UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 001-12351
METRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1849591
(State of Incorporation) (I.R.S. Employer Identification No.)
600 South Highway 169, Suite 1800, St. Louis Park, Minnesota 55426
(Address of principal executive offices)
(952) 525-5020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 2000, 38,764,964 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
<PAGE>
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
- --------------------------------------------------------------------------------
March 31, 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....................5
Consolidated Statements of Cash Flows............6
Notes to Consolidated Financial Statements.......7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...............................29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................31
Item 2. Changes in Securities.......................................31
Item 3. Defaults Upon Senior Securities.............................31
Item 4. Submission of Matters to a Vote of Security Holders.........31
Item 5. Other Information...........................................31
Item 6. Exhibits and Reports on Form 8-K............................31
Signatures..................................................32
<PAGE>
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per-share data) (Unaudited)
March 31, December 31,
2000 1999
---- ----
Assets:
<S> <C> <C>
Cash and due from banks ........................... $ 37,465 $ 28,505
Federal funds sold ................................ 104,696 118,962
Short-term investments ............................ 67,158 46,966
---------- ----------
Cash and cash equivalents ......................... 209,319 194,433
---------- ----------
Retained interests in loans securitized ........... 1,806,361 1,617,226
Less: Allowance for loan losses .................. 616,318 606,853
---------- ----------
Net retained interests in loans securitized ....... 1,190,043 1,010,373
---------- ----------
Credit card loans (net of allowance for loan losses
of $28,771 and $12,175, respectively) .......... 300,252 133,608
Property and equipment, net ....................... 70,831 56,914
Accrued interest and fees receivable .............. 21,880 17,704
Prepaid expenses and deferred charges ............. 77,888 57,371
Deferred income taxes ............................. 183,835 185,613
Customer base intangible .......................... 78,841 83,809
Other receivables due from credit card
securitizations, net ........................... 193,982 243,978
Other assets ...................................... 68,702 61,279
---------- ----------
Total assets ................................. $2,395,573 $2,045,082
========== ==========
Liabilities:
Deposits .......................................... $1,008,342 $ 775,381
Debt .............................................. 345,234 345,012
Accounts payable .................................. 70,715 45,850
Current income taxes payable ...................... 44,353 22,969
Deferred income ................................... 192,041 171,666
Accrued expenses and other liabilities ............ 60,151 60,403
---------- ----------
Total liabilities ............................ 1,720,836 1,421,281
---------- ----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000
shares authorized, 905,095 and 885,178
shares issued and outstanding, respectively ... 337,148 329,729
Common stock, par value $.01 per share;
100,000,000 shares authorized, 38,664,721
and 38,612,955 shares issued and
outstanding, respectively ..................... 387 386
Paid-in capital .................................... 132,315 130,772
Retained earnings .................................. 204,887 162,914
---------- ----------
Total stockholders' equity .................... 674,737 623,801
---------- ----------
Total liabilities and stockholders' equity .... $2,395,573 $2,045,082
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per-share data) (Unaudited)
Three Months Ended
March 31,
2000 1999
-------- ---------
Interest Income:
<S> <C> <C>
Credit card loans and retained interests in loans
securitized ...................................... $ 95,359 $ 41,277
Federal funds sold ................................... 1,369 207
Other ................................................ 1,073 379
--------- ---------
Total interest income ................................ 97,801 41,863
Interest expense ..................................... 24,108 9,375
--------- ---------
Net Interest Income .................................. 73,693 32,488
Provision for loan losses ............................ 87,793 39,309
--------- ---------
Net Interest (Expense) After Provision for
Loan Losses ....................................... (14,100) (6,821)
--------- ---------
Other Operating Income:
Net securitization and credit card servicing income .. 131,059 76,998
Credit card fees, interchange and other credit card
income ............................................ 50,797 21,309
Fee-based services revenues .......................... 59,616 38,694
--------- ---------
241,472 137,001
--------- ---------
Other Operating Expense:
Credit card account and other product solicitation
and marketing expenses ............................ 32,142 24,103
Employee compensation ................................ 43,772 23,318
Data processing services and communications .......... 17,397 10,282
Third-party servicing expense ........................ 3,228 3,646
Warranty and debt waiver underwriting and claims
servicing expense ................................. 6,732 3,980
Credit card fraud losses ............................. 2,141 1,263
Customer base intangible amortization ................ 4,967 10,365
Other ................................................ 29,744 17,863
--------- ---------
140,123 94,820
--------- ---------
Income Before Income Taxes and Cumulative Effect of
Accounting Change ................................. 87,249 35,360
Income taxes ......................................... 33,853 13,720
-------- ---------
Income Before Cumulative Effect of Accounting Change . 53,396 21,640
Cumulative effect of accounting change (net of income
taxes of $2,180) .................................. 3,438 --
--------- ---------
Net Income ........................................... 49,958 21,640
Preferred stock dividends-Series B ................... -- 4,525
Convertible preferred stock dividends-Series C ....... 7,598 --
--------- ---------
Net Income Applicable To Common Stockholders ......... $ 42,360 $ 17,115
========= =========
Earnings per share:
Basic-income before cumulative effect of
accounting change ............................... $ 1.19 $ 0.44
Basic-cumulative effect of accounting change .... (0.09) --
Basic-net income ................................ 1.10 0.44
Diluted-income before cumulative effect of accounting
change .......................................... 0.88 0.42
Diluted-cumluative effect of accounting change ... (0.05) --
Diluted-net income ............................... 0.83 0.42
Shares used to compute earnings per share:
Basic ................................................. 38,642 38,526
Diluted ............................................... 60,439 40,265
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 .................................................... -- -- -- 21,640 21,640
Issuance of common stock
under employee benefit
plans ..................................................... -- -- 232 -- 232
Cash dividends ................................................ -- -- -- (192) (192)
Preferred dividends in kind
- Series B ................................................ 4,525 -- -- (4,525) --
--------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1999 .......................................... $ 205,625 $ 193 $ 107,847 $ 140,997 $ 454,662
========= ========= ========= ========= =========
BALANCE AT DECEMBER 31, 1999 ....................................... $ 329,729 $ 386 $ 130,772 $ 162,914 $ 623,801
Net income .................................................... -- -- -- 49,958 49,958
Issuance of common stock
under employee benefit
plans ..................................................... -- 1 1,543 -- 1,544
Cash dividends ................................................ -- -- -- (566) (566)
Preferred dividends in
kind - Series C ........................................... 7,419 -- -- (7,419) --
--------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 2000 .......................................... $ 337,148 $ 387 $ 132,315 $ 204,887 $ 674,737
========= ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Three Months Ended
March 31,
2000 1999
---- ----
Operating Activities:
Net income ...................................... $ 49,958 $ 21,640
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting change ..... 3,438 --
Depreciation and amortization .............. 17,720 20,504
Change in allowance for loan losses ........ 26,061 57,389
Changes in operating assets and liabilities:
Accrued interest and fees receivable ... (4,176) (2,341)
Prepaid expenses and deferred charges .. (26,482) (14,270)
Deferred income taxes .................. 1,778 (25,794)
Other receivables due from credit card
securitizations, net .............. 48,342 19,737
Accounts payable and accrued expenses .. 24,613 41,125
Current income taxes payable ........... 21,384 4,737
Deferred income ........................ 16,937 303
Other .................................. (11,165) (4,946)
--------- ---------
Net cash provided by operating activities ....... 168,408 118,084
--------- ---------
Investing Activities:
Proceeds from repayments of securitized loans ... (282,031) (302,597)
Net loans originated or collected ............... (90,344) 202,174
Additions to premises and equipment ............. (15,308) (1,452)
--------- ---------
Net cash used in investing activities ........... (387,683) (101,875)
--------- ---------
Financing Activities:
Net decrease in short-term borrowings ........... 222 (3,002)
Net increase in deposits ........................ 232,961 66,003
Cash dividends paid ............................. (566) (192)
Increase in common equity ....................... 1,544 232
--------- ---------
Net cash provided by financing activities ....... 234,161 63,041
--------- ---------
Net increase in cash and cash equivalents ....... 14,886 79,250
Cash and cash equivalents at beginning of period 194,433 37,347
--------- ---------
Cash and cash equivalents at end of period ...... $ 209,319 $ 116,597
========= =========
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries, the "Company," including Direct
Merchants Credit Card Bank, N.A. which may be referred to as "we," "us" and
"our." The Company is an information-based direct marketer of consumer credit
products and fee-based 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.
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.
<PAGE>
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, these transactions are treated
as sales for financial reporting purposes and the associated loans are not
reflected on the consolidated balance sheets.
The sales of these loans have been recorded in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Upon sale,
the sold credit card loans are removed from the balance sheet and the related
financial and servicing assets controlled and liabilities incurred are initially
measured at fair value, if practicable. SFAS 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 $116.7 million and $139.5 million for the
three-month periods ended March 31, 2000 and 1999, respectively.
Provisions for loan losses are made in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable future losses
of principal and earned interest, net of recoveries, inherent in the existing
loan portfolio, effectively reducing our retained interests in loans securitized
to fair value.
Statements of Cash Flows
Cash paid for interest during the three-month periods ended March 31, 2000
and 1999, was $21.9 million and $3.5 million, respectively. Cash paid for income
taxes for the same periods was $8.3 million and $34.6 million, respectively.
<PAGE>
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
March 31,
2000 1999
-------- --------
(In thousands, except per-share amounts)
<S> <C> <C>
Income before cumulative effect of accounting change .............. $ 53,396 $ 21,640
Preferred dividends - Series B .................................... -- 4,525
Preferred dividends - Series C .................................... 7,598 --
-------- --------
Net income applicable to common stockholders before cumulative
effect of accounting change ....................................... 45,798 17,115
Cumulative effect of accounting change, net ....................... 3,438 --
-------- --------
Net income applicable to common stockholders ...................... $ 42,360 $ 17,115
======== ========
Weighted average common shares outstanding ........................ 38,642 38,526
Adjustments for dilutive securities:
Assumed exercise of outstanding stock options ..................... 2,355 1,739
Assumed conversion of convertible preferred stock ................. 19,442 --
-------- --------
Diluted common shares ............................................. 60,439 40,265
======== ========
Earnings per share:
Basic - income before cumulative effect of accounting change . $ 1.19 $ 0.44
Basic - cumulative effect of accounting change ............... (0.09) --
Basic - net income ........................................... 1.10 0.44
Diluted - income before cumulative effect of accounting change 0.88 0.42
Diluted - cumulative effect of accounting change ............. (0.05) --
Diluted - net income ......................................... 0.83 0.42
</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 formalizes the accounting for services sold where the
right to a full refund exists, requiring all companies to defer recognition of
service 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 after the cancellation period is
complete, which is one month. 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. Because we have
applied the provisions of this SAB to our membership programs since 1998, before
the SEC formulated its guidance, no adjustment was required for our membership
services revenues. The proforma effect of adopting SAB 101 was immaterial for
the prior year period.
<PAGE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
Three Months Ended
March 31,
2000 1999
---- ----
(In thousands)
Balance at beginning of period $619,028 $393,283
Provision for loan losses .... 87,793 39,309
Provision for loan losses (1) 116,677 139,533
Loans charged off ............ (193,490) (128,163)
Recoveries ................... 15,081 6,710
-------- --------
Net loans charged off ........ (178,409) (121,453)
-------- --------
Balance at end of period ..... $645,089 $450,672
======== ========
(1) Amounts are included in "Net securitization and credit card servicing
income."
NOTE 4 - PRIVATE EQUITY PLACEMENT
On November 13, 1998, we entered into agreements with affiliates of the
Thomas H. Lee Company, a private equity firm, to make a total private equity
investment of $300 million in the Company. The Lee Company agreed to purchase
0.8 million shares of Series C Perpetual Convertible Preferred Stock, which are
convertible into common shares at a conversion price of $18.63 per common share
subject to adjustment in certain circumstances. The Series C Preferred has a 9%
dividend payable in additional shares of Series C Preferred and will also
receive any dividends paid on the Company's common stock on a converted basis.
The cumulative payment-in-kind dividends are effectively guaranteed for a
seven-year period. Assuming conversion of the Series C Preferred into common
stock, the Lee Company would own approximately 32% of the Company on a diluted
basis at March 31, 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 conversion to the Series C Preferred
could have resulted in a "change in control" in certain of our agreements with
Fingerhut and our credit facilities. It did not because, prior to closing the
transaction, we increased the change in control ownership percentage from 30 to
35 or otherwise exempted the Lee Company from the change in control provision in
its agreements.
Prior to shareholder approval and the receipt of notice that there was no
regulatory objection to the Series C Preferred investment, the Lee Company
agreed to purchase $200 million in Series B Perpetual Preferred Stock and $100
million in 12% Senior Notes due 2006. We also issued the Lee Company 7.5 million
ten-year warrants to purchase shares of our common stock.
On March 12, 1999, shareholders' approved the conversion of the Series B
Preferred and 12% Senior Notes into Series C Preferred. Notice was received on
May 28, 1999, that there was no regulatory objection to the conversion to the
Series C Preferred. On June 1, 1999, the Series B Preferred and the 12% Senior
Notes were extinguished, and the warrants were canceled causing a one-time,
non-cash accounting adjustment. The excess of the fair value of the Series C
Preferred over the carrying value of the Series B Preferred and the 12% Senior
Notes at the time of the conversion was allocated to the 12% Senior Notes and
the Series B Preferred based upon their initial fair values.
<PAGE>
NOTE 5 - SEGMENTS
We operate in two principal areas: consumer credit products and 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 fee-based services, including (i) debt waiver protection for
unemployment, disability, and death; (ii) membership programs such as card
registration, purchase protection and other club memberships; and (iii)
third-party insurance, directly to 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 fee-based services operating segment pays a commission to our consumer
credit products segment for successful marketing efforts to the consumer credit
products segment's cardholders at a rate similar to those paid to our other
third parties. Our fee-based 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 fee-based
services segment and used by the consumer credit products segment to fund the
growth of cardholder balances.
<PAGE>
<TABLE>
Three Months Ended March 31,
2000
----
Consumer
Credit Fee-Based
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest revenue .............................. $ 359,502 $ 2,155 $ (263,856) (b) $ 97,801
Interest expense .............................. 114,684 -- (90,576) (c) 24,108
---------- ---------- ------------- ----------
Net interest
income .................................... 244,818 2,155 (173,280) 73,693
Other revenue ................................. 86,838 59,616 95,018 241,472
Total revenue ................................. 446,340 61,771 (168,838) 339,273
Income before
income taxes and
cumulative effect of
accounting change 152,341 (d) 41,877 (d) (106,969) (e) 87,249
Income taxes .................................. -- -- 33,853 33,853
Total assets .................................. $7,229,730 $ 142,080 $ (4,976,237) (f) $2,395,573
</TABLE>
<TABLE>
Three Months Ended March 31,
1999
----
Consumer
Credit Fee-Based
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest revenue .............................. $ 257,029 $ 847 $ (216,013) (b) $ 41,863
Interest expense .............................. 69,474 -- (60,099) (c) 9,375
----------- ----------- ----------- -----------
Net interest
income .................................... 187,555 847 (155,914) 32,488
Other revenue ................................. 81,926 38,694 16,381 137,001
Total revenue ................................. 338,955 39,541 (199,632) 178,864
Income before
income taxes ................................ 79,921 (d) 20,913 (d) (65,474) (e) 35,360
Income taxes .................................. -- -- 13,720 13,720
Total assets .................................. $ 5,118,901 $ 62,734 $(4,105,070) (f) $ 1,076,565
</TABLE>
<PAGE>
(a) The reconciliation column includes: intercompany eliminations; amounts
not allocated to segments; and adjustments to the amounts reported on a managed
basis to reflect the effects of securitization.
(b) The reconciliation to consolidated owned interest revenue includes the
elimination of $2.2 million and $0.8 million of intercompany interest received
by the fee-based services segment from the consumer credit products segment for
the three months ended March 31, 2000 and 1999, respectively.
(c) The reconciliation to consolidated owned interest expense includes the
elimination of $2.2 million and $0.8 million of intercompany interest paid by
the consumer credit products segment to the fee-based services segment for the
three months ended March 31, 2000 and 1999, respectively.
(d) Income before income taxes includes intercompany commissions paid by
the fee-based services segment to the consumer credit products segment for
successful marketing efforts to consumer credit products cardholders of $0.3
million and $0.7 million for the three months ended March 31, 2000 and 1999,
respectively.
(e) The reconciliation to the owned income before income taxes includes:
unallocated costs related to employee compensation; data processing and
communications; third-party servicing expenses; and other expenses. The majority
of these expenses, although not allocated for the internal segment reporting
used by management, relate to the consumer credit products segment.
(f) Total assets include the assets attributable to corporate functions not
allocated to operating segments and the removal of investors interests in
securitized loans to present total assets on an owned basis.
NOTE 7 - DEBT AND DEPOSITS
We have a $200 million term revolving credit facility and a $100 million
term loan (collectively the "credit facilities") with a syndicate of banks and
money market mutual funds. At March 31, 2000, we were in compliance with all
financial covenants under these agreements. At March 31, 2000 and December 31,
1999, we had $100 million of outstanding borrowings under the credit facilities
with a weighted average interest rate of 8.7% for both periods.
During the third quarter of 1999, we issued $150 million of 10.125% Senior
Notes due 2006. The Senior Notes due 2006 are guaranteed by Metris Direct, Inc.
and Metris Recovery Services, Inc. (the "Guarantors"). We also have $100 million
of 10% Senior Notes due 2004 outstanding with terms and conditions,
substantially similar to the Senior Notes due 2006.
Beginning in the first quarter 1999, Direct Merchants Bank began issuing
certificates of deposit in increments of $100,000. As of March 31, 2000 and
December 31, 1999, $977.6 million and $758.5 million, respectively, of CDs were
outstanding with original maturities ranging from three months to two years with
fixed interest rates ranging from 5.2% to 7.1%.
We have various indirect subsidiaries which have not guaranteed the senior
notes or credit facilities. The following condensed consolidating financial
statements of the Company, the Guarantor subsidiaries and the non-guarantor
subsidiaries are presented for purposes of complying with SEC reporting
requirements. Separate financial statements of the guarantor subsidiaries and
the non-guarantor subsidiaries are not presented because management has
determined that the subsidiaries' financial statements would not be material to
investors.
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
March 31, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ................ $ 64,498 $ (737) $ 145,558 $ -- $ 209,319
Net retained interests in loans
securitized ........................... (21) 29 1,190,035 -- 1,190,043
Credit card loans ........................ 242 -- 300,010 -- 300,252
Property and equipment, net .............. -- 37,839 32,992 -- 70,831
Prepaid expenses and deferred charges .... -- 29,172 48,716 -- 77,888
Deferred income taxes .................... (1,963) 25,414 160,384 -- 183,835
Customer base intangible ................. -- -- 78,841 -- 78,841
Other receivables due from credit card
securitizations, net .................. 6 -- 193,976 -- 193,982
Other assets ............................. 12,151 13,832 64,599 -- 90,582
Investment in subsidiaries ............... 1,267,797 1,178,326 -- (2,446,123) --
----------- ---------- ------------- ------------ ------------
Total assets ............................. $ 1,342,710 $ 1,283,875 $ 2,215,111 $(2,446,123) $ 2,395,573
=========== ============== ============= =========== ============
Liabilities:
Deposits ................................. $ (1,000) $ -- $ 1,009,342 $ -- $ 1,008,342
Debt ..................................... 644,364 (78,591) (220,539) -- 345,234
Accounts payable ......................... (4,771) 16,041 59,445 -- 70,715
Current income taxes payable ............. 1,851 (20,920) 63,422 -- 44,353
Deferred income .......................... 19,820 63,843 108,378 -- 192,041
Accrued expenses and other liabilities.... 7,709 35,705 16,737 -- 60,151
----------- -------------- ------------- ----------- -----------
Total liabilities ........................ 667,973 16,078 1,036,785 -- 1,720,836
Total stockholders' equity ............... 674,737 1,267,797 1,178,326 (2,446,123) 674,737
----------- -------------- ------------- ----------- -----------
Total liabilities and stockholders'
equity ................................ $ 1,342,710 $ 1,283,875 $ 2,215,111 $(2,446,123) $ 2,395,573
=========== ============== ============= =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ............ $ 43,619 $ 309 $ 150,505 $ -- $ 194,433
Net retained interests in loans
securitized ....................... (228) -- 1,010,601 -- 1,010,373
Credit card loans .................... 2,570 -- 131,038 -- 133,608
Property and equipment, net .......... -- 33,152 23,762 -- 56,914
Prepaid expenses and deferred charges -- 26,441 30,930 -- 57,371
Deferred income taxes ................ (1,835) 25,241 162,207 -- 185,613
Customer base intangible ............. -- -- 83,809 -- 83,809
Other receivables due from credit card
securitizations, net .............. 5 -- 243,973 -- 243,978
Other assets ......................... 12,951 8,488 57,544 -- 78,983
Investment in subsidiaries ........... 1,184,006 1,105,992 -- (2,289,998) --
----------- ----------- ------------ ---------- -----------
Total assets ......................... $ 1,241,088 $ 1,199,623 $ 1,894,369 $(2,289,998) $ 2,045,082
=========== =========== ============ ========== ===========
Liabilities:
Deposits ............................. $ (1,000) $ -- $ 776,381 $ -- $ 775,381
Debt ................................. 569,956 (82,779) (142,165) -- 345,012
Accounts payable ..................... 494 12,337 33,019 -- 45,850
Current income taxes payable ......... 16,183 (10,985) 17,771 -- 22,969
Deferred income ...................... 22,231 58,856 90,579 -- 171,666
Accrued expenses and other liabilities 9,423 38,188 12,792 -- 60,403
----------- ----------- ----------- ----------- ----------
Total liabilities .................... 617,287 15,617 788,377 -- 1,421,281
Total stockholders' equity ........... 623,801 1,184,006 1,105,992 (2,289,998) 623,801
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ............................ $ 1,241,088 $ 1,199,623 $ 1,894,369 $(2,289,998) $ 2,045,082
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended March 31, 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 ................... $ (12,047) $ (571) $ 86,311 $ -- $ 73,693
Provision for loan losses ............. (15) -- 87,808 -- 87,793
--------- --------- --------- --------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses (12,032) (571) (1,497) -- (14,100)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................... 2,386 (28) 128,701 -- 131,059
Credit card fees, interchange and other
credit card income.................. (1,548) 1,108 51,237 -- 50,797
Fee-based services revenues............ -- 16,334 43,282 -- 59,616
--------- --------- --------- --------- ---------
838 17,414 223,220 -- 241,472
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 7,770 24,372 -- 32,142
Employee compensation ................. -- 34,871 8,901 -- 43,772
Data processing services and
communications ..................... -- 3,679 13,718 -- 17,397
Third-party servicing expense ......... -- (22,423) 25,651 -- 3,228
Warranty and debt waiver underwriting
and claims servicing expense -- 794 5,938 -- 6,732
Credit card fraud losses .............. 2 -- 2,139 -- 2,141
Customer base intangible amortization . -- -- 4,967 -- 4,967
Other ................................. 37 17,991 11,716 -- 29,744
--------- --------- --------- --------- ---------
39 42,682 97,402 -- 140,123
--------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes,
Cumulative Effect of Accounting
Change and Equity in Income of
Subsidiaries ...................... (11,233) (25,839) 124,321 -- 87,249
Income taxes .......................... (4,358) (10,338) 48,549 -- 33,853
Cumulative effect of accounting change,
net ................................ -- -- (3,438) -- (3,438)
--------- --------- --------- --------- ---------
Equity in income of subsidiaries....... 56,833 72,334 -- (129,167) --
--------- --------- --------- --------- ---------
Net Income ............................ $ 49,958 $ 56,833 $ 72,334 $(129,167) $ 49,958
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended March 31, 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 ......... $ (9,367) $ (108) $ 41,963 $ -- $ 32,488
Provision for loan losses ............. 245 -- 39,064 -- 39,309
--------- --------- --------- --------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses .......... (9,612) (108) 2,899 -- (6,821)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................... 1,792 -- 75,206 -- 76,998
Credit card fees, interchange and other
credit card income ................. 222 (135) 21,222 -- 21,309
Fee-based services revenues ........... -- 11,094 27,600 -- 38,694
--------- --------- --------- --------- ---------
2,014 10,959 124,028 -- 137,001
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 8,160 15,943 -- 24,103
Employee compensation ................. -- 21,010 2,308 -- 23,318
Data processing services and
communications ..................... -- 1,416 8,866 -- 10,282
Third-party servicing expense ......... -- (15,816) 19,462 -- 3,646
Warranty and debt waiver underwriting
and claims servicing expense ....... -- 1,347 2,633 -- 3,980
Credit card fraud losses .............. 3 -- 1,260 -- 1,263
Customer base intangible amortization -- -- 10,365 -- 10,365
Other ................................. 400 9,425 8,038 -- 17,863
--------- --------- --------- --------- ---------
403 25,542 68,875 -- 94,820
--------- --------- --------- --------- ---------
(Loss) Income Before Income Taxes and
Equity in Income of Subsidiaries ... (8,001) (14,691) 58,052 -- 35,360
Income taxes .......................... (3,105) (5,913) 22,738 -- 13,720
Equity in income of subsidiaries ...... 26,536 35,314 -- (61,850) --
--------- --------- --------- --------- ---------
Net Income ............................ $ 21,640 $ 26,536 $ 35,314 $ (61,850) $ 21,640
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
<S> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities ..................................... $ (29,876) $ (26,573) $ 224,857 $ 168,408
--------- --------- --------- ---------
Investing Activities:
Proceeds from repayments of securitized loans ...... -- -- (282,031) (282,031)
Net loans originated or collected .................. 2,328 -- (92,672) (90,344)
Additions to premises and equipment ................ -- (5,618) (9,690) (15,308)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities. 2,328 (5,618) (384,393) (387,683)
--------- --------- --------- ---------
Financing Activities:
Net increase in deposits ........................... -- -- 232,961 232,961
Net increase (decrease) in debt .................... 74,407 4,189 (78,374) 222
Cash dividends paid ................................ (566) -- -- (566)
Net (decrease) increase in equity .................. (25,414) 26,956 2 1,544
--------- --------- --------- ---------
Net cash provided by financing activities .......... 48,427 31,145 154,589 234,161
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ..................................... 20,879 (1,046) (4,947) 14,886
Cash and cash equivalents at beginning of
period .......................................... 43,619 309 150,505 194,433
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......... $ 64,498 $ (737) $ 145,558 $ 209,319
========= ========= ========= =========
</TABLE>
<TABLE>
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 1999
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
<S> <C> <C> <C> <C>
Net cash (used in) provided by operating activities. $ (41,223) $ (5,210) $ 164,517 $ 118,084
--------- --------- --------- ---------
Investing Activities:
Proceeds from repayments of securitized loans ..... -- -- (302,597) (302,597)
Net loans originated or collected ................. (275) -- 202,449 202,174
Additions to premises and equipment ............... -- (1,472) 20 (1,452)
--------- --------- --------- ---------
Net cash used in investing activities ............. (275) (1,472) (100,128) (101,875)
--------- --------- --------- ---------
Financing Activities:
Net increase in deposits .......................... -- -- 66,003 66,003
Net increase (decrease) in debt ................... 16,264 (4,508) (14,758) (3,002)
Cash dividends paid ............................... (192) (804) 804 (192)
Net increase (decrease) in equity ................. 29,846 12,782 (42,396) 232
--------- --------- --------- ---------
Net cash provided by financing activities ......... 45,918 7,470 9,653 63,041
--------- --------- --------- ---------
Net increase in cash and cash equivalents ......... 4,420 788 74,042 79,250
Cash and cash equivalents at beginning of period .. (5,009) (156) 42,512 37,347
--------- --------- --------- ---------
Cash and cash equivalents at end of period ........ $ (589) $ 632 $ 116,554 $ 116,597
========= ========= ========= =========
</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 March 31, 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 March 31, 2000, was $50.0 million, or
$0.83 per diluted share, up 131% from $21.6 million, or $0.42 per diluted share
for the first quarter of 1999. Net income for the three months ended March 31,
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 $0.05 for the three months ended March 31, 2000, and is
reported as the cumulative effect of accounting change in the consolidated
statements of income.
The increase in net income is the result of an increase in net interest
income and other operating income partially offset by increases in the provision
for loan losses and other operating expenses. Fee-based services revenues
continue to contribute to the net income growth due to continued strong product
sales. These increases are largely attributable to the growth in average managed
loans to $7.4 billion for the first quarter 2000 from $5.2 billion for the first
quarter 1999, an increase of 40%, and growth in total credit card accounts to
3.8 million at March 31, 2000, from 2.9 million at March 31, 1999.
Managed Loan Portfolio
We analyze our financial performance on a managed loan portfolio basis. To
do so, we adjust the income statement and balance sheet to reverse the effects
of securitization. Our discussion of revenues, where applicable, and provision
for loan losses includes comparisons to amounts reported in our consolidated
statements of income ("owned basis") as well as on a managed basis.
<PAGE>
Our managed loan portfolio is comprised of credit card loans, retained
interests in loans securitized and the investors' share of securitized credit
card loans. The investors' share of securitized credit card loans is not an
asset of ours, therefore, we do not show it on our consolidated balance sheets.
The following tables summarize our managed loan portfolio:
March 31, December 31, March 31,
2000 1999 1999
---- ---- ----
(Dollars in thousands)
Period-end balances
Credit card loans:
Credit card loans ................. $ 329,023 $ 145,783 $ 12,740
Retained interests in loans
securitized ................... 1,806,361 1,617,226 844,582
Investors' interests in
securitized loans ............. 5,236,282 5,518,313 4,255,545
---------- ---------- ----------
Total managed loan portfolio ......... $7,371,666 $7,281,322 $5,112,867
========== ========== ==========
<PAGE>
Three Months Ended
March 31,
2000 1999
---- ----
(Dollars in thousands)
Average balances
Credit card loans:
Credit card loans ................... $ 227,251 $ 62,130
Retained interests in loans
securitized ...................... 1,731,945 761,627
Investors' interests in
securitized loans ................ 5,393,200 4,421,260
---------- ----------
Total managed loan portfolio ........... $7,352,396 $5,245,017
========== ==========
<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:
Three Months Ended
March 31,
2000 1999
---- ----
(Dollars in thousands)
Statements of Income
(owned basis):
Net interest income .......... $ 73,693 $ 32,488
Provision for loan losses .... 87,793 39,309
Other operating income ....... 241,472 137,001
Other operating expense ...... 140,123 94,820
----------- -----------
Income before income taxes and
cumulative effect of
accounting change ......... $ 87,249 $ 35,360
=========== ===========
Adjustments for Securitizations:
Net interest income .......... $ 173,280 $ 155,914
Provision for loan losses .... 116,677 139,533
Other operating income ....... (56,603) (16,381)
Other operating expense ...... -- --
----------- -----------
Income before income taxes and
cumulative effect of
accounting change ......... $ -- $ --
=========== ===========
Statements of Income
(managed basis):
Net interest income .......... $ 246,973 $ 188,402
Provision for loan losses .... 204,470 178,842
Other operating income ....... 184,869 120,620
Other operating expense ...... 140,123 94,820
----------- -----------
Income before income taxes and
cumulative effect of
accounting change ............ $ 87,249 $ 35,360
=========== ===========
Other Data:
Owned Basis:
Average interest-earning assets . $ 2,137,016 $ 889,240
Return on average assets ........ 9.0% 8.5%
Return on average total equity .. 30.7% 19.6%
Net interest margin (1) ......... 13.9% 14.8%
Managed Basis:
Average interest-earning assets . $ 7,530,216 $ 5,310,500
Return on average assets ........ 2.7% 1.6%
Return on average total equity .. 30.7% 19.6%
Net interest margin (1) ......... 13.2% 14.4%
(1) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets.
<PAGE>
Risk-Based Pricing
We price credit card offers based on a prospect's risk profile prior to
solicitation or upon receipt of a completed application. We evaluate a prospect
to determine credit needs, credit risk and existing credit availability and then
develop a customized offer that includes the most appropriate product, brand,
pricing and credit line. After customers open credit card accounts, we
periodically monitor customers' internal and external credit performance and
periodically recalculate behavior, revenue, attrition and bankruptcy predictors.
The customers are rescored on a regular basis, and the lending relationship can
evolve to include more competitive (or more restrictive) pricing and product
configurations. These analyses consider the overall profitability of accounts
using both credit information and the profitability from selling fee-based
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-month period ended March 31, 2000, was $247.0
million compared to $188.4 million for the same period in 1999. The increase was
primarily due to a $2.1 billion increase in average managed loans over the
comparable period in 1999.
Managed net interest margin was 13.2% for the three-month period ended
March 31, 2000, compared to 14.4% for the same period in 1999. The first quarter
of 2000 net interest margin was negatively impacted by the 50 basis point
increases made by the Federal Reserve during the quarter and the addition of
380,000 new accounts in the quarter. As these accounts have zero balances when
they are opened the Company does not earn interest on these receivables until
the accounts begin to revolve after their first billing cycle. The decrease in
the net interest margin from the first quarter of 1999 is primarily due to an
unusually high margin in the first quarter of 1999 due to the Company's
repricing of the PNC portfolio and approximately 25 percent of the Metris core
portfolio late in 1998. Financing costs as a percent of borrowings for the first
quarter of 2000 were 6.8%, compared with 5.9% in the same period of 1999.
<PAGE>
The following table provides an analysis of interest income and expense,
net interest spread, net interest margin and average balance sheet data for the
three-month periods ended March 31, 2000 and 1999:
Analysis of Average Balances, Interest and Average Yields and Rates
<TABLE>
Three Months Ended March 31,
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 .......... $ 96,684 $ 1,369 5.7% $ 31,272 $ 207 2.7%
Short-term investments ...... 81,136 1,073 5.3% 34,211 379 4.5%
Credit card loans and
retained interests in loans
securitized ................ 1,959,196 95,359 19.6% 823,757 41,277 20.3%
----------- ----------- --- ----------- ----------- ---
Total interest-earning assets $ 2,137,016 $ 97,801 18.4% $ 889,240 $ 41,863 19.1%
Other assets ................ 734,239 -- -- 586,818 -- --
Allowances for loan losses .. (649,654) -- -- (440,116) -- --
----------- -----------
Total assets ............. $ 2,221,601 -- -- $ 1,035,942 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 882,149 $ 13,742 6.3% $ 5,278 $ 61 4.7%
Debt ........................ 352,899 10,366 11.8% 384,010 9,314 9.8%
----------- ----------- --- ----------- ----------- ---
Total interest-bearing
liabilities .............. $ 1,235,048 $ 24,108 7.9% $ 389,288 $ 9,375 9.8%
Other liabilities ........... 332,276 -- -- 198,472 -- --
----------- -----------
Total liabilities ........... 1,567,324 -- -- 587,760 -- --
Stockholders' equity ........ 654,277 -- -- 448,182 -- --
----------- -----------
Total liabilities and equity $ 2,221,601 -- -- $ 1,035,942 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 73,693 13.9% -- $ 32,488 14.8%
Net interest rate spread (2) -- -- 10.5% -- -- 9.3%
Managed Basis
Credit card loans ........... $ 7,352,396 $ 357,060 19.5% $ 5,245,017 $ 256,443 19.8%
Total interest-earning assets 7,530,216 359,502 19.2% 5,310,500 257,029 19.6%
Total interest-bearing
liabilities .............. 6,628,248 112,529 6.8% 4,710,548 68,627 5.9%
Net interest income and
interest margin (1) ...... -- $ 246,973 13.2% -- $ 188,402 14.4%
Net interest rate spread (2). -- -- 12.4% -- -- 13.7%
</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>
Other Operating Income
Other operating income contributes substantially to our results of
operations, representing 77% of owned revenues for the three-month period ended
March 31, 2000. The following table presents other operating income on an owned
basis:
Three Months Ended
March 31,
(Dollars in thousands) 2000 1999
---- ----
Other Operating Income:
Net securitization and credit card
servicing income ................................ $131,059 $ 76,998
Credit card fees, interchange and other
credit card income .............................. 50,797 21,309
Fee-based services revenues ........................ 59,616 38,694
-------- --------
Total ........................................... $241,472 $137,001
======== ========
Other operating income increased $104.5 million for the three-month period
ended March 31, 2000, over the comparable period in 1999. This increase is
primarily due to the $54.1 million increase in income generated from net
securitization and credit card servicing income as a result of the increase in
average managed loans. For the three-month period ended March 31, 2000, credit
card fees, interchange and other credit card income increased $29.5 million over
the comparable period in 1999. This increase was primarily due to the growth in
total accounts and loans in the managed credit card portfolio. The increases in
these two lines also include 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, fee-based services revenues increased by $20.9 million for
the three-month period ended March 31, 2000. This increase reflects the strong
sales of our debt waiver product and the increase in membership program revenues
resulting from increased account penetration for membership programs and
additional product offers to third-party partner's cardholders.
Other Operating Expense
Three Months Ended
March 31,
(Dollars in thousands) 2000 1999
---- ----
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses .. $ 32,142 $ 24,103
Employee compensation ................... 43,772 23,318
Data processing services and
communications .......................... 17,397 10,282
Third-party servicing expense ........... 3,228 3,646
Warranty and debt waiver underwriting and
claims servicing expense ............. 6,732 3,980
Credit card fraud losses ................ 2,141 1,263
Customer base intangible amortization ... 4,967 10,365
Other ................................... 29,744 17,863
-------- --------
Total ................................ $140,123 $ 94,820
======== ========
Total other operating expenses for the three-month period ended March 31,
2000, increased $45.3 million over the comparable period in 1999, largely due to
costs associated with the growth of our business activities. Employee
compensation increased $20.5 million for the three-month period ended March 31,
2000, due to increased staffing needs to support the increase in credit card
accounts and fee-based services active member growth. Other expenses increased
$11.9 million for the three-month period ended March 31, 2000, due to increased
fees associated with increased credit card volume and higher professional fees.
Also, credit card account and other product solicitation and marketing expenses
increased $8.0 million over the comparable period in 1999, largely due to the
increase in fee-based marketing activity and additional costs associated with
our credit card marketing activity which resulted in over 380,000 new credit
card accounts.
Income Taxes
Our provision for income taxes includes both federal and state income
taxes. Applicable income tax expense was $31.7 million for the three-month
period ended March 31, 2000, compared to $13.7 million for the same period in
1999. This tax expense represents an effective tax rate of 38.8% for the
three-month periods ended March 31, 2000 and 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 March 31, 2000, 60% of managed accounts and 50% of managed
loans were less than 36 months old.
For the quarter ended March 31, 2000, our managed net charge-off ratio was
9.8% compared to 9.4% for the quarter ended March 31, 1999. Without the impact
of purchase accounting related to acquired portfolios, the charge-off rate was
10.2% for the three month period ended March 31, 2000, compared to 10.8% for the
same period of 1999. Our charge-offs have been stable, with losses between 9.9%
and 11% for the last nine quarters. We believe, consistent with our statistical
models and other credit analysis, that this rate will continue to fluctuate in
this range over the next few quarters.
We use credit line analyses, account management and customer transaction
authorization procedures to minimize loan losses. Our risk models determine
initial credit lines at the time of solicitation and generally result in lower
credit lines than the industry average. Credit lines are managed on an ongoing
basis and are adjusted based on customer usage and payment patterns. Customer
accounts are continually monitored to maximize profitability. Appropriate
collection activities are initiated when an account is delinquent or overlimit.
Delinquencies
Delinquencies not only have the potential to affect earnings in the form of
net loan losses, but are also costly in terms of the personnel and other
resources dedicated to their resolution. We monitor delinquency levels on a
managed basis, since delinquency on either an owned or managed basis subjects us
to credit loss exposure. A credit card account is contractually delinquent if we
do not receive the minimum payment by the specified date on the cardholder's
statement. It is our policy to continue to accrue interest and fee income on all
credit card accounts, except in limited circumstances, until we charge off the
account and all related loans, interest and other fees. The following table
presents the delinquency trends of our credit card loan portfolio on a managed
portfolio basis:
<PAGE>
<TABLE>
Managed Loan Delinquency
March 31, % of December 31, % of March 31, % of
2000 Total 1999 Total 1999 Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Managed loan portfolio .. $7,371,666 100% $7,281,322 100% $5,112,867 100%
Loans contractually
delinquent:
30 to 59 days ...... 169,403 2.3% 168,882 2.3% 122,360 2.4%
60 to 89 days ...... 127,872 1.7% 117,740 1.6% 98,727 1.9%
90 or more days .... 267,251 3.7% 270,092 3.7% 187,195 3.7%
---------- ----- ---------- ----- ---------- -----
Total ............ $ 564,526 7.7% $ 556,714 7.6% $ 408,282 8.0%
========== ===== ========== ===== ========== =====
</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 would have been 7.7%, 7.8% and 8.3%, respectively.
We intend to continue to focus our resources on our collection efforts to
minimize the negative impact to net loan losses that results from increased
delinquency levels.
Net Charge-Offs
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged against the related income at the
time of charge-off.
During the quarter ended March 31, 2000, we changed our policy for secured
card accounts to charge off accounts 120 days contractually delinquent. Prior to
this 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
three months ended March 31, 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:
Three Months Ended
March 31,
2000 1999
---- ----
(Dollars in thousands)
Owned basis:
Average loans and retained interests in
loans securitized outstanding ............ $1,959,196 $ 823,757
Net charge-offs .......................... 47,573 18,894
Net charge-offs as a percentage of average
loans outstanding (1) ................. 9.8% 9.3%
========== ==========
Managed basis:
Average loans outstanding ................ $7,352,396 $5,245,017
Net charge-offs .......................... 178,409 121,453
Net charge-offs as a percentage of average
loans outstanding(1) .................. 9.8% 9.4%
========== ==========
(1) Annualized
<PAGE>
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 month period
ended March 31, 2000, totaled $204.5 million compared to a provision of $178.8
million for the three-month period ended March 31, 1999. The increase for the
three month period ended March 31, 2000, as compared to the three-month period
ended March 31, 1999, is primarily reflective of the increase in loans. The
following table presents the change in our allowance for loan losses and other
ratios for the periods presented:
Analysis of Allowance for Loan Losses
Three Months Ended
March 31,
2000 1999
---- ----
(Dollars in thousands)
Managed Basis:
Balance at beginning of period $619,028 $393,283
Provision for loan losses .... 204,470 178,842
Loans charged off ............ 193,490 128,163
Recoveries ................... 15,081 6,710
-------- --------
Net loan charge-offs ......... 178,409 121,453
-------- --------
Balance at end of period ..... $645,089 $450,672
======== ========
Ending allowance as a percent
of loans .................. 8.8% 8.8%
======== ========
Derivatives Activities
We use derivative financial instruments for the purpose of managing our
exposure to interest rate risks. We have a number of procedures in place to
monitor and control both market and credit risk from these derivatives
activities. Our senior management approves all derivatives strategies and
transactions.
Liquidity, Funding and Capital Resources
One of our primary financial goals is to maintain an adequate level of
liquidity through active management of assets and liabilities. Because the
pricing and maturing characteristics of our assets and liabilities change,
liquidity management is a dynamic process, affected by changes in short- and
long-term interest rates. We use a variety of financing sources to manage
liquidity, refunding and interest rate risks.
We finance the growth of our credit card loan portfolio through cash flow
from operations, asset securitization, bank loans, subsidiary bank deposits,
long-term debt issuance, and equity issuance.
At March 31, 2000 and 1999, we had received cumulative net proceeds of
approximately $5.2 billion and $4.3 billion, respectively, from sales of credit
card loans to the trust and conduits. We used cash generated from these
transactions to fund credit card loan portfolio growth and reduce borrowings..
We rely upon the securitization of our credit card loans to fund portfolio
growth. To date, we have completed securitization transactions on terms that we
believe are satisfactory. Our ability to securitize our assets depends on the
favorable investor demand and legal, regulatory and tax conditions for
securitization transactions, as well as continued favorable performance of our
securitized portfolio of receivables. Any adverse change could force us to rely
on other potentially more expensive funding sources, and in the worst case
scenario, could create liquidity risks if other funding is unavailable or
significantly limit our ability to grow.
We have a $200 million, three-year revolving credit facility and a $100
million, five-year term loan, collectively (the "credit facilities") with a
syndicate of banks and money market mutual funds. These credit facilities became
effective upon the spin off from Fingerhut on September 25, 1998. At March 31,
2000, we were in compliance with all financial covenants under these credit
facilities. At March 31, 2000, and December 31, 1999, we had $100 million of
outstanding borrowings under the credit facilities.
During the second quarter of 1999, we issued $150 million of 10.125% Senior
Notes due 2006. In November 1997, we issued and sold $100 million of 10% Senior
Notes due 2004. The Senior Notes are guaranteed on the same basis as the Senior
Notes due 2006.
On November 13, 1998, we sold $200 million in Series B Perpetual
Convertible Preferred Stock and $100 million in 12% Senior Notes due 2006 to
affiliates of the Thomas H. Lee Company. We also issued 7.5 million ten-year
warrants to purchase shares of the Company's common stock for $15, subject to
adjustment in certain circumstances. The Series B Preferred had a 12.5% dividend
payable in additional shares of Series B Preferred for ten years, then
converting to payable in cash.
On March 12, 1999, shareholders approved conversion of the Series B
Preferred and 12% Senior Notes into Series C Perpetual Convertible Preferred
stock. On May 28, 1999, notice was received that there was no regulatory
objection to the conversion to the Series C Preferred, and the Series B
Preferred and the 12% Senior Notes were converted into 0.8 million shares of
Series C Preferred and the warrants were canceled. The Series C Preferred has a
9% dividend payable in additional shares of Series C Preferred and will also
receive any dividends paid on the Company's common stock on a converted basis.
The cumulative payment-in-kind dividends are effectively guaranteed for a
seven-year period. Assuming conversion of the Series C Preferred into common
stock had occurred in the first quarter of 2000, the Lee Company would have
owned approximately 32% of the Company on a diluted basis.
As the portfolio of credit card loans grows our funding needs will increase
accordingly. We believe that our cash flow from operations, asset
securitization, long term debt, subsidiary bank deposits, bank loans and equity
will provide us with adequate liquidity for meeting anticipated cash needs,
although no assurance can be given to that effect.
Newly Issued Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments. It requires enterprises to
recognize all derivatives as either assets or liabilities in the statement of
financial position and to measure those instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. We are evaluating the financial impact the adoption of this
statement will have on our financial statements.
<PAGE>
Forward-Looking Statements
This quarterly report contains some forward-looking statements.
Forward-looking statements give our current expectations of future events. You
will recognize these statements because they do not strictly relate to
historical or current facts. Such statements may use words such as "anticipate,"
"estimate," "expect," "project," "intend," "think," "believe" and other words or
terms of similar meaning in connection with any discussion of future performance
of the Company. For example, these include statements relating to future
actions, future performance of current or anticipated products, solicitation
efforts, expenses, the outcome of contingencies such as litigation, and the
impact of the capital markets on liquidity. From time to time, we also may
provide oral or written forward-looking statements in other material released to
the public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors, which can not be predicted with certainty, will be important in
determining future results. Among such factors are our limited operating history
as a stand alone entity, our limited experience in originating and servicing
credit card accounts, the lack of seasoning of our credit card accounts which
renders predictability of delinquencies more difficult, higher default and
bankruptcy rates of our target market of moderate-income consumers, interest
rate risks, risks associated with acquired portfolios, dependence on the
securitization markets and other funding sources, state and federal laws and
regulations, and general economic conditions that can have a major impact on the
performance of loans. Each of these factors and others are more fully discussed
under the caption "Business--Risk Factors" contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. As a result of these
factors, we cannot guarantee any forward-looking statements. Actual future
results may vary materially. Also, please note that the factors we provide are
those we think could cause our actual results to differ materially from expected
and historical results. Other factors besides those listed here or in our 10-K
for the year ended December 31, 1999, could also adversely affect us.
We undertake no obligations to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosure we make on related
subjects in our periodic filings with the Securities and Exchange Commission.
This discussion is provided to you as permitted by the Private Securities
Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our principal market risk is due to changes in interest rates. This
affects us directly in our lending and borrowing activities, as well as
indirectly as interest rates may impact the payment performance of our
cardholders.
To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our owned
and managed balance sheet to minimize the impact changes in interest rates have
on the fair value of assets, net income and cash flow. We seek to minimize the
impact of changes in interest rates on us primarily by matching asset and
liability repricings.
Our primary owned and managed assets are credit card loans, which are
virtually all priced at rates indexed to the variable Prime Rate. Retained
interests in loans securitized and loans held for securitization are funded
through a combination of cash flow from operations, subsidiary bank deposits,
our $300 million bank credit facilities, $250 million in senior notes, and
equity issuance. Our securitized loans are owned by a trust and bank-sponsored
multiseller receivables conduits, which have committed funding indexed to
variable commercial paper rates, as well as term funding which is either
directly indexed to LIBOR or at fixed rates. The $300 million bank credit
facilities have pricing that is indexed to the variable London Interbank Offered
Rate ("LIBOR") or a Prime Rate. At March 31, 2000, approximately 13.8% of the
trust and conduit funding of securitized receivables was funded with fixed-rate
certificates.
Including the impact of interest rate derivative transactions with the
trust and conduit funding, in an interest rate environment with rates
significantly below current rates, 86% of the funding for the securitized loan
portfolio is indexed to floating commercial paper and LIBOR rates. In 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 $12.0 million relative to a base case over the next 12 months;
while a decrease of 200 basis points will result in a reduction in net income of
approximately $24.8 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 its operations. We do not believe that any such
legal proceedings will have a material adverse effect on its financial position
or its operations.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 First Supplemental Indenture, dated as of February 28,
2000, among the Company, the Guarantors named therein and
The Bank of New York.
4.2 Second Supplemental Indenture, dated as of February 28,
2000, among the Company, the Guarantors named therein
and Bank One Trust Company, N.A.
11. Computation of Earnings Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K:
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METRIS COMPANIES INC.
Signature Title Date
- --------- ----- ----
Principal financial officer: Executive Vice President, May 9, 2000
Chief Financial Officer
/s/ David D. Wesselink
- ----------------------
David D. Wesselink
Principal accounting officer: Sr. Vice President, Finance, May 9, 2000
Corporate Controller
/s/ Jean C. Benson
- ------------------
Jean C. Benson
METRIS COMPANIES INC., as Issuer
and
the Guarantors named herein
up to $250,000,000
10 1/8% Senior Notes due 2006, Series A
10 1/8% Senior Notes due 2006, Series B
FIRST SUPPLEMENTAL INDENTURE
Dated as of February 28, 2000
TO
INDENTURE
Dated as of July 13, 1999
THE BANK OF NEW YORK, as Trustee
<PAGE>
FIRST SUPPLEMENTAL INDENTURE, dated as of February 28, 2000 among METRIS
COMPANIES, INC., a Delaware corporation (the "Company"), the GUARANTORS named
herein and THE BANK OF NEW YORK, as Trustee (the "Trustee").
RECITALS
The Company and Metris Direct, Inc., as Guarantor (a "Guarantor"), has
heretofore executed and delivered to the Trustee a certain Indenture, dated as
of July 13, 1999 (the "Indenture"), pursuant to which the company issued and has
outstanding $150,000,000 aggregate principal amount of its 10 1/8% Senior Notes
due 2006, Series A (the "Securities") which Series may be exchanged into Series
B pursuant to the terms of the Indenture. All terms used in this First
Supplemental Indenture which are defined in the Indenture shall have the
meanings assigned to them in the Indenture.
Pursuant to the terms of the Indenture, any Restricted Subsidiary of the
Company other than Securitization Entities, which guarantee Indebtedness of the
Company, are to execute a Subsidiary Guarantee and deliver it to the Trustee.
Metris Recovery Services, Inc., a Restricted Subsidiary ("Metris Recovery")
will be guaranteeing other Indebtedness of the Company simultaneously with the
execution of the Subsidiary Guarantee.
Pursuant to Section 9.01(h), the Trustee may enter into a supplemental
indenture without the consent of any holder to add any subsidiary of the Company
as Guarantor.
The Company has furnished the Trustee with (i) an Opinion of Counsel
stating that this Supplement complies with the provisions of Section 9.01(h);
(ii) a copy of the resolution of its Board of Directors certified by its
Secretary or Assistant Secretary; (iii) a copy of the resolutions of the Board
of Directors of Metris Recovery certified by its Secretary or Assistant
Secretary and (iv) the Security Guarantee of Metris Recovery.
All things necessary to make this First Supplemental Indenture a valid
agreement of the Company and the Trustee and a valid amendment and supplement to
the Indenture have been done.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
Each party hereto agrees as follows for the benefit of each other party and
for the equal and ratable benefit of Holders of the Securities, as follows:
ARTICLE I
SECTION 101. Pursuant to Section 4.13 of the Indenture, Metris Recovery
has become a Guarantor under the Indenture, and has agreed pursuant to a
Security Guarantee executed on the date hereof, to undertake the obligations of
Guarantor as set forth in Article Ten of the Indenture.
ARTICLE II
SECTION 201. For purposes of this First Supplemental Indenture, except as
otherwise herein expressly provided or unless the context otherwise requires:
(i) the terms and expressions used herein shall have the same meanings as
corresponding terms and expressions used in the Indenture: and (ii) the words
"herein", "hereof" and "hereby" and other words of similar import used in this
Second Supplemental Indenture refer to this Second Supplemental Indenture as a
whole and not to any particular section hereof.
SECTION 202. Except as expressly amended hereby, the Indenture is in all
respects ratified and confirmed and all the terms, conditions and provisions
thereof shall remain in full force and effect.
SECTION 203. This First Supplemental Indenture shall form a part of the
Indenture for all purposes, and every Holder of Securities heretofore or
hereafter authenticated and delivered shall be bound hereby.
SECTION 204. This First Supplemental Indenture may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original, and all of such counterparts shall together constitute one and the
same instrument.
SECTION 205. The Trustee makes no representation as to the validity or
sufficiency of this First Supplemental Indenture.
SECTION 206. The Recitals contained herein shall be taken as the statements
of the Company, and the Trustee assumes no responsibility for their correctness.
SECTION 207. This instrument shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be governed by and
construed in accordance with the laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, all as of the first day and year first written
above.
METRIS COMPANIES INC.
By: /s/Paul T. Runice
Name: Paul T. Runice
Title: Senior Vice President, Treasurer
METRIS DIRECT, INC.
By: /s/Paul T. Runice
Name: Paul T. Runice
Title: Senior Vice President, Treasurer
METRIS RECOVERY SERVICES, INC.
By: /s/Jean C. Benson
Name: Jean C. Benson
Title: Treasurer
THE BANK OF NEW YORK
By: /s/
Name:
Title:
<PAGE>
SENIOR GUARANTEE
For value received, the undersigned Guarantor (as defined in the Indenture
referred to in the Security upon which this notation is endorsed) hereby
unconditionally guarantees on a senior basis (such Guarantee by the Guarantor
being referred to herein as the "Guarantee") the due and punctual payment of the
principal of, premium, if any, and interest on the Securities, whether at
maturity, by acceleration or otherwise, the due and punctual payment of interest
on the overdue principal, premium and interest on the Securities, and the due
and punctual performance of all other obligations of the Company to the Holders
or the Trustee, all in accordance with the terms set forth in Article Ten of the
Indenture (as defined below). This Guarantee will become effective in accordance
with Article Ten of the Indenture and its terms shall be evidenced therein. The
validity and enforceability of any Guarantee shall not be affected by the fact
that it is not affixed to any particular Security.
Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Indenture dated as of July 13, 1999, among Metris
Companies Inc., each of the Guarantors named therein and the Bank of New York,
as trustee, as amended or supplemented (the "Indenture").
The obligations of the undersigned to the Holders of Securities and to the
Trustee pursuant to this Guarantee and the Indenture are expressly set forth in
Article Ten of the Indenture and reference is hereby made to the Indenture for
the precise terms of the Guarantee and all of the other provisions of the
Indenture to which this Guarantee relates.
This Security Guarantee shall not be valid or obligatory for any purpose
until the certificate of authentication on the Securities upon which this
Security Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
This Security Guarantee shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflicts
of laws to the extent that the application of the laws of another jurisdiction
would be required thereby.
This Security Guarantee is subject to release upon the terms set forth in
the Indenture.
METRIS RECOVERY SERVICES, INC.
By: /s/David R. Reak
Name: David R. Reak
Title: President
By: /s/Jean C. Benson
Name: Jean C. Benson
Title: Treasurer
EXHIBIT 4.2
METRIS COMPANIES INC., as Issuer,
and
the Guarantors named herein
$100,000,000
10% Senior Notes due 2004, Series A
10% Senior Notes due 2004, Series B
SECOND SUPPLEMENTAL INDENTURE
Dated as of February 28, 2000
TO
INDENTURE
Dated as of November 7, 1997
BANK ONE TRUST COMPANY, N.A., as Trustee
Successor In Interest To
THE FIRST NATIONAL BANK OF CHICAGO
<PAGE>
SECOND SUPPLEMENTAL INDENTURE, dated as of February 28, 2000 among METRIS
COMPANIES, INC., a Delaware corporation (the "Company"), the GUARANTORS named
herein and BANK ONE TRUST COMPANY, N.A. successor in interest to THE FIRST
NATIONAL BANK OF CHICAGO, as Trustee (the "Trustee").
RECITALS
The Company and Metris Direct, Inc., as Guarantor (the "Guarantor"), has
heretofore executed and delivered to the Trustee a certain Indenture, dated as
of November 7, 1997 (the "Indenture"), pursuant to which the company issued and
has outstanding $100,000,000 aggregate principal amount of its 10% Senior Notes
due 2004, Series B (the "Securities"). The Company and the Guarantor executed
and delivered to the Trustee a First Supplemental Indenture dated as of June 25,
1999. All terms used in this Second Supplemental Indenture which are defined in
the Indenture shall have the meanings assigned to them in the Indenture.
Pursuant to the terms of the Indenture, any Restricted Subsidiary of the
Company other than Securitization Entities, which guarantee Indebtedness of the
Company, are to execute a Subsidiary Guarantee and deliver it to the Trustee.
Metris Recovery Services, Inc., a Restricted Subsidiary, ("Metris
Recovery") will be guaranteeing other Indebtedness of the Company simultaneously
with the execution of the Subsidiary Guarantee.
Pursuant to Section 9.01(h), the Trustee may enter into a supplemental
indenture without the consent of any holder to add a subsidiary of the Company
as a Guarantor.
The Company has furnished the Trustee with (i) an Opinion of Counsel
stating that this Supplement complies with the provisions of Section 9.01(h);
(ii) a copy of the resolution of its Board of Directors certified by its
Secretary or Assistant Secretary; (iii) a copy of the resolutions of the Board
of Directors of Metris Recovery certified by its Secretary or Assistant
Secretary and (iv) the Security Guarantee of Metris Recovery.
All things necessary to make this Second Supplemental Indenture a valid
agreement of the Company and the Trustee and a valid amendment and supplement to
the Indenture have been done.
NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH:
Each party hereto agrees as follows for the benefit of each other party and
for the equal and ratable benefit of Holders of the Securities, as follows:
ARTICLE I
SECTION 101. Pursuant to Section 4.13 of the Indenture, Metris Recovery has
become a Guarantor under the Indenture, and has agreed pursuant to a Security
Guarantee executed on the date hereof, to undertake the obligations of Guarantor
as set forth in Article Ten of the Indenture.
ARTICLE II
SECTION 201. For purposes of this Second Supplemental Indenture, except as
otherwise herein expressly provided or unless the context otherwise requires:
(i) the terms and expressions used herein shall have the same meanings as
corresponding terms and expressions used in the Indenture: and (ii) the words
"herein", "hereof" and "hereby" and other words of similar import used in this
Second Supplemental Indenture refer to this Second Supplemental Indenture as a
whole and not to any particular section hereof.
SECTION 202. Except as expressly amended hereby, the Indenture is in all
respects ratified and confirmed and all the terms, conditions and provisions
thereof shall remain in full force and effect.
SECTION 203. This Second Supplemental Indenture shall form a part of the
Indenture for all purposes, and every Holder of Securities heretofore or
hereafter authenticated and delivered shall be bound hereby.
SECTION 204. This Second Supplemental Indenture may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original, and all of such counterparts shall together constitute one and the
same instrument.
SECTION 205. The Trustee makes no representation as to the validity or
sufficiency of this Second Supplemental Indenture.
SECTION 206. The Recitals contained herein shall be taken as the statements
of the Company, and the Trustee assumes no responsibility for their correctness.
SECTION 207. This instrument shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed, all as of the first day and year first written
above.
METRIS COMPANIES INC.
By: /s/Paul T. Runice
Name: Paul T. Runice
Title: Senior Vice President, Treasurer
METRIS DIRECT, INC.
By: /s/Paul T.Runice
Name: Paul T. Runice
Title: Senior Vice President, Treasurer
METRIS RECOVERY SERVICES, INC.
By: /s/Jean C. Benson
Name: Jean C. Benson
Title: Treasurer
BANK ONE TRUST COMPANY, N.A.
By: /s/R.Tarnas
Name: R. Tarnas
Title: Vice President
<PAGE>
SENIOR GUARANTEE
For value received, the undersigned Guarantor (as defined in the Indenture
referred to in the Security upon which this notation is endorsed) hereby
unconditionally guarantees on a senior basis (such Guarantee by the Guarantor
being referred to herein as the "Guarantee") the due and punctual payment of the
principal of, premium, if any, and interest on the Securities, whether at
maturity, by acceleration or otherwise, the due and punctual payment of interest
on the overdue principal, premium and interest on the Securities, and the due
and punctual performance of all other obligations of the Company to the Holders
or the Trustee, all in accordance with the terms set forth in Article Ten of the
Indenture (as defined below). This Guarantee will become effective in accordance
with Article Ten of the Indenture and its terms shall be evidenced therein. The
validity and enforceability of any Guarantee shall not be affected by the fact
that it is not affixed to any particular Security.
Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Indenture dated as of November 7, 1997, among Metris
Companies Inc., each of the Guarantors named therein and Bank One Trust Company,
N.A., as successor in interest to The First National Bank of Chicago, as
trustee, as amended or supplemented (the "Indenture").
The obligations of the undersigned to the Holders of Securities and to the
Trustee pursuant to this Guarantee and the Indenture are expressly set forth in
Article Ten of the Indenture and reference is hereby made to the Indenture for
the precise terms of the Guarantee and all of the other provisions of the
Indenture to which this Guarantee relates.
This Security Guarantee shall not be valid or obligatory for any purpose
until the certificate of authentication on the Securities upon which this
Security Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
This Security Guarantee shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflicts
of laws to the extent that the application of the laws of another jurisdiction
would be required thereby.
This Security Guarantee is subject to release upon the terms set forth in
the Indenture.
<PAGE>
METRIS RECOVERY SERVICES, INC.
By: /s/David R. Reak
Name: David R. Reak
Title: President
By: /s/Jean C. Benson
Name: Jean C. Benson
Title: Treasurer
<TABLE>
Exhibit 11
METRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Earnings Per Share
In thousands, except per-share amounts Three Months Ended March 31,
2000 1999
BASIC:
- ------
<S> <C> <C>
Net income applicable to common stockholders .......................... $42,360 $17,115
======= =======
Weighted average number of common shares outstanding .................. 38,642 38,526
Net income per share .................................................. $ 1.10 $ 0.44
DILUTED:
- --------
Net income applicable to common stockholders (1) ...................... $49,958 $17,115
======= =======
Weighted average number of common shares outstanding .................. 38,642 38,526
Net effect of assumed exercise of stock options based on treasury stock
method using average market price ................................ 2,355 1,739
Assumed conversion of convertible preferred stock ..................... 19,442 --
------- -------
60,439 40,265
======= =======
Net income per share .................................................. $ 0.83 $ 0.42
</TABLE>
(1) For the three month period ended March 31, 2000, diluted earnings per
share is calculated by adding back the Series C convertible preferred
dividend of $7.6 million. In determining the number of dilutive shares
outstanding, the Series C convertible preferred stock is assumed to have
been converted into 19.4 million shares at the beginning of the
period and therefore, no dividend would be paid for the three month
period ended March 31, 2000.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001021061
<NAME> METRIS COMPANIES INC.
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-1-2000
<PERIOD-END> Mar-31-2000
<EXCHANGE-RATE> 1
<CASH> 37,465
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 104,696
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,135,384
<ALLOWANCE> 645,089
<TOTAL-ASSETS> 2,395,573
<DEPOSITS> 1,008,342
<SHORT-TERM> 893
<LIABILITIES-OTHER> 367,260
<LONG-TERM> 344,341
0
337,148
<COMMON> 387
<OTHER-SE> 337,202
<TOTAL-LIABILITIES-AND-EQUITY> 2,395,573
<INTEREST-LOAN> 95,359
<INTEREST-INVEST> 1,369
<INTEREST-OTHER> 1,073
<INTEREST-TOTAL> 97,081
<INTEREST-DEPOSIT> 13,742
<INTEREST-EXPENSE> 24,108
<INTEREST-INCOME-NET> 73,693
<LOAN-LOSSES> 87,793
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 140,123
<INCOME-PRETAX> 87,249
<INCOME-PRE-EXTRAORDINARY> 53,396
<EXTRAORDINARY> 0
<CHANGES> 3,438
<NET-INCOME> 49,958
<EPS-BASIC> 1.10
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 18.40
<LOANS-NON> 0
<LOANS-PAST> 267,251
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 619,028
<CHARGE-OFFS> 193,490
<RECOVERIES> 15,081
<ALLOWANCE-CLOSE> 645,089
<ALLOWANCE-DOMESTIC> 645,089
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
