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 September 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 October 31, 1999, 38,597,526 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
<PAGE>
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
September 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.............23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.........................................38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................39
Item 2. Changes in Securities..............................................39
Item 3. Defaults Upon Senior Securities....................................39
Item 4. Submission of Matters to a Vote of Security Holders................39
Item 5. Other Information..................................................39
Item 6. Exhibits and Reports on Form 8-K...................................39
Signatures.........................................................40
<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>
September 30, December 31,
1999 1998
------------------------
Assets:
<S> <C> <C>
Cash and due from banks ................................... $ 32,055 $ 22,114
Federal funds sold ........................................ 34,800 15,060
Short-term investments .................................... 61,436 173
---------- ----------
Cash and cash equivalents ............................ 128,291 37,347
---------- ----------
Retained interests in loans securitized ................... 1,516,310 753,469
Less: Allowance for loan losses ..................... 553,400 393,283
---------- ----------
Net retained interests in loans securitized .......... 962,910 360,186
---------- ----------
Loans held for securitization/credit card loans ........... 29,462 3,430
Property and equipment, net ............................... 51,077 21,982
Accrued interest and fees receivable ...................... 14,002 6,009
Prepaid expenses and deferred charges ..................... 58,874 59,104
Deferred income taxes ..................................... 185,221 153,021
Customer base intangible .................................. 89,879 81,892
Other receivables due from credit card
securitizations, net ................................... 233,856 185,935
Other assets .............................................. 58,900 36,813
---------- ----------
Total assets ......................................... $1,812,472 $ 945,719
========== ==========
Liabilities:
Deposits .................................................. $ 588,297 $ --
Debt ...................................................... 344,787 310,896
Accounts payable .......................................... 73,886 19,091
Current income taxes payable .............................. 11,411 31,783
Deferred income ........................................... 154,867 124,892
Accrued expenses and other liabilities .................... 49,905 26,075
---------- ----------
Total liabilities .................................... 1,223,153 512,737
---------- ----------
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, 865,699 shares issued
and outstanding ...................................... 322,473 --
Common stock, par value $.01 per share;
100,000,000 shares authorized, 38,595,538 and
38,519,500 shares issued and outstanding, respectively 386 193
Paid-in capital ........................................... 129,767 107,615
Retained earnings ......................................... 136,693 124,074
---------- ----------
Total stockholders' equity ........................... 589,319 432,982
---------- ----------
Total liabilities and stockholders' equity ........... $1,812,472 $ 945,719
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Interest Income:
<S> <C> <C> <C> <C>
Credit card loans and retained
interests in loans securitized $ 66,337 $ 28,234 $ 148,449 $ 80,494
Federal funds sold ................ 915 197 3,390 977
Other ............................. 683 133 1,495 902
--------- --------- --------- ---------
Total interest income ........ 67,935 28,564 153,334 82,373
Interest expense .................. 15,725 8,902 35,161 21,733
--------- --------- --------- ---------
Net Interest Income ............... 52,210 19,662 118,173 60,640
Provision for loan losses ......... 67,052 17,154 122,125 58,586
--------- --------- --------- ---------
Net interest (expense) income
after provision for loan
losses ......................... (14,842) 2,508 (3,952) 2,054
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ............. 89,077 30,499 240,156 95,454
Credit card fees, interchange
and other credit card income . 38,368 18,961 83,597 47,707
Fee-based services revenues ....... 44,636 27,364 123,481 80,154
--------- --------- --------- ---------
172,081 76,824 447,234 223,315
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses .......... 19,103 8,783 70,841 31,898
Employee compensation ............. 34,184 12,940 85,101 42,612
Data processing services and
communications .............. 14,135 8,822 36,746 25,792
Third-party servicing expense ..... 3,515 2,895 11,440 7,953
Warranty and debt waiver
underwriting and claims
servicing expense ........... 6,515 3,059 14,979 8,479
Credit card fraud losses .......... 1,717 1,034 3,830 3,354
Other ............................. 26,358 14,162 85,478 39,231
--------- --------- --------- ---------
105,527 51,695 308,415 159,319
--------- --------- --------- ---------
Income Before Income Taxes and
Extraordinary Loss ........... 51,712 27,637 134,867 66,050
Income taxes ...................... 20,529 10,641 53,542 25,430
--------- --------- --------- ---------
Income Before Extraordinary Loss .. 31,183 16,996 81,325 40,620
Extraordinary loss from early
extinguishment of debt ...... -- -- 50,808 --
--------- --------- --------- ---------
Net Income ........................ 31,183 16,996 30,517 40,620
Preferred stock dividends-Series B -- -- 7,506 --
Convertible preferred stock
dividends-Series C ............. 7,182 -- 9,649 --
Adjustment for the retirement of
Series B preferred stock .... -- -- 101,615 --
--------- --------- --------- ---------
Net Income (Loss) Applicable To
Common Stockholders ............ $ 24,001 $ 16,996 $ (88,253) $ 40,620
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
Earnings per share:
<S> <C> <C> <C> <C>
Basic-income (loss) before
extraordinary loss ..... $ .62 $ .44 $ (.97) $ 1.06
Basic-extraordinary loss ... -- -- (1.32) --
Basic-net income (loss) .... .62 .44 (2.29) 1.06
Diluted-income (loss) before
extraordinary loss ..... .54 .42 (.97) 1.02
Diluted-extraordinary loss . -- -- (1.32) --
Diluted-net income (loss) .. .54 .42 (2.29) 1.02
Shares used to compute earnings
per share:
Basic ........................... 38,585 38,461 38,561 38,454
Diluted ......................... 58,077 40,126 38,561 39,947
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Total
Preferred Common Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .. $ -- $ 192 $ 107,059 $ 68,787 $ 176,038
Net income ............... -- -- -- 40,620 40,620
Issuance of common stock
under employee benefit
plans ................... -- -- 272 -- 272
Cash dividends ........... -- -- -- (574) (574)
--------- --------- --------- --------- ---------
Balance at September 30, 1998 . $ $ 192 $ 107,331 $ 108,833 $ 216,356
========= ========= ========= ========= =========
Balance at December 31, 1998 .. $ 201,100 $ 193 $ 107,615 $ 124,074 $ 432,982
Net income ............... -- -- -- 30,517 30,517
Issuance of common stock
under employee benefit
plans ................ -- -- 1,591 -- 1,591
Cash dividends ........... -- -- -- (829) (829)
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 ...... 9,563 -- -- (9,563) --
--------- --------- --------- --------- ---------
Balance at September 30, 1999 . $ 322,473 $ 386 $ 129,767 $ 136,693 $ 589,319
========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Operating Activities:
Net income ......................................... $ 30,517 $ 40,620
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss from early extinguishment
of debt ................................... 50,808 --
Depreciation and amortization ................. 56,566 33,428
Change in allowance for loan losses ........... 160,117 106,780
Changes in operating assets and liabilities:
Accrued interest and fees receivable ...... (7,993) (987)
Prepaid expenses and deferred charges ..... (43,148) (30,216)
Deferred income taxes ..................... (32,200) (48,429)
Accounts payable and accrued expenses ..... 82,875 (2,378)
Other receivables due from credit card
securitizations, net ................. (49,713) (75,202)
Current income taxes payable .............. (20,372) 7,060
Deferred income ........................... 29,975 19,909
Other ..................................... (33,318) (10,969)
----------- -----------
Net cash provided by operating activities .......... 224,114 39,616
----------- -----------
Investing Activities:
Proceeds from/repayments of securitized loans ...... 581,161 590,928
Net loans originated or collected .................. (247,027) (599,322)
Credit card portfolio acquisition .................. (1,156,673) (108,164)
Additions to premises and equipment ................ (33,581) (8,640)
----------- -----------
Net cash used in investing activities .............. (856,120) (125,198)
----------- -----------
Financing Activities:
Net (decrease) increase in debt .................... 133,891 70,896
Net increase in deposits ........................... 588,297 --
Cash dividends paid ................................ (829) (574)
Net increase in equity ............................. 1,591 272
----------- -----------
Net cash provided by financing activities .......... 722,950 70,594
----------- -----------
Net increase (decrease) in cash and cash equivalents 90,944 (14,988)
Cash and cash equivalents at beginning of period ... 37,347 48,223
----------- -----------
Cash and cash equivalents at end of period ......... $ 128,291 $ 33,235
=========== ===========
</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 accounts 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 $146.5 million and $409.4
million for the three and nine month periods ended September 30, 1999,
respectively, compared to $117.6 million and $331.6 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 nine month periods ended September 30,
1999 and 1998, was $15.9 million and $8.5 million, respectively. Cash paid for
income taxes for the same periods was $105.7 million and $66.8 million,
respectively.
The statement of cash flows for the nine month period ended September 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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income before extraordinary items .......... $ 31,183 $ 16,996 $ 81,325 $ 40,620
Preferred dividends - Series B ............. -- -- 7,506 --
Preferred dividends - Series C ............. 7,182 -- 9,649 --
Adjustment for the retirement of Series B
preferred stock ....................... -- -- 101,615 --
--------- --------- --------- ---------
Net income (loss) applicable to common
stockholders before extraordinary items 24,001 16,996 (37,445) 40,620
Extraordinary loss from the early
extinguishment of debt ................ -- -- 50,808 --
--------- --------- --------- ---------
Net income (loss) applicable to common
stockholders .......................... $ 24,001 $ 16,996 $ (88,253) $ 40,620
========= ========= ========= =========
Weighted average common shares outstanding . 38,585 38,461 38,561 38,454
Adjustments for dilutive securities:
Assumed exercise of outstanding stock
options(1) .............................. 2,366 1,665 -- 1,493
Assumed conversion of convertible preferred
stock(1) .............................. 17,126 -- -- --
--------- --------- --------- ---------
Diluted common shares ...................... 58,077 40,126 38,561 39,947
========= ========= ========= =========
(1) For the nine month period ended September 30, 1999, there were options and
convertible preferred stock outstanding to purchase 1.9 million and 7.8 million
common shares. These potential common shares have been excluded from the
computation of diluted earnings per share because their inclusion would have
been anti-dilutive.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Earnings per share:
Basic - income (loss) before
extraordinary loss ................. $ .62 $ .44 $ (.97) $ 1.06
Basic - extraordinary loss ............. -- -- (1.32) --
Basic - net income (loss) .............. .62 .44 (2.29) 1.06
Diluted - income (loss) before
extraordinary loss ................. .54 .42 (.97) 1.02
Diluted - extraordinary loss ........... -- -- (1.32) --
Diluted - net income (loss) ............ .54 .42 (2.29) 1.02
</TABLE>
<PAGE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period .......... $475,028 $324,157 $393,283 $244,084
Allowance related to assets acquired, net 10,250 -- 26,293 1,378
Provision for loan losses ............... 67,052 17,154 122,125 58,586
Provision for loan losses (1) ........... 146,491 117,582 409,371 331,554
Loans charged-off ....................... 153,672 112,390 422,059 295,480
Recoveries .............................. 8,251 4,361 24,387 10,742
-------- -------- -------- --------
Net loan charge-offs .................... 145,421 108,029 397,672 284,738
-------- -------- -------- --------
Balance at end of period ................ $553,400 $350,864 $553,400 $350,864
======== ======== ======== ========
</TABLE>
(1) Amounts are included in "Net securitization and credit card servicing
income."
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 were converted to the Direct Merchants Bank platform in October
of 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 Conduits and jumbo certificates of
deposit issued by 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.
<TABLE>
Three Months Ended September 30,
1999
Consumer
Credit Fee-Based
Products Services Reconciliation (a) Consolidated
(In thousands)
<S> <C> <C> <C> <C>
Interest income $ 318,131 $ 1,235 $ (251,431)(b) $ 67,935
Interest expense 93,742 -- (78,017)(c) 15,725
---------- ---------- ---------- ----------
Net interest
income ..... 224,389 1,235 (173,414) 52,210
Other income ... 100,522 44,636 26,923 172,081
Total income ... 418,653 45,871 (224,508) 240,016
Income before
income taxes 105,143(d) 24,761(d) (78,192) (e) 51,712
Total assets ... $6,672,130 $ 97,316 $(4,956,974) $1,812,472
</TABLE>
<TABLE>
Three Months Ended September 30,
1998
Consumer
Credit Fee-Based
Products Services Reconciliation(a) Consolidated
(In thousands)
<S> <C> <C> <C> <C>
Interest income $ 187,715 $ 143 $ (159,294)(b) $ 28,564
Interest expense 64,516 -- (55,614)(c) 8,902
----------- ----------- ----------- -----------
Net interest
income ..... 123,199 143 (103,680) 19,662
Other income ... 63,362 27,364 (13,902) 76,824
Total income ... 251,077 27,507 (173,196) 105,388
Income before
income taxes . 46,456 (d) 20,000(d) (38,819)(e) 27,637
Total assets ... $ 4,216,310 $ 53,597 $(3,595,440)(f) $ 674,467
</TABLE>
<PAGE>
<TABLE>
Nine Months Ended September 30,
1999
Consumer
Credit Fee-Based
Products Services Reconciliation (a) Consolidated
(In thousands)
<S> <C> <C> <C> <C>
Interest income .. $ 824,900 $ 2,995 $(674,561) (b) $ 153,334
Interest expense . 234,847 (199,686) (c) 35,161
---------- ---------- ---------- -----------
Net interest
income ....... 590,053 2,995 (474,875) 118,173
Other income ..... 258,249 123,481 65,504 447,234
Total income ..... 1,083,149 126,476 (609,057) 600,568
Income before
income taxes
and extra-
ordinary loss .. 284,928(d) 68,704(d) (218,765)(e) 134,867
Total assets ..... $6,672,130 $ 97,316 $(4,956,974)(f) $1,812,472
</TABLE>
<TABLE>
Nine Months Ended September 30,
1998
Consumer
Credit Fee-Based
Products Services Reconciliation(a) Consolidated
(In thousands)
<S> <C> <C> <C> <C>
Interest income $ 533,721 $ 1,573 $ (452,921)(b) $ 82,373
Interest expense 172,385 (150,652)(c) 21,733
----------- ----------- ----------- -----------
Net interest
income ..... 361,336 1,573 (302,269) 60,640
Other income ... 172,446 80,154 (29,285) 223,315
Total income ... 706,167 81,727 (482,206) 305,688
Income before
income taxes . 124,858(d) 56,780(d) (115,588)(e) 66,050
Total assets ... $ 4,216,310 $ 53,597 $(3,595,440)(f) $ 674,467
</TABLE>
(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 $1.2 million, $0.1 million, $3.0 million and $1.6 million of
intercompany interest received by the fee-based services segment from the
consumer credit products segment for the three months ended September 30, 1999
and 1998, and the nine months ended September 30, 1999 and 1998, respectively.
(c) The reconciliation to consolidated owned interest expense includes the
elimination of $1.2 million, $0.1 million, $3.0 million, and $1.6 million of
intercompany interest paid by the consumer credit products segment to the
fee-based services segment for the three months ended September 30, 1999 and
1998 and the nine months ended September 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 $2.5 million, $0.9 million, $3.9 million and $1.4 million for
the three months ended September 30, 1999 and 1998 and the nine months ended
September 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 November 3, 1999, the Company declared a cash dividend in the amount of
$.01 per share, aggregating approximately $0.6 million, payable on November 22,
1999, to shareholders of record as of the close of business on November 12,
1999.
NOTE 8 - DEBT
The Company has a $200 million revolving credit facility maturing in June
of 2003 and a $100 million term loan maturing June of 2001, collectively (the
"Credit Facilities") with a syndicate of banks and money market mutual funds. At
September 30, 1999, the Company was in compliance with all financial covenants
of these faclities. At September 30, 1999 and December 31, 1998, the Company had
outstanding borrowings of $100 million and $110 million, respectively, under the
Credit Facilities. The weighted average interest rates on the borrowings were
7.9% at September 30, 1999 and December 31, 1998.
On July 15, 1999, the Company privately issued and sold $150 million of
10.125% Senior Notes due 2006 (the "Senior Notes due 2006") pursuant to the
144(a) exemption of the Securities Act of 1933, as amended. The proceeds were
utilized to repay borrowings under the Credit Facility and 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 Credit Facilities. The guarantee is an
unsecured obligation of the Guarantor and ranks pari passu with all existing and
future unsubordinated indebtedness.
Beginning in the first quarter 1999, Direct Merchants Bank began issuing
certificates of deposit ("CDs"). These CDs are issued through third party
registered deposit brokers in increments of $100,000. As of September 30, 1999,
$584.8 million of CDs were outstanding with maturities ranging from six months
to two years with fixed interest rates ranging from 5.0% to 6.35%.
The Company has $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 or bank credit facility. 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.
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
September 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ................ $ (430) $ 151 $ 128,570 $ -- $ 128,291
Net retained interests in loans
securitized ........................... (1,435) -- 964,345 -- 962,910
Loans held for securitization/credit card
loans ................................. 16,099 -- 13,363 -- 29,462
Property and equipment, net .............. -- 29,176 21,901 -- 51,077
Prepaid expenses and deferred charges .... (136) 22,135 36,875 -- 58,874
Deferred income taxes .................... (683) 24,975 160,929 -- 185,221
Customer base intangible ................. -- -- 89,879 -- 89,879
Other receivables due from credit card
securitizations, net .................. 6 -- 233,850 -- 233,856
Other assets ............................. 13,805 7,840 51,257 -- 72,902
Investment in subsidiaries ............... 1,148,213 1,058,070 -- (2,206,283) --
----------- ----------- ----------- ----------- -----------
Total assets ............................. $ 1,175,439 $ 1,142,347 $ 1,700,969 $(2,206,283) $ 1,812,472
=========== =========== =========== =========== ===========
Liabilities:
Deposits/Debt ............................ $ 534,798 $ (91,336) $ 489,622 $ -- $ 933,084
Accounts payable ......................... 1,430 13,994 58,462 -- 73,886
Current income taxes payable ............. 17,254 (16,269) 10,426 -- 11,411
Deferred income .......................... 24,775 54,671 75,421 -- 154,867
Accrued expenses and other liabilities ... 7,863 33,074 8,968 -- 49,905
----------- ----------- ----------- ----------- -----------
Total liabilities ........................ 586,120 (5,866) 642,899 -- 1,223,153
Total stockholders' equity ............... 589,319 1,148,213 1,058,070 (2,206,283) 589,319
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,175,439 $ 1,142,347 $ 1,700,969 $(2,206,283) $ 1,812,472
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 1998
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies 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/credit card loans 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 September 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Interest Income (Expense) $ (9,088) $ (385) $ 61,683 $ -- $ 52,210
Provision for loan losses ............. 177 -- 66,875 -- 67,052
--------- --------- --------- ---------
Net Interest Expense After Provision
for Loan Losses .................... (9,265) (385) (5,192) -- (14,842)
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................... 1,229 -- 87,848 -- 89,077
Credit card fees, interchange and other
income ............................. 297 366 37,705 -- 38,368
Fee-based services revenues ........... -- 12,297 32,339 -- 44,636
--------- --------- --------- ---------
1,526 12,663 157,892 -- 172,081
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 7,797 11,306 -- 19,103
Employee compensation ................. -- 30,973 3,211 -- 34,184
Data processing services and
communications ..................... -- 2,285 11,850 -- 14,135
Third-party servicing expenses ........ -- (18,651) 22,166 -- 3,515
Warranty and debt waiver underwriting
and claims servicing expenses ...... -- 225 6,290 -- 6,515
Credit card fraud losses .............. 8 -- 1,709 -- 1,717
Other ................................. (758) 4,251 22,865 -- 26,358
--------- --------- --------- ---------
(750) 26,880 79,397 -- 105,527
--------- --------- --------- ---------
Income (Loss) Before Income Taxes and
Equity in Income of Subsidiaries (6,989) (14,602) 73,303 -- 51,712
Income taxes .......................... (2,774) (6,529) 29,832 -- 20,529
Equity in income of subsidiaries 35,398 43,471 -- (78,869) --
--------- --------- --------- --------- ---------
Net Income ............................ $ 31,183 $ 35,398 $ 43,471 $ (78,869) $ 31,183
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended September 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) $ (2,887) $ (6,516) $ 29,065 $ -- $ 19,662
Provision for loan losses ............ (4) -- 17,158 -- 17,154
-------- -------- -------- --------
Net Interest Income (Expense) After
Provision for Loan Losses ......... (2,883) (6,516) 11,907 -- 2,508
-------- -------- -------- --------
Other Operating Income:
Net securitization and credit card
servicing income .................. 2,720 5 27,774 -- 30,499
Credit card fees, interchange and other
income ............................ 3 (1) 18,959 -- 18,961
Fee-based services revenues .......... -- 9,586 17,778 -- 27,364
-------- -------- -------- --------
2,723 9,590 64,511 -- 76,824
-------- -------- -------- --------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 4,713 4,070 -- 8,783
Employee compensation ................. -- 11,669 1,271 -- 12,940
Data processing services and
communications ..................... -- 1,390 7,432 -- 8,822
Third-party servicing expenses ........ -- (13,583) 16,478 -- 2,895
Warranty and debt waiver underwriting
and claims servicing expenses ...... -- 477 2,582 -- 3,059
Credit card fraud losses .............. -- -- 1,034 -- 1,034
Other ................................. 62 4,667 9,433 -- 14,162
-------- -------- -------- --------
62 9,333 42,300 -- 51,695
-------- -------- -------- --------
Income (Loss) Before Income Taxes and
Equity in Income of Subsidiaries (222) (6,259) 34,118 -- 27,637
Income taxes .......................... (85) (2,637) 13,363 -- 10,641
Equity in income of subsidiaries ...... 17,133 20,755 -- (37,888) --
-------- -------- -------- -------- --------
Net Income ............................ $ 16,996 $ 17,133 $ 20,755 $(37,888) $ 16,996
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Nine Months Ended September 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Interest Income (Expense).......... $ (25,256) $ (897) $ 144,326 $ -- $ 118,173
Provision for loan losses ............. 283 121,842 -- 122,125
--------- --------- --------- ---------
Net Interest Income (Expense) After
Provision for Loan Losses .......... (25,539) (897) 22,484 -- (3,952)
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................... 4,644 -- 235,512 -- 240,156
Credit card fees, interchange and other
income ............................. 838 264 82,495 -- 83,597
Fee-based services revenues ........... -- 36,446 87,035 -- 123,481
--------- --------- --------- ---------
5,482 36,710 405,042 -- 447,234
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 26,954 43,887 -- 70,841
Employee compensation ................. -- 76,887 8,214 -- 85,101
Data processing services and
communications ..................... -- 5,459 31,287 -- 36,746
Third-party servicing expenses ........ -- (49,180) 60,620 -- 11,440
Warranty and debt waiver underwriting
and claims servicing expenses -- 2,167 12,812 -- 14,979
Credit card fraud losses .............. 16 -- 3,814 -- 3,830
Other ................................. 490 24,014 60,974 -- 85,478
--------- --------- --------- ---------
506 86,301 221,608 -- 308,415
--------- --------- --------- ---------
Income (Loss) Before Income Taxes and
Equity in Income of Subsidiaries ... (20,563) (50,488) 205,918 -- 134,867
Income taxes .......................... (8,163) (20,243) 81,948 -- 53,542
Equity in income of subsidiaries ...... 93,725 123,970 -- (217,695) --
--------- --------- --------- --------- ---------
Income Before Extraordinary Loss ...... 81,325 93,725 123,970 (217,695) 81,325
Extraordinary loss from the early
extinguishment of debt ............. 50,808 -- -- -- 50,808
--------- --------- --------- --------- ---------
Net Income ............................ $ 30,517 $ 93,725 $ 123,970 $(217,695) $ 30,517
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Nine Months Ended September 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) ......... $ (12,512) $ (10,934) $ 84,086 $ -- $ 60,640
Provision for loan losses ............. 79 -- 58,507 -- 58,586
-------------- ------------ --------------- -----------
Net Interest Income/(Expense) After
Provision for Loan Losses .......... (12,591) (10,934) 25,579 -- 2,054
--------------- ------------- --------------- -----------
Other Operating Income:
Net securitization and credit card
servicing income ................... 9,115 (19) 86,358 -- 95,454
Credit card fees, interchange and other
income ............................. 92 -- 47,615 -- 47,707
Fee-based services revenues ........... -- 26,683 53,471 -- 80,154
-------------- ------------ --------------- -----------
9,207 26,664 187,444 -- 223,315
-------------- ------------ --------------- -----------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 14,133 17,765 -- 31,898
Employee compensation ................. -- 37,860 4,752 -- 42,612
Data processing services and
communications ..................... -- 3,877 21,915 -- 25,792
Third-party servicing expenses ........ (266) (37,419) 45,638 -- 7,953
Warranty and debt waiver underwriting
and claims servicing expenses ...... -- 1,480 6,999 -- 8,479
Credit card fraud losses .............. 18 -- 3,336 -- 3,354
Other ................................. 279 13,310 25,642 -- 39,231
-------------- ------------ --------------- -------------
31 33,241 126,047 -- 159,319
-------------- ------------ --------------- -------------
Income (Loss) Before Income Taxes and
Equity in Income of Subsidiaries .. (3,415) (17,511) 86,976 -- 66,050
Income taxes ......................... (1,315) (7,187) 33,932 -- 25,430
Equity in income of subsidiaries ..... 42,720 53,044 -- (95,764) --
-------------- ------------ --------------- -------------- ----------
Net Income ........................... $ 40,620 $ 42,720 $ 53,044 $ (95,764) $ 40,620
============== ============ =============== ============== ==========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
<S> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities........................................$ (1,432) $ (17,178) $ 242,724 $ 224,114
---------- ----------- ----------- ----------
Investing Activities:
Proceeds from/repayments of securitized loans......... -- -- 581,161 581,161
Net loans originated or collected .................... (14,222) -- (232,805) (247,027)
Credit card portfolio acquisition .................... -- -- (1,156,673) (1,156,673)
Additions to premises and equipment .................. -- (15,077) (18,504) (33,581)
----------- ---------- ----------- -----------
Net cash used in investing activities................ (14,222) (15,077) (826,821) (856,120)
----------- ---------- ----------- -----------
Financing Activities:
Net increase (decrease) in deposits/debt ............. 317,500 (106,357) 511,045 722,188
Cash dividends paid .................................. (829) (804) 804 (829)
Net increase in equity ............................... (296,440) 139,723 158,308 1,591
----------- --------- ----------- -----------
Net cash provided by financing activities ............ 20,231 32,562 670,157 722,950
----------- --------- ----------- -----------
Net increase in cash and cash equivalents ............ 4,577 307 86,060 90,944
Cash and cash equivalents at beginning of
period ............................................ (5,007) (156) 42,510 37,347
----------- --------- ----------- -----------
Cash and cash equivalents at end of period ...........$ (430) $ 151 $ 128,570 $ 128,291
=========== ========= =========== ===========
</TABLE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 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 $ 107,473 $ (8,961) $ (58,896) $ 39,616
--------- --------- --------- ---------
Investing Activities:
Proceeds from/repayments of securitized loans ..... -- -- 590,928 590,928
Net loans originated or collected ................. 8,155 -- (607,477) (599,322)
Credit card portfolio acquisition ................. -- -- (108,164) (108,164)
Additions to premises and equipment ............... -- (6,402) (2,238) (8,640)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities 8,155 (6,402) (126,951) (125,198)
--------- --------- --------- ---------
Financing Activities:
Net increase (decrease) in debt ................... 39,688 (1,454) 32,662 70,896
Cash dividends paid ............................... 12,926 -- (13,500) (574)
Net increase in equity ............................ (170,783) 16,371 154,684 272
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (118,169) 14,917 173,846 70,594
--------- --------- --------- ---------
Net decrease in cash and cash equivalents (2,541) (446) (12,001) (14,988)
Cash and cash equivalents at beginning of period 337 390 47,496 48,223
--------- --------- --------- ---------
Cash and cash equivalents at end of period ........ $ (2,204) $ (56) $ 35,495 $ 33,235
========= ========= ========= =========
</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 September 30,
1999, of which this commentary is a part, and the condensed consolidated
financial statements and related notes thereto.
Results of Operations
Net income for the three months ended September 30, 1999, was $31.2
million, or $.54 per share, up 83% from $17.0 million, or $.42 per share for the
third quarter 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. Fee-based
services revenues continue to contribute to the net income growth due to
continued strong product sales. These increases are largely attributable to the
growth in average managed loans to $6.6 billion for the third quarter 1999 from
$4.1 billion for the third quarter 1998, an increase of 61%, and growth in total
credit card accounts to 3.5 million at September 30, 1999, from 2.5 million at
September 30, 1998.
Net (loss) income applicable to common stockholders for the nine months
ended September 30, 1999, was a loss of $88.3 million, or $2.29 per share, down
from $40.6 million, or $1.02 per share for the first nine months of 1998. Net
loss applicable to common stockholders for the nine months ended September 30,
1999 included 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 reported
in the second quarter 1999. Without this adjustment reported earnings per share
would have been $1.53 per share for the nine month period ended September 30,
1999. 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
$5.7 billion for the nine months ended September 30, 1999, from $3.8 billion for
the same period in 1998, an increase of 50%. In addition, credit card charge
volume was $3.8 billion for the first nine months of 1999, a 39% increase over
the same period in 1998.
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>
September 30, December 31, September 30,
1999 1998 1998
---- ---- ----
(Dollars in thousands)
Period-end balances
Credit card loans:
<S> <C> <C> <C>
Loans held for securitization/credit card loans .......... $ 29,462 $ 3,430 $ 38,916
Retained interests in loans
securitized .......................................... 1,516,310 753,469 546,419
Investors' interests in
securitized loans .................................... 5,139,303 4,558,143 3,657,433
---------- ---------- ----------
Total managed loan portfolio ................................ $6,685,075 $5,315,042 $4,242,768
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Average balances
Credit card loans:
<S> <C> <C> <C> <C>
Loans held for securitization/credit card loans $ 61,588 $ 85,737 $ 61,216 $ 58,636
Retained interests in loans
securitized ............................... 1,269,414 530,625 942,775 511,662
Investors' interests in
securitized loans ......................... 5,257,414 3,466,443 4,679,000 3,228,742
---------- ----------- ---------- ----------
Total managed loan portfolio .................... $6,588,416 $4,082,805 $5,682,991 $3,799,040
========== ========== ========== ==========
</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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Statements of Income
(owned basis):
<S> <C> <C> <C> <C>
Net interest income ............................. $ 52,210 $ 19,662 $ 118,173 $ 60,640
Provision for loan losses ....................... 67,052 17,154 122,125 58,586
Other operating income .......................... 172,081 76,824 447,234 223,315
Other operating expense ......................... 105,527 51,695 308,415 159,319
----------- ----------- ----------- -----------
Income before income taxes
and extraordinary loss .................... $ 51,712 $ 27,637 $ 134,867 $ 66,050
=========== =========== =========== ===========
Adjustments for Securitizations:
Net interest income ............................. $ 173,414 $ 103,680 $ 474,875 $ 302,269
Provision for loan losses ....................... 146,491 117,582 409,371 331,554
Other operating income .......................... (26,923) 13,902 (65,504) 29,285
Other operating expense
----------- ----------- ----------- -----------
Income before income taxes
and extraordinary loss .................... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Statements of Income (managed basis):
Net interest income ............................. $ 225,624 $ 123,342 $ 593,048 $ 362,909
Provision for loan losses ....................... 213,543 134,736 531,496 390,140
Other operating income .......................... 145,158 90,726 381,730 252,600
Other operating expense ......................... 105,527 51,695 308,415 159,319
----------- ----------- ----------- -----------
Income before income taxes
and extraordinary loss .................... $ 51,712 $ 27,637 $ 134,867 $ 66,050
=========== =========== =========== ===========
Other Data:
Owned Basis:
Average interest-earning assets .................... $ 1,458,894 $ 640,776 $ 1,140,608 $ 616,935
Return on average assets* .......................... 7.6% 10.1% 8.4% 8.8%
Return on average total equity* 21.4% 32.0% 21.0% 27.9%
Net interest margin (1) ............................ 14.2% 12.2% 13.9% 13.1%
Managed Basis:
Average interest-earning assets .................... $ 6,716,308 $ 4,107,219 $ 5,819,608 $ 3,845,677
Return on average assets* .......................... 1.8% 1.6% 1.8% 1.4%
Return on average total equity* .................... 21.4% 32.0% 21.0% 27.9%
Net interest margin (1) ............................ 13.3% 11.9% 13.6% 12.6%
(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 nine month periods ended September 30,
1999, was $225.6 million and $593.0 million compared to $123.3 million and
$362.9 million for the same periods in 1998. These increases were primarily due
to a $2.5 billion and $1.9 billion increase in average managed loans over the
comparable periods in 1998.
Managed net interest margin was 13.3% and 13.6% for the three and nine
month periods ended September 30, 1999, respectively, compared to 11.9% and
12.6% for the same periods in 1998. The third 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 months ended September 30, 1999 was
negatively impacted by the GE portfolio having a lower average margin and
increased LIBOR rates. These were slightly offset by the increase in margin from
the Company's spring campaign. Financing costs as a percent of borrowings for
the third quarter and year-to-date periods of 1999 were 6.1% and 6.0%,
respectively, compared with 6.7% and 6.5% 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 nine month periods ended September 30, 1999 and 1998:
Analysis of Average Balances, Interest and Average Yields and Rates
Three Months Ended September 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 .......... $ 73,090 $ 915 5.0% $ 14,306 $ 197 5.5%
Short-term investments ...... 54,802 683 4.9% 10,108 133 5.2%
Credit card loans and
retained interests in loans
securitized ................ 1,331,002 66,337 19.8% 616,362 28,234 18.2%
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets $ 1,458,894 $ 67,935 18.5% $ 640,776 $ 28,564 17.7%
Other assets ................ 690,323 -- -- 370,612 -- --
Allowances for loan losses .. (526,156) -- -- (341,169) -- --
----------- -----------
Total assets ............. $ 1,623,061 -- -- $ 670,219 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 437,861 $ 6,429 5.8% $ -- $ -- --%
Debt ........................ 338,784 9,296 10.9% 345,866 8,902 10.2%
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities .............. $ 776,645 $ 15,725 8.0% $ 345,866 $ 8,902 10.2%
Other liabilities ........... 267,106 -- -- 113,931 -- --
----------- -----------
Total liabilities ........... 1,043,751 -- -- 459,797 -- --
Stockholders' equity ........ 579,310 -- -- 210,422 -- --
----------- -----------
Total liabilities and equity $ 1,623,061 -- -- $ 670,219 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 52,210 14.2% -- $ 19,662 12.2%
Net interest rate spread (2). -- -- 10.5% -- -- 7.5%
Managed Basis
Credit card loans ........... $ 6,588,416 $ 316,533 19.1% $ 4,082,805 $ 187,385 18.2%
Total interest-earning assets 6,716,308 318,131 18.8% 4,107,219 187,715 18.1%
Total interest-bearing
liabilities .............. 6,034,060 92,507 6.1% 3,816,056 64,373 6.7%
Net interest income and
interest margin (1) ...... -- $ 225,624 13.3% -- $ 123,342 11.9%
Net interest rate spread (2). -- -- 12.7% -- -- 11.4%
</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>
Nine Months Ended September 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 .......... $ 94,202 $ 3,390 4.8% $ 23,947 $ 977 5.5%
Short-term investments ...... 42,415 1,495 4.7% 22,690 902 5.3%
Credit card loans and
retained interests in loans
securitized ................ 1,003,991 148,449 19.8% 570,298 80,494 18.9%
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets $ 1,140,608 $ 153,334 18.0% $ 616,935 $ 82,373 17.9%
Other assets ................ 623,956 -- -- 313,897 -- --
Allowances for loan losses .. (476,423) -- -- (311,914) -- --
----------- -----------
Total assets ............. $ 1,288,141 -- -- $ 618,918 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 211,113 $ 9,013 5.7% $ -- $ -- --%
Debt ........................ 313,202 26,148 11.2% 302,946 21,733 9.6%
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities .............. $ 524,315 $ 35,161 9.0% $ 302,946 $ 21,733 9.6%
Other liabilities ........... 245,428 -- -- 121,067 -- --
----------- -----------
Total liabilities ........... 769,743 -- -- 424,013 -- --
Stockholders' equity ........ 518,398 -- -- 194,905 -- --
----------- -----------
Total liabilities and equity $ 1,288,141 -- -- $ 618,918 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 118,173 13.9% -- $ 60,640 13.1%
Net interest rate spread (2) -- -- 9.0% -- -- 8.3%
Managed Basis
Credit card loans ........... $ 5,682,991 $ 820,015 19.3% $ 3,799,040 $ 531,841 18.8%
Total interest-earning assets 5,819,608 824,900 19.0% 3,845,677 533,721 18.6%
Total interest-bearing
liabilities .............. 5,203,314 231,852 6.0% 3,532,950 170,812 6.5%
Net interest income and
interest margin (1) ...... -- $ 593,048 13.6% -- $ 362,909 12.6%
Net interest rate spread (2) -- -- 13.0% -- -- 12.1%
</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 77% and 79% of owned revenues for the three and nine
month periods ended September 30, 1999. The following table presents other
operating income on an owned basis:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Other Operating Income:
<S> <C> <C> <C> <C>
Net securitization and credit
card servicing income .......... $ 89,077 $ 30,499 $240,156 $ 95,454
Credit card fees, interchange and
other income ................... 38,368 18,961 83,597 47,707
Fee-based services revenues ..... 44,636 27,364 123,481 80,154
-------- -------- -------- --------
Total ........................ $172,081 $ 76,824 $447,234 $223,315
======== ======== ======== ========
</TABLE>
Other operating income increased $95.3 million and $223.9 million for the
three and nine month periods ended September 30, 1999, over the comparable
periods in 1998. These increases are primarily due to the $58.6 million and
$144.7 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 nine month periods ended September 30, 1999, credit card fees, interchange
and other income increased $19.4 million and $35.9 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 $17.3 million and
$43.3 million for the three and nine month periods ended September 30, 1999.
These increases are attributed to the Company's debt waiver product and the
increases in membership program revenues resulting from increases in debt waiver
and more account penetration for membership programs.
<TABLE>
Other Operating Expense
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Other Operating Expense:
<S> <C> <C> <C> <C>
Credit card account and other
product solicitation and
marketing expenses ......... $ 19,103 $ 8,783 $ 70,841 $ 31,898
Employee compensation ....... 34,184 12,940 85,101 42,612
Data processing services and
communications ........... 14,135 8,822 36,746 25,792
Third-party servicing expense 3,515 2,895 11,440 7,953
Warranty and debt waiver
underwriting and claims
servicing expense 6,515 3,059 14,979 8,479
Credit card fraud losses .... 1,717 1,034 3,830 3,354
Other ....................... 26,358 14,162 85,478 39,231
-------- -------- -------- --------
Total .................... $105,527 $ 51,695 $308,415 $159,319
======== ======== ======== ========
</TABLE>
Total other operating expenses for the three and nine month periods ended
September 30, 1999 increased $53.8 million and $149.1 million over the
comparable periods in 1998, largely due to costs associated with the growth of
the Company's business activities. Employee compensation increased $21.2 million
and $42.5 million, respectively, for the three and nine month periods ended
September 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 $12.2 million and $46.2 million for the three and nine month periods
ended September 30, 1999 due to increased customer base intangible amortization
resulting from the addition of the PNC and GE portfolios 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 $10.3 million, and $38.9 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 nine months
of 1999.
Income Taxes
The Company's provision for income taxes includes both federal and state
income taxes. Applicable income tax expense was $20.5 million and $53.5 million
for the three and nine month periods ended September 30, 1999 compared to $10.6
million and $25.4 million for the same periods in 1998. This tax expense
represents an effective tax rate of 39.7% and 38.5% for the nine month periods
ended September 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
September 30, 1999, 60% of managed accounts and 53% 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 September 30, 1999, the Company's managed net
charge-off ratio was 8.8% compared to 10.5% for the quarter ended September 30,
1998. For the nine months ended September 30, 1999, the net charge off rate
stood at 9.4% compared to 10.0% for the nine months ended September 30, 1998.
Without the impact of purchase accounting related to acquired portfolios, the
charge-off rate would have been 10.3% and 10.6% for the three and nine month
periods ended September 30, 1999, respectively compared to 10.7% and 10.7% for
the same periods of 1998. The Company's charge-offs have been stable, with
losses between 10% and 11% for the last eight quarters. The Company believes,
consistent with its statistical models and other credit analysis, that this rate
will continue to fluctuate in this range over the next few quarters.
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>
September 30, % of December 31, % of September 30, % of
1999 Total 1998 Total 1998 Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Managed loan portfolio
<S> <C> <C> <C> <C> <C> <C>
$6,685,075 100.0% $5,315,042 100% $4,242,768 100%
Loans contractually
delinquent:
30 to 59 days ... 166,616 2.5% 113,449 2.1% 101,350 2.4%
60 to 89 days ... 116,097 1.7% 75,049 1.4% 71,530 1.7%
90 or more days . 218,034 3.3% 173,812 3.3% 156,377 3.7%
---------- ----- ---------- ----- ---------- -----
Total ......... $ 500,747 7.5% $ 362,310 6.8% $ 329,257 7.8%
========== ===== ========== ===== ========== =====
</TABLE>
The above numbers reflect the continued seasoning of the Company's managed
loan portfolio. Without the impact of purchase accounting related to acquired
portfolios, delinquency rates would have been 8.1%, 7.4% and 7.8%, 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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Owned basis:
<S> <C> <C> <C> <C>
Average loans and retained interests in
loans securitized outstanding ...... $1,331,002 $ 616,362 $1,003,991 $ 570,298
Net charge-offs ....................... 25,541 16,564 66,081 42,226
Net charge-offs as a percentage
of average loans outstanding (1) ... 7.6% 10.7% 8.8% 9.9%
========== ========== ========== ==========
Managed basis:
Average loans outstanding ............. $6,588,416 $4,082,805 $5,682,991 $3,799,040
Net charge-offs ....................... 145,421 108,029 397,672 284,738
Net charge-offs as a percentage of
average loans outstanding(1) ....... 8.8% 10.5% 9.4% 10.0%
========== ========== ========== ==========
(1) Annualized
</TABLE>
<PAGE>
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 nine
month periods ended September 30, 1999 totaled $213.5 million and $531.5
million, respectively, compared to a provision of $134.7 million and $390.1
million for the three and nine month periods ended September 30, 1998. The
increases for the three and nine month periods ended September 30, 1999, as
compared to the three and nine month periods ended September 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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Managed Basis:
<S> <C> <C> <C> <C>
Balance at beginning of period .......... $475,028 $324,157 $393,283 $244,084
Allowance related to assets acquired, net 10,250 -- 26,293 1,378
Provision for loan losses ............... 213,543 134,736 531,496 390,140
Loans charged-off ....................... 153,672 112,390 422,059 295,480
Recoveries .............................. 8,251 4,361 24,387 10,742
-------- -------- -------- --------
Net loan charge-offs .................... 145,421 108,029 397,672 284,738
-------- -------- -------- --------
Balance at end of period ................ $553,400 $350,864 $553,400 $350,864
======== ======== ======== ========
Ending allowance as a percent of ....... 8.3% 8.3% 8.3% 8.3%
======== ======== ======== ========
</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 senior
management.
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, subsidiary bank
deposits, long-term debt issuance, and equity issuance.
Through September 30, 1999 and 1998, the Company had received cumulative
net proceeds of approximately $5.1 billion and $3.7 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 or significantly
limit the Company's ability to grow.
The Company has a $200 million revolving credit facility maturing in June
of 2001 and a $100 million term loan maturing in June of 2003, collectively (the
"Credit Facilities") with a syndicate of banks and money market mutual funds. At
September 30, 1999, the Company was in compliance with all financial covenants
of these facilities. At September 30, 1999 and December 31, 1998, the Company
had outstanding borrowings of $100 million and $110 million, respectively, under
the Credit Facilities. 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 Credit Facilities is higher than the interest rate
under the previous old credit facility due to the Company's lower independent
credit rating.
On July 15, 1999, the Company privately issued and sold $150 million of
10.125% Senior Notes due 2006 (the "Senior Notes due 2006") pursuant to the
144(a) exemption of the Securities Act of 1933, as amended. The net proceeds
were used for repayment of borrowings under the bank credit facility and 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 Credit Facilities.
The guarantee is an unsecured obligation of the Guarantor and ranks pari passu
with all existing and future unsubordinated indebtedness.
Beginning in the first quarter of 1999, Direct Merchants Bank began issuing
jumbo certificates of deposit ("CDs"). These CDs are issued through third party
registered deposit brokers in increments of $100,000. As of September 30, 1999,
$584.8 million of CDs were outstanding with maturities ranging from six months
to two years with fixed interest rates ranging from 5.0% to 6.35%.
In addition to cash flow from operations, asset securitization, subsidiary
bank CDs and the Credit Facilities, 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 third
quarter of 1999, the Lee Company would have owned over 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.
As the portfolio of credit card loans grows, or as the trust and conduit
securitization funding amortize, the Company's funding needs will increase
accordingly. The Company believes that its cash flow from operations, asset
securitization programs, together with the Credit Facilities, 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.
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. The
Validatation Phase was completed in October of 1999 for Mission Critical
systems, and the Implementation Phase for Mission Critical systems has a
targeted completion date of November 30, 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 Complete testing of mission-critical
systems and service providers and
substantially complete implementation.
---------------------------------- --------------------------------------
---------------------------------- --------------------------------------
October 31, 1999 Substantially complete Contingency
Planning and validation for Year 2000
Business Resumption Contingency
Planning.
---------------------------------- --------------------------------------
As of October 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 internal Mission
Critical systems has been completed and implementation has been substantially
completed.
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[R], and Visa[R] 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 substantially completed Year 2000 Business Resumption
Contingency plans.
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, subsidiary bank deposits,
the Company's $300 million bank credit facilities, $250 million in senior notes,
and equity issuance. 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. The $300
million bank credit facilities have pricing that is indexed to the variable
London Interbank Offered Rate ("LIBOR") or a Prime Rate. At September 30, 1999,
approximately 17.1% of the Trust and Conduit funding of securitized receivables
was funded with fixed rate certificates.
Including the impact of interest rate derivative transactions with the
Trust and Conduit funding, in an interest rate environment with rates
significantly below current rates, 86% of the funding for the securitized loan
portfolio is indexed to floating commercial paper and LIBOR rates. In a interest
rate environment with rates significantly above current rates, the potentially
negative impact on earnings of higher interest expense is mitigated by the fixed
rate funding and interest rate cap contracts.
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 $22.0 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 $18.5 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.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Indenture, dated as of July 13, 1999, by and
among the Company, Metris Direct, Inc. and
The Bank of New York, including Form of 10
1/8% Senior Notes due 2006 and Form of
Guarantee (incorporated by reference to
Exhibit 4.1 to the Company's Registration
Statement on Form S-4, filed on September 8,
1999 (File No. 333-86695)).
4.2 Exchange and Registration Rights Agreement,
dated as of July 13, 1999, by and among the
Company, Bear, Stearns & Co. Inc., Chase
Securities Inc., Salomon Smith Barney Inc.
and Barclays Capital Inc., relating to the
new notes (incorporated by reference to
Exhibit 4.2 to the Company's Registration
Statement on Form S-4, filed on September 8,
1999 (File No. 333-86695)).
10.3 Metris Companies Inc. Non-Employee Director
Stock Option Plan (incorporated by reference
to Exhibit 10.3 to the Amendment No. 1 filed
on October 8, 1999, to the Company's
Registration Statement on Form S-4 (File No.
333-86695)).
10.4 Metris Companies Inc. Management Stock
Purchase Plan (incorporated by reference to
Exhibit 10.4 to the Amendment No. 1 filed on
October 8, 1999, to the Company's
Registration Statement on Form S-4 (File No.
333-86695)).
10.5 Metris Companies Inc. Amended and Restated
Annual Incentive Plan for Designated
Corporate Officers (incorporated by
reference to Exhibit 10.5 to the Amendment
No. 1 filed on October 8, 1999, to the
Company's Registration Statement on Form S-4
(File No. 333-86695)).
10.6 Metris Companies Inc. Amended and Restated
Long-Term Incentive and Stock Option Plan
(incorporated by reference to Exhibit 10.6 to
the Amendment No. 1 filed on October 8,
1999, to the Company's Registration
Statement on Form S-4 (File No. 333-86695)).
10.10 Amendment dated as of May 7, 1999, to (a)
the Amended and Restated Credit Agreement,
dated as of June 30, 1998, among the Company
and the lenders named therein, Nationsbank,
N.A., as syndication agent, Deutsche Bank,
as documentation agent, U.S. Bank National
Association, as documentation agent,
Barclays Bank, PLC, as co-agent, and The
Chase Manhattan Bank, as administrative
agent and (b) the Amended and Restated
Pledge Agreement, dated as of June 30, 1998,
among the Company, Metris Direct, Inc. and
The Chase Manhattan Bank (incorporated by
reference to Exhibit to the Amendment No. 1
filed on October 8, 1999, to the Company's
Registration Statement on Form S-4 (File No.
333-86695)).
10.11 Amendment dated as of June 10, 1999, to the
Amended and Restated Credit Agreement, dated
as of June 30, 1998, among the Company and
the lenders named therein, Nationsbank,
N.A., as syndication agent, Deutsche Bank,
as documentation agent, U.S. Bank National
Association, as documentation agent,
Barclays Bank, PLC, as co-agent, Bank of
America National Trust and Savings
Association, as co-agent, and The Chase
Manhattan Bank, as administrative agent
(incorporated by reference to Exhibit 10.11
to the Amendment No. 1 filed on October 8,
1999, to the Company's Registration
Statement on Form S-4 (File No. 333-86695)).
10.12 Transfer and Administration Agreement, dated
June 30, 1999, among Direct Merchants Credit
Card Bank, N.A. as Transferor and Collection
Agent, Enterprise Funding Corporation,
Sheffield Receivables Corporation as
Purchasers, Barclays Bank PLC as Agent and
NationsBank, N.A. as Bank Investor and Agent
(incorporated by reference to Exhibit 10.12
to the Amendment No. 1 filed on October 8,
1999, to the Company's Registration
Statement on Form S-4 (File No. 333-86695)).
11.* Computation of Earnings Per Share.
27.* Financial Data Schedule.
(b) Reports on Form 8-K:
Not applicable
*Filed herewith
<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, November 12, 1999
Chief Financial Officer
/s/ David D. Wesselink
- ----------------------
David D. Wesselink
Principal accounting officer: Sr. Vice President, Finance, November 12, 1999
Corporate Controller
/s/ Jean C. Benson
- ----------------------
Jean C. Benson
Exhibit 11
METRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Earnings Per Share
<TABLE>
In thousands, except per share amounts Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
BASIC:
<S> <C> <C> <C> <C>
Net income (loss) applicable to common
stockholders ............................... $ 24,001 $ 16,996 $(88,253) $ 40,620
======== ======== ======== ========
Weighted average number of common shares
outstanding ................................ 38,585 38,461 38,561 38,454
Net income (loss) per share ..................... $ .62 $ .44 $ (2.29) $ 1.06
DILUTED:
Net income (loss) applicable to common
stockholders (1) ........................... $ 24,001 $ 16,996 $(88,253) $ 40,620
======== ======== ======== ========
Weighted average number of common shares
outstanding ................................ 38,585 38,461 38,561 38,454
Net effect of assumed exercise of stock options
based on treasury stock method using average
market price (2) ........................... 2,366 1,665 -- 1,493
Assumed conversion of convertible preferred
stock (2) .................................. 17,126 -- -- --
-------- -------- -------- --------
58,077 40,126 38,561 39,947
======== ======== ======== ========
Net income (loss) per share ..................... $ .54 $ .42 $ (2.29) $ 1.02
</TABLE>
(1) For the three month period ended September 30, 1999, diluted earnings per
share is calculated by adding back the Series C convertible preferred
dividend of $7.2 million. In determining the number of dilutive shares
outstanding, the Series C convertible preferred stock is assumed to have
been converted into 17.1 million shares at the beginning of the period and
therefore, no dividend would be paid for the three month period ended
September 30, 1999.
(2) For the nine month period ended September 30, 1999, there were options
and convertible preferred stock outstanding to purchase 1.9 million and
7.8 million common shares. These potential common shares have been excluded
from the computation of diluted earnings per share because their inclusion
would have been anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK>0001021061
<NAME>Metris Companies Inc.
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1
<CASH> 32,055
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 34,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,545,772
<ALLOWANCE> 553,400
<TOTAL-ASSETS> 1,812,472
<DEPOSITS> 588,297
<SHORT-TERM> 893
<LIABILITIES-OTHER> 290,069
<LONG-TERM> 343,894
0
322,473
<COMMON> 386
<OTHER-SE> 266,460
<TOTAL-LIABILITIES-AND-EQUITY> 1,812,472
<INTEREST-LOAN> 148,449
<INTEREST-INVEST> 3,390
<INTEREST-OTHER> 1,495
<INTEREST-TOTAL> 153,334
<INTEREST-DEPOSIT> 9,013
<INTEREST-EXPENSE> 35,161
<INTEREST-INCOME-NET> 118,173
<LOAN-LOSSES> 122,215
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 308,415
<INCOME-PRETAX> 134,867
<INCOME-PRE-EXTRAORDINARY> 81,325
<EXTRAORDINARY> 50,808
<CHANGES> 0
<NET-INCOME> 30,517
<EPS-BASIC> (2.29)
<EPS-DILUTED> (2.29)
<YIELD-ACTUAL> 18.00
<LOANS-NON> 0
<LOANS-PAST> 218,034
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 393,283
<CHARGE-OFFS> 422,059
<RECOVERIES> 24,387
<ALLOWANCE-CLOSE> 553,400
<ALLOWANCE-DOMESTIC> 553,400
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
