UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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.)
10900 Wayzata Boulevard, Minnetonka, Minnesota 55305
(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 October 31, 2000, 62,141,073 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
<PAGE>
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
September 30, 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.......................................23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................36
Item 2. Changes in Securities........................................36
Item 3. Defaults Upon Senior Securities..............................36
Item 4. Submission of Matters to a Vote of Security Holders..........36
Item 5. Other Information............................................36
Item 6. Exhibits and Reports on Form 8-K........................36
Signatures..............................................37
<PAGE>
<TABLE>
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)
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Cash and due from banks ........................................................................ $ 100,742 $ 28,505
Federal funds sold ............................................................................. 162,263 118,962
Short-term investments ......................................................................... 49,155 46,966
---------- ----------
Cash and cash equivalents ...................................................................... 312,160 194,433
---------- ----------
Retained interests in loans securitized ........................................................ 1,899,958 1,617,226
Less: Allowance for loan losses ............................................................... 610,680 606,853
---------- ----------
Net retained interests in loans securitized .................................................... 1,289,278 1,010,373
---------- ----------
Credit card loans (net of allowance for loan losses of $118,595 and
$12,175, respectively)....................................................................... 791,010 133,608
Property and equipment, net .................................................................... 120,127 56,914
Accrued interest and fees receivable ........................................................... 27,474 17,704
Prepaid expenses and deferred charges .......................................................... 94,750 57,371
Deferred income taxes .......................................................................... 183,394 185,613
Customer base intangible ....................................................................... 100,902 83,809
Other receivables due from credit card
securitizations, net ........................................................................ 216,812 243,978
Other assets ................................................................................... 86,341 61,279
---------- ----------
Total assets .............................................................................. $3,222,248 $2,045,082
========== ==========
Liabilities:
Deposits ....................................................................................... $1,632,294 $ 775,381
Debt ........................................................................................... 355,925 345,012
Accounts payable ............................................................................... 95,660 45,850
Current income taxes payable ................................................................... 9,057 22,969
Deferred income ................................................................................ 230,143 171,666
Accrued expenses and other liabilities ......................................................... 65,792 60,403
---------- ----------
Total liabilities ......................................................................... 2,388,871 1,421,281
---------- ----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000
shares authorized, 946,282 and 885,178 shares issued and outstanding,
respectively .............................................................................. 352,490 329,729
Common stock, par value $.01 per share;
100,000,000 shares authorized, 62,129,887 and 57,919,433 shares issued
and outstanding, respectively.............................................................. 621 386
Paid-in capital ................................................................................ 195,545 130,772
Retained earnings .............................................................................. 284,721 162,914
---------- ----------
Total stockholders' equity ................................................................ 833,377 623,801
---------- ----------
Total liabilities and stockholders' equity ................................................ $3,222,248 $2,045,082
========== ==========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per-share data) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Interest Income:
<S> <C> <C> <C> <C>
Credit card loans and retained
interests in loans securitized .................................... $ 131,326 $ 66,337 $ 339,853 $ 148,449
Federal funds sold ..................................................... 2,444 915 5,540 3,390
Other .................................................................. 1,070 683 3,007 1,495
--------- --------- --------- ---------
Total interest income .................................................. 134,840 67,935 348,400 153,334
Deposit interest expense ............................................... 24,321 6,451 56,369 9,013
Other interest expense ................................................. 11,073 9,274 31,915 26,148
--------- --------- --------- ---------
Total interest expense ................................................. 35,394 15,725 88,284 35,161
Net Interest Income .................................................... 99,446 52,210 260,116 118,173
Provision for loan losses .............................................. 110,936 67,052 296,944 122,125
--------- --------- --------- ---------
Net Interest Loss After Provision for Loan Losses ...................... (11,490) (14,842) (36,828) (3,952)
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income .................................................. 110,880 89,077 362,448 240,156
Credit card fees, interchange and
other credit card income .......................................... 59,982 38,368 164,309 83,597
Enhancement services revenues .......................................... 68,767 44,636 192,367 123,481
--------- --------- --------- ---------
239,629 172,081 719,124 447,234
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses................................ 36,619 19,103 105,077 70,841
Employee compensation .................................................. 45,773 34,184 132,327 85,101
Data processing services and communications ............................ 18,682 14,135 53,669 36,746
Third-party servicing expense .......................................... 3,162 3,515 9,619 11,440
Warranty and debt waiver underwriting
and claims servicing expense ..................................... 7,260 6,515 20,752 14,979
Credit card fraud losses ............................................... 2,227 1,717 6,799 3,830
Customer base intangible amortization .................................. 3,915 7,549 14,107 25,681
Other .................................................................. 32,011 18,809 95,589 59,797
--------- --------- --------- ---------
149,649 105,527 437,939 308,415
--------- --------- --------- ---------
Income Before Income Taxes, Extraordinary
Loss and Cumulative Effect of Accounting Change................... 78,490 51,712 244,357 134,867
Income taxes ........................................................... 30,130 20,529 94,321 53,542
--------- --------- --------- ---------
Income Before Extraordinary Loss and
Cumulative Effect of Accounting Change............................ 48,360 31,183 150,036 81,325
Extraordinary loss from early
extinguishment of debt ........................................... -- -- -- 50,808
Cumulative effect of accounting change (net
of income taxes of $2,180)........................................ -- -- 3,438 --
--------- --------- --------- ---------
Net Income ............................................................. 48,360 31,183 146,598 30,517
Preferred stock dividends-Series B ..................................... -- -- -- 7,506
Convertible preferred stock dividends-Series C ......................... 8,036 7,182 23,404 9,649
Adjustment for the retirement of Series B preferred stock .............. -- -- -- 101,615
--------- --------- --------- ---------
Net Income (Loss) Applicable To Common Stockholders .................... $ 40,324 $ 24,001 $ 123,194 $ (88,253)
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Earnings per share:
<S> <C> <C> <C> <C>
Basic-income (loss) before
extraordinary loss and cumulative
effect of accounting change ....... $ 0.66 $ 0.41 $ 2.13 $ (0.65)
Basic-extraordinary loss .............. -- -- -- (0.88)
Basic-cumulative effect of accounting
change ............................ -- -- (0.06) --
Basic-net income (loss) ............... 0.66 0.41 2.07 (1.53)
Diluted-income (loss) before
extraordinary loss and cumulative
effect of accounting change ....... 0.52 0.36 1.64 (0.65)
Diluted-extraordinary loss ............ -- -- -- (0.88)
Diluted-cumulative effect of accounting
change ............................ -- -- (0.04) --
Diluted-net income (loss) ............. 0.52 0.36 1.60 (1.53)
Shares used to compute earnings per share:
Basic ...................................... 61,293 57,877 59,371 57,841
Diluted .................................... 93,444 87,115 91,647 57,841
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands) (Unaudited)
Total
Preferred Common Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ 201,100 $ 193 $ 107,615 $ 124,074 $ 432,982
Net income ............. -- -- -- 30,517 30,517
Issuance of common stock
under employee
benefit plans ...... -- -- 1,591 -- 1,591
Cash dividends ......... -- -- -- (829) (829)
Retirement of preferred
stock - Series B ... (208,606) -- (101,615) -- (310,221)
Issuance of preferred
stock - Series C ... 312,910 -- 122,369 -- 435,279
June 1999 two-for-one
stock split ........ -- 193 (193) -- --
Preferred dividends in
kind - Series B .... 7,506 -- -- (7,506) --
Preferred dividends in
kind - Series C .... 9,563 -- -- (9,563) --
--------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30, 1999 $ 322,473 $ 386 $ 129,767 $ 136,693 $ 589,319
========= ========= ========= ========= =========
BALANCE AT DECEMBER 31, 1999 $ 329,729 $ 386 $ 130,772 $ 162,914 $ 623,801
Net income ............. -- -- -- 146,598 146,598
Issuance of common stock
under employee
benefit plans ...... -- 34 64,974 -- 65,008
Cash dividends ......... -- -- -- (2,030) (2,030)
June 2000 three-for-two
stock split ........ -- 201 (201) -- --
Preferred dividends in
kind - Series C .... 22,761 -- -- (22,761) --
--------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30, 2000 $ 352,490 $ 621 $ 195,545 $ 284,721 $ 833,377
========= ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Operating Activities:
Net income ........................................... $ 146,598 $ 30,517
Adjustments to reconcile net income 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 ................... 53,791 56,566
Change in allowance for loan losses ............. 110,247 160,117
Changes in operating assets and liabilities, net:
Accrued interest and fees receivable ........ (9,770) (7,993)
Prepaid expenses and deferred charges ....... (51,953) (43,148)
Deferred income taxes ....................... 2,219 (32,200)
Other receivables due from credit card
securitizations, net ................... 20,579 (49,713)
Accounts payable and accrued expenses ....... 55,199 82,875
Current income taxes payable ................ (13,912) (20,372)
Deferred income ............................. 55,039 29,975
Other ....................................... 6,123 (32,764)
----------- -----------
Net cash provided by operating activities ............ 377,598 224,668
----------- -----------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans................................ 176,964 581,161
Net loans originated or collected .................... (1,058,924) (247,027)
Credit card portfolio acquisition .................... (195,597) (1,156,673)
Additions to premises and equipment .................. (72,335) (33,581)
----------- -----------
Net cash used in investing activities ................ (1,149,892) (856,120)
----------- -----------
Financing Activities:
Net increase in debt ................................. 10,913 133,891
Net increase in deposits ............................. 856,913 588,297
Cash dividends paid .................................. (2,030) (829)
Increase in common equity ............................ 24,225 1,037
----------- -----------
Net cash provided by financing activities ............ 890,021 722,396
----------- -----------
Net increase in cash and cash equivalents ............ 117,727 90,944
Cash and cash equivalents at beginning of period ..... 194,433 37,347
----------- -----------
Cash and cash equivalents at end of period ........... $ 312,160 $ 128,291
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<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 prior-year common share and
per-share disclosures have been restated to reflect 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 $138.0 million and $369.0 million for the
three- and nine-month periods ended September 30, 2000, respectively, compared
to $146.5 million and $409.4 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 nine-month periods ended September 30,
2000 and 1999, was $71.2 million and $15.9 million, respectively. Cash paid for
income taxes for the same periods was $75.2 million and $105.7 million,
respectively. The income tax benefit from the deduction triggered by exercises
of employee stock options reflected in "Changes in operating assets and
liabilities, net: Other" on the consolidated statements of cash flows for the
nine-month periods ended September 30, 2000 and 1999, was $40.8 million and $0.6
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 Nine Months Ended
September 30, September 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 ... $ 48,360 $ 31,183 $ 150,036 $ 81,325
Preferred dividends - Series B ................ -- -- -- 7,506
Preferred dividends - Series C ................ 8,036 7,182 23,404 9,649
Adjustment for the retirement of Series B
preferred stock .......................... -- -- -- 101,615
--------- --------- --------- ---------
Net income (loss) applicable to common
stockholders before extraordinary loss
and cumulative effect of accounting
change ................................... 40,324 24,001 126,632 (37,445)
Extraordinary loss from the early
extinguishment of debt ................... -- -- -- 50,808
Cumulative effect of accounting change, net ... -- -- 3,438 --
--------- --------- --------- ---------
Net income (loss) applicable to common
stockholders ............................. $ 40,324 $ 24,001 $ 123,194 $ (88,253)
========= ========= ========= =========
Weighted average common shares outstanding .... 61,293 57,877 59,371 57,841
Adjustments for dilutive securities:
Assumed exercise of outstanding stock
options .................................. 2,987 3,549 3,112 --
Assumed conversion of convertible preferred
stock .................................... 29,164 25,689 29,164 --
--------- --------- --------- ---------
Diluted common shares ......................... 93,444 87,115 91,647 57,841
========= ========= ========= =========
Earnings per share:
Basic - income (loss) before extra-
ordinary loss and cumulative effect of
accounting change .................... $ 0.66 $ 0.41 $ 2.13 $ (0.65)
Basic - extraordinary loss ............... -- -- -- (0.88)
Basic - cumulative effect of accounting
change ............................... -- -- (0.06) --
Basic - net income (loss) ................ 0.66 0.41 2.07 (1.53)
Diluted - income (loss) before extra-
ordinary loss and cumulative effect of
accounting change .................... 0.52 0.36 1.64 (0.65)
Diluted - extraordinary loss ............. -- -- -- (0.88)
Diluted - cumulative effect of accounting
change ............................... -- -- (0.04) --
Diluted - net income (loss) .............. 0.52 0.36 1.60 (1.53)
</TABLE>
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 formalized 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 nine months ended September 30,
2000. Because we have applied the provisions of this SAB to our membership
programs since 1998, before the SEC formalized 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 Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period .......... $ 677,121 $ 475,028 $ 619,028 $ 393,283
Allowance related to assets acquired, net 5,963 10,250 5,963 26,293
Provision for loan losses ............... 110,936 67,052 296,944 122,125
Provision for loan losses (1) ........... 137,971 146,491 369,035 409,371
Loans charged off ....................... (220,689) (153,672) (610,731) (422,059)
Recoveries .............................. 17,973 8,251 49,036 24,387
--------- --------- --------- ---------
Net loans charged off ................... (202,716) (145,421) (561,695) (397,672)
--------- --------- --------- ---------
Balance at end of period ................ $ 729,275 $ 553,400 $ 729,275 $ 553,400
========= ========= ========= =========
(1) Amounts are included in "Net securitization and credit card servicing income."
</TABLE>
NOTE 4 - CONVERTIBLE PREFERRED STOCK
The Series C Perpetual Convertible Preferred Stock is held by affiliates of
the Thomas H. Lee Company, a private equity firm and is 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 September 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 Series C Preferred Stock is normally convertible into common stock.
However, in the event that such conversion would result in a stockholder or
group (within the meaning of Rules 13d-3 and 13d-5 promulgated under the
Exchange Act) obtaining 35% or more of the outstanding voting stock of the
Company, the indenture which governs our outstanding 10% Senior Notes due 2004
("10% Notes") requires us to make an offer to purchase those notes. Accordingly,
for so long as any of our 10% Notes remain outstanding, in the event that the
conversion of the Series C Preferred Stock into common stock would cause any
stockholder or group to beneficially own 35% or more of the outstanding voting
stock of the Company, the excess number of shares of Series C Preferred Stock
will be convertible into non-voting stock. Such non-voting stock will consist of
non-voting common stock, or in the alternative, Series D Preferred Stock. The
non-voting common stock, if issued, will automatically convert into common stock
at the time such conversion will not trigger the restrictions on beneficial
ownership of voting stock set forth in the indenture relating to the 10% Notes.
The terms of the Series D Preferred Stock are essentially the same as the terms
of the common stock, except that the Series D Preferred Stock has a liquidation
preference of $.01 per share and is non-voting, except as required by law. In
addition, like the non-voting common stock, the Series D Preferred Stock will
automatically convert into common stock at the time such conversion will not
trigger the restrictions set forth in the indenture described above.
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 fee 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 September 30,
2000
----
Consumer
Credit Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest income.... $ 416,509 $ 3,337 $ (285,006) (b) $ 134,840
Interest expense... 140,774 -- (105,380) (b) 35,394
---------- ---------- ------------ ----------
Net interest
income ........ 275,735 3,337 (179,626) 99,446
Other revenue ..... 129,207 68,767 41,655 239,629
Total revenue ..... 545,716 72,104 (243,351) 374,469
Income before
income taxes... 137,426 (c) 44,607 (c) (103,543) (d) 78,490
Total assets ...... $8,447,600 $ 160,072 $ (5,385,424) (e) $3,222,248
</TABLE>
<TABLE>
Three Months Ended September 30,
1999
----
Consumer
Credit Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest income ..... $ 318,131 $ 1,235 $ (251,431) (b) $ 67,935
Interest expense .... 93,742 -- (78,017) (b) 15,725
----------- ----------- ----------- ----------
Net interest
income .......... 224,389 1,235 (173,414) 52,210
Other revenue ....... 100,522 44,636 26,923 172,081
Total revenue ....... 418,653 45,871 (224,508) 240,016
Income before
income taxes
and extra-
ordinary loss...... 105,143 (c) 24,761 (c) (78,192) (d) 51,712
Total assets ........ $ 6,672,130 $ 97,316 $(4,956,974) (e) $ 1,812,472
</TABLE>
<PAGE>
<TABLE>
Nine Months Ended September 30,
2000
Consumer
Credit Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest income ........ $ 1,152,033 $ 8,239 $ (811,872) (b) $ 348,400
Interest expense ....... 378,276 -- (289,992) (b) 88,284
----------- ----------- ----------- -----------
Net interest
income ............. 773,757 8,239 (521,880) 260,116
Other revenue .......... 373,912 192,367 152,845 719,124
Total revenue .......... 1,525,945 200,606 (659,027) 1,067,524
Income before
income taxes and
cumulative effect of
accounting change... 420,518 (c) 129,150 (c) (305,311) (d) 244,357
Total assets ........... $ 8,447,600 $ 160,072 $(5,385,424) (e) $ 3,222,248
</TABLE>
<TABLE>
Nine Months Ended September 30,
1999
----
Consumer
Credit Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- -------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Interest income ........ $ 824,900 $ 2,995 $ (674,561) (b) $ 153,334
Interest expense ....... 234,847 -- (199,686) (b) 35,161
----------- ----------- ------------ -----------
Net interest
income ............. 590,053 2,995 (474,875) 118,173
Other revenue .......... 258,249 123,481 65,504 447,234
Total revenue .......... 1,083,149 126,476 (609,057) 600,568
Income before
income taxes
and extra-
ordinary loss....... 284,928 (c) 68,704 (c) (218,765) (d) 134,867
Total assets ........... $ 6,672,130 $ 97,316 $(4,956,974) (e) $ 1,812,472
</TABLE>
(a) The reconciliation column includes: intercompany eliminations; amounts not
allocated to segments; and adjustments to the amounts reported on a managed
basis to reflect the effects of securitization.
(b) The reconciliation to consolidated owned interest revenue and interest
expense includes the elimination of $3.3 million, $1.2 million, $8.2 million and
$3.0 million of intercompany interest received by the enhancement services
segment from the consumer credit products segment for the three months ended
September 30, 2000 and 1999, and the nine months ended September 30, 2000 and
1999, respectively.
(c) 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 $6.4 million, $2.5
million, $10.8 million and $3.9 million for the three months ended September 30,
2000 and 1999, and the nine months ended September 30, 2000 and 1999,
respectively.
(d) 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.
(e) 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.
<PAGE>
NOTE 6 - DEBT AND DEPOSITS
During July of 2000, we amended and restated our credit facility. The
amended credit facility consists of a $170 million revolving credit facility and
a $100 million term loan, which mature in July 2003. At September 30, 2000 and
December 31, 1999, we had $100 million outstanding under the term loan facility
with a weighted average interest rate of 10.0% and 8.7%, respectively. As of
September 30, 2000 and December 31, 1999, there were no outstanding borrowings
under the revolving credit facility. At September 30, 2000, we were in
compliance with all financial covenants under the amended and restated credit
facility.
Direct Merchants Bank issues certificates of deposit of $100,000 or more.
As of September 30, 2000 and December 31, 1999, $1.6 billion and $0.8 billion of
CDs were outstanding, respectively, with original maturities ranging from six
months to five years with fixed interest rates ranging from 5.2% to 7.6%.
We have various indirect subsidiaries which have not guaranteed the senior
notes or credit facility. 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
September 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 ................. $ 44,443 $ 6,617 $ 261,100 $ -- $ 312,160
Net retained interests in loans
securitized ............................ (418) -- 1,289,696 -- 1,289,278
Credit card loans ......................... 4,090 -- 786,920 -- 791,010
Property and equipment, net ............... -- 72,306 47,821 -- 120,127
Prepaid expenses and deferred charges -- 14,063 88,873 (8,186) 94,750
Deferred income taxes ..................... (2,288) 19,852 165,830 -- 183,394
Customer base intangible .................. 248 -- 100,654 -- 100,902
Other receivables due from credit card
securitizations, net.................... 15 -- 216,797 -- 216,812
Other assets .............................. 14,838 18,431 88,732 (8,186) 113,815
Investment in subsidiaries ................ 1,517,975 1,371,815 -- (2,889,790) --
----------- ----------- ----------- ----------- -----------
Total assets .............................. $ 1,578,903 $ 1,503,084 $ 3,046,423 $(2,906,162) $ 3,222,248
=========== =========== =========== =========== ===========
Liabilities:
Deposits .................................. $ (1,000) $ -- $ 1,633,294 $ -- $ 1,632,294
Debt ...................................... 793,701 (69,074) (368,702) -- 355,925
Accounts payable .......................... (454) 18,179 86,121 (8,186) 95,660
Current income taxes payable (72,589) (33,165) 114,811 -- 9,057
Deferred income ........................... 15,171 39,143 184,015 (8,186) 230,143
Accrued expenses and other liabilities..... 10,697 30,026 25,069 -- 65,792
----------- ----------- ----------- ----------- -----------
Total liabilities ......................... 745,526 (14,891) 1,674,608 (16,372) 2,388,871
Total stockholders' equity ................ 833,377 1,517,975 1,371,815 (2,889,790) 833,377
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity.................... $ 1,578,903 $ 1,503,084 $ 3,046,423 $(2,906,162) $ 3,222,248
=========== =========== =========== =========== ===========
</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
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
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 September 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 ................. $ (17,105) $ (1,606) $ 118,157 $ -- $ 99,446
Provision for loan losses ........... 21 -- 110,915 -- 110,936
--------- --------- --------- --------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses ........ (17,126) (1,606) 7,242 -- (11,490)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................. 2,379 1 108,500 -- 110,880
Credit card fees, interchange
and other credit card income ..... (1,735) 503 61,214 -- 59,982
Enhancement services revenues ....... -- 9,188 59,579 -- 68,767
--------- --------- --------- --------- ---------
644 9,692 229,293 -- 239,629
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses ............... -- 2,250 34,369 -- 36,619
Employee compensation ............... -- 37,969 7,804 -- 45,773
Data processing services and
communications ................... -- 4,061 14,621 -- 18,682
Third-party servicing expense ....... -- (25,388) 28,550 -- 3,162
Warranty and debt waiver underwriting
and claims servicing expense ..... -- 99 7,161 -- 7,260
Credit card fraud losses ............ 1 -- 2,226 -- 2,227
Customer base intangible
amortization ..................... -- -- 3,915 -- 3,915
Other ............................... (396) 22,771 9,636 -- 32,011
--------- --------- --------- --------- ---------
(395) 41,762 108,282 -- 149,649
--------- --------- --------- --------- ---------
(Loss) Income Before Income Taxes
and Equity in Income
of Subsidiaries .................. (16,087) (33,676) 128,253 -- 78,490
Income taxes ........................ (6,178) (13,341) 49,649 -- 30,130
Equity in income of subsidiaries .... 58,269 78,604 -- (136,873) --
--------- --------- --------- --------- ---------
Net Income .......................... $ 48,360 $ 58,269 $ 78,604 $(136,873) $ 48,360
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended September 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Interest
(Expense) Income................... $ (9,088) $ (385) $ 61,683 $ -- $ 52,210
Provision for loan losses ............ 177 -- 66,875 -- 67,052
--------- --------- --------- --------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses.......... (9,265) (385) (5,192) -- (14,842)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income................... 1,229 -- 87,848 -- 89,077
Credit card fees, interchange
and other credit card income....... 297 366 37,705 -- 38,368
Enhancement services revenues......... -- 12,297 32,339 -- 44,636
--------- --------- --------- --------- ---------
1,526 12,663 157,892 -- 172,081
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses................. -- 7,797 11,306 -- 19,103
Employee compensation ................ -- 30,973 3,211 -- 34,184
Data processing services and
communications .................... -- 2,285 11,850 -- 14,135
Third-party servicing expense......... -- (18,651) 22,166 -- 3,515
Warranty and debt waiver underwriting
and claims servicing expense....... -- 225 6,290 -- 6,515
Credit card fraud losses ............. 8 -- 1,709 -- 1,717
Customer base intangible
amortization....................... -- -- 7,549 -- 7,549
Other ................................ (758) 4,251 15,316 -- 18,809
--------- --------- --------- --------- ---------
(750) 26,880 79,397 -- 105,527
--------- --------- --------- --------- ---------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries
and Extraordinary Loss............. (6,989) (14,602) 73,303 -- 51,712
Income taxes ......................... (2,774) (6,529) 29,832 -- 20,529
Equity in income of subsidiaries...... 35,398 43,471 -- (78,869) --
--------- --------- --------- --------- ---------
Net Income ............................ $ 31,183 $ 35,398 $ 43,471 $ (78,869) $ 31,183
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Nine Months Ended September 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 ............. $ (49,986) $ (3,404) $ 313,506 $ -- $ 260,116
Provision for loan losses ................. (1) -- 296,945 -- 296,944
--------- --------- ----------- ---------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses............... (49,985) (3,404) 16,561 -- (36,828)
--------- --------- ----------- ---------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ....................... 7,143 (3) 355,308 -- 362,448
Credit card fees, interchange and other
credit card income...................... (4,932) 1,373 167,868 -- 164,309
Enhancement services revenues ............. -- 36,907 155,460 -- 192,367
--------- --------- ----------- ---------- ---------
2,211 38,277 678,636 -- 719,124
--------- --------- ----------- ---------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses..... -- 12,898 92,179 -- 105,077
Employee compensation ..................... -- 108,742 23,585 -- 132,327
Data processing services
and communications...................... -- 11,612 42,057 -- 53,669
Third-party servicing expense ............. -- (70,792) 80,411 -- 9,619
Warranty and debt waiver underwriting
and claims servicing expense............ -- 917 19,835 -- 20,752
Credit card fraud losses .................. 4 -- 6,795 -- 6,799
Customer base intangible amortization...... -- -- 14,107 -- 14,107
Other ..................................... (303) 56,233 39,659 -- 95,589
--------- --------- ----------- ---------- ---------
(299) 119,610 318,628 -- 437,939
--------- --------- ----------- ---------- ---------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries
and Cumulative Effect of
Accounting Change....................... (47,475) (84,737) 376,569 -- 244,357
Income taxes .............................. (18,325) (33,481) 146,127 -- 94,321
Equity in income of subsidiaries........... 175,748 227,004 -- (402,752) --
--------- --------- ----------- ---------- ---------
Income Before Cumulative Effect of
Accounting Change ...................... 146,598 175,748 230,442 (402,752) 150,036
Cumulative effect of
accounting change, net.................. -- -- 3,438 -- 3,438
--------- --------- ----------- ---------- ---------
Net Income ................................ $ 146,598 $ 175,748 $ 227,004 $ (402,752) $ 146,598
========= ========= =========== ========== =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Nine Months Ended September 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Interest (Expense) Income ................ $ (25,256) $ (897) $ 144,326 $ -- $ 118,173
Provision for loan losses .................... 283 -- 121,842 -- 122,125
--------- --------- --------- --------- ---------
Net Interest (Expense) Income
After Provision for Loan Losses............ (25,539) (897) 22,484 -- (3,952)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit
card servicing income ..................... 4,644 -- 235,512 -- 240,156
Credit card fees, interchange
and other income........................... 838 264 82,495 -- 83,597
Enhancement services revenues ................ -- 36,446 87,035 -- 123,481
--------- --------- --------- --------- ---------
5,482 36,710 405,042 -- 447,234
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses........ -- 26,954 43,887 -- 70,841
Employee compensation ........................ -- 76,887 8,214 -- 85,101
Data processing services
and communications......................... -- 5,459 31,287 -- 36,746
Third-party servicing expenses ............... -- (49,180) 60,620 -- 11,440
Warranty and debt waiver underwriting and
claims servicing expenses.................. -- 2,167 12,812 -- 14,979
Credit card fraud losses ..................... 16 -- 3,814 -- 3,830
Customer base intangible amortization......... -- -- 25,681 -- 25,681
Other ........................................ 490 24,014 35,293 -- 59,797
--------- --------- --------- --------- ---------
506 86,301 221,608 -- 308,415
--------- --------- --------- --------- ---------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries
and Extraordinary Loss..................... (20,563) (50,488) 205,918 -- 134,867
Income taxes ................................. (8,163) (20,243) 81,948 -- 53,542
Equity in income of subsidiaries.............. 93,725 123,970 -- (217,695) --
--------- --------- --------- --------- ---------
Income Before Extraordinary Loss.............. 81,325 93,725 123,970 (217,695) 81,325
Extraordinary loss from the early
extinguishment of debt .................... 50,808 -- -- -- 50,808
--------- --------- --------- --------- ---------
Net Income ................................... $ 30,517 $ 93,725 $ 123,970 $(217,695) $ 30,517
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 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............................ $ (85,127) $ (81,397) $ 544,122 $ 377,598
----------- ----------- ----------- -----------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans .............................. -- -- 176,964 176,964
Net loans originated or collected ................. (1,768) -- (1,057,156) (1,058,924)
Credit card portfolio acquisition ................. -- -- (195,597) (195,597)
Additions to premises and equipment ............... -- (45,960) (26,375) (72,335)
----------- ----------- ----------- -----------
Net cash used in investing activities ............. (1,768) (45,960) (1,102,164) (1,149,892)
----------- ----------- ----------- -----------
Financing Activities:
Net increase in deposits .......................... -- -- 856,913 856,913
Net increase (decrease) in debt ................... 223,744 13,705 (226,536) 10,913
Cash dividends paid ............................... (2,030) -- -- (2,030)
Net (decrease) increase in equity ................. (133,995) 119,960 38,260 24,225
----------- ----------- ----------- -----------
Net cash provided by financing activities ......... 87,719 133,665 668,637 890,021
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents ......... 824 6,308 110,595 117,727
Cash and cash equivalents at beginning of
period ......................................... 43,619 309 150,505 194,433
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ........ $ 44,443 $ 6,617 $ 261,100 $ 312,160
=========== =========== =========== ===========
</TABLE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities:
Net cash (used in) provided by
operating activities........................... $ (878) $ (17,178) $ 242,724 $ 224,668
----------- ----------- ----------- -----------
Investing Activities:
Proceeds from repayments of
securitized loans .............................. -- -- 581,161 581,161
Net loans originated or collected ................. (14,222) -- (232,805) (247,027)
Credit card portfolio acquisition ................. -- -- (1,156,673) (1,156,673)
Additions to premises and equipment ............... -- (15,077) (18,504) (33,581)
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities ........................... (14,222) (15,077) (826,821) (856,120)
----------- ----------- ----------- -----------
Financing Activities:
Net increase in deposits .......................... -- -- 588,297 588,297
Net increase (decrease) in debt ................... 317,500 (106,357) (77,252) 133,891
Cash dividends paid ............................... (829) (804) 804 (829)
Net (decrease) increase in equity ................. (296,994) 139,723 158,308 1,037
----------- ----------- ----------- -----------
Net cash provided by financing activities ......... 19,677 32,562 670,157 722,396
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents ......... 4,577 307 86,060 90,944
Cash and cash equivalents at beginning of period... (5,007) (156) 42,510 37,347
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ........ $ (430) $ 151 $ 128,570 $ 128,291
=========== =========== =========== ===========
</TABLE>
<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 September 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 September 30, 2000, was $48.4
million, up from $31.2 million for the third quarter of 1999. Earnings per share
for the three months ended September 30, 2000, was $0.52 compared to $0.36 per
share for the third quarter of 1999. 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 $8.2 billion for the third quarter 2000 from $6.6 billion for the third
quarter 1999, an increase of 25%, and growth in total credit card accounts to
4.4 million at September 30, 2000, from 3.5 million at September 30, 1999.
Enhancement services revenues continue to contribute to the net income growth
due to continued strong product sales. At September 30, 2000, combined active
enhancement members totaled over 6.0 million.
Net income for the nine months ended September 30, 2000 was $146.6 million,
up from $30.5 million for the first nine months of 1999. Net income reported for
the nine- month period ended September 30, 2000 includes the $3.4 million
cumulative effect of accounting change described below. Net income for the nine
months ended September 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 $150.0 million and $81.3 million for
the nine-month periods ended September 30, 2000 and 1999, respectively. Reported
earnings per share for the nine months ended September 30, 2000, was $1.60,
compared to a loss of $1.53 per share for the same period in 1999. The reported
earnings per share for the nine-month period ended September 30, 2000 was
reduced by $0.04 due to the cumulative effect of accounting change described
below. The loss per share reported for the third 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 $1.64 and $1.02 for the nine months ended September 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 $7.7 billion for
the nine months ended September 30, 2000, from $5.7 billion for the same period
in 1999, an increase of 36%. In addition, credit card and interchange fee income
increased due to an increase in credit card charge volume, which was $5.6
billion for the first nine months of 2000, a 50% increase over the same period
in 1999.
Net income for the nine months ended September 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 nine months ended September 30, 2000, and is reported as the cumulative
effect of accounting change in the consolidated statements of income.
<PAGE>
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.
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:
<TABLE>
September 30, December 31, September 30,
2000 1999 1999
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Period-end balances
Credit card loans:
Credit card loans ................. $ 909,605 $ 145,783 $ 29,462
Retained interests in loans
securitized ................... 1,899,958 1,617,226 1,516,310
Investors' interests in
securitized loans ............. 5,695,276 5,518,313 5,139,303
---------- ---------- ----------
Total managed loan portfolio ......... $8,504,839 $7,281,322 $6,685,075
========== ========== ==========
</TABLE>
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balances
Credit card loans:
Credit card loans ..................................... $ 731,331 $ 61,588 $ 471,738 $ 61,216
Retained interests in loans securitized ............... 1,877,956 1,269,414 1,820,697 942,775
Investors' interests in securitized loans ............. 5,601,047 5,257,414 5,434,233 4,679,000
---------- ---------- ---------- ----------
Total managed loan portfolio ............................. $8,210,334 $6,588,416 $7,726,668 $5,682,991
========== ========== ========== ==========
</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 Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Statements of Income
(owned basis):
Net interest income ....... $ 99,446 $ 52,210 $ 260,116 $ 118,173
Provision for loan losses . 110,936 67,052 296,944 122,125
Other operating income .... 239,629 172,081 719,124 447,234
Other operating expense ... 149,649 105,527 437,939 308,415
--------- --------- --------- ---------
Income before income taxes,
extraordinary loss and
cumulative effect of
accounting change ...... $ 78,490 $ 51,712 $ 244,357 $ 134,867
========= ========= ========= =========
Adjustments for
Securitizations:
Net interest income ....... $ 179,626 $ 173,414 $ 521,880 $ 474,875
Provision for loan losses . 137,971 146,491 369,035 409,371
Other operating income .... (41,655) (26,923) (152,845) (65,504)
Other operating expense ... -- -- -- --
--------- --------- --------- ---------
Income before income taxes,
extraordinary loss and
cumulative effect of
accounting change ...... $ -- $ -- $ -- $ --
========= ========= ========= =========
Statements of Income
(managed basis):
Net interest income ....... $ 279,072 $ 225,624 $ 781,996 $ 593,048
Provision for loan losses . 248,907 213,543 665,979 531,496
Other operating income .... 197,974 145,158 566,279 381,730
Other operating expense ... 149,649 105,527 437,939 308,415
--------- --------- --------- ---------
Income before income taxes,
extraordinary loss and
cumulative effect of
accounting change ...... $ 78,490 $ 51,712 $ 244,357 $ 134,867
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Other Data:
Owned Basis:
Average interest-earning assets $ 2,824,446 $ 1,458,894 $ 2,480,251 $ 1,140,608
Return on average assets* ..... 6.4% 7.6% 7.5% 8.4%
Return on average total equity* 24.0% 21.4% 27.0% 21.0%
Net interest margin (1) ....... 14.0% 14.2% 14.0% 13.9%
Managed Basis:
Average interest-earning assets $ 8,425,493 $ 6,716,308 $ 7,914,484 $ 5,819,608
Return on average assets* ..... 2.2% 1.8% 2.4% 1.8%
Return on average total equity* 24.0% 21.4% 27.0% 21.0%
Net interest margin (1) ....... 13.2% 13.3% 13.2% 13.6%
</TABLE>
(1) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets.
*1999 nine-month 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.
Customers' risk profiles are re-evaluated 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 nine-month periods ended September 30, 2000,
was $279.1 million and $782.0 million compared to $225.6 million and $593.0
million for the same periods in 1999. The increase was primarily due to $1.6
billion and $2.0 billion increases in average managed loans over the comparable
periods in 1999, partially offset by a reduction in net interest margin.
Managed net interest margin was 13.2% for both the three- and nine-month
periods ended September 30, 2000, compared to 13.3% and 13.6% for the same
periods in 1999. The third 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 nine-month period ended September 30, 1999, is also due to an unusually high
margin in the first quarter of 1999 due to the Company's repricing of the
acquired PNC portfolio and approximately 25 percent of the Metris core portfolio
late in 1998. Financing costs as a percentage of borrowings for the third
quarter and year-to-date periods of 2000 were 7.4% and 7.1%, compared with 6.1%
and 6.0% 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 nine-month periods ended September 30, 2000 and 1999:
Analysis of Average Balances, Interest and Average Yields and Rates
<TABLE>
Three Months Ended September 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................... $ 149,496 $ 2,444 6.5% $ 73,090 $ 915 5.0%
Short-term investments............... 65,663 1,070 6.5% 54,802 683 4.9%
Credit card loans and
retained interests in loans
securitized......................... 2,609,287 131,326 20.0% 1,331,002 66,337 19.8%
--------------- ------------ ---------- -------------- ----------- --------
Total interest-earning assets........ $ 2,824,446 $ 134,840 19.0% $ 1,458,894 $ 67,935 18.5%
Other assets......................... 889,667 -- -- 690,323 -- --
Allowances for loan losses........... (713,028) -- -- (526,156) -- --
-------------- ---------------
Total assets......................... $ 3,001,085 -- -- $ 1,623,061 -- --
=============== ==============
Liabilities and Equity:
Interest-bearing liabilities:
Deposits............................. $ 1,403,696 $ 24,321 6.9% $ 437,861 $ 6,451 5.9%
Debt................................. 353,626 11,073 12.5% 338,784 9,274 10.9%
--------------- ------------ ---------- -------------- ------------ ----------
Total interest-bearing
liabilities....................... $ 1,757,322 $ 35,394 8.0% $ 776,645 $ 15,725 8.0%
Other liabilities.................... 440,522 -- -- 267,106 -- --
--------------- --------------
Total liabilities.................... 2,197,844 -- -- 1,043,751 -- --
Stockholders' equity................. 803,241 -- -- 579,310 -- --
--------------- --------------
Total liabilities and equity......... $ 3,001,085 -- -- $ 1,623,061 -- --
=============== ==============
Net interest income and
interest margin (1)............... -- $ 99,446 14.0% -- $ 52,210 14.2%
Net interest rate spread (2)......... -- -- 11.0% -- -- 10.5%
Managed Basis
Credit card loans.................... $ 8,210,334 $ 412,996 20.0% $ 6,588,416 $ 316,533 19.1%
Total interest-earning assets........ 8,425,493 416,509 19.6% 6,716,308 318,131 18.8%
Total interest-bearing
liabilities....................... 7,358,369 137,437 7.4% 6,034,060 92,507 6.1%
Net interest income and
interest margin (1)............... -- $ 279,072 13.2% -- $ 225,624 13.3%
Net interest rate spread (2)......... -- -- 12.2% -- -- 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>
Nine Months Ended September 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 .......... $ 118,939 $ 5,540 6.2% $ 94,202 $ 3,390 4.8%
Short-term investments ...... 68,877 3,007 5.8% 42,415 1,495 4.7%
Credit card loans and
retained interests in loans
securitized ................ 2,292,435 339,853 19.8% 1,003,991 148,449 19.8%
----------- ----------- ----- ----------- ----------- -----
Total interest-earning assets $ 2,480,251 $ 348,400 18.8% $ 1,140,608 $ 153,334 18.0%
Other assets ................ 798,234 -- -- 623,956 -- --
Allowances for loan losses .. (674,808) -- -- (476,423) -- --
----------- -----------
Total assets ................ $ 2,603,677 -- -- $ 1,288,141 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 1,131,089 $ 56,369 6.7% 211,113 $ 9,013 5.7%
Debt ........................ 352,478 31,915 12.1% 313,202 26,148 11.2%
----------- ----------- ----- ----------- ----------- -----
Total interest-bearing
liabilities .............. $ 1,483,567 $ 88,284 7.9% $ 524,315 $ 35,161 9.0%
Other liabilities ........... 393,925 -- -- 245,428 -- --
----------- -----------
Total liabilities ........... 1,877,492 -- -- 769,743 -- --
Stockholders' equity ........ 726,185 -- -- 518,398 -- --
----------- -----------
Total liabilities and equity $ 2,603,677 -- -- $ 1,288,141 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 260,116 14.0% -- $ 118,173 13.9%
Net interest rate spread (2) -- -- 10.9% -- -- 9.0%
Managed Basis
Credit card loans ........... $ 7,726,668 $ 1,143,487 19.8% $ 5,682,991 $ 820,015 19.3%
Total interest-earning assets 7,914,484 1,152,033 19.4% 5,819,608 824,900 19.0%
Total interest-bearing
liabilities .............. 6,917,800 370,037 7.1% 5,203,314 231,852 6.0%
Net interest income and
interest margin (1) ...... -- $ 781,996 13.2% -- $ 593,048 13.6%
Net interest rate spread (2) -- -- 12.3% -- -- 13.0%
</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 71% and 73% of owned revenues for the three- and
nine-month periods ended September 30, 2000, respectively.
Other operating income increased $67.5 million and $271.9 million for the
three- and nine-month periods ended September 30, 2000, over the comparable
periods in 1999. These increases are primarily due to the $21.8 million and
$122.3 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 nine-month periods ended September 30, 2000, credit card fees,
interchange and other credit card income increased $21.6 million and $80.7
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 nine-month period ended September 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 $24.1 million and
$68.9 million for the three- and nine-month periods ended September 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-parties' cardholders.
Other Operating Expense
Total other operating expenses for the three- and nine-month periods ended
September 30, 2000, increased $44.1 million and $129.5 million over the
comparable periods in 1999, largely due to costs associated with the growth of
our business activities. Employee compensation increased $11.6 million and $47.2
million for the three- and nine-month periods ended September 30, 2000, due to
increased staffing needs to support the increase in credit card accounts and
enhancement services active member growth and increased collections and customer
service staff. Other expenses increased $13.2 million and $35.8 million for the
three- and nine-month periods ended September 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 $17.5 million and $34.2 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 1.3 million new credit card accounts during the first nine
months of 2000.
Income Taxes
Our provision for income taxes includes both federal and state income
taxes. Applicable income tax expense was $30.1 million and $94.3 million for the
three- and nine-month periods ended September 30, 2000, compared to $20.5
million and $53.5 million for the same periods in 1999. This tax expense
represents an effective tax rate of 38.6% for the nine-month period ended
September 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 September 30, 2000, 63% of managed accounts and 51% of
managed loans were less than 36 months old.
For the quarter ended September 30, 2000, our managed net charge-off ratio
was 9.8% compared to 8.8% for the quarter ended September 30, 1999. For the nine
months ended September 30, 2000, the net charge-off rate stood at 9.7% compared
to 9.4% for the nine months ended September 30, 1999. Without the impact of
purchase accounting related to acquired portfolios, the charge-off rate was 9.9%
and 10.0% for the three- and nine-month periods ended September 30, 2000,
compared to 10.3% and 10.6% for the same periods of 1999. Our charge-offs have
been stable, with losses between 9.7% and 11.0% for the last eleven quarters. We
believe, consistent with our statistical models and other credit analysis, that
this rate will continue to fluctuate between 9.5% and 10.5% 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.
<PAGE>
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:
<TABLE>
Managed Loan Delinquency
September 30, % of December 31, % of September 30, % of
2000 Total 1999 Total 1999 Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Managed loan
portfolio....... $8,504,839 100% $7,281,322 100% $6,685,075 100%
Loans contractually
delinquent:
30 to 59 days . 220,791 2.6% 168,882 2.3% 166,616 2.5%
60 to 89 days . 157,923 1.9% 117,740 1.6% 116,097 1.7%
90 or more days 319,031 3.7% 270,092 3.7% 218,034 3.3%
---------- ----- ---------- ----- ---------- -----
Total ....... $ 697,745 8.2% $ 556,714 7.6% $ 500,747 7.5%
========== ===== ========== ===== ========== =====
</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 8.3%, 7.8% and 8.1%, 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.
<PAGE>
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
nine months ended September 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 Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Owned basis:
Average loans and retained
interests in loans securitized
outstanding .................... $2,609,287 $1,331,002 $2,292,435 $1,003,991
Net charge-offs ................... 69,289 25,541 172,586 66,081
Net charge-offs as a percentage
of average loans outstanding (1) 10.6% 7.6% 10.1% 8.8%
========== ========== ========== ==========
Managed basis:
Average loans outstanding ......... $8,210,334 $6,588,416 $7,726,668 $5,682,991
Net charge-offs ................... 202,716 145,421 561,695 397,672
Net charge-offs as a percentage of
average loans outstanding(1) ... 9.8% 8.8% 9.7% 9.4%
========== ========== ========== ==========
(1) Annualized
</TABLE>
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
nine-month periods ended September 30, 2000, totaled $248.9 million and $666.0
million compared to a provision of $213.5 million and $531.5 million for the
three- and nine-month periods ended September 30, 1999. The increase for the
three- and nine-month periods ended September 30, 2000, as compared to the
three- and nine-month periods ended September 30, 1999, is primarily reflective
of the increase in loans. The allowance for loan losses on a managed basis was
8.6% at September 30, 2000, compared to 8.3% at September 30, 1999.
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.
<PAGE>
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 September 30, 2000 and 1999, we had received cumulative net proceeds of
approximately $5.7 billion and $5.1 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.
Direct Merchants Bank issues certificates of deposit of $100,000 or more.
As of September 30, 2000 and December 31, 1999, $1.6 billion and $0.8 billion of
CDs were outstanding, respectively, with original maturities ranging from six
months to five years with fixed interest rates ranging from 5.2% to 7.6%.
As of September 30, 2000, we had a $170 million, three-year revolving
credit facility and a $100 million, three-year term loan. At September 30, 2000,
we were in compliance with all financial covenants under these agreements. At
September 30, 2000, and December 31, 1999, we had $100 million of outstanding
borrowings under the term loan facility for both periods.
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.
<PAGE>
Newly Issued Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaces SFAS No. 125, and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures. It requires enterprises to recognize, upon
transfer of financial assets, the financial and servicing assets it controls and
the liabilities it has incurred, derecognize financial assets when control has
been surrendered, and derecognize liabilities when extinguished. This statement
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after March 31, 2001. The statement is effective for
recognition and reclassification of collateral and for disclosures related to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. We are evaluating the financial impact the adoption of this
statement will have on our financial statements.
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.
<PAGE>
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 $270 million bank credit facility, $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 $270 million bank credit
facility has pricing that is indexed to the variable London Interbank Offered
Rate ("LIBOR") or a Prime Rate. At September 30, 2000, approximately 12.7% 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, 87.3% 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 $32.8 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 $32.8 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 our operations. In July
2000 an Amended Complaint was filed in Hennepin County Court in
Minneapolis, Minnesota against Metris Companies Inc., Metris
Direct, Inc. and Direct Merchants Credit Card Bank. The complaint
seeks damages in unascertained amounts and purports to be a class
action complaint on behalf of all cardholders who were issued a
credit card by Direct Merchants Credit Card Bank and were
assessed fees or charges that the cardholder did not authorize.
Specifically, the complaint alleges violations of the Minnesota
Prevention of Consumer Fraud Act, the Minnesota Deceptive Trade
Practices Act and breach of contract. We filed our answer to the
complaint in August 2000. To date, the complaint has not been
certified as a class action claim. We believe we have numerous
substantive legal defenses to these claims and are prepared to
vigorously defend the case. Because we are unable to estimate the
damages at this time, there can be no assurance that defense or
resolution of these matters will not have a material adverse
effect on our financial position.
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) and (c). The Company held a special meeting of stockholders
on September 14, 2000, and the matters voted on in that meeting
were the following:
The approval of an amendment to the Amended and Restated
Certificate of Incorporation of Metris Companies Inc. to increase
the authorized number of shares of common stock from 100,000,000
to 300,000,000.
For Against Withheld Abstentions Broker Non-Vote
--- ------- -------- ----------- ---------------
74,680,732 8,859,707 None 45,977 None
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Metris Companies Inc.
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: Chief Financial Officer November 13, 2000
/s/ Benson Woo
--------------
Benson Woo
Principal accounting officer: Executive Vice President, November 13, 2000
Finance, Corporate Controller
/s/ Jean C. Benson
------------------
Jean C. Benson
