged-off, Fraud, Lost/Stolen or Deceased as of the Cut-Off Time.
"FDR" shall mean First Data Resources, Inc.
"Final Conversion Date" shall mean the date (which shall be no later
than the last transfer date allowed by FDR in October, 1999, unless the
delay is outside the reasonable control of Purchaser) on which
Purchaser converts the Accounts to its own bank identification number.
"Fraud" shall mean an Account which fits one or more of the following
descriptions as of the Cut-Off Time:
(i) has been identified on the Seller's processing system
in a type code, credit rating or user status code as
fraudulent; or
(ii) had any fraudulent transaction posted to the Account
prior to the Cut-Off Time and Seller receives
notification of the fraudulent transaction from any
source before the Settlement Date.
"Federal Funds Rate" shall mean the offered rate as reported in The
Wall Street Journal in the "Money Rates" section for reserves traded
among commercial banks for overnight use in amounts of one million
dollars or more, as published in the most recent Friday edition prior
to any required payment or settlement date.
"HSR Act" shall mean the Hart Scott Rodino Antitrust Improvements Act
of 1976, as amended.
"Indemnified Party" shall have the meaning specified in Section 7.5(a).
"Indemnifying Party" shall have the meaning specified in Section 7.5(a).
"Initial Conversion Date" shall mean the date on which Seller shall
convert from TSYS to FDR system and on which Purchaser shall assume all
servicing functions (except the functions performed by FDR and except
as set forth in Section 2.01(a)(ii) of the Interim Servicing
Agreement).
"Interim Servicing Agreement" shall mean the Interim Servicing
Agreement in the form of Exhibit A attached hereto.
"Losses" shall have the meaning specified in Section 7.3.
"Lost/Stolen" shall mean an Account which has been identified on the
Seller's processing system in a type code, credit rating or user status
code as lost/stolen prior to the Cut-Off Time.
"Offering Memorandum" means that certain Confidential Memorandum dated
March 1999 of the Seller.
"MasterCard" shall mean MasterCard International, Inc.
"Material," "Material Adverse Effect," "material" or "materially" shall
mean any amount which exceeds the Threshhold Amount.
"Operating Regulations" shall mean the by-laws, rules and regulations
of MasterCard and Visa.
"Policies and Procedures" shall mean the policies and procedures of
Seller relating to the Accounts, as in effect from time to time.
"Post Closing Payments" shall have the meaning specified in Section 3.7.
"Protected Party" shall have the meaning specified in Section 5.1(c).
"Purchase Price" shall have the meaning specified in Section 2.3.
"Purchaser" shall have the meaning specified in the first paragraph
hereof.
"Related Agreements" shall mean the Assignment and Assumption Agreement
and the Interim Servicing Agreement.
"SEC" shall have the meaning specified in Section 5.1(c).
"Seller" shall have the meaning assigned in the first paragraph hereof.
"Settlement Date" shall mean the date, not later than sixty (60) days
after the Closing Date, on which the parties make any adjustment to the
Purchase Price, computed as of the Cut-Off Time, and corresponding
payment.
"Settlement Date Statement" shall mean a statement, substantially in
the form of Exhibit B attached hereto, which contains the Purchase
Price, computed as of the Cut-Off Time.
"Tax" (and, with correlative meaning, "Taxes") shall mean any federal,
state, local or foreign net income, gross income, gross receipts,
windfall profit, severance, property, production, sales, use, license,
excise, franchise, employment, payroll, withholding, alternative or
add-on minimum, ad valorem, value added, transfer, stamp, or
environmental tax, or any other tax, custom, duty, governmental fee or
other like assessment or charge of any kind whatsoever, together with
any interest or penalty, addition to tax or additional amount imposed
by any governmental authority.
"Threshhold Amount" shall mean $200,000.
"TSYS" shall mean Total System Services, Inc.
"Unauthorized Use" shall mean use that was made by a person other than
the Cardholder who did not have actual, implied or apparent authority
for such use of the Account and from which the Cardholder received no
benefit.
"Unearned Annual Fees" shall mean the portion of the billed annual fees
(net of waivers), if any, on an Account as of the relevant date which
is derived by multiplying such annual fee by a fraction, the numerator
of which is equal to the number of months (including any fraction
thereof) from the Cut-Off Time remaining in the fiscal year covered by
such annual fees, and the denominator of which is twelve.
"Valuation Date" shall mean a date at least five (5) Business Days
before the Closing Date.
"Valuation Date Statement" shall mean a statement, substantially in the
form of Exhibit C attached hereto, which contains Seller's computation
of the Purchase Price in accordance with Section 2.3, but determined as
of the Valuation Date.
"Visa" shall mean Visa U.S.A., Inc.
"Year 2000 Capable" shall have the meaning specified in Section 4.1(p).
1.2 Construction.
Unless the context otherwise clearly indicates, words used in the
singular include the plural and words used in the plural include the
singular. The Schedules and Exhibits referred to herein shall be
construed with and as an integral part of this Agreement to the same
extent as if they were set forth verbatim herein.
ARTICLE 2 - PURCHASE AND SALE OF ACQUIRED ASSETS
2.1 Acquired Assets.
(a) On the Closing Date, Purchaser agrees to purchase from
Seller, and Seller agrees to sell, convey, assign and
transfer to Purchaser, all of Seller's right, title and
interest in, to and under the following assets , as the same
exist on the Closing Date (collectively, the "Acquired
Assets"): (i) the Accounts including the Excluded Accounts
(but not reaffirmation, corporate card, line of credit or
secured card accounts); (ii) the Credit Card Receivables;
(iii) the Cardholder Agreements and all rights and privileges
of Seller accruing thereunder on and after the Closing
Date, including the right to receive all payments on
Accounts due from Cardholders on and after the Closing Date;
(iv) the Books and Records; (v) the AMGEN Loss Sharing;
(vi) the right to receive net interchange fees on the
Accounts from MasterCard or Visa accruing on and after the
Closing Date; (vii) the right to receive revenues under
certain third party agreements, in accordance with Section
2.6(b); (viii) the Cardholder List; and (ix) the Co-Brand
Agreements and all rights and privileges of Seller accruing
thereunder on and after the Closing Date.
(b) No later than five (5) Business Days following the Closing,
Seller shall deliver to Purchaser an updated tape of Accounts
including the Excluded Accounts as of the Cut-Off Time.
2.2 Assumed Liabilities.
On and after the Closing Date, Purchaser shall assume and perform and
discharge, in accordance with their respective terms, the following
obligations of Seller with respect to the Acquired Assets
(collectively, the "Assumed Liabilities"): (i) the obligation to pay
fees and assessments to MasterCard or Visa on the Accounts accruing on
and after the Closing Date; (ii) the Credit Balances; (iii) all of
Seller's obligations under the Cardholder Agreements; (iv) all
liabilities in respect of Taxes for which Purchaser is liable pursuant
to Section 5.2(f); (v) all of Seller's obligations with respect to the
AMGEN Loss Sharing; (vi) all of Seller's obligations under the Co-Brand
Agreements accruing on and after the Closing Date; and (vii) the costs
of the benefit or enhancement programs set forth in Schedule 4.1(m)
accruing on and after the Closing Date.
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanies by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24B-2 of the Securities
Exchange Act of 1934.
2.3 Purchase Price.
The purchase price for the Acquired Assets (the "Purchase Price") shall
be an amount, determined as of the Cut-Off Time, equal to (x) ***
multiplied by an amount equal to the total amount of all *** minus (y)
*** minus (z) ***.
2.4 Use of Name and Trademarks.
(a) Limited Rights. Purchaser agrees to use its reasonable best
efforts to replace the Cardholders' Credit Cards with Credit
Cards not bearing any of the Credit Card Marks as soon as
possible but no later than thirty (30) days after the Final
Conversion Date. For the period commencing on the
Closing Date and ending sixty (60) days after replacement
of Cardholders' Credit Cards, Seller authorizes Purchaser
to use the Credit Card Marks in accordance with the provisions
of this Section 2.4. During such period of authorized use,
Purchaser may use the Credit Card Marks: (i) on Credit Cards
and (ii) on periodic statements, Cardholder Agreements and
other communications to Cardholders with respect to the
Accounts. Purchaser shall so use the Credit Card Marks
solely in the forms and formats currently in use for Credit
Cards, periodic statements, Cardholder Agreements and
communications, or in the forms and formats and on such forms
as Seller shall approve in writing prior to any such use.
The authorization contained in this Section 2.4 shall be
exclusive with respect to the use of the Credit Card Marks by
Purchaser for the purposes authorized under this Section 2.4.
The authorization contained in this Section shall not be
assignable by Purchaser. Purchaser is not permitted to
sublicense or authorize any other party to make any use of any
of the Credit Card Marks without the prior written consent of
the Seller.
(b) Rights Reserved by Seller. It is expressly agreed that
Purchaser is not purchasing or acquiring any right, title or
interest in the Credit Card Marks. Purchaser acknowledges
that Seller exclusively owns the Credit Card Marks and
goodwill related thereto and symbolized thereby. Purchaser
shall not combine the Credit Card Marks with any other
mark or term (other than Visa or MasterCard), and shall not
use the Credit Card Marks in any manner which will
materially damage or diminish Seller's goodwill. Purchaser
shall immediately upon receipt of written notice from
Seller, which notice shall provide detailed information about
inconsistent usage of the Credit Card Marks, cease any
act or practice that in Seller's reasonable opinion has or
may damage or diminish the goodwill of Seller or its
Affiliates.
2.5 Interim Servicing Agreement.
As of the date hereof, Seller and Purchaser shall enter into the
Interim Servicing Agreement.
2.6 Agreements with Third Parties.
(a) Seller will cooperate with Purchaser to the extent reasonably
requested by Purchaser in its efforts to ensure uninterrupted
availability of benefits and enhancements with respect to the
Accounts to Cardholders.
(b) Seller shall assign all payments paid or payable to Seller
under agreements (but shall not be required to assign the
agreements) with third party providers of services to
Cardholders identified on Schedule 4.1(m) hereto that pertain
to Accounts and relate to transactions or periods following
the Cut-Off Time, and Seller agrees to execute and deliver
to Purchaser on the Closing Date and thereafter one or more
instruments of assignment to evidence such assignment and
to reasonably cooperate with Purchaser in arranging, to the
extent possible, for direct payment of the amounts subject
to this assignment by the third party providers. Within 120
days of the Final Conversion Date, Purchaser shall enter
into separate contractual arrangements with third party
providers for the payment of any amounts assigned to
Purchaser under this Section 2.6(b) and Seller's obligation
to forward to Purchaser any payments that are rightfully
Purchaser's shall terminate.
Purchaser shall be responsible for all credit
insurance claims relating to events occurring on and after the
Cut-Off Time. Seller shall continue to retain the credit
insurance reserves maintained by it to pay the credit
insurance claims relating to events occurring before the
Cut-Off Time.
ARTICLE 3 - THE CLOSING
3.1 The Closing.
Subject to the satisfaction or waiver of all conditions set forth in
Article 6, the closing of the transactions contemplated hereby (the
"Closing") shall be held at 11:00 a.m. Central Time on June 30, 1999 at
the offices of Sidley & Austin, One First National Plaza, Chicago,
Illinois 60603, or at such other time, place and manner (including via
facsimile) as may be mutually agreed to by the parties hereto (such
time and date being referred to herein as the "Closing Time" and the
"Closing Date," respectively). Upon Closing, Purchaser shall own the
Acquired Assets as of the Cut-Off Time and shall assume and perform and
discharge, in accordance with their respective terms, the Assumed
Liabilities. Seller shall have no further income participation or
ownership interest in any of the Acquired Assets. It is the express
intent of the parties that the conveyance of the Acquired Assets by the
Seller to the Purchaser pursuant hereto be construed as a sale, free
and clear of all security interests, pledges, liens or other
encumbrances or adverse claims, for accounting, regulatory, tax and all
other purposes, and that the Acquired Assets not be a part of the
Seller's assets or its estate in the event of its insolvency.
3.2 Documents and Certificates.
At the Closing, Seller shall deliver to Purchaser, and Purchaser shall
deliver to Seller, the Assignment and Assumption Agreement in the form
of Exhibit D attached hereto (the "Assignment and Assumption
Agreement"), dated the Closing Date, and appropriately completed and
duly executed. Purchaser and Seller shall, at or prior to the Closing
Date, execute and deliver all such additional instruments, documents or
certificates as may be reasonably requested by the other party for the
consummation at the Closing of the transactions contemplated by this
Agreement.
3.3 Valuation Date Statement.
(a)(i) Bankrupt Accounts. Purchaser shall receive a masterfile
tape of Accounts as of May 21, 1999. Purchaser shall
deliver the masterfile tape of Accounts to a bankruptcy
database of Purchaser's choice for a match using primary
cardholder name and social security number, and will ensure
that results of the match are provided to both Purchaser
and Seller. Any Account that matches to the database if the
filing date occurred after the Account open date and
before the Cut-Off Time shall be considered an Excluded
Account for purposes of calculating the Purchase Price and
will be included in the Valuation Date Statement. Purchaser
shall receive another masterfile tape of Accounts as of
the Cut-Off Time. Purchaser shall deliver the masterfile
tape of Accounts to a bankruptcy database of Purchaser's
choice for a match using primary cardholder name and social
security number, and will ensure that results of the match
are provided to both Purchaser and Seller. Any Account
that matches to the database if the filing date occurred
after the Account open date and before the Cut-Off Time
shall be an Excluded Account. Any Account identified
through this match that was not included in the Valuation
Date Statement shall be included as an adjustment in the
Settlement Date Statement. The expenses relating to the
database matching under this Section 3.3(a)(i) shall be borne
by Purchaser.
(ii) Deceased Accounts. Purchaser shall receive a masterfile tape
of Accounts as of May 21, 1999. Purchaser shall deliver the
masterfile tape of Accounts to a deceased database of
Purchaser's choice for a match using primary cardholder name
and social security number, and will ensure that results of
the match are provided to both Purchaser and Seller. Any
Account that matches to the database if the date of death
occurred before the Cut-Off Time shall be considered an
Excluded Account for purposes of calculating the Purchase
Price and will be included in the Valuation Date Statement.
Purchaser shall receive another masterfile tape of Accounts as
of the Cut-Off Time. Purchaser shall deliver the masterfile
tape of Accounts to a deceased database of Purchaser's choice
for a match using primary cardholder name and social security
number, and will ensure that results of the match are provided
to both Purchaser and Seller. Any Account that matches to the
database if the date of death occurred before the Cut-Off Time
shall be an Excluded Account. Any Account identified through
this match that was not included in the Valuation Date
Statement shall be included as an adjustment in the Settlement
Date Statement. The expenses relating to the database matching
under this Section 3.3(a)(ii) shall be borne by Purchaser.
(b) Seller shall deliver to Purchaser the Valuation Date
Statement, along with the masterfile tape, supporting
calculations for the Accrued Interest, Unearned Annual Fee and
Cardholder rewards liability, and the masterfile extension
record, at least three (3) Business Days prior to the Closing
Date.
3.4 Payments on the Closing Date.
At the Closing, Purchaser shall pay Seller the Purchase Price set forth
in the Valuation Date Statement. Payment to Seller on the Closing Date
shall be made by a wire transfer of immediately available U.S. dollars
no later than 11:00 a.m. Central Time to an account designated in
writing by Seller. Seller shall provide Purchaser with wire
instructions no later than two(2) Business Days prior to the Closing
Date.
3.5 Settlement Date Statement.
Seller shall deliver to Purchaser the Settlement Date Statement along
with supporting calculations for the Accrued Interest, Unearned Annual
Fee and Cardholder rewards liability, and the masterfile extension
record, at least ten (10) Business Days prior to the Settlement Date.
Purchaser shall have the right to review the Settlement Date Statement,
together with any supporting documents reasonably requested by
Purchaser to verify the accuracy and completeness of the valuations set
forth therein, and the Settlement Date Statement shall be revised by
Seller to reflect any corrections agreed to by Purchaser and Seller.
3.6 Payments on the Settlement Date.
If the Purchase Price for the Acquired Assets as reflected on the
Settlement Date Statement is greater than the Purchase Price paid by
Purchaser on the Closing Date, Purchaser shall remit the difference to
Seller together with interest on such amount at the Federal Funds Rate
divided by three hundred sixty (360) for each day during the period
from the Closing Date to the Settlement Date. If the Purchase Price for
the Acquired Assets as reflected on the Settlement Date Statement is
less than the Purchase Price paid by Purchaser on the Closing Date,
Seller shall remit the difference to Purchaser together with interest
on such amount at the Federal Funds Rate divided by three hundred sixty
(360) for each day during the period from the Closing Date to the
Settlement Date. Payments on the Settlement Date shall be remitted no
later than 11:00 a.m. Central Time by a wire transfer of immediately
available U.S. dollars to an account designated in writing by the party
to which payment is due. Wire instructions shall be forwarded to the
paying party no later than two (2) Business Days prior to the
Settlement Date.
3.7 Post Closing Payments (the "Post Closing Payments").
(a) If (i) Seller is debited by MasterCard or Visa after the
Cut-Off Time for a chargeback in respect of which Seller
provided a Cardholder a credit on an Account prior to the
Cut-Off Time, (ii) a check from a Cardholder in payment of
amounts owed on an Account, which was credited to such
Account prior to the Cut-Off Time, is returned unpaid by the
drawee after the Cut-Off Time, (iii) Purchaser provides a
credit on an Account with respect to Unauthorized Use of
an Account prior to the Closing Date, or (iv) Purchaser
provides a credit on an Account in connection with a
transaction posted before the Cut-Off Time as a result of
rights asserted by the Cardholder under 12 CFRss.226.12(c)
or 12 CFRss.226.13(d), then an adjustment to the Purchase
Price shall be made in favor of Seller (in the case of
clause (i) or (ii)) and Purchaser (in the case of clause
(iii) or (iv)) in the amount of such chargeback, check or
credit (as the case may be). The adjustment to the
Purchase Price shall be affected by making the appropriate
adjustment to the Daily Settlement that occurs between
the parties in accordance with the Interim Servicing
Agreement.
(b) In the event any Account acquired hereunder by Purchaser is
discovered by Purchaser and Seller after the Closing Date to
be an Account which should have been classified as an Excluded
Account as of the Cut-Off Time, Purchaser may, on or before
the 45th day after the Closing Date, request that Seller
refund 100% of the Purchase Price relating to such Account.
The refund of the Purchase Price on such Accounts shall be
included in the adjustments made on the Settlement Date
Statement, provided, however, that Purchaser identifies such
Accounts to Seller at least fifteen (15) days prior to the
Settlement Date.
3.8 Power of Attorney
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Effective upon the Closing Date and thereafter, Seller hereby
irrevocably names, constitutes and appoints Purchaser and Purchaser's
officers, agents, employees and representatives its duly authorized
attorney and agent with full power and authority to endorse in Seller's
name, any checks relating to the Accounts.
3.9 Dispute Resolution
------------------
(a) Each party will use its best efforts to resolve any disputes
regarding the contents of the Settlement Date Statement in
good faith. However, if Purchaser and Seller can not mutually
agree upon the correct amounts for all line items in the
Settlement Date Statement, the parties shall:
(i) pay to each other any undisputed amounts in the
Settlement Date Statement that are owed, plus
interest calculated at the Federal Funds Rate from
the Closing Date to the date the undisputed payments
are made; and
(ii) resolve any outstanding disputed line items in the
Settlement Date Statement by resorting to the dispute
resolution procedures that are set forth in Section
3.9(b).
(b) Seller and Purchaser agree to attempt in good faith to resolve
any disputes arising in connection with the payments made or
demanded by the parties under this Article 3. In the event
Purchaser and Seller are unable to resolve any such dispute,
either party may request a mutually agreed upon nationally
recognized firm of independent accountants
(the "Accountants") to reconcile any financial items in
dispute. Any such request shall be in writing, shall
specify with particularity the disputed amounts being
submitted for determination and a direction to the Accountants
to proceed with such review as soon as practicable. The
requesting party shall furnish the other party hereto with
a copy of such request at the same time it is submitted to
the Accountants. Purchaser and Seller shall cooperate
fully in assisting the Accountants in their review, including,
without limitation, by providing the Accountants full
access to all files, books and records relevant thereto and
providing such other information as the Accountants may
reasonably request in connection with any such review.
One-half of the fees and disbursements of such Accountants
arising out of such review shall be borne by Purchaser
and the other one-half by Seller. In the event the
determination made by the Accountants requires either party
to make payment to the other of any additional amount,
such party shall make such payment no later than five
(5) Business Days following receipt from the Accountants of
written notice to both parties of such determination plus
interest on any amount due at a rate equal to the Federal
Funds Rate divided by 360 for each day during the period from
the date on which a payment was required pursuant to
the terms of this Agreement through the date of payment.
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Seller. Seller hereby represents and
warrants to Purchaser as follows:
(a) Organization. Seller is a state-chartered bank, validly
existing and in good standing under the laws of the State of
Ohio.
(b) Capacity; Authority; Validity. Seller has all necessary
corporate power and authority to enter into this Agreement
and the Related Agreements and to perform all of the
obligations to be performed by it under this Agreement and the
Related Agreements. This Agreement and the Related
Agreements and the consummation by Seller of the transactions
contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action of Seller
and this Agreement has been duly executed and delivered by
Seller. This Agreement constitutes, and the Related
Agreements, when executed by Seller, will constitute,
the valid and binding obligations of Seller, enforceable
against Seller in accordance with their respective terms
(except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium, receivership,
conservatorship, the rights and obligations of receivers and
conservators of insured depository institutions under 12
U.S.C.ss.1821(d) and (e) and other laws relating to or
affecting creditors' rights generally and by general equity
principles).
(c) Conflicts; Defaults. Except as set forth in Schedule 4.1(c),
neither the execution and delivery of this Agreement and the
Related Agreements by Seller, nor the consummation of the
transactions contemplated hereby and thereby will
(i) conflict with, result in the breach of, constitute a
default under, or accelerate the performance required by,
the terms of any order, law, regulation, contract, instrument
or commitment to which Seller is a party or by which
it is bound, (ii) violate the articles of incorporation or
bylaws or any other equivalent organizational document of
Seller, (iii) require any consent, approval, authorization
or filing under any law, regulation, judgment, order,
writ, decree, permit, license or agreement to which Seller
is a party, or (iv) require the consent or approval of any
other party to any contract, instrument or commitment to
which Seller is a party, in each case other than (x)
approvals of regulatory authorities, if any, which have been
obtained or will be obtained prior to or on the Closing Date
and (y) any of the foregoing which would not have a material
adverse effect on the Acquired Assets. Seller is not subject
to any agreement with any regulatory authority which would
prevent the consummation by Seller of the transactions
contemplated by this Agreement and the Related Agreements.
No receiver or conservator has been appointed for the
Seller nor has any proceeding been instituted or, to the best
knowledge of Seller, threatened for such appointment.
(d) Title to Acquired Assets. Seller has good and marketable title
to the Acquired Assets free and clear of any lien, pledge,
claim, security interest, encumbrance, charge or restriction
of any kind. Delivery by Seller of the Assignment and
Assumption Agreement to Purchaser will vest in Purchaser good
and marketable title to all the Acquired Assets, free and
clear of any lien, pledge, claim, security interest,
encumbrance, charge or restriction of any kind.
(e) Litigation. There is no claim, litigation, proceeding,
arbitration or governmental investigation pending against
Seller, which will have a material adverse effect on the
Acquired Assets or the ability of Seller to consummate the
transactions contemplated hereby and by the Related
Agreements. Seller represents that the litigation titled Shean
v. GE Capital Consumer Card Co. No. 99C1625 (N.D.-Ill.) is in
the process of being settled, and no claims will be made
against Purchaser as a result of this matter.
(f) Compliance with Laws. (i) The Accounts and Cardholder
Agreements comply in all material respects with all
applicable laws, rules and regulations and Seller has
complied with all applicable federal and state laws and
regulations and the Operating Regulations with respect
to the origination, maintenance and servicing of the
Accounts, including any change in the terms of any Account;
(ii) the interest rates, fees and charges in connection
with the Accounts comply with all applicable federal and
state laws and regulations and with the Operating
Regulations; (iii) other than in the Cardholder Agreements
and other related documents made available to Purchaser,
Seller has made no promise, agreement or commitment to any
Cardholder in connection with an Account, except in the
ordinary course of business in connection with collection
and customer service; (iv) to the best knowledge of
Seller, each Cardholder Agreement is the legal, valid and
binding obligation of the Cardholder and any guarantor or
co-signer named therein and is enforceable in accordance with
its terms, except as such enforcement may be limited
by bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights
generally and by general equity principles, and is not subject
to offset, recoupment, adjustment or any other claim
except for the rights of Cardholders under 12 CFRss.226.12(c),
12 CFRss.226.13(d) and the Soldiers and Sailors Civil
Relief Act; and (v) to the best knowledge of Seller,
except for billing inquiries, each of the Credit Card
Receivables arises from a bona fide sale or loan transaction.
(g) Cardholder Agreements. Attached as Schedule 4.1(g)(i), to the
best knowledge of Seller, are copies of all forms of
Cardholder Agreements governing the Accounts. Except as set
forth in Schedule 4.1(g)(ii), the Cardholder Agreements
accurately reflect the method Seller uses to calculate and
impose charges, collect fees and payments and to process and
service the Acquired Assets. Seller has made no promises,
commitments or agreements to any Cardholder except in
accordance with the Policies and Procedures.
(h) Performance of Obligations. Seller has performed, in all
material respects, all obligations required to be
performed by it to date under the Cardholder Agreements, and
Seller is not materially in default under, and no event
has occurred which, with the lapse of time or action by a
third party, could result in a material default under, any
such agreements. All Cardholder Agreements are legal, valid
and binding obligations of Seller, enforceable by the other
parties thereto in accordance with their respective terms,
except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium,
receivership, conservatorship, the rights and obligations of
conservators or receivers of insured depository institutions
under 12 U.S.C.ss.1821(d) and (e) and other laws relating to
or affecting creditors' rights generally and by general equity
principles.
(i) Operation of Business. Since March 1, 1999, Seller has not (i)
effected any material change in Policies and Procedures
relating to the Accounts that would have a material adverse
effect on the Acquired Assets; (ii) entered into any
transaction or made any commitment or agreement in connection
with the Accounts, other than in the ordinary course of
Seller's business consistent with past practice and the
Policies and Procedures; or (iii) amended the terms of any
Cardholder Agreement, except on an individual basis in
accordance with the Policies and Procedures.
(j) Finders or Brokers. Seller acknowledges that it has agreed to
pay any fee or commission to any agent, broker, finder, or
other person retained by it, for or on account of services
rendered as a broker or finder in connection with this
Agreement or the transactions contemplated hereby and agrees
that Seller is solely responsible for the payment of any such
fee or commission.
(k) Effect of Law on Closing. There is no federal or state
statute, rule or regulation, or order or rule of any federal
or state regulatory agency which prevents Seller from selling
the Acquired Assets to Purchaser as contemplated by this
Agreement or from performing its obligations under the Interim
Servicing Agreement.
(l) Books and Records. The Books and Records with respect to the
Accounts accurately reflect in all material respects the terms
and conditions of the Accounts. Except to the extent set forth
in the Co-Brand Agreements, no third party has rights to use
or market the information contained in the Books and Records
and the Cardholder List.
(m) Third Party Agreements. Schedule 4.1(m) sets forth a list of
all third party contracts relating to benefit or enhancement
programs in effect with respect to the Accounts on the date
hereof.
(n) Co-Brand Agreements. Schedule 4.1(n) sets forth a list of all
Co-Brand Agreements in effect with respect to the Accounts on
the date hereof. Seller shall make reasonable best efforts to
obtain the consents required under such contracts to effect
the transactions hereby contemplated by the Closing Date.
(o) Chattel Paper. None of the Acquired Assets (other than
Excluded Accounts) constitutes "chattel paper" within the
meaning of the Uniform Commercial Code as in effect in the
State of Ohio.
(p) Year 2000 Compliance. All of Seller's hardware, firmware or
software, or any Seller system consisting of one or more
thereof, including, without limitation, any and all
enhancements, upgrades, customizations, modifications,
maintenance and the like used or necessary to perform the
Services (as defined in the Interim Servicing Agreement)
(collectively, the "Computer Systems") will be Year 2000
Capable (as defined below).
As used in this Agreement, "Year 2000 Capable" as it
relates to the Computer Systems, shall mean that: (i) no value
for current dates will cause any interruption in the operation
of the Computer Systems; (ii) all manipulations of
time-related data will produce the desired results for all
value dates within the application domain and in combination
with other products, prior to, through and beyond the year
2000; (iii) date elements in interfaces and data storage will
permit specifying the century to eliminate date ambiguity
without human intervention, including leap year calculations;
(iv) where any date element is represented without a century,
the correct century shall be unambiguous for all manipulations
involving that element; and (v) authorization codes, passwords
and zaps relative to expiration dates and CPU serial numbers
shall function normally during year 2000 testing time
horizons.
(q) AMGEN Loss Sharing. Not more than $24 million of the
cumulative maximum reimbursement obligations of the "Sellers",
as defined in the agreement with respect to the AMGEN Loss
Sharing, has been claimed by Seller as of March 31, 1999.
(r) Conversion to FDR. The conversion from the TSYS system to the
FDR system shall not create a material adverse effect on the
Accounts.
(s) No "Early-Out" Accounts. Seller represents that the Accounts
do not include any accounts (other than Deceased Accounts)
that are "early outs" (that is, Accounts that have been sent
to a collection agency and identified as uncollectible prior
to being statused as charged-off on the Seller's processing
system).
4.2 Representations and Warranties of Purchaser. Purchaser hereby represents and
warrants to Seller as follows:
(a) Organization. Purchaser is a national bank, validly existing
and in good standing under the laws of the State of Arizona.
(b) Capacity; Authority; Validity. Purchaser has all necessary
corporate power and authority to enter into this
Agreement and the Related Agreements and to perform all
of the obligations to be performed by it under this
Agreement and the Related Agreements. This Agreement and the
Related Agreements and the consummation by Purchaser
of the transactions contemplated hereby and thereby have been
duly and validly authorized by all necessary corporate
action of Purchaser and this Agreement has been duly
executed and delivered by Purchaser. This Agreement
constitutes, and the Related Agreements, when executed
by Purchaser, will constitute, the valid and binding
obligations of Purchaser, enforceable against Purchaser in
accordance with their respective terms (except as such
enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium, receivership, conservatorship, the
rights and obligations of receivers and conservators of
insured depository institutions under 12 U.S.C.ss.1821(d) and
(e) and other laws relating to or affecting creditors' rights
generally and by general equity principles).
(c) Conflicts; Defaults. Neither the execution and delivery of
this Agreement and the Related Agreements by Purchaser
nor the consummation of the transactions contemplated hereby
or thereby by Purchaser will (i) conflict with, result
in the breach of, constitute a default under, or accelerate
the performance required by, the terms of any order,
law, regulation, contract, instrument or commitment to which
Purchaser is a party or by which Purchaser is bound,
(ii) violate the articles of incorporation or bylaws or any
other equivalent organizational document of Purchaser,
(iii) require any consent, approval, authorization or filing
under any law, regulation, judgment, order, writ,
decree, permit or license to which Purchaser is a party or
by which Purchaser is bound, or (iv) require the consent
or approval of any other party to any contract, instrument
or commitment to which Purchaser is a party or by which
Purchaser is bound, other than (A) the approvals of
regulatory authorities, if any (which have been obtained or
will be obtained prior to or on the Closing Date), and (B)
the waiver (the "Bank Waiver") of the lenders of Metris
Companies Inc. ("MCI") under its Amended and Restated
Revolving Credit Agreement dated June 30, 1998 among MCI, The
Chase Manhattan Bank, as agent and the lenders named
therein. Purchaser is not subject to any agreement or
understanding with any regulatory authority which would
prevent the consummation by Purchaser of the transactions
contemplated by this Agreement and the Related Agreements.
No receiver or conservator has been appointed for the
Purchaser nor has any proceeding been instituted or, to
the best knowledge of Purchaser, threatened for such
appointment.
(d) Litigation. There is no claim, litigation, proceeding,
arbitration or governmental investigation pending against
Purchaser, which will have a material adverse effect on the
Purchaser's ability to consummate the transactions
contemplated hereby and by the Related Agreements.
(e) Finders or Brokers. Purchaser has not agreed to pay any fee or
commission to any agent, broker, finder, or other person for
or on account of services rendered as a broker or finder in
connection with this Agreement or the transactions
contemplated hereby which would give rise to any valid claim
against Seller for any brokerage commission or finder's fee or
like payment.
(f) Effect of Law on Closing. There is no federal or state
statute, rule or regulation, or order or rule of any federal
or state regulatory agency, which prevents Purchaser from
purchasing the Acquired Assets as contemplated by this
Agreement.
(g) Source of Funding. Purchaser has the necessary sources of
funding to complete the transactions contemplated in this
Agreement in accordance with the terms hereof, except that
Purchaser shall not be obligated to purchase, and Seller shall
not be obligated to sell, the Acquired Assets to be sold if
Purchaser has not received the Bank Waiver.
(h) MasterCard and Visa Member. Purchaser is qualified to
participate in, and is a member in good standing of, the
MasterCard and Visa credit card programs.
4.3 NO OTHER REPRESENTATIONS OR WARRANTIES...... EXCEPT FOR THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT AND THE RELATED
AGREEMENTS, SELLER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
WRITTEN OR ORAL, AND SELLER HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR WARRANTY
(INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR
A PARTICULAR PURPOSE), WHETHER BY SELLER, ITS AFFILIATES OR ANY OF THEIR
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OR ANY OTHER PERSON,
WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS AGREEMENT, THE RELATED
AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY; PROVIDED,
HOWEVER, THAT ALL DISCLOSURES OF INFORMATION (WHETHER ORAL OR IN WRITING) MADE
BY SELLER OR ITS AGENTS AND REPRESENTATIVES IN CONNECTION WITH THE OFFERING
MEMORANDUM, DUE DILIGENCE AND THE MASTERFILE TAPE, WERE TRUE AND CORRECT IN ALL
MATERIAL RESPECTS AND SELLER ACKNOWLEDGES PURCHASER HAS RELIED ON SUCH
INFORMATION.
ARTICLE 5 - CERTAIN COVENANTS
5.1 Mutual Covenants and Agreements. Each party hereto covenants and agrees
that:
(a) Cooperation. It shall cooperate with the other party hereto in
furnishing any information or performing any action reasonably
requested by that party, which information or action is
necessary for the prompt consummation of the transactions
contemplated by this Agreement.
(b) Other Required Information. It shall furnish to the other
party hereto all information as is required or requested to be
set forth in any application or statement to be filed with any
state or federal governmental agency or authority in
connection with the regulatory approval or review of the
transactions contemplated by this Agreement.
(c) Confidentiality. All information furnished by a party
(the "Protected Party") to the other party in connection with
this Agreement and the transactions contemplated hereby
shall be received in confidence and kept confidential by
such other party, and shall be used by it only in connection
with this Agreement and the transactions contemplated
hereby, except to the extent that such information:
(i) is already lawfully known to such other party when
received; (ii) thereafter becomes lawfully obtainable
from other sources other than as a result of disclosure by
such other party; (iii) is required to be disclosed to
MasterCard or Visa or to a regulatory authority having
authority over such party; (iv) is disclosed to its
Affiliates, provided that such parties agree to be bound by
the provisions of this Section 5.1(c); (v) is disclosed to
its auditors or counsel (each of whom the disclosing party
shall cause to keep such information confidential and to
use the same only in connection with this Agreement,
including in the case of auditors, any general or more
limited audit or review of Purchaser or Seller, and in the
case of counsel, any disputes relating to this Agreement or
legal matters which involve Seller or its Affiliates
with respect to which confidential information which is
subject to this Section 5.1(c) is germane) or is required to
be disclosed strictly on a need to know basis to its lenders,
investors, or rating agencies; (vi) is required to be
disclosed in the financial statements of such other party or
its Affiliates to the extent required by GAAP, or in
any filing with the Securities and Exchange Commission
(the "SEC"); (vii) is required to be disclosed to its
source(s) of funding, provided such sources agree to be
bound by confidentiality provisions similar to those
contained in this Section 5.1(c); or (viii) is required by
law, regulation or court order to be disclosed by such
other party, provided that prior notice of such disclosure
(other than to its Affiliates, auditors, counsel, rating
agencies or lenders) has been given to the Protected Party,
when legally permissible, and that the party which is
required to make the disclosure uses its reasonable best
efforts to provide sufficient notice to permit the Protected
Party to take legal action to prevent the disclosure. In the
event that the transactions contemplated by this Agreement
shall fail to be consummated, such other party shall promptly
cause all originals and copies of documents or extracts
thereof containing all information and data furnished by the
Protected Party to be returned to the Protected Party or
destroyed and shall cause an officer to so certify to the
Protected Party. This Section 5.1(c) shall survive any
termination of this Agreement.
(d) Press Releases. Except as may be required by law or regulation
or a court or regulatory authority or the rules of a stock
exchange, or as may be necessary to disclose to lenders and
rating agencies, neither Seller nor Purchaser, nor any of
their respective Affiliates, subsequent to the date hereof and
continuing after the Closing Date, shall issue a press release
or make any public announcement related to the transactions
contemplated hereby without the prior written consent of the
other party hereto, which consent shall not be unreasonably
withheld or delayed. This Section 5.1(d) shall survive any
termination of this Agreement.
(e) Notice to Cardholders. Seller and Purchaser shall cooperate
with each other in good faith to enable Purchaser, prior to
the Final Conversion Date, to prepare, print and mail, at
Purchaser's expense, a notice notifying each Cardholder on a
timely basis of the purchase of the Accounts by Purchaser and
such other information as may be required to be given to such
Cardholder and other matters which the parties determine to be
appropriate. Any such notice shall be in a form consented to
by each of the parties hereto prior to mailing, but no party
shall unreasonably withhold such consent.
(f) Miscellaneous Agreements and Consents. Subject to the terms
and conditions contained herein, each party to this
Agreement shall use its reasonable best efforts to take, or
cause to be taken, all action, and to do, or cause to be
done, all things necessary, appropriate or desirable
hereunder and under applicable laws and regulations to
consummate and make effective the transactions contemplated
by this Agreement. Each party to this Agreement will use its
reasonable best efforts to obtain consents of all third
parties and governmental bodies necessary for the
consummation of the transactions contemplated by this
Agreement. The parties and their respective officers,
directors and/or employees shall use their reasonable best
efforts to take such further actions subsequent to the
Closing Date as are reasonably necessary, appropriate or
desirable to carry out the purposes of this Agreement.
(g) Advice on Changes. Between the date hereof and the Closing
Date, each party shall promptly advise the other of any fact
known to it which, if existing or known at the date hereof,
would have been required to be set forth or disclosed in or
pursuant to this Agreement or of any fact which, if existing
or known at the date hereof, would have made any of the
representations of such party contained herein untrue in any
material respect.
(h) Preserve Accuracy of Representations and Warranties. Each
party hereto shall refrain from taking any action which would
render any representation or warranty of such party contained
in Article 4 of this Agreement materially inaccurate as of the
Closing Date. Each party shall promptly notify the other party
of any action, suit or proceeding that shall be instituted or
threatened against such party to restrain, prohibit or
otherwise challenge the legality of any transaction
contemplated by this Agreement.
5.2 Certain Covenants of Seller. Seller hereby agrees with Purchaser as
follows:
(a) Preservation of Credit Card Business. From the date of this
Agreement and continuing until the Closing Date, Seller
shall, and shall cause its agents, to: (i) maintain and
service the Accounts in substantially the same manner
(except for marketing activities) as currently maintained and
serviced and in accordance with the Policies and
Procedures, (ii) maintain and service the Accounts in
compliance, in all material respects , with applicable federal
and state laws and regulations; and (iii) not make any
change to the Policies and Procedures that would have a
material adverse effect on the Accounts except as required by
law, safe or sound banking practices or the Operating
Regulations. Seller shall, and shall cause its agents to,
post all payments received prior to the Cut-Off Time to
the applicable Account as of the Cut-Off Time.
(b) Preservation of Accounts. From the date of this Agreement and
continuing until the Closing Date, Seller shall: (i) not sell,
assign, transfer or pledge, any Account without the prior
written consent of Purchaser; (ii) not take any substantial
action with respect to the Accounts which will impair any
material rights of Seller, and shall not amend any Cardholder
Agreement other than on a per customer basis in accordance
with the Policies and Procedures; and (iii) comply, in all
material respects, with the terms and conditions of the
Cardholder Agreements, as then in effect.
(c) Access. From the date of this Agreement and continuing until
the Closing Date, Seller shall (i) permit Purchaser and its
authorized representatives reasonable access, during
reasonable hours, to the Books and Records of Seller as
they relate to the Acquired Assets; (ii) make available
to Purchaser true, accurate and complete copies of such
contracts and other such records and all other information in
its possession with respect to the Acquired Assets as
Purchaser or its authorized representatives may reasonably
request; (iii) cause its personnel and its agents to provide
Purchaser assistance in its investigation of such matters;
provided, however, that such investigation shall be conducted
in a manner which does not unreasonably interfere with
Seller's normal operations and, provided, further, that
Seller shall not be required to divulge, and shall not
divulge, any records or information to the extent prohibited
by applicable laws or regulations.
(d) Use of List. Seller agrees that for a period of two (2) years
from the Closing Date, neither Seller, nor any Affiliate of
Seller, will sell or otherwise provide the Cardholder List,
in whole or in part, to any third party or use the Cardholder
List to solicit any Cardholder for a credit card account or
any card enhancement set forth in Schedule 5.2(d). The parties
acknowledge that Seller has previously included in the
internal records or databases of its Affiliates some or all
of the names of Cardholders. Nothing contained herein shall
require Seller or its respective Affiliates to remove
Cardholder names from such internal records or databases. The
parties agree that it shall not be a violation of this Section
5.2(d) if an Affiliate of Seller: (i) solicits a Cardholder or
develops a solicitation list that includes names of some but
not all Cardholders (as well as the names of persons who are
not Cardholders) if such name or list is obtained (A) from a
third party, or (B) from the internal records or a database
of Seller or an Affiliate of Seller not derived from the
Cardholder List, provided that such Affiliate does not
intentionally target Cardholders for such solicitation;
(ii) solicits the public at large for any product or service
through a list of names other than one derived from the
Cardholder List; or (iii) engages in any marketing of
products or services, provided that such Affiliate does not
intentionally target Cardholders in such marketing efforts.
(e) Further Assurances. On and after the Closing Date, Seller
shall, at Purchaser's request, execute, acknowledge and
deliver all such acknowledgments and other instruments as may
be reasonably necessary or appropriate to fully and
effectively carry out the transactions contemplated hereby.
(f) Responsibility for Taxes. Seller shall be liable for and pay,
and pursuant to Article 7 shall indemnify and hold
Purchaser harmless from and against all Taxes applicable to
the Acquired Assets and the Assumed Liabilities, in each
case incurred or assessed during the portion of the
taxable years or periods on or prior to the Closing Date.
Purchaser shall be liable for and pay, and pursuant to
Article 7 shall indemnify and hold Seller harmless from and
against, (i) all Taxes applicable to the Acquired Assets and
the Assumed Liabilities, in each case incurred or assessed
during the portion of the taxable years or periods after the
Closing Date, and (ii) any sales Tax, use Tax, transfer or
gains Tax, documentary stamp Tax or similar Tax attributable
to the sale or transfer of the Acquired Assets or the Assumed
Liabilities pursuant to this Agreement and the Related
Agreements. Each of Seller and Purchaser shall be entitled to
refund of any Taxes for which it is liable under this Section
5.2(f).
(g) Books and Records. Commencing on the Closing Date, the Books
and Records shall be the property of Purchaser, provided that
Seller may retain possession of such copies thereof as may be
required to meet legal, regulatory, tax, accounting and
auditing requirements. Except for (i) keeping such records
as Seller may require to perform its interim servicing
obligations, and (ii) any Books and Records which Seller
cannot reasonably segment from books and records relating to
the credit card accounts not being sold to Purchaser
hereunder, Seller will make the Books and Records available
for delivery to Purchaser on the Closing Date. In addition,
on the Initial Conversion Date, Seller shall deliver to
Purchaser all Books and Records retained by Seller or its
agents in connection with Seller's performance of its interim
servicing obligations, excluding any Books and Records which
Seller cannot reasonably segment from books and records
relating to the credit card accounts not being sold to
Purchaser hereunder. If the Books and Records delivered by
Seller contain information on accounts not being sold to
Purchaser hereunder, Purchaser shall comply with the
provisions of Section 5.1(c) with respect to such information
and shall not use such information for any purpose.
(h) Payments to Co-Brand Partners. Seller shall pay to its
co-brand partners any amounts validly owed to them under the
Co-Brand Agreements listed in Schedule 4.1(n) for the period
up to the Cut-Off Time.
5.3 Covenants of Purchaser. Purchaser hereby agrees with Seller as follows:
(a) Books and Records. Purchaser shall retain the Books and
Records delivered to Purchaser for at least the periods
required under applicable laws and under the Operating
Regulations and shall allow Seller reasonable access to such
Books and Records and the right to make copies thereof at any
reasonable time or shall provide, upon request, copies
thereof, in the event any such Books and Records are required
by Seller in connection with any claim or proceeding in which
Seller is involved, including, but not limited to, any
financial reporting obligation, tax claim, legal claim or
accounting matter, or any other reasonable business
requirement of Seller.
(b) Covenant to Comply with Cardholder Agreements. On and after
the Closing Date, Purchaser will comply with the terms and
conditions of the Cardholder Agreements, as they may be
amended by Purchaser from time to time, the Operating
Regulations and all laws and regulations applicable to the
Acquired Assets.
(c) Assumed Liabilities. On and after the Closing Date, Purchaser
shall discharge the Assumed Liabilities in accordance with the
terms thereof.
(d) Further Assurances. On and after the Closing Date, Purchaser
shall, at Seller's request, execute, acknowledge and deliver
all such acknowledgments and other instruments as may be
reasonably necessary or appropriate to fully and effectively
carry out the transactions contemplated hereby.
(e) Payments to Co-Brand Partners. Purchaser shall pay to its
co-brand partners any amounts validly owed to them under the
Co-Brand Agreements listed in Schedule 4.1(n) for the period
on and after the Cut-Off Time.
ARTICLE 6 - CONDITIONS OF CLOSING
6.1 Conditions Applicable to Purchaser. The obligation of Purchaser under
this Agreement to consummate the transactions contemplated by this
Agreement is subject to the satisfaction or waiver by Purchaser of the
following conditions as of the Closing Date:
(a) Related Agreements. Seller shall have executed and delivered
to Purchaser the Related Agreements, each dated as of the
Closing Date.
(b) Financing Statements. On or before the Closing Date, Seller
shall have executed and delivered to Purchaser, financing
statements, prepared by Purchaser, in the appropriate form for
filing under the Uniform Commercial Code of the State of Ohio
to give notice of Purchaser's interest in the Acquired Assets.
(c) Board Resolutions; Incumbency Certificates. Purchaser shall
have received from Seller certified resolutions of Seller's
Board of Directors authorizing the execution and delivery of
this Agreement and the Related Agreements and the consummation
of the transactions contemplated hereby and thereby, and
certificates as to incumbency and signatures of officers
authorized to execute this Agreement and the Related
Agreements.
(d) Performance of this Agreement. All the terms, covenants and
conditions of this Agreement to be complied with and performed
by Seller on or prior to the Closing Date shall have been
complied with and performed in all material respects; and
there shall have been delivered to Purchaser a certificate to
such effect, dated the Closing Date, signed by an authorized
officer of Seller.
(e) Accuracy of Representations and Warranties. The
representations and warranties of Seller as set forth in
Section 4.1 hereof shall be true and correct in all material
respects on the Closing Date as though made on the Closing
Date, except for changes therein permitted by this Agreement
or resulting from any transaction consented to in writing by
Purchaser; and there shall have been delivered to Purchaser a
certificate to such effect, dated the Closing Date, signed by
an authorized officer of Seller.
(f) Litigation. No action, suit, litigation or proceeding related
to any of the transactions contemplated hereby shall have been
threatened or instituted by a governmental body to restrain or
prohibit the consummation of any of the transactions
contemplated hereby.
(g) HSR Waiting Period. The waiting period (and any extensions
thereof), if any, under the HSR Act applicable to the
consummation of the transactions contemplated by this
Agreement shall have expired or been terminated.
(h) Legal Opinion. Seller shall have delivered to Purchaser (and
each other addressee) an opinion of counsel to Seller, dated
the Closing Date, substantially in the form of Exhibit E.
(i) List of Accounts. Seller shall have delivered to Purchaser a
list of Accounts (including Excluded Accounts) in computer
tape form containing with respect to each Account and Excluded
Account, the account number and information supporting
calculation of Accrued Interest, Unearned Annual Fees and
Cardholder reward liability, and the masterfile extension
record.
(j) Additional Legal Opinions. Seller shall have delivered to
Purchaser (and each other addressee) an opinion of counsel to
Seller substanitally in the form of Exhibit F and, if required
in order to satisfy the conditions precedent to the funding
source of Purchaser, either or both of (1) an opinion of
counsel to Seller addressed to and acceptable to the rating
agencies rating the commercial paper of such funding source's
commercial paper conduit, and addressed to NationsBank, N.A.,
as agent, as to the consequences of proceeding in respect of
the insolvency of the Seller (or a true sale opinion, if the
Seller may be a "debtor" under the U.S. Bankruptcy Code),
and (2) officers' certificates of the Seller as may be
requested by and acceptable to such rating agencies.
(k) Government Consents. The parties shall have received all
approvals and actions of or by all governmental authorities
which are necessary to consummate the transactions
contemplated hereby.
(l) Other Consents. Seller shall have received any required
consents to the transactions contemplated hereby from the
other party to any contract, instrument or commitment to which
Seller is a party, other than those the failure to receive
which would not have a material adverse effect on the Acquired
Assets. Seller shall have received any required consent to
assignment of each Co-Brand Agreement, which consent shall
include (i) consent to the subsequent assignments pursuant to
a receivables securitization program, and (ii) with respect to
the agreement with Ames Department Stores, Inc., forfeiture or
waiver of any option to elect to purchase or require a sale of
Accounts at the termination thereof.
(m) No Injunction. There shall not be in effect any injunction
restraining or prohibiting the consummation of the
transactions contemplated hereby.
(n) Waiver by MCI Lenders. Metris Companies Inc. shall have
received the Bank Waiver.
6.2 Conditions Applicable to Seller. The obligation of Seller under this
Agreement to consummate the transactions contemplated by this Agreement
is subject to the satisfaction or waiver by Seller of the following
conditions as of the Closing Date:
(a) Related Agreements. Purchaser shall have executed and
delivered to Seller the Related Agreements, each dated as of
the Closing Date.
(b) Board Resolutions; Incumbency Certificates. Seller shall have
received from Purchaser certified resolutions of Purchaser's
Board of Directors authorizing the execution and delivery of
this Agreement and the Related Agreements and the consummation
of the transactions contemplated hereby and thereby, and
certificates as to incumbency and signatures of officers
authorized to execute this Agreement and the Related
Agreements.
(c) Performance of this Agreement. All the terms, covenants and
conditions of this Agreement to be complied with and performed
by Purchaser on or prior to the Closing Date shall have been
complied with and performed in all material respects; and
there shall have been delivered to Seller a certificate to
such effect, dated the Closing Date, signed by an authorized
officer of Purchaser.
(d) Accuracy of Representations and Warranties. The
representations and warranties of Purchaser as set forth in
Section 4.2 hereof shall be true and correct in all material
respects on the Closing Date as though made on the Closing
Date, except for changes therein permitted by this Agreement
or resulting from any transaction consented to in writing by
Seller; and there shall have been delivered to Seller a
certificate to such effect, dated the Closing Date, signed by
an authorized officer of Purchaser.
(e) Litigation. No action, suit, litigation or proceeding related
to any of the transactions contemplated hereby shall have been
threatened or instituted by a governmental body to restrain or
prohibit the consummation of any of the transactions
contemplated hereby.
(f) HSR Waiting Period. The waiting period (and any extensions
thereof), if any, under the HSR Act applicable to the
consummation of the transactions contemplated by this
Agreement shall have expired or been terminated.
(g) Government Consents. The parties shall have received all
approvals and actions of or by all governmental authorities
which are necessary to consummate the transactions
contemplated hereby.
(h) Other Consents. Seller shall have received any required
consents to the transactions contemplated hereby from the
other party to any contract, instrument or commitment to which
Seller is a party, other than those failure to receive which
would not have a material adverse effect on the Acquired
Assets.
(i) No Injunction. There shall not be in effect any injunction
restricting or prohibiting the consummation of the
transactions contemplated hereby.
(j) Purchase Price. Purchaser shall have delivered to Seller the
Purchase Price.
(k) Legal Opinion. Purchaser shall have delivered to Seller an
opinion of counsel to Purchaser, dated the Closing Date,
substantially in the form of Exhibit G.
(l) Waiver by MCI Lenders. Metris Companies Inc. shall have received,
and delivered to Seller, the Bank Waiver.
ARTICLE 7 - INDEMNIFICATION
7.1 Seller's Indemnification Obligations. Seller shall indemnify and hold
harmless, Purchaser and its Affiliates and their respective officers,
directors and employees, from and against any and all Losses (as
hereinafter defined) arising from or relating to: (i) the inaccuracy of
any representation or the breach of any warranty of Seller contained in
this Agreement or the Assignment and Assumption Agreement; or (ii) the
failure by Seller to perform any of its covenants contained in this
Agreement or the Assignment and Assumption Agreement.
7.2 Purchaser's Indemnification Obligations. Purchaser shall indemnify and
hold harmless, Seller and its Affiliates and their respective officers,
directors and employees, from and against any and all Losses arising
from or relating to: (i) the inaccuracy of any representation or the
breach of any warranty of Purchaser contained in this Agreement or the
Assignment and Assumption Agreement; or (ii) the failure by Purchaser
to perform any of its covenants contained in this Agreement or the
Assignment and Assumption Agreement.
7.3 Definition of Losses. For purposes of this Article 7, the term "Losses"
shall mean any liability, damage, Tax, costs and expenses, including,
without limitation, any attorneys' fees, disbursements and court costs,
in each case reasonably incurred by Purchaser or Seller, as the case
may be.
7.4 Tax Consequences of Indemnification. Purchaser and Seller agree that,
for purposes of computing the amount of any indemnification payment
under this Article 7, any such indemnification payment shall be treated
as an adjustment to the Purchase Price for all Tax purposes.
7.5 Procedures.
(a) Notice of Claims. The parties agree that in case any claim
is made, any suit or action is commenced, or any knowledge is
received of a state of facts which, if not corrected, may
give rise to a right of indemnification for such party
hereunder ("Indemnified Party") from the other party
("Indemnifying Party"), the Indemnified Party will give notice
to the Indemnifying Party as promptly as practicable after
the receipt by the Indemnified Party of notice or knowledge
of such claim, suit, action or state of facts. Notice to the
Indemnifying Party under the preceding sentence shall be
given no later than fifteen (15) days after receipt by the
Indemnified Party of service of process in the event a suit
or action has commenced or thirty (30) days under all other
circumstances. The failure to give prompt notice shall not
relieve an Indemnifying Party of its obligation to indemnify
except to the extent the Indemnifying Party is prejudiced by
such failure. The Indemnified Party shall make available to
the Indemnifying Party and its counsel and accountants at
reasonable times and for reasonable periods, during normal
business hours, all books and records of the Indemnified Party
relating to any such possible claim for indemnification, and
each party hereunder will render to the other such assistance
as it may reasonably require of the other in order to insure
prompt and adequate defense of any suit, claim or proceeding
based upon a state of facts which may give rise to a right of
indemnification hereunder.
The Indemnifying Party shall have the right to
defend, compromise and settle any third party suit, claim or
proceeding in the name of the Indemnified Party to the extent
that the Indemnifying Party may be liable to the Indemnified
Party in connection therewith. The Indemnifying Party shall
notify the Indemnified Party within thirty (30) days of having
been notified pursuant to this Section 7.5(a) if the
Indemnifying Party elects to assume the defense of any such
claim, suit or proceeding and employ counsel. The Indemnified
Party shall have the right to employ its own counsel if the
Indemnifying Party so elects to assume such defense, but the
fees and expenses of such counsel shall be at the Indemnified
Party's expense.
Notwithstanding anything to the contrary set forth in
the preceding paragraph, the Indemnified Party shall have the
right to defend, compromise and settle any third party suit,
claim or proceeding in the name of the Indemnified Party
involving an amount of less than $1,000. The Indemnifying
Party shall have the right to employ its own counsel in such
case, but the fees and expenses of such counsel shall be at
the Indemnifying Party's expense.
(b) Settlement of Claims. The Indemnified Party may at any time
notify the Indemnifying Party of its intention to settle or
compromise any claim, suit or action against the Indemnified
Party without the consent of the Indemnifying Party, provided
that the Indemnifying Party shall have no further liability in
respect thereof.
(c) Subrogation. The Indemnifying Party shall be subrogated to any
claims or rights of the Indemnified Party as against any other
persons with respect to any amount paid by the Indemnifying
Party under this Article 7. The Indemnified Party shall
cooperate with the Indemnifying Party, at the Indemnifying
Party's expense, in the assertion by the Indemnifying Party of
any such claim against such other persons.
(d) Limitations on Indemnification. Notwithstanding anything to
the contrary set forth in this Article 7, Purchaser shall not
be entitled to indemnification for any breach of any
representation or warranty or covenants made by Seller under
this Agreement, unless and until the aggregate amount of all
Losses of Purchaser sustained by reason of such breach(es)
exceeds $200,000 in the aggregate (it being understood and
agreed that $200,000 is intended as a deductible, and Seller
shall be responsible only for Losses in excess of $200,000).
Notwithstanding anything to the contrary set forth in
this Article 7, Seller shall not be entitled to
indemnification for any breach of any representation or
warranty or covenants made by Purchaser under this Agreement,
unless and until the aggregate amount of all Losses of Seller
sustained by reason of such breach(es) exceeds $200,000 in the
aggregate (it being understood and agreed that $200,000 is
intended as a deductible, and Purchaser shall be responsible
only for Losses in excess of $200,000).
(e) Survival of Indemnification Obligations. The obligations of
the parties set forth in this Article 7 shall survive the
Closing Date for a period of one (1) year, except that a claim
for indemnification for which notice was given pursuant to
Section 7.5(a) hereof by an Indemnified Party prior to the end
of such one (1) year period shall survive until such claim is
fully and finally determined, and except that the
indemnification shall continue as to the covenants of Seller
set forth in Sections 5.1(c), 5.1(d), 5.2(e) and 5.2(f) and in
the Assignment and Assumption Agreement and the covenants of
Purchaser set forth in Sections 5.1(c), 5.1(d), 5.2(f) and 5.3
and in the Assignment and Assumption Agreement, as to all of
which no time limitation shall apply.
(f) Exclusive Remedy. (i) Subject to the provisions of Section
7.5(f)(ii), the indemnification provided in this Article 7
shall be the exclusive post-Closing remedy available to each
party and its Affiliates and their respective officers,
directors and employees in connection with any breach of any
representation, warranty, covenant or agreement made by the
other party in this Agreement or the Assignment and Assumption
Agreement, or for any other matter or claim arising under or
in connection with this Agreement, the Assignment and
Assumption Agreement or the transactions contemplated hereby
or thereby.
(ii) The parties agree that damages at law may not be an
adequate remedy for violation of Section 5.2(a), (b), (c) and
(d). The parties, therefore, agree that in the event of any
violation of any of the aforesaid provisions by a party, the
other party shall be entitled to seek appropriate injunctive
relief to prevent the violation of such provision.
ARTICLE 8 - TERMINATION
8.1 Termination By Either Party. Anything contained in this Agreement to
the contrary notwithstanding, this Agreement may be terminated prior to
the Closing Date:
(a) by either Purchaser or Seller if a material breach of
any provision of this Agreement has been committed by
the other party and such breach has not been cured or
waived within fifteen (15) Business Days from the
date of notice from the party alleging the breach;
(b) by the mutual consent of the parties;
(c) by Seller if Purchaser has not delivered to Seller a copy
of the Bank Waiver by May 30,1999; or (d) by Purchaser or
Seller if the Closing Date has not occurred by July 30,
1999.
8.2 Effect of Termination. In the event that this Agreement shall be
terminated pursuant to this Article 8, all further obligations of the
parties under this Agreement (other than Sections 5.1(c), 5.1(d) and
9.6 and the Confidentiality Agreement) shall be terminated without
further liability of any party to the other, provided that nothing
herein shall relieve any party from liability for its breach of this
Agreement.
ARTICLE 9 - MISCELLANEOUS
9.1 Survival of Representations and Warranties. The representations and
warranties of each party contained in this Agreement or in any
certificates or other instruments delivered pursuant to this Agreement
will survive the Closing of the transactions contemplated herein
through the period during which claims for indemnification may be made
pursuant to Article 7.
9.2 Notices. All notices and other communications by Purchaser or Seller
hereunder shall be in writing to the other party and shall be deemed to
have been duly given when delivered in person or to an overnight
courier service, receipt requested, or sent via telecopy transmission,
receipt requested or when posted by the United States registered or
certified mail, with postage prepaid, addressed as follows:
If to Seller: GE Capital Consumer Card Co.
5300 Kings Island Drive
Mason, Ohio 45040
Attn: President
Fax Number: (513) 459-6801
copy to: GE Capital Consumer Card Co.
5300 Kings Island Drive
Mason, Ohio 45040
Attn: General Counsel
Fax Number: (513) 459-6888
and copy to: GE Card Services
1600 Summer Street
Stamford, Connecticut 06905
Attn: General Counsel
Fax Number: (203) 961-5331
If to Purchaser: Direct Merchants Credit Card Bank, N.A.
6909 E. Greenway Parkway, Suite 100
Scottsdale, AZ 85254
Attn: Chairman
Fax Number: (602) 718-4825
copy to: Metris Companies Inc.
600 South Highway 169, Suite 1000
St. Louis Park, MN 55426
Attn: General Counsel
Fax Number: (612) 595-0510
or to such other addresses as a party may from time to time designate
by notice as provided herein, except that notices of change of address
shall be effective only upon actual receipt.
9.3 Assignment. Prior to the Closing, the rights of any party under this
Agreement shall not be assigned or transferred by any party without the
prior written approval of the other party hereto. Upon and following
the Closing, any party may assign any of its rights hereunder, but no
such assignment shall relieve it of its obligations hereunder.
9.4 Entire Agreement. This Agreement, together with the exhibits and
schedules to this Agreement and the Confidentiality Agreement,
constitutes the entire agreement between the parties and supersedes any
other agreement, whether written or oral, that may have been made or
entered into by Seller and Purchaser (or by any officer or officers of
any of such parties) relating to the matters contemplated hereby.
9.5 Amendments and Waivers. This Agreement may be amended, modified,
superseded, or canceled, and any of the terms, representations,
warranties or covenants hereof may be waived, only by written
instrument executed by each of the parties or, in the case of a waiver,
by the party waiving compliance. In the course of the planning and
coordination of this Agreement, written documents have been exchanged
between the parties. Such written documents shall not be deemed to
amend or supplement this Agreement. The failure of any party at any
time or times to require performance of any provision hereof shall in
no manner affect the right at a later time to enforce the same. No
waiver by any party of any condition or of any breach of any term,
representation, warranty or covenant under this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be deemed to
be or construed as a further or continuing waiver of any other
condition or of any breach of any such condition of breach or waiver of
any other condition or of any breach of any other term, representation,
warranty or covenant under this Agreement.
9.6 Expenses. The parties will each bear their own legal, accounting and
other costs in connection with the transactions contemplated hereby,
including taxes, if any, which are imposed upon a party attributable to
its activities hereunder, except as otherwise specified in this
Agreement.
9.7 Captions; Counterparts. The captions in this Agreement are for
convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement. This
Agreement may be executed in two or more counterparts, each of which
shall be an original, but all of which together shall constitute one
and the same instrument.
9.8 Governing Law. This Agreement shall be governed by and construed and
interpreted in accordance with the internal laws of the State of New
York, without regard to principles of conflict of laws.
9.9 Severability. If any provision of this Agreement or portion thereof is
held invalid, illegal, void or unenforceable by reason of any rule of
law, administrative or judicial provision or public policy, such
provision shall be ineffective only to the extent invalid, illegal,
void or unenforceable, and the remainder of such provision and all
other provisions of this Agreement shall nevertheless remain in full
force and effect.
<PAGE>
IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to
be duly executed as of the date first above written.
GE CAPITAL CONSUMER CARD CO., Seller
By: /s/ Laurie Malone
Title: Senior Vice President
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION, Purchaser
By: /s/ Jean C. Benson
Title: CFO & Controller
May 17, 1999
Mr. Ronald N. Zebeck
Metris Companies Inc.
600 South Highway 169
Suite 1800
St. Louis Park, Minnesota 55426
Dear Ron:
Metris Companies Inc. (the "Company") desires to provide you
with incentives to continue to serve the Company as a key employee. We are thus
pleased to inform you that in consideration of your continued services as a key
employee, the Company has decided to compensate you by providing to you a loan
and certain other benefits specified in this letter (the "Agreement"), subject
to the terms and conditions set forth below:
1. Retention Consideration.
(a) Loan. The Company will loan you cash in the principal
amount of $5,000,000 (the "Loan") upon your execution and delivery to
the Company a copy of this Agreement and in the form attached hereto as
Exhibit A.
(b) Special Interest Bonus Payment. If you remain employed by
the Company until the fifth anniversary of the date the Loan is made,
or if your employment by the Company is terminated before the fifth
anniversary date of the Loan, on account of your death or disability
(as determined by the Compensation Committee of the Company's Board of
Directors in its sole and absolute discretion), or if you are
terminated by the Company for any reason other than Cause (defined
below), you will receive a cash payment, ("Special Interest Bonus
Payment") equal to (i) the amount of the interest accrued on the Loan
(the "Interest Amount"); plus (ii) plus the gross-up of taxes;
including federal, state and local income taxes and social security
taxes payable, with respect to your receipt of the Interest Amount. For
purposes of the preceding sentence, it shall be assumed that you are
subject to the highest marginal tax rates. The computation of any
amounts payable hereunder shall be approved by the Company's Chief
Financial Officer, and such computation shall be binding upon the
parties.
If your employment is terminated because of your death, the
Special Interest Bonus Payment shall be made to your estate or any
other person who succeeds to your liabilities under the Loan.
(c) Option Reload. It is our understanding that as partial
payment for the exercise price and taxes associated with your exercise
of all or a portion of the options presently held by you to purchase
656,075 shares of the Company's stock (the "Original Option"), you will
instruct the Company to withhold a designated number of whole shares of
Company stock which would otherwise have been delivered to you pursuant
to such exercise (the "Withheld Shares"). On the date of each exercise
of the Original Option, you will be granted a new non-qualified option
under the Metris Companies Inc. Long Term Incentive and Stock Option
Plan (the "LTIP") to purchase that number of whole shares of Company
stock equal to the number of Withheld Shares (a "Replacement Option") .
The exercise price under such Replacement Option shall be the fair
market value (as defined in the LTIP) of the Withheld Shares on the
date of exercise of the Original Option with respect to which such
Replacement Option is granted. Each Replacement Option shall become
exercisable on the fifth anniversary of its date of grant, provided,
however, that at any such date you have retained ownership of that
number of shares of the Company's stock at least equal to twenty-five
percent of the aggregate number of shares received by you upon exercise
of the Original Options and any Replacement Options. If prior to the
fifth anniversary of the grant of any Replacement Option you no longer
own at least the number of shares of Company stock described in the
immediately preceding sentence, you will forfeit any remaining
unexercised Replacement Options. The exercisability of each Replacement
Option also is expressly conditioned upon your continued employment
with the Company (or its affiliates) through the fifth anniversary of
the date of your last exercise of the Original Option exercise, unless
your employment is terminated prior to such time (i) by the Company for
any reason (other than for Cause), or (ii) by reason of your death or
disability (as determined by the Compensation Committee of the
Company's Board of Directors in its sole and absolute discretion). Each
Replacement Option shall be subject to such additional terms and
conditions, not inconsistent with the terms and conditions of this
Agreement, as may be provided in the LTIP and standard option agreement
under the LTIP.
(d) Restricted Stock. You have been awarded 100,000 shares of
Restricted Company stock (the "Restricted Stock"), that until March 31,
2004 shall be non-transferable and forfeitable to the Company if your
employment is terminated prior to that date (i) by the Company for
Cause or (ii) by you for any reason other than your death or disability
(as determined by the Compensation Committee of the Company's Board of
Directors in its sole and absolute discretion). Failure to satisfy the
foregoing condition shall result in the complete forfeiture of the
Restricted Stock. The Restricted Stock shall be subject to additional
terms and conditions, not inconsistent with the terms of this Agreement
as provided in the standard restricted stock agreement.
2. Definitions. For purposes of this Agreement, "Cause" shall mean any
of the following:
(a) your material breach of your employment duties
and responsibilities (other than as a result of incapacity due
to physical or mental illness) which is demonstrably willful
and deliberate on you part, which is committed in bad faith or
without reasonable belief that such breach is in the best
interests of the Company and which is not remedied within a
reasonable period of time after receipt of written notice from
the Company specifying such breach;
(b) your intentional act of fraud, embezzlement or
theft in connection with the your duties in the course of your
employment with the Company or any prior employment, or your
admission or conviction of a felony or of any crime involving
moral turpitude, fraud, embezzlement, theft or
misrepresentation;
(c) your gross negligence or willful misconduct in
performing your duties which, if curable, has not been cured
within 10 days of delivery by the Company to you of written
notice of such gross negligence or willful misconduct; or
(d) any violation in any material respect of any
statutory or common law duty of loyalty to the Company or any
of its affiliates which, if curable, has not been cured within
10 days of delivery by the Company to you of written notice of
such violation.
3. Continued Employment. This Agreement is not a contract of
employment. Nothing expressed or implied in this Agreement shall create any
right or duty of your continued employment by the Company, or its affiliates or
the successors of the Company or its affiliates . The Company reserves all
rights to cause your employment to be terminated at any time with or without
Cause.
4. Unfunded Agreement. The Company's obligations under this Agreement
shall be unfunded. Neither the Company nor any of its affiliates shall be
required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any award under this Agreement.
5. Successors Bound. The rights and obligations of the Company
hereunder shall inure to the benefit of and be binding upon the successors of
the Company.
6. Non-Assignability. It is a condition of this Agreement that no right
or interest granted to you pursuant to this Agreement shall be assignable or
transferable in whole or in part, either directly or by operation of law or
otherwise, including, but not by way of limitation, by execution, levy,
garnishment, attachment, pledge or bankruptcy, but excluding any rights or
interests arising by reason of mental incompetency, and no right or interest
granted to you pursuant to this Agreement shall be liable for, or subject to,
any of your obligations or liabilities, including claims for alimony or the
support of any spouse or child; provided, however, that in the event of your
death, any payments then due and owing will be made when due to the legal
representative of your estate.
7. Notices and Other Documents. All payments, requests, notices and the
like may be made to you by mailing the same to you at the address set forth
below or at such other address as you may file in writing with the Company for
that purpose. Notices, requests and the like sent by you to the Company shall be
sufficient if mailed to Metris Companies Inc., 600 South Highway 169, Suite
1800, St. Louis Park, MN 55426, Attention: Senior Vice President, Human
Resources, or to such other address as the Company may furnish to you for this
purpose from time to time in writing.
8. Employment Taxes. All payments made under this Agreement shall be
subject to withholding tax, other employment taxes and other withholds and
deductions as required by applicable law or regulation, as in effect from time
to time.
9. Term of Agreement. This Agreement shall have a term expiring on the
fifth anniversary of the date of (i) this Agreement, or (ii) your last exercise
of the Original Option, whichever is later, at which time it shall be of no
further force or effect, except to the extent that rights of payment have
accrued to you hereunder prior to such date.
10. Governing Law/Jurisdiction. The substantive law (and not the law of
conflicts) of the State of Minnesota will govern all questions concerning the
construction, validity and interpretation of this Agreement and the performance
of the obligations imposed by this Agreement. The parties hereby waive their
rights to request or demand a trial by jury in the event controversy arises
under this Agreement.
11. Entire Agreement. Except as otherwise provided herein, this
Agreement sets forth the entire agreement and understanding of the parties
relating to the subject matter hereof, and supersedes all prior agreements,
arrangements and understandings, written or oral, relating to the subject matter
hereof. No representation, promise or inducement has been made by either party
that is not embodied in this Agreement, and neither party shall be bound by or
liable for any illegal representation or promise of inducement not so set forth.
12. Amendments. This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof may be waived,
only by a written instrument executed by the parties hereto, or in the case of a
waiver, by the party waiving compliance. The failure of a party at any time or
times to require performance of any provision hereof shall in no manner affect
the right of such party at a later time to enforce the same. No waiver by either
party of the breach of any term or covenant contained in this Agreement, whether
by conduct or otherwise, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach, or a waiver of
the breach of any other term or covenant contained in this Agreement.
13. Headings. The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
If the foregoing correctly sets forth your understanding of
the Agreement between us, please sign both copies of this Agreement in the place
indicated below and return one copy in us.
Very truly yours,
Metris Companies Inc.
By: /s/ David D. Wesselink
Name: David D. Wesselink
Title: Executive Vice President & C.F.O.
Agreed to this 17th day of May, 1999
/s/ Ronald N. Zebeck
- -------------------------------
Ronald N. Zebeck
Exhibit 11
METRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Earnings Per Share
<TABLE>
In thousands, except per share amounts Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
BASIC:
<S> <C> <C> <C> <C>
Net (loss)/income applicable to common
stockholders ............................... $(129,369) $ 12,400 $(112,254) $ 23,624
Weighted average number of common shares
outstanding ................................ 38,570 38,450 38,548 38,450
Net (loss)/income per share ..................... $ (3.35) $ .32 $ (2.91) $ .61
DILUTED:
Net (loss)/income applicable to common
stockholders ............................... $(129,369) $ 12,400 $(112,254) $ 23,624
Weighted average number of common shares
outstanding ................................ 38,570 38,450 38,548 38,450
Net effect of assumed exercise of stock options
based on treasury stock method using average
market price ............................... -- 1,514 -- 1,426
------ ------ ------ ------
38,570 39,964 38,548 39,876
====== ====== ====== ======
Net (loss)/income per share ..................... $ (3.35) $ .31 $ (2.91) $ .59
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001021061
<MULTIPLIER> 1,000
<NAME> Metris Companies Inc.
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 23,035
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 50,148
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,148,319
<ALLOWANCE> 475,028
<TOTAL-ASSETS> 1,338,700
<DEPOSITS> 315,373
<SHORT-TERM> 39,000
<LIABILITIES-OTHER> 225,240
<LONG-TERM> 200,893
0
315,377
<COMMON> 386
<OTHER-SE> 242,431
<TOTAL-LIABILITIES-AND-EQUITY> 1,338,700
<INTEREST-LOAN> 82,112
<INTEREST-INVEST> 2,475
<INTEREST-OTHER> 812
<INTEREST-TOTAL> 85,399
<INTEREST-DEPOSIT> 2,624
<INTEREST-EXPENSE> 19,436
<INTEREST-INCOME-NET> 85,399
<LOAN-LOSSES> 55,073
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 200,461
<INCOME-PRETAX> 83,155
<INCOME-PRE-EXTRAORDINARY> 50,142
<EXTRAORDINARY> 50,808
<CHANGES> 0
<NET-INCOME> (666)
<EPS-BASIC> (2.91)
<EPS-DILUTED> (2.91)
<YIELD-ACTUAL> 17.60
<LOANS-NON> 0
<LOANS-PAST> 201,168
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 393,283
<CHARGE-OFFS> 268,387
<RECOVERIES> 16,136
<ALLOWANCE-CLOSE> 475,028
<ALLOWANCE-DOMESTIC> 475,028
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
