UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
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)
(952) 525-5020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
As of July 31, 2000, 60,739,577 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
<PAGE>
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
June 30, 2000
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets.......................3
Consolidated Statements of Income.................4
Consolidated Statements of Changes in
Stockholders' Equity.....................6
Consolidated Statements of Cash Flows.............7
Notes to Consolidated Financial Statements........8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................37
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............................................40
Item 6. Exhibits and Reports on Form 8-K.............................40
Signatures...................................................41
<PAGE>
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per-share data) (Unaudited)
<TABLE>
June 30, December 31,
2000 1999
---- ----
Assets:
<S> <C> <C>
Cash and due from banks ................................................... $ 39,271 $ 28,505
Federal funds sold ........................................................ 203,346 118,962
Short-term investments .................................................... 42,858 46,966
---------- ----------
Cash and cash equivalents ................................................. 285,475 194,433
---------- ----------
Retained interests in loans securitized ................................... 1,815,047 1,617,226
Less: Allowance for loan losses .......................................... 600,216 606,853
---------- ----------
Net retained interests in loans securitized ............................... 1,214,831 1,010,373
---------- ----------
Credit card loans (net of allowance for loan
losses of $76,905 and $12,175, respectively) ......................... 466,931 133,608
Property and equipment, net ............................................... 93,185 56,914
Accrued interest and fees receivable ...................................... 23,814 17,704
Prepaid expenses and deferred charges ..................................... 85,975 57,371
Deferred income taxes ..................................................... 200,888 185,613
Customer base intangible .................................................. 73,463 83,809
Other receivables due from credit card
securitizations, net ................................................ 185,833 243,978
Other assets .............................................................. 82,222 61,279
---------- ----------
Total assets ......................................................... $2,712,617 $2,045,082
========== ==========
Liabilities:
Deposits .................................................................. $1,244,973 $ 775,381
Debt ...................................................................... 345,456 345,012
Accounts payable .......................................................... 74,538 45,850
Current income taxes payable .............................................. 14,884 22,969
Deferred income ........................................................... 220,020 171,666
Accrued expenses and other liabilities .................................... 57,928 60,403
---------- ----------
Total liabilities .................................................... 1,957,799 1,421,281
---------- ----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000
shares authorized, 925,459 and 885,178
shares issued and outstanding, respectively........................... 344,733 329,729
Common stock, par value $.01 per share;
100,000,000 shares authorized, 60,398,982
and 57,919,433 shares issued and outstanding, respectively............ 604 386
Paid-in capital ........................................................... 164,470 130,772
Retained earnings ......................................................... 245,011 162,914
---------- ----------
Total stockholders' equity ........................................... 754,818 623,801
---------- ----------
Total liabilities and stockholders' equity ........................... $2,712,617 $2,045,082
========== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per-share data) (Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Interest Income:
<S> <C> <C> <C> <C>
Credit card loans and retained
interests in loans securitized ............... $ 113,168 $ 40,835 $ 208,527 $ 82,112
Federal funds sold ................................ 1,727 2,268 3,096 2,475
Other ............................................. 864 433 1,937 812
--------- --------- --------- ---------
Total interest income ............................. 115,759 43,536 213,560 85,399
Interest expense .................................. 10,476 7,499 20,842 16,812
Deposit interest expense .......................... 18,306 2,562 32,048 2,624
--------- --------- --------- ---------
Total interest expense ............................ 28,782 10,061 52,890 19,436
Net Interest Income ............................... 86,977 33,475 160,670 65,963
Provision for loan losses ......................... 98,215 15,764 186,008 55,073
--------- --------- --------- ---------
Net Interest (Loss) Income After Provision
for Loan Losses............................... (11,238) 17,711 (25,338) 10,890
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ............................. 120,509 74,081 251,568 151,079
Credit card fees, interchange and
other credit card income ..................... 53,530 23,920 104,327 45,229
Enhancement services revenues ..................... 63,984 40,151 123,600 78,845
--------- --------- --------- ---------
238,023 138,152 479,495 275,153
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses........... 36,316 27,635 68,458 51,738
Employee compensation ............................. 42,782 27,599 86,554 50,917
Data processing services and communications ....... 17,590 12,329 34,987 22,611
Third-party servicing expense ..................... 3,229 4,279 6,457 7,925
Warranty and debt waiver underwriting
and claims servicing expense ................. 6,760 4,484 13,492 8,464
Credit card fraud losses .......................... 2,431 850 4,572 2,113
Customer base intangible amortization ............. 5,225 7,767 10,192 18,132
Other ............................................. 33,834 23,125 63,578 40,988
--------- --------- --------- ---------
148,167 108,068 288,290 202,888
--------- --------- --------- ---------
Income Before Income Taxes, Extraordinary
Loss and Cumulative Effect of
Accounting Change............................. 78,618 47,795 165,867 83,155
Income taxes ...................................... 30,338 19,293 64,191 33,013
--------- --------- --------- ---------
Income Before Extraordinary Loss and
Cumulative Effect of Accounting Change........ 48,280 28,502 101,676 50,142
Extraordinary loss from early
extinguishment of debt ....................... -- 50,808 -- 50,808
Cumulative effect of accounting change (net
of income taxes of $2,180) ................... -- -- 3,438 --
--------- --------- --------- ---------
Net Income (Loss) ................................. 48,280 (22,306) 98,238 (666)
Preferred stock dividends-Series B ................ -- 2,981 -- 7,506
Convertible preferred stock
dividends-Series C ........................... 7,770 2,467 15,368 2,467
Adjustment for the retirement of
Series B preferred stock ..................... -- 101,615 -- 101,615
--------- --------- --------- ---------
Net Income (Loss) Applicable To Common
Stockholders ................................ $ 40,510 $(129,369) $ 82,870 $(112,254)
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share:
Basic-income (loss) before
extraordinary loss and cumulative
effect of accounting change ....... $ 0.69 $ (1.36) $ 1.48 $ (1.06)
Basic-extraordinary loss .............. -- (0.88) -- (0.88)
Basic-cumulative effect of accounting
change ............................ -- -- (0.06) --
Basic-net income (loss) ............... 0.69 (2.24) 1.42 (1.94)
Diluted-income (loss) before
extraordinary loss and cumulative
effect of accounting change ....... 0.53 (1.36) 1.12 (1.06)
Diluted-extraordinary loss ............ -- (0.88) -- (0.88)
Diluted-cumulative effect of accounting
change ............................ -- -- (0.04) --
Diluted-net income (loss) ............. 0.53 (2.24) 1.08 (1.94)
Shares used to compute earnings per share:
Basic ...................................... 58,838 57,856 58,400 57,822
Diluted .................................... 91,568 57,856 91,118 57,822
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands) (Unaudited)
<TABLE>
Total
Preferred Common Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 .. $ 201,100 $ 193 $ 107,615 $ 124,074 $ 432,982
Net loss ................. -- -- -- (666) (666)
Issuance of common stock
under employee
benefit plans ........ -- -- 1,368 -- 1,368
Cash dividends and other.. -- -- -- (548) (548)
Retirement of preferred
stock - Series B ..... (208,606) -- (101,615) -- (310,221)
Issuance of preferred
stock - Series C ..... 312,910 -- 122,369 -- 435,279
June 1999 two-for-one
stock split .......... -- 193 (193) -- --
Preferred dividends in
kind - Series B ...... 7,506 -- -- (7,506) --
Preferred dividends in
kind - Series C ...... 2,467 -- -- (2,467) --
--------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 1999 ...... $ 315,377 $ 386 $ 129,544 $ 112,887 $ 558,194
========= ========= ========= ========= =========
BALANCE AT DECEMBER 31, 1999 .. $ 329,729 $ 386 $ 130,772 $ 162,914 $ 623,801
Net income ............... -- -- -- 98,238 98,238
Issuance of common stock
under employee benefit
plans ................ -- 17 33,899 -- 33,916
Cash dividends ........... -- -- -- (1,137) (1,137)
June 2000 three-for-two
stock split .......... -- 201 (201) -- --
Preferred dividends in
kind - Series C ...... 15,004 -- -- (15,004) --
--------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 2000 ...... $ 344,733 $ 604 $ 164,470 $ 245,011 $ 754,818
========= ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
2000 1999
---- ----
Operating Activities:
Net income (loss) ............................... $ 98,238 $ (666)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss from early extinguishment
of debt ................................ -- 50,808
Cumulative effect of accounting change ..... 3,438 --
Depreciation and amortization .............. 37,137 38,892
Change in allowance for loan losses ........ 58,093 81,745
Changes in operating assets and liabilities:
Accrued interest and fees receivable ... (6,110) (4,637)
Prepaid expenses and deferred charges .. (39,996) (18,279)
Deferred income taxes .................. (15,275) (42,139)
Other receivables due from credit card
securitizations, net .............. 54,198 9,780
Accounts payable and accrued expenses .. 26,213 43,997
Current income taxes payable ........... (8,085) (30,776)
Deferred income ........................ 44,916 14,428
Other .................................. (27,848) (20,087)
----------- -----------
Net cash provided by operating activities ....... 224,919 123,066
----------- -----------
Investing Activities:
Proceeds from repayments of securitized loans ... (34,075) 746,270
Net loans originated or collected ............... (561,449) (11,331)
Credit card portfolio acquisition ............... -- (1,156,673)
Additions to premises and equipment ............. (41,168) (8,558)
----------- -----------
Net cash used in investing activities ........... (636,692) (430,292)
----------- -----------
Financing Activities:
Net increase in short-term borrowings ........... 444 29,000
Net increase in deposits ........................ 469,592 315,373
Cash dividends paid ............................. (1,137) (551)
Increase in common equity ....................... 33,916 1,368
----------- -----------
Net cash provided by financing activities ....... 502,815 345,190
----------- -----------
Net increase in cash and cash equivalents ....... 91,042 37,964
Cash and cash equivalents at beginning of period 194,433 37,347
----------- -----------
Cash and cash equivalents at end of period ...... $ 285,475 $ 75,311
=========== ===========
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, the "Company," including Direct
Merchants Credit Card Bank, N.A., which may be referred to as "we," "us" and
"our." The Company is an information-based direct marketer of consumer credit
products and enhancement services primarily to moderate-income consumers.
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
We have prepared the unaudited interim consolidated financial statements
and related unaudited financial information in the footnotes in accordance with
generally accepted accounting principles and the rules and regulations of the
Securities and Exchange Commission ("SEC") for interim financial statements.
These interim financial statements reflect all adjustments consisting of normal
recurring accruals which, in the opinion of our management, are necessary to
present fairly our consolidated financial position and the results of our
operations and our cash flows for the interim periods. You should read these
consolidated financial statements in conjunction with the financial statements
and the notes thereto contained in our annual report on Form 10-K for the fiscal
year ended December 31, 1999. The nature of our 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 three-for-two stock split effected in the form of a
50% stock dividend distributed on June 15, 2000. All share and per-share
information reflects this stock split.
Pervasiveness of Estimates
We have prepared the consolidated financial statements in accordance with
generally accepted accounting principles, which require us to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements as well as the reported amount of revenues and expenses
during the reporting periods. Actual results could differ from these estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting and reporting
policies used in preparing the consolidated financial statements.
Federal Funds Sold and Short-term Investments
Federal funds sold are short-term loans made to banks through the Federal
Reserve System. It is our policy to make such loans only to banks that are
considered to be in compliance with their regulatory capital requirements.
Short-term investments are investments in commercial paper, money market mutual
funds and certificates of deposits with maturities less than three months.
Credit Card Loans
Credit card loans are receivables from consumers that we do not intend to
securitize.
Securitization, Retained Interests in Loans Securitized and
Securitization Income
We securitize and publicly and privately sell a significant portion of our
credit card loans to investors through the Metris Master Trust and third-party,
multi-seller receivables conduits. We retain participating interests in the
credit card loans under "Retained interests in loans securitized" on the
consolidated balance sheets. A portion of our retained interests in loans
securitized are subordinate to the interests of investors in the trust and
conduit portfolios. Although we continue to service the securitized credit card
accounts and maintain the customer relationships, we treat these transactions as
sales for financial reporting purposes and do not reflect the associated loans
on our consolidated balance sheets.
We have recorded the sales of these loans 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, we
remove the sold credit card loans from the balance sheet and initially measure
the related financial and servicing assets controlled and liabilities incurred
at fair value, if practicable. SFAS 125 also requires that servicing assets and
other retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer.
The securitization and sale of credit card loans changes our 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." We have 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 $114.4 million and $231.1 million for the
three- and six-month periods ended June 30, 2000, respectively, compared to
$123.3 million and $262.9 million for the same periods of 1999.
We make provisions for loan losses 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 our retained interests in loans securitized
to fair value.
Statements of Cash Flows
Cash paid for interest during the six-month periods ended June 30, 2000 and
1999, was $40.1 million and $10.1 million, respectively. Cash paid for income
taxes for the same periods was $70.3 million and $105.5 million, respectively.
Earnings Per Share
The following table presents the computation of basic and diluted weighted
average shares used in the per-share calculations:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Income before extraordinary loss and
cumulative effect of accounting change ... $ 48,280 $ 28,502 $ 101,676 $ 50,142
Preferred dividends - Series B ................ -- 2,981 -- 7,506
Preferred dividends - Series C ................ 7,770 2,467 15,368 2,467
Adjustment for the retirement of Series B
preferred stock .......................... -- 101,615 -- 101,615
--------- --------- --------- ---------
Net income (loss) applicable to common
stockholders before extraordinary loss
and cumulative effect of accounting
change ................................... 40,510 (78,561) 86,308 (61,446)
Extraordinary loss from the early
extinguishment of debt ................... -- 50,808 -- 50,808
Cumulative effect of accounting change, net ... -- -- 3,438 --
--------- --------- --------- ---------
Net income (loss) applicable to common
stockholders ............................. $ 40,510 $(129,369) $ 82,870 $(112,254)
========= ========= ========= =========
Weighted average common shares outstanding .... 58,838 57,856 58,400 57,822
Adjustments for dilutive securities:
Assumed exercise of outstanding stock
options .................................. 3,566 -- 3,554 --
Assumed conversion of convertible preferred
stock .................................... 29,164 -- 29,164 --
--------- --------- --------- ---------
Diluted common shares ......................... 91,568 57,856 91,118 57,822
========= ========= ========= =========
Earnings per share:
Basic - income (loss) before extra-
ordinary loss and cumulative effect of
accounting change .................... $ 0.69 $ (1.36) $ 1.48 $ (1.06)
Basic - extraordinary loss ............... -- (0.88) -- (0.88)
Basic - cumulative effect of accounting
change ............................... -- -- (0.06) --
Basic - net income (loss) ................ 0.69 (2.24) 1.42 (1.94)
Diluted - income (loss) before extra-
ordinary loss and cumulative effect of
accounting change .................... 0.53 (1.36) 1.12 (1.06)
Diluted - extraordinary loss ............. -- (0.88) -- (0.88)
Diluted - cumulative effect of accounting
change ............................... -- -- (0.04) --
Diluted - net income (loss) .............. 0.53 (2.24) 1.08 (1.94)
</TABLE>
<PAGE>
Comprehensive Income
During 1998, we adopted SFAS 130, "Reporting Comprehensive Income." This
statement does not apply to our current financial results and therefore, net
income equals comprehensive income.
Revenue Recognition in Financial Statements
During the quarter ended March 31, 2000, we adopted Staff Accounting
Bulletin No. 101 - "Revenue Recognition in Financial Statements" for our Debt
Waiver products. This SAB formalizes the accounting for services sold where the
right to a full refund exists, requiring all companies to defer recognition of
revenues until the cancellation period is complete. Previously, we recognized
half of the revenues in the month billed and half in the following month. We now
recognize all of the revenue the month following completion of the cancellation
period. This change resulted in a one-time, non-cash net charge to earnings of
$3.4 million, which is reflected as a cumulative effect of accounting change in
the consolidated statements of income for the six months ended June 30, 2000.
Because we have applied the provisions of this SAB to our membership programs
since 1998, before the SEC formulated its guidance, no adjustment was required
for our membership services revenues. The proforma effect of adopting SAB 101
was immaterial for the prior year periods.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
<TABLE>
The activity in the allowance for loan losses is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period .......... $ 645,089 $ 450,672 $ 619,028 $ 393,283
Allowance related to assets acquired, net -- 16,044 -- 16,044
Provision for loan losses ............... 98,215 15,764 186,008 55,073
Provision for loan losses (1) ........... 114,387 123,347 231,064 262,880
Loans charged off ....................... (196,552) (140,225) (390,042) (268,388)
Recoveries .............................. 15,982 9,426 31,063 16,136
--------- --------- --------- ---------
Net loans charged off ................... (180,570) (130,799) (358,979) (252,252)
--------- --------- --------- ---------
Balance at end of period ................ $ 677,121 $ 475,028 $ 677,121 $ 475,028
========= ========= ========= =========
(1) Amounts are included in "Net securitization and credit card servicing income."
</TABLE>
NOTE 4 - PRIVATE EQUITY PLACEMENT
On November 13, 1998, we entered into agreements with affiliates of the
Thomas H. Lee Company, a private equity firm, 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, which are
convertible into common shares at a conversion price of $12.42 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 a converted basis.
One share of Series C Preferred Stock is convertible into 30 shares of common
stock, plus a premium amount designed to guarantee a portion of seven years'
worth of dividends at a 9% annual rate. For conversions this year, the premium
amount would be equal to approximately 14% of those future dividends. Assuming
conversion of the Series C Preferred into common stock, the Lee Company would
own approximately 31% of the Company on a diluted basis at June 30, 2000. The
Series C Preferred entitles the holders to elect four members to our Board of
Directors. The Series C Preferred may be redeemed by us 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. We also have 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 acquisition of the Series C Preferred could have resulted in a
"change in control" in certain of our agreements with Fingerhut. It did not
because, prior to closing the transaction, we increased the change in control
ownership percentage from 30 to 35 or otherwise exempted the Lee Company from
the change in control provision in its agreements. Pursuant to the Indenture for
the notes due 2004, if a shareholder or group obtains 35% or more of our
outstanding voting stock, we must make an offer to purchase the notes.
Furthermore, a "change of control" under our Credit Agreement constitutes an
event of default. Accordingly, to the extent that conversion of the Series C
Preferred Stock into common stock would cause one or a group of shareholders to
obtain 35% or more of our outstanding voting stock, the excess shares of Series
C Preferred Stock will instead be convertible into non-voting Series D Preferred
Stock.
Prior to shareholder approval and the receipt of notice that there was no
regulatory objection to the Series C Preferred investment, the Lee Company
agreed to purchase $200 million in Series B Perpetual Preferred Stock and $100
million in 12% Senior Notes due 2006. We also issued the Lee Company 11.25
million ten-year warrants to purchase shares of our common stock.
On March 12, 1999, shareholders approved the conversion of the Series B
Preferred and 12% 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, we extinguished the Series B Preferred and
the 12% Senior Notes, and cancelled the warrants, causing a one-time, non-cash
accounting adjustment. We allocated the excess of the fair value of the Series C
Preferred over the carrying value of the Series B Preferred and the 12% Senior
Notes at the time of the conversion to the 12% Senior Notes and the Series B
Preferred based upon their initial fair values.
NOTE 5 - SEGMENTS
We operate in two principal areas: consumer credit products and enhancement
services, previously referred to as fee-based services. Our primary consumer
credit products are unsecured and secured credit cards, including the Direct
Merchants Bank MasterCard(R) and Visa(R). Our credit card accountholders include
customers obtained from third-party lists and other customers for whom general
credit bureau information is available.
We market our enhancement 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 our credit card customers and customers of
third parties. We currently administer our extended service plans sold through a
third-party retailer, and the customer pays the retailer directly. In addition,
we develop customized targeted mailing lists from information contained in our
databases for use by unaffiliated companies in their own product solicitation
efforts that do not directly compete with our efforts.
We have presented the segment information reported below on a managed
basis. We use this basis to review segment performance and to make operating
decisions. To do so, we adjust the income statement and balance sheet 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 tables includes adjustments to present the information on an
owned basis as reported in the financial statements of this quarterly report.
We do not allocate the expenses, assets and liabilities attributable to
corporate functions 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. We include these expenses
in the reconciliation of the income before income taxes for the reported
segments to the consolidated total. We do 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.
Our enhancement services operating segment pays a commission to our
consumer credit products segment for successful marketing efforts to the
consumer credit products segment's cardholders at a rate similar to those paid
to our other third parties. Our enhancement services segment reports interest
income and the consumer credit products segment reports interest expense at our
weighted average borrowing rate for the excess cash flow generated by the
enhancement services segment and used by the consumer credit products segment to
fund the growth of cardholder balances.
<PAGE>
<TABLE>
Three Months Ended June 30,
2000
----
Consumer
Credit Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest revenue.. $ 376,022 $ 2,697 $ (262,960) (b) $ 115,759
Interest expense.. 122,768 -- (93,986) (c) 28,782
---------- ---------- --------------- ----------
Net interest
income ....... 253,254 2,697 (168,974) 86,977
Other revenue .... 119,452 63,984 54,587 238,023
Total revenue .... 495,474 66,681 (208,373) 353,782
Income before
income taxes.. 138,611 (d) 42,666(d) (102,659) (e) 78,618
Income taxes ..... -- -- 30,338 30,338
Total assets ..... $7,737,289 $ 150,025 $ (5,174,697) $2,712,617
</TABLE>
<TABLE>
Three Months Ended June 30,
1999
----
Consumer
Credit Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest revenue .. $ 249,740 $ 913 $ (207,117)(b) $ 43,536
Interest expense .. 71,631 -- (61,570)(c) 10,061
----------- ----------- -------------- -----------
Net interest
income ........ 178,109 913 (145,547) 33,475
Other revenue ..... 75,801 40,151 22,200 138,152
Total revenue ..... 325,541 41,064 (184,917) 181,688
Income before
income taxes
and extra-
ordinary loss.. 99,864 (d) 23,031(d) (75,100)(e) 47,795
Income taxes ...... -- -- 19,293 19,293
Total assets ...... $ 6,443,038 $ 82,100 $(5,186,438)(f) $ 1,338,700
</TABLE>
<PAGE>
<TABLE>
Six Months Ended June 30,
2000
----
Consumer
Credit Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest revenue .. $ 735,524 $ 4,902 $ (526,866) (b) $ 213,560
Interest expense .. 237,502 -- (184,612) (c) 52,890
----------- ----------- -------------- -----------
Net interest
income ........ 498,022 4,902 (342,254) 160,670
Other revenue ..... 244,705 123,600 111,190 479,495
Total revenue ..... 980,229 128,502 (415,676) 693,055
Income before
income taxes and
cumulative effect of
accounting
change ........ 283,092 (d) 84,543 (d) (201,768) (e) 165,867
Income taxes ...... -- -- 64,191 64,191
Total assets ...... $ 7,737,289 $ 150,025 $(5,174,697) (f) $ 2,712,617
</TABLE>
<TABLE>
Six Months Ended June 30,
1999
----
Consumer
Credit Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest revenue .. $ 506,769 $ 1,760 $ (423,130) (b) $ 85,399
Interest expense .. 141,105 -- (121,669) (c) 19,436
----------- ----------- --------------- -----------
Net interest
income ........ 365,664 1,760 (301,461) 65,963
Other revenue ..... 157,727 78,845 38,581 275,153
Total revenue ..... 664,496 80,605 (384,549) 360,552
Income before
income taxes and
extra-
ordinary loss .. 179,785 (d) 43,943(d) (140,573)(e) 83,155
Income taxes ....... -- -- 33,013 33,013
Total assets ....... $ 6,443,038 $ 82,100 $(5,186,438)(f) $ 1,338,700
</TABLE>
<PAGE>
(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 $2.7 million, $0.9 million, $4.9 million and $1.8 million of
intercompany interest received by the enhancement services segment from the
consumer credit products segment for the three months ended June 30, 2000 and
1999, and the six months ended June 30, 2000 and 1999, respectively.
(c) The reconciliation to consolidated owned interest expense includes the
elimination of $2.7 million, $0.9 million, $4.9 million and $1.8 million of
intercompany interest paid by the consumer credit products segment to the
enhancement services segment for the three months ended June 30, 2000 and 1999
and the six months ended June 30, 2000 and 1999, respectively.
(d) Income before income taxes (and extraordinary loss and cumulative
effect of accounting change) includes intercompany commissions paid by the
enhancement services segment to the consumer credit products segment for
successful marketing efforts to consumer credit products cardholders of $4.1
million, $0.8 million, $4.4 million and $1.5 million for the three months ended
June 30, 2000 and 1999, and the six months ended June 30, 2000 and 1999,
respectively.
(e) The reconciliation to the owned income before income taxes 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 6 - SUBSEQUENT EVENT
On July 24, 2000, we agreed to purchase Banco Popular's U.S. Bankcard
program. The purchase of the credit card portfolio, which has approximately
185,000 active account relationships and approximately $180 million in
receivables, is expected to close in the third quarter of 2000. Under the
agreement, we will take ownership of Banco Popular's Orlando facility and retain
its Orlando bankcard employees.
NOTE 7 - DEBT AND DEPOSITS
As of June 30, 2000, we had a $200 million term revolving credit facility
and a $100 million term loan (collectively the "credit facilities") with a
syndicate of banks and money market mutual funds. At June 30, 2000, we were in
compliance with all financial covenants under these agreements. At June 30, 2000
and December 31, 1999, we had $100 million of outstanding borrowings under the
credit facilities with a weighted average interest rate of 9.1% and 8.7%,
respectively.
During July of 2000, we amended and restated our credit facilities. The
amended credit facilities consist of a $170 million revolving credit facility
maturing in July 2003 and a $100 million term loan maturing in September 2003
with a syndicate of banks and money market mutual funds.
During the third quarter of 1999, we issued $150 million of 10.125% Senior
Notes due 2006. The Senior Notes due 2006 are guaranteed by Metris Direct, Inc.
and Metris Recovery Services, Inc. (the "Guarantors"). We also have $100 million
of 10% Senior Notes due 2004 outstanding with terms and conditions,
substantially similar to the Senior Notes due 2006.
Beginning in the first quarter 1999, Direct Merchants Bank began issuing
certificates of deposit in increments of $100,000. As of June 30, 2000 and
December 31, 1999, $1.2 billion and $0.8 billion of CDs were outstanding,
respectively, with original maturities ranging from three months to two years
with fixed interest rates ranging from 5.2% to 7.4%.
We have various indirect subsidiaries which have not guaranteed the senior
notes or credit facilities. The following condensed consolidating financial
statements of the Company, the Guarantor subsidiaries and the non-guarantor
subsidiaries are presented for purposes of complying with SEC reporting
requirements. Separate financial statements of the guarantor subsidiaries and
the non-guarantor subsidiaries are not presented because management has
determined that the subsidiaries' financial statements would not be material to
investors.
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
June 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ................ $ 37,622 $ 1,093 $ 246,760 $ -- $ 285,475
Net retained interests in loans
securitized ........................... (462) -- 1,215,293 -- 1,214,831
Credit card loans ........................ 526 -- 466,405 -- 466,931
Property and equipment, net .............. -- 47,162 46,023 -- 93,185
Prepaid expenses and deferred charges .... -- 15,219 80,223 (9,467) 85,975
Deferred income taxes .................... (2,110) 20,555 182,443 -- 200,888
Customer base intangible ................. -- -- 73,463 -- 73,463
Other receivables due from credit card
securitizations, net .................. 13 -- 185,820 -- 185,833
Other assets ............................. 11,475 19,184 84,844 (9,467) 106,036
Investment in subsidiaries ............... 1,352,015 1,254,392 -- (2,606,407) --
----------- ----------- ----------- ----------- -----------
Total assets ............................. $ 1,399,079 $ 1,357,605 $ 2,581,274 $(2,625,341) $ 2,712,617
=========== =========== =========== =========== ===========
Liabilities:
Deposits ................................. $ (1,000) $ -- $ 1,245,973 $ -- $ 1,244,973
Debt ..................................... 666,408 (65,057) (255,895) -- 345,456
Accounts payable ......................... 813 22,429 60,763 (9,467) 74,538
Current income taxes payable ............. (48,046) (19,121) 82,051 -- 14,884
Deferred income .......................... 17,505 38,142 173,840 (9,467) 220,020
Accrued expenses and other liabilities ... 8,581 29,197 20,150 -- 57,928
----------- ----------- ----------- ----------- -----------
Total liabilities ........................ 644,261 5,590 1,326,882 (18,934) 1,957,799
Total stockholders' equity ............... 754,818 1,352,015 1,254,392 (2,606,407) 754,818
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity .................. $ 1,399,079 $ 1,357,605 $ 2,581,274 $(2,625,341) $ 2,712,617
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 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 ............ $ 43,619 $ 309 $ 150,505 $ -- $ 194,433
Net retained interests in loans
securitized ....................... (228) -- 1,010,601 -- 1,010,373
Credit card loans .................... 2,570 -- 131,038 -- 133,608
Property and equipment, net .......... -- 33,152 23,762 -- 56,914
Prepaid expenses and deferred
charges ........................... -- 26,441 30,930 -- 57,371
Deferred income taxes ................ (1,835) 25,241 162,207 -- 185,613
Customer base intangible ............. -- -- 83,809 -- 83,809
Other receivables due from credit card
securitizations, net .............. 5 -- 243,973 -- 243,978
Other assets ......................... 12,951 8,488 57,544 -- 78,983
Investment in subsidiaries ........... 1,184,006 1,105,992 -- (2,289,998) --
----------- ----------- ----------- ----------- -----------
Total assets ......................... $ 1,241,088 $ 1,199,623 $ 1,894,369 $(2,289,998) $ 2,045,082
=========== =========== =========== =========== ===========
Liabilities:
Deposits ............................. $ (1,000) $ -- $ 776,381 $ -- $ 775,381
Debt ................................. 569,956 (82,779) (142,165) -- 345,012
Accounts payable ..................... 494 12,337 33,019 -- 45,850
Current income taxes payable ......... 16,183 (10,985) 17,771 -- 22,969
Deferred income ...................... 22,231 58,856 90,579 -- 171,666
Accrued expenses and other
liabilities ....................... 9,423 38,188 12,792 -- 60,403
----------- ----------- ----------- ----------- -----------
Total liabilities .................... 617,287 15,617 788,377 -- 1,421,281
Total stockholders' equity ........... 623,801 1,184,006 1,105,992 (2,289,998) 623,801
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ............................ $ 1,241,088 $ 1,199,623 $ 1,894,369 $(2,289,998) $ 2,045,082
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Interest
(Expense) Income .................. $ (20,834) $ (1,227) $ 109,038 $ -- $ 86,977
Provision for loan losses ............ (7) -- 98,222 -- 98,215
--------- --------- --------- --------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses ......... (20,827) (1,227) 10,816 -- (11,238)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income .................. 2,378 24 118,107 -- 120,509
Credit card fees, interchange and other
credit card income ................ (1,649) (238) 55,417 -- 53,530
Enhancement services revenues ........ -- 11,385 52,599 -- 63,984
--------- --------- --------- --------- ---------
729 11,171 226,123 -- 238,023
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account
and other product solicitation
and marketing expenses ............ -- 2,878 33,438 -- 36,316
Employee compensation ................ -- 35,902 6,880 -- 42,782
Data processing services and
communications .................... -- 3,872 13,718 -- 17,590
Third-party servicing expense ........ -- (22,981) 26,210 -- 3,229
Warranty and debt waiver underwriting
and claims servicing expense ...... -- 24 6,736 -- 6,760
Credit card fraud losses ............. 1 -- 2,430 -- 2,431
Customer base intangible
amortization ..................... -- -- 5,225 -- 5,225
Other ................................ 56 15,471 18,307 -- 33,834
--------- --------- --------- --------- ---------
57 35,166 112,944 -- 148,167
--------- --------- --------- --------- ---------
(Loss) Income Before Income Taxes and
Equity in Income of Subsidiaries .. (20,155) (25,222) 123,995 -- 78,618
Income taxes ......................... (7,789) (9,802) 47,929 -- 30,338
Equity in income of subsidiaries ..... 60,646 76,066 -- (136,712) --
--------- --------- --------- --------- ---------
Net Income ........................... $ 48,280 $ 60,646 $ 76,066 $(136,712) $ 48,280
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Interest (Expense) Income ....... $ (6,801) $ (404) $ 40,680 $ -- $ 33,475
Provision for loan losses ........... (138) -- 15,902 -- 15,764
---------- ---------- --------- --------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses ........ (6,663) (404) 24,778 -- 17,711
---------- ---------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................. 1,623 -- 72,458 -- 74,081
Credit card fees, interchange and
other credit card income ......... 319 34 23,567 -- 23,920
Enhancement services revenues ....... -- 11,897 28,254 -- 40,151
---------- ---------- --------- --------- ---------
1,942 11,931 124,279 -- 138,152
---------- ---------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses ............... -- 9,838 17,797 -- 27,635
Employee compensation ............... -- 24,904 2,695 -- 27,599
Data processing services and
communications ................... -- 1,758 10,571 -- 12,329
Third-party servicing expense ....... -- (14,713) 18,992 -- 4,279
Warranty and debt waiver underwriting
and claims servicing expense ..... -- 595 3,889 -- 4,484
Credit card fraud losses ............ 5 -- 845 -- 850
Customer base intangible
amortization ..................... -- -- 7,767 -- 7,767
Other ............................... 848 10,340 11,937 -- 23,125
---------- ---------- --------- --------- ---------
853 32,722 74,493 -- 108,068
---------- ---------- --------- --------- ---------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries
and Extraordinary Loss ........... (5,574) (21,195) 74,564 -- 47,795
Income taxes ........................ (2,284) (7,800) 29,377 -- 19,293
Equity in income of subsidiaries .... 31,792 45,187 -- (76,979) --
---------- ---------- --------- --------- ---------
Income Before Extraordinary Loss ... 28,502 31,792 45,187 (76,979) 28,502
Extraordinary loss from the early
extinguishment of debt ........... 50,808 -- -- -- 50,808
---------- ---------- --------- --------- ---------
Net (Loss) Income ................... $ (22,306) $ 31,792 $ 45,187 $ (76,979) $ (22,306)
========== ========== ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Interest (Expense) Income ......... $ (32,881) $ (1,798) $ 195,349 $ -- $ 160,670
Provision for loan losses ............. (22) -- 186,030 -- 186,008
--------- --------- ------------ -------------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses .......... (32,859) (1,798) 9,319 -- (25,338)
--------- --------- ------------ -------------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................... 4,764 (4) 246,808 -- 251,568
Credit card fees, interchange and other
credit card income ................. (3,197) 870 106,654 -- 104,327
Enhancement services revenues ......... -- 27,719 95,881 -- 123,600
--------- --------- ------------ -------------- ---------
1,567 28,585 449,343 -- 479,495
--------- --------- ------------ -------------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses ................. -- 10,648 57,810 -- 68,458
Employee compensation ................. -- 70,773 15,781 -- 86,554
Data processing services and
communications ..................... -- 7,551 27,436 -- 34,987
Third-party servicing expense ......... -- (45,404) 51,861 -- 6,457
Warranty and debt waiver underwriting
and claims servicing expense ....... -- 818 12,674 -- 13,492
Credit card fraud losses .............. 3 -- 4,569 -- 4,572
Customer base intangible
amortization ....................... -- -- 10,192 -- 10,192
Other ................................. 93 33,462 30,023 -- 63,578
--------- --------- ------------ -------------- ---------
96 77,848 210,346 -- 288,290
--------- --------- ------------ -------------- ---------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries
and Cumulative Effect of
Accounting Change .................. (31,388) (51,061) 248,316 -- 165,867
Income taxes .......................... (12,147) (20,140) 96,478 -- 64,191
Equity in income of subsidiaries ...... 117,479 148,400 -- (265,879) --
--------- --------- ------------ -------------- ---------
Income Before Cumulative Effect of
Accounting Change .................. 98,238 117,479 151,838 (265,879) 101,676
Cumulative effect of accounting
change, net ........................ -- -- 3,438 -- 3,438
--------- --------- ------------ -------------- ---------
Net Income ............................ $ 98,238 $ 117,479 $ 148,400 $ (265,879) $ 98,238
========= ========= ============ ============== =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Interest (Expense) Income .......... $ (16,168) $ (512) $ 82,643 $ -- $ 65,963
Provision for loan losses .............. 106 -- 54,967 -- 55,073
--------- --------- --------- ------------- ----------
Net Interest (Expense) Income
After Provision for Loan
Losses .............................. (16,274) (512) 27,676 -- 10,890
--------- --------- --------- ------------- ----------
Other Operating Income:
Net securitization and credit card
servicing income .................... 3,415 -- 147,664 -- 151,079
Credit card fees, interchange
and other income .................... 541 (102) 44,790 -- 45,229
Enhancement services revenues .......... -- 24,149 54,696 -- 78,845
--------- --------- --------- ------------- ----------
3,956 24,047 247,150 -- 275,153
--------- --------- --------- ------------- ----------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses .................. -- 19,157 32,581 -- 51,738
Employee compensation .................. -- 45,914 5,003 -- 50,917
Data processing services and
communications ...................... -- 3,174 19,437 -- 22,611
Third-party servicing expenses ......... -- (30,529) 38,454 -- 7,925
Warranty and debt waiver underwriting
and claims servicing expenses ....... -- 1,942 6,522 -- 8,464
Credit card fraud losses ............... 8 -- 2,105 -- 2,113
Customer base intangible
amortization ........................ -- -- 18,132 -- 18,132
Other .................................. 1,248 19,763 19,977 -- 40,988
--------- --------- --------- ------------- ----------
1,256 59,421 142,211 -- 202,888
--------- --------- --------- ------------- ----------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries
and Extraordinary Loss .............. (13,574) (35,886) 132,615 -- 83,155
Income taxes ........................... (5,389) (13,714) 52,116 -- 33,013
Equity in income of subsidiaries ....... 58,327 80,499 -- (138,826) --
--------- --------- --------- ------------- ----------
Income Before Extraordinary Loss ....... 50,142 58,327 80,499 (138,826) 50,142
Extraordinary loss from the early
extinguishment of debt .............. 50,808 -- -- -- 50,808
--------- --------- --------- ------------- ----------
Net (Loss) Income ...................... $ (666) $ 58,327 $ 80,499 $ (138,826) $ (666)
========= ========= ========= ============= ==========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities:
Net cash (used in) provided by operating
activities ...................................... $ (86,740) $ (49,918) $ 361,577 $ 224,919
--------- --------- --------- ---------
Investing Activities:
Proceeds from repayments of securitized loans ...... -- -- (34,075) (34,075)
Net loans originated or collected .................. 2,043 -- (563,492) (561,449)
Additions to premises and equipment ................ -- (17,550) (23,618) (41,168)
--------- --------- --------- ---------
Net cash provided by (used in)
investing activities ............................ 2,043 (17,550) (621,185) (636,692)
--------- --------- --------- ---------
Financing Activities:
Net increase in deposits ........................... -- -- 469,592 469,592
Net increase (decrease) in debt .................... 96,452 17,723 (113,731) 444
Cash dividends paid ................................ (1,137) -- -- (1,137)
Net (decrease) increase in equity .................. (16,615) 50,529 2 33,916
--------- --------- --------- ---------
Net cash provided by financing activities .......... 78,700 68,252 355,863 502,815
--------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents ................................ (5,997) 784 96,255 91,042
Cash and cash equivalents at beginning of period ... 43,619 309 150,505 194,433
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......... $ 37,622 $ 1,093 $ 246,760 $ 285,475
========= ========= ========= =========
</TABLE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
<S> <C> <C> <C> <C>
Operating Activities:
Net cash (used in) provided by operating
activities ..................................... $ (13,985) $ (11,240) $ 148,291 $ 123,066
----------- ----------- ----------- -----------
Investing Activities:
Proceeds from repayments of
securitized loans .............................. -- -- 746,270 746,270
Net loans originated or collected ................. 1,344 -- (12,675) (11,331)
Credit card portfolio acquisition ................. -- -- (1,156,673) (1,156,673)
Additions to premises and equipment ............... -- (7,343) (1,215) (8,558)
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities ........................... 1,344 (7,343) (424,293) (430,292)
----------- ----------- ----------- -----------
Financing Activities:
Net increase in deposits .......................... -- -- 315,373 315,373
Net increase (decrease) in debt ................... 205,491 (28,877) (147,614) 29,000
Cash dividends paid ............................... (551) (804) 804 (551)
Net (decrease) increase in equity ................. (189,313) 49,238 141,443 1,368
----------- ----------- ----------- -----------
Net cash provided by financing activities ......... 15,627 19,557 310,006 345,190
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents ......... 2,986 974 34,004 37,964
Cash and cash equivalents at beginning
of period ...................................... (5,007) (156) 42,510 37,347
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ........ $ (2,021) $ 818 $ 76,514 $ 75,311
=========== =========== =========== ===========
</TABLE>
<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. ("MCI") and its subsidiaries, the "Company,"
including Direct Merchants Credit Card Bank, N.A., which may be referred to as
"we," "us" and "our." This discussion should be read in conjunction with the
following documents for a full understanding of our financial condition and
results of operations: Management's Discussion and Analysis of Financial
Condition and Results of Operations in our 1999 Annual Report to Shareholders;
our annual report on Form 10-K for the fiscal year ended December 31, 1999; and
our Proxy Statement for the 2000 Annual Meeting of Shareholders. In addition,
this discussion should be read in conjunction with our quarterly report on Form
10-Q for the period ended June 30, 2000, 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 June 30, 2000 was $48.3 million, up
from a net loss of $22.3 million for the second quarter of 1999. The net loss
for the three months ended June 30, 1999, included the $50.8 million
extraordinary loss from the early extinguishment of the 12% Lee Senior Notes.
Without this extraordinary item, reported earnings for the three-month period
ended June 30, 1999 would have been $28.5 million. Earnings per share for the
three months ended June 30, 2000 was $0.53 compared to a loss of $2.24 per share
for the second quarter of 1999. The loss per share reported for the second
quarter of 1999 included the $152.4 million one-time, non-cash accounting impact
from the issuance of the Series C Perpetual Convertible Preferred Stock and the
extinguishment of the Series B Perpetual Convertible Preferred Stock, the 12%
Senior Notes and the ten-year warrants. Without the impact of these charges,
earnings per share would have been $0.36 per share. The increase in net income
is the result of an increase in net interest income and other operating income
partially offset by increases in the provision for loan losses and other
operating expenses. These increases are largely attributable to the growth in
average managed loans to $7.6 billion for the second quarter 2000 from $5.2
billion for the second quarter 1999, an increase of 46%, and growth in total
credit card accounts to 4.1 million at June 30, 2000, from 3.4 million at June
30, 1999. Enhancement services revenues continue to contribute to the net income
growth due to continued strong product sales.
Net income for the six months ended June 30, 2000 was $98.2 million, up
from a net loss of $0.7 million for the first six months of 1999. Net income
reported for the six month period ended June 30, 2000 includes the $3.4 million
cumulative effect of accounting change described below. The net loss for the six
months ended June 30, 1999 includes the $50.8 million extraordinary loss related
to the early extinguishment of the 12% Lee Senior Notes. Without these items,
reported earnings would have been $101.7 million and $50.1 million for the
six-month periods ended June 30, 2000 and 1999, respectively. Reported earnings
per share for the six months ended June 30, 2000 was $1.08, compared to a loss
of $1.94 per share for the same period in 1999. The reported earnings per share
for the six month period ended June 30, 2000 was reduced by $0.04 due to the
cumulative effect of accounting change described below. The reported loss per
share for the six months ended June 30, 1999 was reduced by the $152.4 million
one-time, non-cash accounting impact described in the three month period ended
June 30, 1999. Without the impact of these charges, earnings per share would
have been $1.12 and $0.65 for the six months ended June 30, 2000 and 1999,
respectively. The increase in net income is the result of an increase in net
interest income and other operating income partially offset by increases in the
provision for loan losses and other operating expenses. These increases are
largely attributable to the growth in average managed loans to $7.5 billion for
the six months ended June 30, 2000, from $5.2 billion for the same period in
1999, an increase of 43%. In addition, credit card charge volume was $3.5
billion for the first half of 2000, a 60% increase over the same period in 1999.
Net income for the six months ended June 30, 2000, was reduced by a $3.4
million net impact for the adoption of Staff Accounting Bulletin 101 - "Revenue
Recognition in Financial Statements" issued December 1999 for our debt waiver
products. This adjustment reduced reported earnings per share by $0.04 for the
six months ended June 30, 2000, and is reported as the cumulative effect of
accounting change in the consolidated statements of income.
Managed Loan Portfolio
We analyze our financial performance on a managed loan portfolio basis. To
do so, we adjust the income statement and balance sheet to reverse the effects
of securitization. Our discussion of revenues, where applicable, and provision
for loan losses includes comparisons to amounts reported in our consolidated
statements of income ("owned basis") as well as on a managed basis.
<PAGE>
Our managed loan portfolio is comprised of credit card loans, 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 ours, therefore, we do not show it on our consolidated balance sheets.
The following tables summarize our managed loan portfolio:
June 30, December 31, June 30,
2000 1999 1999
---- ---- ----
(Dollars in thousands)
Period-end balances
Credit card loans:
Credit card loans ................. $ 543,836 $ 145,783 $ 39,757
Retained interests in loans
securitized ................... 1,815,047 1,617,226 1,108,562
Investors' interests in
securitized loans ............. 5,484,238 5,518,313 5,304,338
---------- ---------- ----------
Total managed loan
portfolio ............................ $7,843,121 $7,281,322 $6,452,657
========== ========== ==========
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balances
Credit card loans:
Credit card loans ......... $ 453,780 $ 59,935 $ 340,516 $ 61,026
Retained interests in loans
securitized ............ 1,851,563 791,704 1,791,754 776,748
Investors' interests in
securitized loans ...... 5,306,617 4,349,137 5,349,908 4,385,000
---------- ---------- ---------- ----------
Total managed loan portfolio . $7,611,960 $5,200,776 $7,482,178 $5,222,774
========== ========== ========== ==========
</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 our statements of income for each of
the periods presented, as well as selected financial information on both an
owned and managed loan portfolio basis:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in thousands)
Statements of Income
(owned basis):
Net interest income ....... $ 86,977 $ 33,475 $ 160,670 $ 65,963
Provision for loan losses . 98,215 15,764 186,008 55,073
Other operating income .... 238,023 138,152 479,495 275,153
Other operating expense ... 148,167 108,068 288,290 202,888
--------- --------- --------- ---------
Income before income taxes,
extraordinary loss and
cumulative effect of
accounting change ...... $ 78,618 $ 47,795 $ 165,867 $ 83,155
========= ========= ========= =========
Adjustments for
Securitizations:
Net interest income ....... $ 168,974 $ 145,547 $ 342,254 $ 301,461
Provision for loan losses . 114,387 123,347 231,064 262,880
Other operating income .... (54,587) (22,200) (111,190) (38,581)
Other operating expense ... -- -- -- --
--------- --------- --------- ---------
Income before income taxes,
extraordinary loss and
cumulative effect of
accounting change ....... $ -- $ -- $ -- $ --
========= ========= ========= =========
Statements of Income
(managed basis):
Net interest income ....... $ 255,951 $ 179,022 $ 502,924 $ 367,424
Provision for loan losses . 212,602 139,111 417,072 317,953
Other operating income .... 183,436 115,952 368,305 236,572
Other operating expense ... 148,167 108,068 288,290 202,888
--------- --------- --------- ---------
Income before income taxes,
extraordinary loss and
cumulative effect of
accounting change ...... $ 78,618 $ 47,795 $ 165,867 $ 83,155
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
Other Data:
Owned Basis:
<S> <C> <C> <C> <C>
Average interest-earning assets $ 2,475,510 $ 1,067,431 $ 2,306,263 $ 978,827
Return on average assets* ..... 7.5% 9.5% 8.2% 9.0%
Return on average total equity* 26.9% 21.7% 28.7% 20.7%
Net interest margin (1) ....... 14.1% 12.6% 14.0% 13.6%
Managed Basis:
Average interest-earning assets $ 7,782,127 $ 5,416,568 $ 7,656,171 $ 5,363,826
Return on average assets* ..... 2.5% 2.1% 2.6% 1.8%
Return on average total equity* 26.9% 21.7% 28.7% 20.7%
Net interest margin (1) ....... 13.2% 13.3% 13.2% 13.8%
</TABLE>
(1) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets.
*1999 periods presented before extraordinary loss.
Risk-Based Pricing
We price credit card offers based on a prospect's risk profile prior to
solicitation or upon receipt of a completed application. We evaluate a prospect
to determine credit needs, credit risk and existing credit availability and then
develop a customized offer that includes the most appropriate product, brand,
pricing and credit line. After customers open credit card accounts, we
periodically monitor customers' internal and external credit performance and
periodically recalculate behavior, revenue, attrition and bankruptcy predictors.
The customers are rescored on a regular basis, and 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 enhancement
services to the customers.
Net Interest Income
Net interest income consists primarily of interest earned on our credit
card loans, less interest expense on borrowings to fund the loans. Managed net
interest income for the three- and six-month periods ended June 30, 2000, was
$256.0 million and $502.9 million compared to $179.0 million and $367.4 million
for the same periods in 1999. The increase was primarily due to $2.4 billion and
$2.3 billion increases in average managed loans over the comparable periods in
1999.
Managed net interest margin was 13.2% and 13.2% for the three- and
six-month periods ended June 30, 2000, compared to 13.3% and 13.8% for the same
periods in 1999. The second quarter and year-to-date periods of 2000 net
interest margins were negatively impacted by the interest rate increases made by
the Federal Reserve during the year. The decrease in the net interest margin
from the six-month period ended June 30, 1999, is primarily due to an unusually
high margin in the first quarter of 1999 due to the Company's repricing of the
PNC portfolio and approximately 25 percent of the Metris core portfolio late in
1998. Financing costs as a percentage of borrowings for the second quarter and
year-to-date periods of 2000 were 7.1% and 7.0%, compared with 5.8% and 5.9% in
the same periods of 1999. The increases in borrowing rates for the current year
periods are the result of interest rate increases made by the Federal Reserve
during the year.
<PAGE>
The following tables provide an analysis of interest income and expense,
net interest spread, net interest margin and average balance sheet data for the
three- and six-month periods ended June 30, 2000 and 1999:
Analysis of Average Balances, Interest and Average Yields and Rates
<TABLE>
Three Months Ended June 30,
---------------------------------------------------------------------------
2000 1999
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Owned Basis
Assets:
Interest-earning assets:
Federal funds sold .......... $ 110,300 $ 1,727 6.3% $ 177,785 $ 2,268 5.1%
Short-term investments ...... 59,867 864 5.8% 38,007 433 4.6%
Credit card loans and
retained interests in loans
securitized ................ 2,305,343 113,168 19.7% 851,639 40,835 19.2%
----------- ----------- ----- ----------- ----------- -----
Total interest-earning assets $ 2,475,510 $ 115,759 18.8% $ 1,067,431 $ 43,536 16.4%
Other assets ................ 770,797 -- -- 594,726 -- --
Allowances for loan losses .. (661,743) -- -- (463,476) -- --
----------- -----------
Total assets ................ $ 2,584,564 -- -- $ 1,198,681 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 1,104,424 $ 18,306 6.7% $ 185,447 $ 2,562 5.5%
Debt ........................ 350,899 10,476 12.0% 316,209 7,499 9.5%
----------- ----------- ----- ----------- ----------- -----
Total interest-bearing
liabilities .............. $ 1,455,323 $ 28,782 8.0% $ 501,656 $ 10,061 8.0%
Other liabilities ........... 408,204 -- -- 169,323 -- --
----------- -----------
Total liabilities ........... 1,863,527 -- -- 670,979 -- --
Stockholders' equity ........ 721,037 -- -- 527,702 -- --
----------- -----------
Total liabilities and equity $ 2,584,564 -- -- $ 1,198,681 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 86,977 14.1% -- $ 33,475 12.6%
Net interest rate spread (2) -- -- 10.8% -- -- 8.4%
Managed Basis
Credit card loans ........... $ 7,611,960 $ 373,431 19.7% $ 5,200,776 $ 247,039 19.1%
Total interest-earning assets 7,782,127 376,022 19.4% 5,416,568 249,740 18.5%
Total interest-bearing
liabilities .............. 6,761,940 120,071 7.1% 4,850,794 70,718 5.8%
Net interest income and
interest margin (1) ...... -- $ 255,951 13.2% -- $ 179,022 13.3%
Net interest rate spread (2) -- -- 12.3% -- -- 12.7%
</TABLE>
(1) Net interest margin is computed by dividing annualized net interest income
by average total interest-earning assets.
(2) The net interest rate spread is the annualized yield on average
interest-earning assets minus the annualized funding rate on average
interest-bearing liabilities.
<PAGE>
<TABLE>
Six Months Ended June 30,
2000 1999
--------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Owned Basis
Assets:
Interest-earning assets:
Federal funds sold .......... $ 103,492 $ 3,096 6.0% $ 104,933 $ 2,475 4.8%
Short-term investments ...... 70,501 1,937 5.5% 36,119 812 4.5%
Credit card loans and
retained interests in loans
securitized ................ 2,132,270 208,527 19.7% 837,775 82,112 19.8%
----------- ----------- ----- ----------- ----------- -----
Total interest-earning assets $ 2,306,263 $ 213,560 18.6% $ 978,827 $ 85,399 17.6%
Other assets ................ 752,518 -- -- 590,772 -- --
Allowances for loan losses .. (655,698) -- -- (451,796) -- --
----------- -----------
Total assets ................ $ 2,403,083 -- -- $ 1,117,803 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 993,286 $ 32,048 6.5% $ 95,860 $ 2,624 5.5%
Debt ........................ 351,899 20,842 11.9% 300,199 16,812 11.3%
----------- ----------- ----- ----------- ----------- -----
Total interest-bearing
liabilities .............. $ 1,345,185 $ 52,890 7.9% $ 396,059 $ 19,436 9.9%
Other liabilities ........... 370,241 -- -- 233,803 -- --
----------- -----------
Total liabilities ........... 1,715,426 -- -- 629,862 -- --
Stockholders' equity ........ 687,657 -- -- 487,941 -- --
----------- -----------
Total liabilities and equity $ 2,403,083 -- -- $ 1,117,803 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 160,670 14.0% -- $ 65,963 13.6%
Net interest rate spread (2) -- -- 10.7% -- -- 7.7%
Managed Basis
Credit card loans ........... $ 7,482,178 $ 730,491 19.6% $ 5,222,774 $ 503,482 19.4%
Total interest-earning assets 7,656,171 735,524 19.3% 5,363,826 506,769 19.1%
Total interest-bearing
liabilities .............. 6,695,094 232,600 7.0% 4,781,058 139,345 5.9%
Net interest income and
interest margin (1) ...... -- $ 502,924 13.2% -- $ 367,424 13.8%
Net interest rate spread (2) -- -- 12.3% -- -- 13.2%
</TABLE>
(1) Net interest margin is computed by dividing annualized net interest income
by average total interest-earning assets.
(2) The net interest rate spread is the annualized yield on average
interest-earning assets minus the annualized funding rate on average
interest-bearing liabilities.
<PAGE>
Other Operating Income
Other operating income contributes substantially to our results of
operations, representing 73% and 75% of owned revenues for the three- and
six-month periods ended June 30, 2000, respectively. The following tables
present other operating income on an owned basis:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
(Dollars in thousands) ---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Operating Income:
Net securitization and credit card
servicing income ................................ $120,509 $ 74,081 $251,568 $151,079
Credit card fees, interchange and
other credit card income ........................ 53,530 23,920 104,327 45,229
Enhancement services revenues ...................... 63,984 40,151 123,600 78,845
-------- -------- -------- --------
Total ........................................... $238,023 $138,152 $479,495 $275,153
======== ======== ======== ========
</TABLE>
Other operating income increased $99.9 million and $204.3 million for the
three- and six-month periods ended June 30, 2000, over the comparable periods in
1999. These increases are primarily due to the $46.4 million and $100.5 million
increases in income generated from net securitization and credit card servicing
income as a result of increases in average managed loans. For the three- and
six-month periods ended June 30, 2000, credit card fees, interchange and other
credit card income increased $29.6 million and $59.1 million over the comparable
periods in 1999. These increases were primarily due to the growth in total
accounts and loans in the managed credit card portfolio. The increase for the
six-month period ended June 30, 2000, also includes the favorable impact of
$12.1 million related to the operational policy change in the billing of
overlimit fees. Previously we charged a customer an overlimit fee at the time
the customer statement was generated. Our new policy is to charge the overlimit
fee at the time the customer's account exceeds the credit limit.
Additionally, enhancement services revenues increased by $23.8 million and
$44.8 million for the three- and six-month periods ended June 30, 2000. These
increases reflect the strong sales of our debt waiver product and the increase
in membership program revenues resulting from increased account penetration for
membership programs and additional product offers to third-party's cardholders.
Other Operating Expense
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
(Dollars in thousands) 2000 1999 2000 1999
---- ---- ---- ----
Other Operating Expense:
<S> <C> <C> <C> <C>
Credit card account and other
product solicitation and
marketing expenses ....... $ 36,316 $ 27,635 $ 68,458 $ 51,738
Employee compensation ....... 42,782 27,599 86,554 50,917
Data processing services and
communications .............. 17,590 12,329 34,987 22,611
Third-party servicing expense 3,229 4,279 6,457 7,925
Warranty and debt waiver
underwriting and claims
servicing expense ........ 6,760 4,484 13,492 8,464
Credit card fraud losses .... 2,431 850 4,572 2,113
Customer base intangible
amortization ............. 5,225 7,767 10,192 18,132
Other ....................... 33,834 23,125 63,578 40,988
-------- -------- -------- --------
Total .................... $148,167 $108,068 $288,290 $202,888
======== ======== ======== ========
</TABLE>
Total other operating expenses for the three- and six-month periods ended
June 30, 2000, increased $40.1 million and $85.4 million over the comparable
periods in 1999, largely due to costs associated with the growth of our business
activities. Employee compensation increased $15.2 million and $35.6 million for
the three- and six-month periods ended June 30, 2000, due to increased staffing
needs to support the increase in credit card accounts and enhancement services
active member growth. Other expenses increased $10.7 million and $22.6 million
for the three- and six-month periods ended June 30, 2000, due to increased fees
associated with increased credit card volume and higher professional fees. Also,
credit card account and other product solicitation and marketing expenses
increased $8.7 million and $16.7 million over the comparable periods in 1999,
largely due to the increase in enhancement services marketing activity and
additional costs associated with our credit card marketing activity which
resulted in over 400,000 new credit card accounts.
Income Taxes
Our provision for income taxes includes both federal and state income
taxes. Applicable income tax expense was $30.3 million and $64.2 million for the
three- and six-month periods ended June 30, 2000, compared to $19.3 million and
$33.0 million for the same periods in 1999. This tax expense represents an
effective tax rate of 38.7% for the six-month period ended June 30, 2000,
compared to 39.7% for the same period in 1999.
Asset Quality
Our 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 our various
credit card account portfolios, the success of our collection and recovery
efforts, and general economic conditions. The average age of our credit card
portfolio affects the stability of delinquency and loss rates. In order to
minimize losses, we continue to focus our resources on refining our credit
underwriting standards for new accounts, and on collections and post charge-off
recovery efforts. At June 30, 2000, 61% of managed accounts and 49% of managed
loans were less than 36 months old.
For the quarter ended June 30, 2000, our managed net charge-off ratio was
9.5% compared to 10.1% for the quarter ended June 30, 1999. For the six months
ended June 30, 2000, the net charge-off rate stood at 9.6% compared to 9.7% for
the six months ended June 30, 1999. Without the impact of purchase accounting
related to acquired portfolios, the charge-off rate was 9.7% and 10.0% for the
three- and six-month periods ended June 30, 2000, compared to 10.8% for both
periods of 1999. Our charge-offs have been stable, with losses between 9.7% and
11.0% for the last ten quarters. We believe, consistent with our statistical
models and other credit analysis, that this rate will continue to fluctuate in
this range over the next few quarters.
We use credit line analyses, account management and customer transaction
authorization procedures to minimize loan losses. Our risk models determine
initial credit lines at the time of solicitation and generally result in lower
credit lines than the industry average. We manage credit lines on an ongoing
basis and adjust them based on customer usage and payment patterns. To maximize
profitability, we continually monitor customer accounts. We initiate appropriate
collection activities when an account is delinquent or overlimit.
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. We monitor delinquency levels on a
managed basis, since delinquency on either an owned or managed basis subjects us
to credit loss exposure. A credit card account is contractually delinquent if we
do not receive the minimum payment by the specified date on the cardholder's
statement. It is our policy to continue to accrue interest and fee income on all
credit card accounts, except in limited circumstances, until we charge off the
account and all related loans, interest and other fees. The following table
presents the delinquency trends of our credit card loan portfolio on a managed
portfolio basis:
Managed Loan Delinquency
<TABLE>
June 30, % of December 31, % of June 30, % of
2000 Total 1999 Total 1999 Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Managed loan
portfolio ......... $7,843,121 100% $7,281,322 100% $6,452,657 100%
Loans contractually
delinquent:
30 to 59 days ... 189,322 2.4% 168,882 2.3% 118,760 1.9%
60 to 89 days ... 137,513 1.8% 117,740 1.6% 85,426 1.3%
90 or more days . 274,968 3.5% 270,092 3.7% 201,168 3.1%
---------- ----- ---------- ----- ---------- -----
Total ....... $ 601,803 7.7% $ 556,714 7.6% $ 405,354 6.3%
========== ===== ========== ===== ========== =====
</TABLE>
The above numbers reflect the continued seasoning of our managed loan
portfolio. Without the impact of purchase accounting related to acquired
portfolios, delinquency rates were 7.7%, 7.8% and 7.6%, respectively. We intend
to continue to focus our resources on our collection efforts to minimize the
negative impact to net loan losses that results from increased delinquency
levels.
Net Charge-Offs
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged against the related income at the
time of charge-off.
During the quarter ended March 31, 2000, we changed our policy for secured
card accounts to charge off accounts 120 days contractually delinquent. Prior to
the first quarter our charge-off policy for secured card accounts was the same
as our overall charge-off policy, which is to charge off accounts 180 days
contractually delinquent. This change was made based on our experience that
secured card customers who are 120 days delinquent more closely resemble
recovery accounts. The following charge-off amounts on an owned and managed
basis reflect the $1.2 million charge-off related to this policy change for the
six months ended June 30, 2000.
The following table presents our net charge-offs for the periods indicated
as reported in the consolidated financial statements and on a managed portfolio
basis:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Owned basis:
Average loans and retained
interests in loans securitized
outstanding .................... $2,305,343 $ 851,639 $2,132,270 $ 837,775
Net charge-offs ................... 55,723 21,646 103,297 40,540
Net charge-offs as a percentage
of average loans outstanding (1) 9.7% 10.2% 9.7% 9.8%
========== ========== ========== ==========
Managed basis:
Average loans outstanding ......... $7,611,960 $5,200,776 $7,482,178 $5,222,774
Net charge-offs ................... 180,570 130,799 358,979 252,252
Net charge-offs as a percentage of
average loans outstanding(1) ... 9.5% 10.1% 9.6% 9.7%
========== ========== ========== ==========
</TABLE>
(1) Annualized
Provision and Allowance for Loan Losses
We maintain an allowance for loan losses for both owned loans and the
retained interest in loans securitized. The portion allocated to the retained
interest in loans securitized represents our estimate of a valuation adjustment
to report this asset in accordance with SFAS 125. For securitized loans,
anticipated losses and related provisions for loan losses are reflected in the
calculations of net securitization and credit card servicing income. We make
provisions for loan losses in amounts necessary to maintain the allowance at a
level estimated to be sufficient to absorb probable future losses of principal
and earned interest, net of recoveries, inherent in the existing loan portfolio.
The provision for loan losses on a managed basis for the three- and
six-month periods ended June 30, 2000, totaled $212.6 million and $417.1 million
compared to a provision of $139.1 million and $318.0 million for the three- and
six-month periods ended June 30, 1999. The increase for the three- and six-month
periods ended June 30, 2000, as compared to the three- and six-month periods
ended June 30, 1999, is primarily reflective of the increase in loans. The
following table presents the change in our allowance for loan losses and other
ratios for the periods presented:
Analysis of Allowance for Loan Losses
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Managed Basis:
Balance at beginning of period .......... $ 645,089 $ 450,672 $ 619,028 $ 393,283
Allowance related to assets acquired, net -- 16,044 -- 16,044
Provision for loan losses ............... 212,602 139,111 417,072 317,953
Loans charged off ....................... (196,552) (140,225) (390,042) (268,388)
Recoveries .............................. 15,982 9,426 31,063 16,136
--------- --------- --------- ---------
Net loan charge-offs .................... (180,570) (130,799) (358,979) (252,252)
--------- --------- --------- ---------
Balance at end of period ................ $ 677,121 $ 475,028 $ 677,121 $ 475,028
========= ========= ========= =========
Ending allowance as a percent
of loans ............................. 8.6% 7.4% 8.6% 7.4%
========= ========= ========= =========
</TABLE>
<PAGE>
Derivatives Activities
We use derivative financial instruments for the purpose of managing our
exposure to interest rate risks. We have a number of procedures in place to
monitor and control both market and credit risk from these derivatives
activities. Our senior management approves all derivatives strategies and
transactions.
Liquidity, Funding and Capital Resources
One of our primary financial goals is to maintain an adequate level of
liquidity through active management of assets and liabilities. Because the
pricing and maturing characteristics of our assets and liabilities change,
liquidity management is a dynamic process, affected by changes in short- and
long-term interest rates. We use a variety of financing sources to manage
liquidity, refunding and interest rate risks.
We finance the growth of our credit card loan portfolio through cash flow
from operations, asset securitization, bank loans, subsidiary bank deposits,
long-term debt issuance, and equity issuance.
At June 30, 2000 and 1999, we had received cumulative net proceeds of
approximately $5.5 billion and $5.3 billion, respectively, from sales of credit
card loans to the trust and conduits. We used cash generated from these
transactions to fund credit card loan portfolio growth and reduce borrowings. We
rely upon the securitization of our credit card loans to fund portfolio growth.
To date, we have completed securitization transactions on terms that we believe
are satisfactory. Our ability to securitize our assets depends on the favorable
investor demand and legal, regulatory and tax conditions for securitization
transactions, as well as continued favorable performance of our securitized
portfolio of receivables. Any adverse change could force us 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 our ability to grow.
Beginning in the first quarter 1999, Direct Merchants Bank began issuing
certificates of deposit in increments of $100,000. As of June 30, 2000 and
December 31, 1999, $1.2 billion and $0.8 billion of CDs were outstanding,
respectively, with original maturities ranging from three months to two years
with fixed interest rates ranging from 5.2% to 7.4%.
As of June 30, 2000, we had a $200 million, three-year revolving credit
facility and a $100 million, five-year term loan, collectively (the "credit
facilities") with a syndicate of banks and money market mutual funds. These
credit facilities became effective upon the spin off from Fingerhut on September
25, 1998. At June 30, 2000, we were in compliance with all financial covenants
under these credit facilities. At June 30, 2000, and December 31, 1999, we had
$100 million of outstanding borrowings under the credit facilities for both
periods.
During July 2000, we amended and restated our credit facilities. The
amended credit facilities consist of a $170 million revolving credit facility
maturing in July 2003 and a $100 million term loan maturing in September 2003
with a syndicate of banks and money market mutual funds.
During the third quarter of 1999, we issued $150 million of 10.125% Senior
Notes due 2006. In November 1997, we issued and sold $100 million of 10% Senior
Notes due 2004. The Senior Notes are guaranteed on the same basis as the Senior
Notes due 2006.
On November 13, 1998, we sold $200 million in Series B Perpetual
Convertible Preferred Stock and $100 million in 12% Senior Notes due 2006 to
affiliates of the Thomas H. Lee Company. We also issued 11.25 million ten-year
warrants to purchase shares of the Company's common stock for $10, 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.
On March 12, 1999, shareholders approved conversion of the Series B
Preferred and 12% Senior Notes into Series C Perpetual Convertible Preferred
Stock. 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 12% Senior Notes were converted into 0.8 million shares of
Series C Preferred 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 a converted basis.
The cumulative payment-in-kind dividends are effectively guaranteed for a
seven-year period. Assuming conversion of the Series C Preferred into common
stock had occurred in the second quarter of 2000, the Lee Company would have
owned approximately 31% of the Company on a diluted basis.
As the portfolio of credit card loans grows our funding needs will increase
accordingly. We believe that our cash flow from operations, asset
securitization, long term debt, subsidiary bank deposits, bank loans and equity
will provide us with adequate liquidity for meeting anticipated cash needs,
although no assurance can be given to that effect.
Newly Issued Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and subsequent amendments No. 137 and No.
138, which establish accounting and reporting standards for derivative
instruments. They require enterprises to recognize all derivatives as either
assets or liabilities in the statement of financial position and to measure
those instruments at fair value. These statements are effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. We are evaluating the
financial impact the adoption of these statements will have on our financial
statements.
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 our limited operating history
as a stand alone entity, our limited experience in originating and servicing
credit card accounts, the lack of seasoning of our credit card accounts which
renders predictability of delinquencies more difficult, higher default and
bankruptcy rates of our target market of moderate-income consumers, interest
rate risks, risks associated with acquired portfolios, dependence on the
securitization markets and other funding sources, state and federal laws and
regulations, and general economic conditions that can have a major impact on the
performance of loans. 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, 1999. As a result of these
factors, we cannot guarantee any forward-looking statements. 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 our 10-K
for the year ended December 31, 1999, could also adversely affect us.
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. Our principal market risk is due to changes in interest rates. This
affects us directly in our lending and borrowing activities, as well as
indirectly as interest rates may impact the payment performance of our
cardholders.
To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our 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. We seek to minimize the
impact of changes in interest rates on us primarily by matching asset and
liability repricings.
Our 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,
our $300 million bank credit facilities, $250 million in senior notes, and
equity issuance. Our securitized loans are owned by a trust and bank-sponsored
multiseller receivables 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 June 30, 2000, approximately 13.2% 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, 87% of the funding for the securitized loan
portfolio is indexed to floating commercial paper and LIBOR rates. In an
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 our 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 our floating rate financial instruments, including both
debt obligations and loans, will result in an increase in net income of
approximately $14.2 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 $29.7 million. Our 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 our 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
We are a party to various legal proceedings resulting from the ordinary
business activities relating to its operations. We do not believe that any of
these legal proceedings will have a material adverse effect on our financial
position or our 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
(a) The Company held its annual meeting of stockholders on May 9,
2000, and the following matters were voted on in that meeting.
The number of shares in the voting results are shown before the
three-for-two stock split distributed June 15, 2000.
(b) The following directors were elected at the meeting:
Derek V. Smith David V. Harkins Thomas M. Hagerty
Thomas H. Lee C. Hunter Boll
The following directors continued their term of office after the
meeting:
Ronald N. Zebeck John A. Cleary Frank D. Trestman
Lee R. Anderson, Sr. Walter M. Hoff
(c) The election of the following directors who will serve until
their successors are elected and qualified, or their earlier
death or resignation:
Broker
Director For Against Withheld Abstentions Non-Vote
-------- --- ------- -------- ----------- --------
Derek V. Smith 35,559,799 None 326,481 None None
Thomas H. Lee 19,185,365 None None None None
David V. Harkins 19,185,365 None None None None
C. Hunter Boll 19,185,365 None None None None
Thomas M. Hagerty 19,185,365 None None None None
The approval of an increase in the number of shares of the Company's
Common Stock available to be issued pursuant to the Metris Companies Inc.
Amended and Restated Long-Term Incentive and Stock Option Plan from
8,000,000 to 10,000,000 shares.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
37,946,280 13,324,818 None 48,528 3,762,019
Ratification of the selection of KPMG LLP as independent auditors of
the Company for 2000.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
55,015,274 15,898 None 40,473 None
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amended and Restated Credit Agreement, dated as of July 21,
2000, among Metris Companies Inc.; the lenders from time to
time parties thereto; The Chase Manhattan Bank, as
Administrative Agent; Bank of America, N.A., as Syndicate
Agent; Deutsche Bank AG, New York Branch, as
Co-Documentation Agent; U.S. Bank National Association, as
Co-Documentation Agent; and Barclays Bank PLC, as Co-Agent.
11. Computation of Earnings Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K:
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METRIS COMPANIES INC.
Signature Title Date
--------- ----- ----
Principal financial officer: Executive Vice President, August 9, 2000
Chief Financial Officer
/s/ David D. Wesselink
----------------------
David D. Wesselink
Principal accounting officer: Sr. Vice President, Finance, August 9, 2000
Corporate Controller
/s/ Jean C. Benson
----------------------
Jean C. Benson
<PAGE>
