UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 001-12351
METRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1849591
(State of Incorporation) (I.R.S. Employer Identification No.)
10900 Wayzata Boulevard, Minnetonka, Minnesota 55305-1534
(Address of principal executive offices)
(952) 525-5020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
As of July 31, 2002, 57,948,559 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
METRIS COMPANIES INC.
FORM 10-Q/A
TABLE OF CONTENTS
-----------------
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June 30, 2002
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets.......................3
Consolidated Statements of Income.................4
Consolidated Statements of Changes in
Stockholders' Equity.....................6
Consolidated Statements of Cash Flows.............7
Notes to Consolidated Financial Statements........8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................41
Item 2. Changes in Securities........................................41
Item 3. Defaults Upon Senior Securities..............................41
Item 4. Submission of Matters to a Vote of Security Holders..........42
Item 5. Other Information............................................42
Item 6. Exhibits and Reports on Form 8-K.............................43
Signatures...................................................44
2
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per-share data) (Unaudited)
June 30, December 31,
2002 2001
----------- ------------
Assets:
Cash and due from banks .................................................... $ 100,735 $ 109,812
Federal funds sold ......................................................... 132,662 243,772
Short-term investments ..................................................... 665,224 134,502
----------- -----------
Cash and cash equivalents .................................................. 898,621 488,086
----------- -----------
Retained interests in loans securitized .................................... 1,466,442 1,263,655
Less: Valuation allowance ................................................. 744,205 537,499
----------- -----------
Net retained interests in loans securitized ................................ 722,237 726,156
----------- -----------
Credit card loans .......................................................... 1,306,824 2,746,656
Less: Allowance for loan losses ........................................... 275,279 410,159
----------- -----------
Net credit card loans ...................................................... 1,031,545 2,336,497
----------- -----------
Property and equipment, net ................................................ 106,410 114,913
Deferred tax asset ......................................................... 32,897 32,167
Purchased portfolio premium, net ........................................... 78,595 94,793
Other receivables due from credit card
securitizations, net .................................................... 118,942 179,868
Other assets ............................................................... 222,462 256,206
----------- -----------
Total assets .......................................................... $ 3,211,709 $ 4,228,686
=========== ===========
Liabilities:
Deposits ................................................................... $ 1,321,861 $ 2,058,008
Debt ....................................................................... 356,057 647,904
Accounts payable ........................................................... 108,678 83,475
Deferred income ............................................................ 197,986 215,031
Accrued expenses and other liabilities ..................................... 100,881 82,313
----------- -----------
Total liabilities ..................................................... 2,085,463 3,086,731
----------- -----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000
shares authorized, 1,105,767 and 1,057,638
shares issued and outstanding, respectively ........................... 411,898 393,970
Common stock, par value $.01 per share;
300,000,000 shares authorized, 64,462,260
and 64,224,878 shares issued, respectively ............................ 645 642
Paid-in capital ............................................................ 235,635 232,413
Unearned compensation ...................................................... (5,037) (4,980)
Treasury stock - 3,526,400 and 806,300 shares,
respectively........................................................... (45,965) (13,014)
Retained earnings .......................................................... 529,070 532,924
----------- -----------
Total stockholders' equity ............................................ 1,126,246 1,141,955
----------- -----------
Total liabilities and stockholders' equity ............................ $ 3,211,709 $ 4,228,686
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except earnings per-share data) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
2002 2001 2002 2001
---- ---- ---- ----
Interest Income:
Credit card loans and retained
interests in loans securitized ........................ $ 134,759 $ 168,702 $ 286,973 $ 332,224
Federal funds sold ......................................... 110 329 224 2,640
Other ...................................................... 2,359 3,176 3,563 7,072
--------- --------- --------- ---------
Total interest income ...................................... 137,228 172,207 290,760 341,936
Deposit interest expense ................................... 18,335 32,936 41,988 69,559
Other interest expense ..................................... 8,620 11,377 17,132 22,589
--------- --------- --------- ---------
Total interest expense ..................................... 26,955 44,313 59,120 92,148
--------- --------- --------- ---------
Net Interest Income ........................................ 110,273 127,894 231,640 249,788
Provision for loan losses .................................. 152,811 114,682 307,181 202,411
--------- --------- --------- ---------
Net Interest (Expense)Income After Provision for
Loan Losses ........................................... (42,538) 13,212 (75,541) 47,377
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ...................................... 49,668 119,712 173,786 206,804
Credit card fees, interchange and
other credit card income .............................. 48,089 74,837 121,196 137,669
Enhancement services revenues .............................. 95,649 82,900 190,645 161,164
--------- --------- --------- ---------
193,406 277,449 485,627 505,637
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses.................... 56,193 51,481 96,745 92,246
Employee compensation ...................................... 54,365 56,115 110,913 110,851
Data processing services and communications ................ 20,795 22,141 43,101 44,520
Enhancement services claims expense ........................ 15,917 8,250 27,124 14,929
Credit card fraud losses ................................... 2,953 2,200 5,181 4,851
Purchased portfolio premium amortization ................... 7,743 7,418 16,198 15,246
Other ...................................................... 51,558 41,325 84,650 77,510
--------- --------- --------- ---------
209,524 188,930 383,912 360,153
--------- --------- --------- ---------
(Loss) Income Before Income Taxes and
Cumulative Effect of Accounting Change................. (58,656) 101,731 26,174 192,861
Income taxes ............................................... (22,282) 38,963 10,208 74,048
--------- --------- --------- ---------
(Loss) Income Before Cumulative Effect of
Accounting Change...................................... (36,374) 62,768 15,966 118,813
Cumulative effect of accounting change
(net of income taxes of $9,000)........................ -- -- -- 14,499
--------- --------- --------- ---------
Net (Loss) Income .......................................... (36,374) 62,768 15,966 104,314
Convertible preferred stock
dividends-Series C .................................... 9,394 8,593 18,582 16,996
--------- --------- --------- ---------
Net (Loss) Income Applicable to Common
Stockholders........................................... $ (45,768) $ 54,175 $ (2,616) $ 87,318
========= ========= ========= =========
4
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(Loss) earnings per share:
Basic-(loss) income before cumulative
effect of accounting change ....... $ (0.74) $ 0.64 $ (0.04) $ 1.22
Basic-cumulative effect of accounting
change ............................ -- -- -- (0.15)
Basic-net (loss) income ............... (0.74) 0.64 (0.04) 1.07
Diluted-(loss) income before cumulative
effect of accounting change ....... (0.74) 0.63 (0.04) 1.20
Diluted-cumulative effect of accounting
change ............................ -- -- -- (0.15)
Diluted-net (loss) income ............. (0.74) 0.63 (0.04) 1.05
Shares used to compute earnings per share:
Basic ................................. 61,503 97,633 61,844 97,117
Diluted ............................... 61,503 99,841 61,844 99,055
Dividends declared per common share ........ $ 0.010 $ 0.010 $ 0.020 $ 0.020
See accompanying Notes to Consolidated Financial Statements.
5
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Total
Number of Shares Preferred Common Paid-in Unearned Treasury Retained Stockholders'
Preferred Common Stock Stock Capital Compensation Stock Earnings Equity
-------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 968 62,243 $ 360,421 $ 622 $ 198,077 $ -- $ -- $ 324,433 $ 883,553
Net income ............. -- -- -- -- -- -- -- 104,314 104,314
Cash dividends ......... -- -- -- -- -- -- -- (1,847) (1,847)
Preferred dividends in
kind - Series C .... 44 -- 16,401 -- -- -- -- (16,401) --
Issuance of common stock
under employee
benefit plans ...... -- 1,129 -- 12 20,562 -- -- -- 20,574
Deferred compensation
obligations ........ -- 422 -- 4 5,429 (7,127) -- -- (1,694)
Amortization of
restricted stock ... -- -- -- -- -- 2,348 -- -- 2,348
------- -------- --------- -------- ---------- ---------- --------- ----------- ----------
BALANCE AT JUNE 30, 2001 .... 1,012 63,794 $ 376,822 $ 638 $ 224,068 $ (4,779) $ -- $ 410,499 $1,007,248
======= ======== ========== ========= ========== ======== ========= =========== ==========
BALANCE AT DECEMBER 31, 2001 1,058 63,419 $ 393,970 $ 642 $ 232,413 $ (4,980) $ (13,014) $ 532,924 $1,141,955
Net income ............. -- -- -- -- -- -- -- 15,966 15,966
Cash dividends ......... -- -- -- -- -- -- -- (1,892) (1,892)
Common stock repurchased -- (2,720) -- -- -- -- (32,951) -- (32,951)
Preferred dividends in
kind - Series C .... 48 -- 17,928 -- -- -- -- (17,928) --
Issuance of common stock
under employee
benefit plans ...... -- 161 -- 2 2,255 -- -- -- 2,257
Deferred compensation
obligations ........ -- 76 -- 1 967 (968) -- -- --
Amortization of
restricted stock ... -- -- -- -- -- 911 -- -- 911
--------- ------- ---------- -------- ---------- --------- ----------- ---------- ----------
BALANCE AT JUNE 30, 2002 ... 1,106 60,936 $ 411,898 $ 645 $ 235,635 $ (5,037) $ (45,965) $ 529,070 $1,126,246
========= ======= ========== ======== ========== ========= =========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
6
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
2002 2001
---- ----
Operating Activities:
Net income ........................................... $ 15,966 $ 104,314
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change .......... -- 14,499
Depreciation and amortization ................... 52,374 45,075
Provision for loan losses ....................... 307,181 202,411
Retained interests valuation expense (income).... (66,578) (31,976)
Loss (gain) on derivative financial instruments . 13,947 (2,905)
Changes in operating assets and liabilities, net:
Deferred income taxes ....................... (730) 39,164
Other receivables due from credit card
securitizations ........................ 46,979 6,065
Accounts payable and accrued expenses ....... 43,771 51,771
Deferred income ............................. (17,045) (24,176)
Other ....................................... 10,520 (37,579)
----------- -----------
Net cash provided by operating activities ............ 406,385 366,663
----------- -----------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans................................ 70,497 913,799
Net loans originated or collected .................... 997,771 (1,200,926)
Additions to property and equipment .................. (3,538) (3,991)
----------- -----------
Net cash provided by (used in) investing activities .. 1,064,730 (291,118)
----------- -----------
Financing Activities:
(Decrease) increase in debt .......................... (291,847) 271
(Decrease) increase in deposits ...................... (736,147) 68,746
Cash dividends paid .................................. (1,892) (1,847)
Issuance of common stock ............................. 2,257 21,228
Repurchase of common stock ........................... (32,951) --
----------- -----------
Net cash (used in) provided by financing activities .. (1,060,580) 88,398
----------- -----------
Net increase in cash and cash equivalents ............ 410,535 163,943
Cash and cash equivalents at beginning of period ..... 488,086 521,440
----------- -----------
Cash and cash equivalents at end of period ........... $ 898,621 $ 685,383
=========== ===========
Supplemental disclosures and cash flow
information:
Cash paid during the period for:
Interest ........................................ $ 61,345 $ 86,731
Income taxes .................................... (16,488) 25,366
Tax benefit from employee stock option
exercises........................................ 174 6,651
See accompanying Notes to Consolidated Financial Statements.
7
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except as noted) (Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries, including Direct Merchants Credit
Card Bank, N.A. ("Direct Merchants Bank"), which may be referred to as "we,"
"us," "our" and the "Company." We are an information-based direct marketer of
consumer lending products and enhancement services.
We have eliminated all significant intercompany balances and transactions
in consolidation. We have reclassified certain prior-period amounts to conform
with the current period'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
accounting principles generally accepted in the United States of America 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
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/A for the fiscal year ended December 31, 2001. 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
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions that affect the reported amounts in
the consolidated financial statements and accompanying notes. The most
significant and subjective of these estimates is our determination of the
adequacy of the allowance for loan losses and our determination of the fair
value of retained interests from assets securitized. The significant factors
susceptible to future change that have an impact on these estimates include
default rates, net interest spreads, liquidity and overall economic conditions.
As a result, the actual losses in our loan portfolio and the fair value of our
retained interests as of June 30, 2002 and December 31, 2001 could materially
differ from these estimates.
8
NOTE 2 - EARNINGS PER SHARE
The following table presents the computation of basic and diluted weighted-
average shares used in the per-share calculations:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
(Loss) income before cumulative effect
of accounting change ................... $(36,374) $ 62,768 $ 15,966 $118,813
Preferred dividends - Series C .............. 9,394 8,593 18,582 16,996
-------- -------- -------- --------
Net (loss) income applicable to common
stockholders before cumulative effect of
accounting change ...................... (45,768) 54,175 (2,616) 101,817
Cumulative effect of accounting change, net . -- -- -- 14,499
-------- -------- -------- --------
Net (loss) income applicable to common
stockholders ........................... $(45,768) $ 54,175 $ (2,616) $ 87,318
======== ======== ======== ========
Weighted-average common shares outstanding .. 61,503 62,788 61,844 62,547
Adjustments for dilutive securities:
Assumed conversion of convertible preferred
stock (1) .............................. -- 34,845 -- 34,570
-------- -------- -------- --------
Basic common shares ......................... 61,503 97,633 61,844 97,117
Assumed exercise of outstanding stock
options (1) ............................ -- 2,208 -- 1,938
-------- -------- -------- --------
Diluted common shares ....................... 61,503 99,841 61,844 99,055
======== ======== ======== ========
(1) In accordance with SFAS 128, the earnings per share calculations for the
three- and six-month periods ended June 30, 2002 exclude the assumed conversion
of the convertible preferred stock and the outstanding stock options as they are
anti-dilutive.
NOTE 3 - ACCOUNTING CHANGES
On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments. SFAS 133 requires enterprises to recognize all derivatives as
either assets or liabilities in the statement of financial position and to
measure those instruments at fair market value. As a result of the adoption of
SFAS 133, we marked our derivatives to market value and recognized a one-time,
non-cash, after-tax charge to earnings of $14.5 million. This one-time charge is
reflected as a "Cumulative effect of accounting change" in the consolidated
statements of income for the six months ended June 30, 2001.
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes accounting and reporting standards for goodwill and
other intangible assets. It requires enterprises to test these assets for
impairment upon adoption of SFAS 142 as well as on an annual basis, and reduce
the carrying amount of these assets if they are found to be impaired. Goodwill
and other intangible assets with an indefinite useful life will no longer be
amortized. Other intangible assets with an estimable useful life will continue
to be amortized over their useful lives. The adoption of the new standard did
not have a material impact on our financial statements.
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
supersedes FASB Statement No. 121, and provides a single accounting model for
long-lived assets to be disposed of. The adoption of the new standard did not
have a material impact on our financial statements.
9
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 will require gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS 4. SFAS 145 also amends
SFAS 13 to require certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor or guarantor. Accordingly, most gains or
losses from extinguishments of debt for fiscal years beginning after May 15,
2002 shall not be reported as extraordinary. Upon adoption, any gain or loss on
extinguishment of debt previously classified as an extraordinary item in prior
periods presented must be reclassified to conform with the provisions of SFAS
145. SFAS 145's amendment and technical correction to SFAS 13 is effective for
all transactions occurring after May 15, 2002. We do not expect a material
impact on our financial statements upon adoption of SFAS 145.
In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." The statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when a liability is incurred.
Under Issue 94-3, a liability for an exit cost as generally defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. We do not expect a material impact on our
financial statements upon adoption of SFAS 146.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period ....... $ 416,914 $ 143,537 $ 410,159 $ 123,123
Allowance transferred to the
retained interests valuation
allowance .......................... (209,347) 59,998 (273,284) 40,792
Provision for loan losses ............ 152,811 114,682 307,181 202,411
Loans charged off .................... (91,595) (65,013) (180,486) (117,629)
Recoveries ........................... 6,496 4,853 11,709 9,360
--------- --------- --------- ---------
Net loans charged off ................ (85,099) (60,160) (168,777) (108,269)
--------- --------- --------- ---------
Balance at end of period ............. $ 275,279 $ 258,057 $ 275,279 $ 258,057
========= ========= ========= =========
As of June 30, 2002, we had $11.6 million in credit card loans classified
as non-accrual, compared to $1.3 million in credit card loans classified as
non-accrual as of December 31, 2001. As of June 30, 2001, we had no credit card
loans classified as non-accrual. Credit card loans contractually 90 or more days
past due and still accruing interest amounted to $60.8 million, $122.3 million
and $89.8 million as of June 30, 2002, December 31, 2001 and June 30, 2001,
respectively.
During the three- and six-month periods ended June 30, 2002, we transferred
$209.3 million and $273.3 million of allowance for loan losses, respectively, to
the valuation allowance for retained interests in loans securitized. This
transfer is primarily due to the sale of approximately $1.6 billion of
receivables from Direct Merchants Bank to the Metris Master Trust ("Master
Trust") during the first six months of 2002. During the three- and six-month
periods ended June 30, 2001, we transferred $60.0 million and $40.8 million,
respectively, of valuation allowance for retained interests in loans
10
securitized to allowance for loan losses. These transfers were primarily due to
the maturity of a bank conduit that was accounted for as a sale under SFAS 140.
NOTE 5 - RETAINED INTERESTS IN LOANS SECURITIZED
Activity in retained interests is as follows:
June 30, December 31,
2002 Change 2001
---- ------ ----
Gross retained interests .................................................... $ 1,466,442 $ 202,787 $ 1,263,655
Valuation allowance ......................................................... (744,205) (206,706) (537,499)
----------- ----------- -----------
Net retained interest ....................................................... $ 722,237 $ (3,919) $ 726,156
=========== =========== ===========
June 30, December 31,
2001 Change 2000
---- ------ ----
Gross retained interests .................................................... $ 1,069,090 $ (954,591) $ 2,023,681
Valuation allowance ......................................................... (568,084) 72,768 (640,852)
----------- ----------- -----------
Net retained interest ....................................................... $ 501,006 $ (881,823) $ 1,382,829
=========== =========== ===========
Activity in the valuation allowance on retained interests in loans
securitized is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period ....... $ 551,385 $ 643,261 $ 537,499 $ 640,852
Transfers from the allowance for
loan losses ........................ 209,347 (59,998) 273,284 (40,792)
Retained interests
valuation expense (income) ......... (16,527) (15,179) (66,578) (31,976)
--------- --------- --------- ---------
Balance at end of period ............. $ 744,205 $ 568,084 $ 744,205 $ 568,084
========= ========= ========= =========
11
NOTE 6 - SEGMENTS
We operate in two principal areas: consumer lending products and
enhancement services. Our consumer lending products are primarily unsecured
credit cards, including the Direct Merchants Bank MasterCard(R) and Visa(R). Our
credit card accountholders include consumers obtained from third-party lists and
other consumers for whom general credit bureau information is available.
We market our enhancement services, including (1) debt waiver protection
for unemployment, disability, and death; (2) membership programs such as card
registration, purchase protection and other club memberships; and (3)
third-party insurance, directly to our credit card accountholders 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. In doing so, the income statement and balance sheet are adjusted to
reverse the effects of securitizations. Presentation on a managed basis is not
in conformity with accounting principles generally accepted in the United States
of America. The adjustments columns in the segment table include 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 do not allocate capital
expenditures for leasehold improvements, capitalized software and furniture and
equipment to operating segments. There were no material operating assets located
outside of the United States for the periods presented.
Our enhancement services operating segment pays a fee to our consumer
lending products segment for successful marketing efforts to the consumer
lending products segment's credit card accountholders at a rate similar to those
paid to our other third parties. Our enhancement services segment reports
interest income and our consumer lending products segment reports interest
expense at our weighted-average borrowing rate for the excess cash flow
generated by the enhancement services segment that is used by the consumer
lending products segment to fund the growth of credit card accountholder
balances.
12
Three Months Ended June 30,
2002
----
Consumer
Lending Enhancement Securitization Other
Products Services Adjustments(a) Adjustments(b) Consolidated
-------- -------- -------------- -------------- ------------
Interest income. $ 509,821 $ 58 $ (372,593) (58) $ 137,228
Interest
expense ..... 81,005 -- (53,992) (58) 26,955
----------- ----------- ----------- ------------ -----------
Net interest
income ...... 428,816 58 (318,601) -- 110,273
Other revenue ... 119,317 95,649 (21,560) -- 193,406
Total revenue ... 548,133 95,707 (340,161) -- 303,679
Income before
income taxes. 21,145(c) 54,659(c) -- (134,460) (58,656)
Total assets ... $10,985,709 $ 142,705 $(8,924,497) $ 1,007,792 (d) $ 3,211,709
Three Months Ended June 30,
2001
----
Consumer
Lending Enhancement Securitization Other
Products Services Adjustments(a) Adjustments(b) Consolidated
-------- -------- -------------- -------------- ------------
Interest income $ 481,540 $ 3,202 $ (309,333) (3,202) $ 172,207
Interest expense 129,361 -- (81,846) (3,202) 44,313
----------- ----------- ----------- ------------ -----------
Net interest
income ..... 352,179 3,202 (227,487) -- 127,894
Other revenue .. 160,240 82,900 34,309 -- 277,449
Total revenue .. 512,419 86,102 (193,178) -- 405,343
Income before
income taxes 173,672(c) 55,058(c) -- (126,999) 101,731
Total assets ... $ 9,777,687 $ 138,076 $(6,762,272) $ 802,841 (d) $ 3,956,332
13
Six Months Ended June 30,
2002
----
Consumer
Lending Enhancement Securitization Other
Products Services Adjustments(a) Adjustments(b) Consolidated
-------- -------- -------------- -------------- ------------
Interest income $ 1,036,499 $ 2,386 $ (745,739) (2,386) $ 290,760
Interest expense 171,737 -- (110,231) (2,386) 59,120
----------- ----------- ----------- ------------ -----------
Net interest
income ..... 864,762 2,386 (635,508) -- 231,640
Other revenue .. 250,080 190,645 44,902 -- 485,627
Total revenue .. 1,114,842 193,031 (590,606) -- 717,267
Income before
income taxes 161,469(c) 119,567(c) -- (254,862) 26,174
Total assets ... $10,985,709 $ 142,705 $(8,924,497) $ 1,007,792(d) $ 3,211,709
Six Months Ended June 30,
2001
----
Consumer
Lending Enhancement Securitization Other
Products Services Adjustments(a) Adjustments(b) Consolidated
-------- -------- -------------- -------------- ------------
Interest income . $ 948,360 $ 6,822 $ (606,424) (6,822) $ 341,936
Interest expense. 273,291 -- (174,321) (6,822) 92,148
----------- ----------- ----------- ------------ -----------
Net interest
income ...... 675,069 6,822 (432,103) -- 249,788
Other revenue ... 285,611 161,164 58,862 -- 505,637
Total revenue ... 960,680 167,986 (373,241) -- 755,425
Income before
income taxes
and cumulative
effect of
accounting
change....... 331,251(c) 109,737(c) -- (248,127) 192,861
Total assets .... $ 9,777,687 $ 138,076 $(6,762,272) $ 802,841 (d) $ 3,956,332
(a) This column reflects adjustments to the Company's internal financial
statements, which are prepared on a managed basis, to eliminate investors'
interests in securitized loans.
(b) The other adjustments column includes: intercompany eliminations and
amounts not allocated to segments.
(c) Income before income taxes (and cumulative effect of accounting change)
includes intercompany commissions paid by the enhancement services segment
to the consumer lending products segment for successful marketing efforts
to consumer lending products credit card accountholders of $3.0 million for
the three months ended June 30, 2002, $3.0 million for the three months
ended June 30, 2001, $6.3 million for the six months ended June 30, 2002
and $6.2 million for the six months ended June 30, 2001.
(d) 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.
14
NOTE 7 - SHAREHOLDERS' EQUITY
On February 6, 2001, the Board of Directors authorized a share repurchase
program of up to $200 million of our outstanding common stock over a period
ending December 31, 2002. The amount of common shares we can repurchase in a
calendar year is limited under various debt agreements. For the six months
ended June 30, 2002, 2,720,100 common shares had been repurchased under the
program for $33.0 million. Subsequent to June 30, 2002, we repurchased an
additional 3,026,900 common shares for $10.8 million. In 2002, the Company may
repurchase up to an additional $51 million of common shares.
The purpose of the Metris Companies Inc. stock repurchase program is to
purchase outstanding stock for later reissuance under its stock option and
employee benefit plans or potential acquisition opportunities. During the first
six months of 2002 and 2001, the Company issued 161,000 and 1,129,000 shares of
common stock, respectively, under its employee benefit plans for net cash
proceeds of $2.3 million and $20.6 million, respectively.
NOTE 8 - SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS
We have various indirect subsidiaries which do not guarantee Company debt.
We have presented the following condensed consolidating financial statements of
the Company, the guarantor subsidiaries and the non-guarantor subsidiaries to
comply with SEC reporting requirements. We have not presented separate financial
statements of the guarantor and non-guarantor subsidiaries because management
has determined that the subsidiaries' financial statements would not be material
to investors.
15
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
June 30, 2002
(Dollars in thousands)
Unaudited
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ................ $ 157,238 $ 1,978 $ 739,405 $ -- $ 898,621
Net retained interests in loans
securitized ........................... -- -- 722,237 -- 722,237
Credit card loans, net of allowance ...... 2,252 -- 1,029,293 -- 1,031,545
Property and equipment, net .............. -- 71,913 34,497 -- 106,410
Deferred income taxes .................... (7,645) 12,451 28,091 -- 32,897
Purchased portfolio premium .............. 248 -- 78,347 -- 78,595
Other receivables due from credit card
securitizations, net................... 5 -- 118,937 -- 118,942
Other assets ............................. 9,741 44,903 174,220 (6,402) 222,462
Investment in subsidiaries ............... 1,924,383 1,784,935 -- (3,709,318) --
----------- ----------- ----------- ------------ -----------
Total assets ............................. $ 2,086,222 $ 1,916,180 $ 2,925,027 $(3,715,720) $ 3,211,709
=========== =========== =========== =========== ============
Liabilities:
Deposits ................................. $ (1,000) $ -- $ 1,322,861 $ -- $ 1,321,861
Debt ..................................... 346,371 67 9,619 -- 356,057
Accounts payable ......................... 5,673 17,568 88,638 (3,201) 108,678
Deferred income .......................... 36 23,086 178,065 (3,201) 197,986
Accrued expenses and other liabilities ... 608,896 (48,924) (459,091) -- 100,881
----------- ----------- ----------- ----------- -----------
Total liabilities ........................ 959,976 (8,203) 1,140,092 (6,402) 2,085,463
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ............... 1,126,246 1,924,383 1,784,935 (3,709,318) 1,126,246
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity.................. $ 2,086,222 $ 1,916,180 $ 2,925,027 $(3,715,720) $ 3,211,709
=========== =========== =========== =========== ===========
16
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ................ $ 17,613 $ 1,505 $ 468,968 $ -- $ 488,086
Net retained interests in loans
securitized ........................... -- -- 726,156 -- 726,156
Credit card loans, net of allowance ...... 1,646 -- 2,334,851 -- 2,336,497
Property and equipment, net .............. -- 78,425 36,488 -- 114,913
Deferred income taxes .................... (31,921) 4,937 59,151 -- 32,167
Purchased portfolio premium .............. 248 -- 94,545 -- 94,793
Other receivables due from credit card
securitizations, net................... 34 644 179,190 -- 179,868
Other assets ............................. 10,145 50,794 201,525 (6,258) 256,206
Investment in subsidiaries ............... 1,900,528 1,745,701 -- (3,646,229) --
----------- ----------- ----------- ----------- -----------
Total assets ............................. $ 1,898,293 $ 1,882,006 $ 4,100,874 $(3,652,487) $ 4,228,686
=========== =========== =========== =========== ===========
Liabilities:
Deposits ................................. $ (1,000) $ -- $ 2,059,008 $ -- $ 2,058,008
Debt ..................................... 345,924 171 301,809 -- 647,904
Accounts payable ......................... 3,070 15,461 68,073 (3,129) 83,475
Deferred income .......................... 3,270 30,615 184,275 (3,129) 215,031
Accrued expenses and other
liabilities........................... 405,074 (64,769) (257,992) -- 82,313
Total liabilities ........................ 756,338 (18,522) 2,355,173 (6,258) 3,086,731
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ............... 1,141,955 1,900,528 1,745,701 (3,646,229) 1,141,955
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity ................. $ 1,898,293 $ 1,882,006 $ 4,100,874 $(3,652,487) $ 4,228,686
=========== =========== =========== =========== ===========
17
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense)
Income ............................... $ (3,017) $ 157 $ 113,133 $ -- $ 110,273
Provision for loan losses ................ (797) -- 153,608 -- 152,811
--------- --------- --------- ----------- ---------
Net Interest (Expense)
Income After Provision
for Loan Losses....................... (2,220) 157 (40,475) -- (42,538)
--------- --------- --------- ----------- ---------
Other Operating Income:
Net securitization and
credit card servicing
income................................ 793 -- 48,875 -- 49,668
Credit card fees,
interchange and other
credit card income.................... (2,381) 5,796 (20,060) 64,734 48,089
Enhancement services
revenues.............................. -- 2,663 92,986 -- 95,649
Intercompany allocations ................. 41 72,194 15,126 (87,361) --
--------- --------- --------- ----------- ---------
(1,547) 80,653 136,927 (22,627) 193,406
--------- --------- --------- ----------- ---------
Other Operating Expense:
Credit card account
and other product
solicitation and
marketing expenses.................... -- 4,594 51,653 (54) 56,193
Employee compensation .................... (1,505) 45,753 10,117 -- 54,365
Data processing services
and communications ................... 13 (23,809) 43,019 1,572 20,795
Enhancement services claims
expense............................... -- 444 15,473 -- 15,917
Credit card fraud losses ................. 135 -- 2,818 -- 2,953
Purchased portfolio premium
amortization ......................... -- -- 11,938 (4,195) 7,743
Other .................................... (153) 48,261 9,680 (6,230) 51,558
Intercompany allocations ................. 555 23,510 63,296 (87,361) --
--------- --------- --------- ----------- ---------
(955) 98,753 207,994 (96,268) 209,524
--------- --------- --------- ----------- ---------
Loss Before Income Taxes
and Equity in Income of
Subsidiaries.......................... (2,812) (17,943) (111,542) 73,641 (58,656)
Income taxes ............................. (1,134) (7,003) (42,116) 27,971 (22,282)
Equity in income
of subsidiaries....................... (34,696) (69,426) -- 104,122 --
--------- --------- ---------- ----------- ---------
Net Loss ................................. $ (36,374) $ (80,366) $ (69,426) $ 149,792 $ (36,374)
========= ========= ========== =========== =========
18
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense)
Income............................... $ (25,386) $ (2,162) $ 155,442 $ -- $ 127,894
Provision for loan losses ............... 1,013 -- 113,669 -- 114,682
--------- --------- --------- ----------- ---------
Net Interest Expense After
Provision for Loan Losses............ (26,399) (2,162) 41,773 -- 13,212
--------- --------- --------- ---------- ---------
Other Operating Income:
Net securitization and
credit card servicing
income............................... 2,378 -- 117,334 -- 119,712
Credit card fees,
interchange and other
credit card income................... (1,562) 16,085 60,314 -- 74,837
Enhancement services
revenues............................. -- 14,083 68,817 -- 82,900
--------- --------- --------- --------- ---------
816 30,168 246,465 -- 277,449
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and
other product
solicitation and
marketing expenses -- 4,364 47,117 -- 51,481
Employee compensation .................. 342 53,815 1,958 -- 56,115
Data processing services
and communications ................. 2 (22,399) 44,538 -- 22,141
Enhancement services claims
expense............................. -- 323 7,927 -- 8,250
Credit card fraud losses ............... -- -- 2,200 -- 2,200
Purchased portfolio premium
amortization........................ -- -- 7,418 -- 7,418
Other .................................. 52 25,825 15,448 -- 41,325
--------- --------- --------- --------- ---------
396 61,928 126,606 -- 188,930
--------- --------- --------- --------- ---------
(Loss) Income Before Income
Taxes and Equity in
Income of Subsidiaries.............. (25,979) (33,922) 161,632 -- 101,731
Income taxes ........................... (9,881) (13,940) 62,784 -- 38,963
Equity in income of
subsidiaries........................ 78,866 98,848 -- (177,714) --
--------- --------- --------- --------- ---------
Net Income ............................. $ 62,768 $ 78,866 $ 98,848 $(177,714) $ 62,768
========= ========= ========= ========= =========
19
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense)
Income .............................. $ (8,499) $ (1,016) $ 241,155 $ -- $ 231,640
Provision for loan losses .............. (732) -- 257,913 50,000 307,181
--------- --------- --------- --------- ---------
Net Interest (Expense)
Income After Provision
for Loan Losses..................... (7,767) (1,016) (16,758) (50,000) (75,541)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and
credit card servicing
income............................... 3,171 -- 170,615 -- 173,786
Credit card fees,
interchange and other
credit card income................... (4,460) 13,719 111,649 288 121,196
Enhancement services
revenues............................. -- 18,826 171,819 -- 190,645
Intercompany allocations ................ 71 125,267 24,787 (150,125) --
--------- --------- --------- --------- ---------
(1,218) 157,812 478,870 (149,837) 485,627
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and
other product
solicitation and
marketing expenses.................... -- 7,823 88,976 (54) 96,745
Employee compensation .................... (1,101) 94,921 17,093 -- 110,913
Data processing services
and communications ................... 36 (43,371) 88,230 (1,794) 43,101
Enhancement services claims
expense............................... -- (69) 27,193 -- 27,124
Credit card fraud losses ................. 127 -- 5,054 -- 5,181
Purchased portfolio premium
amortization ......................... -- -- 22,382 (6,184) 16,198
Other .................................... (110) 74,609 18,341 (8,190) 84,650
Intercompany allocations ................. 46 41,588 108,491 (150,125) --
--------- --------- --------- --------- ---------
(1,002) 175,501 375,760 (166,347) 383,912
--------- --------- --------- --------- ---------
(Loss) Income Before Income
Taxes and Equity in
Income of Subsidiaries................ (7,983) (18,705) 86,352 (33,490) 26,174
Income taxes ............................. (3,114) (7,295) 33,677 (13,060) 10,208
Equity in income of
subsidiaries.......................... 20,835 52,675 -- (73,510) --
--------- --------- --------- --------- ---------
Net Income ............................... $ 15,966 $ 41,265 $ 52,675 $ (93,940) $ 15,966
========= ========= ========= ========= =========
20
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense)
Income................................ $ (60,937) $ (3,592) $ 314,317 $ -- $ 249,788
Provision for loan losses ................ 1,217 -- 201,194 -- 202,411
--------- --------- ----------- ---------- ---------
Net Interest (Expense)
Income After
Provision for Loan Losses............. (62,154) (3,592) 113,123 -- 47,377
--------- --------- ----------- ---------- ---------
Other Operating Income:
Net securitization and
credit card servicing
income................................. 4,756 -- 202,048 -- 206,804
Credit card fees,
interchange and other
credit card income..................... (2,851) 9,297 131,223 -- 137,669
Enhancement services
revenues............................... -- 31,201 129,963 -- 161,164
--------- --------- ----------- ---------- ---------
1,905 40,498 463,234 -- 505,637
--------- --------- ----------- ---------- ---------
Other Operating Expense:
Credit card account and
other product
solicitation and
marketing expenses..................... -- 10,484 81,762 -- 92,246
Employee compensation ..................... 342 97,226 13,283 -- 110,851
Data processing services
and communications .................... 2 (52,932) 97,450 -- 44,520
Enhancement services claims
expense................................ -- 490 14,439 -- 14,929
Credit card fraud losses .................. -- -- 4,851 -- 4,851
Purchased portfolio premium
amortization ............................. -- -- 15,246 -- 15,246
Other ..................................... 90 44,287 33,133 -- 77,510
--------- --------- ----------- ---------- ---------
434 99,555 260,164 -- 360,153
--------- --------- ----------- ---------- ---------
(Loss) Income Before Income
Taxes, Equity in Income
of Subsidiaries and
Cumulative Effect of
Accounting Change...................... (60,683) (62,649) 316,193 -- 192,861
Income taxes .............................. (23,242) (25,910) 123,200 -- 74,048
Equity in income of
subsidiaries........................... 141,755 178,494 -- (320,249) --
--------- --------- ----------- ---------- --------
Income Before Cumulative
Effect of Accounting
Change................................. 104,314 141,755 192,993 (320,249) 118,813
Cumulative effect of
accounting change, net ................ -- -- 14,499 -- 14,499
--------- --------- ----------- ---------- --------
Net Income ................................ $ 104,314 $ 141,755 $ 178,494 $ (320,249) $104,314
========= ========= =========== ========== ========
21
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Operating Activities:
Net cash provided by operating activities ......... $ 195,384 $ 62,602 $ 242,339 $ (93,940) $ 406,385
----------- ----------- ----------- ----------- --------------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans .............................. -- -- 70,497 -- 70,497
Net loans originated or collected ................. 235 -- 997,536 -- 997,771
(Additions to) dispositions of property
and equipment.................................. -- (5,381) 1,843 -- (3,538)
Investment in subsidiaries ........................ (23,855) (39,234) -- 63,089 --
----------- ----------- ----------- ----------- --------------
Net cash (used in) provided by investing
activities..................................... (23,620) (44,615) 1,069,876 63,089 1,064,730
----------- ----------- ----------- ----------- --------------
Financing Activities:
Net increase (decrease) in debt ................... 447 (104) (292,190) -- (291,847)
Net decrease in deposits .......................... -- -- (736,147) -- (736,147)
Cash dividends paid ............................... (1,892) -- -- -- (1,892)
Issuance of common stock .......................... 2,257 -- -- -- 2,257
Repurchase of common stock ........................ (32,951) -- -- -- (32,951)
Capital contributions ............................. -- (17,410) (13,441) 30,851 --
----------- ----------- ----------- ----------- --------------
Net cash used in financing activities ............. (32,139) (17,514) (1,041,778) 30,851 (1,060,580)
----------- ----------- ----------- ----------- --------------
Net increase in cash and cash equivalents ......... 139,625 473 270,437 -- 410,535
Cash and cash equivalents at beginning of
period ......................................... 17,613 1,505 468,968 -- 488,086
----------- ----------- ----------- ----------- --------------
Cash and cash equivalents at end of
period.......................................... $ 157,238 $ 1,978 $ 739,405 $ -- $ 898,621
=========== =========== =========== =========== ==============
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Operating Activities:
Net cash provided by operating activities ......... $ 151,145 $ 183,268 $ 364,650 $ (332,400) $ 366,663
------------ ----------- ----------- ----------- -------------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans .............................. 545 -- 913,254 -- 913,799
Net loans originated or collected ................. (57,761) -- (1,143,165) -- (1,200,926)
(Additions to) dispositions of
property and equipment.......................... -- (14,636) 10,645 -- (3,991)
Investment in subsidiaries ........................ (176,900) (213,497) -- 390,397 --
------------ ----------- ----------- ----------- -------------
Net cash used in investing activities ............. (234,116) (228,133) (219,266) 390,397 (291,118)
------------ ----------- ----------- ----------- -------------
Financing Activities:
Net increase (decrease) in debt ................... 446 (3) (172) -- 271
Net increase in deposits .......................... -- -- 68,746 -- 68,746
Cash dividends paid ............................... (1,847) -- -- -- (1,847)
Issuance of common stock .......................... 21,228 -- -- -- 21,228
Capital contributions ............................. -- 35,145 22,852 (57,997) --
------------ ----------- ----------- ----------- -------------
Net cash provided by financing activities ......... 19,827 35,142 91,426 (57,997) 88,398
------------ ----------- ----------- ----------- -------------
Net increase (decrease) in cash and cash
equivalents.................................... (63,144) (9,723) 236,810 -- 163,943
Cash and cash equivalents at beginning of
period......................................... 64,869 10,658 445,913 -- 521,440
------------ ----------- ----------- ----------- -------------
Cash and cash equivalents at end of
period......................................... $ 1,725 $ 935 $ 682,723 $ -- $ 685,383
============ =========== =========== =========== =============
22
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, including
Direct Merchants Credit Card Bank, N.A. ("Direct Merchants Bank"), which may be
referred to as "we," "us," "our" and the "Company." You should read this
discussion along 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 Annual Report
on Form 10-K/A for the fiscal year ended December 31, 2001; and our Proxy
Statement for the 2002 Annual Meeting of Shareholders. In addition, you should
read this discussion along with our Quarterly Report on Form 10-Q/A for the
period ended June 30, 2002, of which this commentary is a part, and the
condensed consolidated financial statements and related notes thereto.
Results of Operations
Net loss for the three months ended June 30, 2002 was $36.4 million,
compared to net income of $62.8 million for the second quarter of 2001. Diluted
loss per share for the three months ended June 30, 2002 was $0.74 compared to
diluted earnings per share of $0.69 for the second quarter of 2001. The decrease
in net income is primarily due to a decrease in net securitization and credit
card servicing income, increased marketing expenses, increased enhancement
services claims expense and a one-time charge of $10 million associated with a
write-down of portfolios of charged-off loans purchased in 2001 and 2000. The
decrease in the net securitization revenue relates to the estimated required
valuation allowance for the retained interests in loans securitized as of June
30, 2002. Increased net charge-offs, increased delinquency rates and the current
economic environment were some of the factors considered by management in
determining the necessary balance in the valuation allowance for the retained
interests. Enhancement services revenue increased 15% to $95.6 million for the
second quarter of 2002 compared to the same period in 2001. This increase was
primarily due to development of new third-party relationships and the creation
of new products.
Net income for the six months ended June 30, 2002 was $16.0 million, down
from $104.3 million for the first six months of 2001. Net income reported for
the six-month period ended June 30, 2001 includes $14.5 million of a cumulative
effect of accounting change described below. Without this item, reported
earnings would have been $118.8 million for the six-month period ended June 30,
2001. Diluted loss per share for the six months ended June 30, 2002 was $0.04
compared to diluted earnings per share of $1.05 for the same period in 2001.
Without the impact of the cumulative effect of accounting change, diluted
earnings per share would have been $1.20 for the six months ended June 30, 2001.
The $102.8 million decrease in net income before cumulative effect of accounting
change primarily relates to a $33.0 million reduction in net securitization and
credit card servicing income, a $104.8 million increase in provision for loan
losses and a $23.8 million increase in operating expenses. This was partially
offset by enhancement services revenue increasing 18% to $190.6 million for the
six months ended June 30, 2002 compared to the same period in 2001.
On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments. SFAS 133 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. Prior to SFAS 133, we amortized the
costs of interest rate contracts on a straight-line
23
basis over the expected life of the contract. The adoption of SFAS 133 resulted
in a one-time, non-cash, after-tax charge to earnings of $14.5 million reflected
as a "Cumulative effect of accounting change" in the consolidated statements of
income for the six months ended June 30, 2001.
Critical Accounting Policies
The Company's most significant accounting policies are our determination of
the allowance for loan losses, valuation of retained interests and accounting
for deferred origination costs.
Allowance for loan losses
We maintain an allowance for loan losses sufficient to cover anticipated
probable loan losses inherent in the credit card loan portfolio as of the
balance sheet date. The allowance is based on management's consideration of all
relevant factors including management's assessment of applicable economic and
seasonal trends. In addition, we have incorporated updated regulatory guidance
regarding analysis and documentation for the allowance for loan losses.
We segment the loan portfolio into several individual static pools with
similar credit risk and time since solicitation (vintage pools), and estimate
(based on historical experience and existing environmental conditions) the
dollar amount of principal, accrued finance charges and fees in each 30-day
delinquency bucket that will not be collected and, therefore, "roll" into the
next 30-day bucket, and ultimately charge-off. We then aggregate these pools
into prime and sub-prime portfolios based on the prescribed FICO score cuts and
into several other groups such as credit counseling and payment alternative
receivables. We also isolate individual pools subsequent to solicitation when
the credit risk associated with the pools include higher risk segments, such as
our partially secured card program, accounts that are over their credit limit by
more than 10%, accounts receiving benefits under our debt waiver program and
other programs as deemed necessary. We separately analyze the reserve
requirement on each of these groups or portfolios.
We continually evaluate the homogenous static risk pools using a roll rate
model which uses historical delinquency levels and pay-down levels (12 months of
historical data, with significant influence given to last six month's
performance to capture current economic and seasonal trends), loan seasoning and
other measures of asset quality to estimate charge-offs for both credit loss and
bankruptcy losses.
Additionally, in evaluating the adequacy of the loan loss reserves, we
consider several subjective factors which may be overlaid into the credit risk
roll-rate model in determining the necessary loan loss reserve, including:
o national and economic trends and business conditions, including the
condition of various market segments;
o changes in lending policies and procedures, including those for
underwriting, collection, charge-off and recovery, as well as in the
experience, ability and depth of lending management and staff;
o trends in volume and the product pricing of accounts, including any
concentrations of credit; and
o impacts from external factors, such as changes in competition, and legal
and regulatory requirements, on the level of estimated credit losses in the
current portfolio.
Significant changes in these factors could impact our financial projections
and thereby affect the adequacy of our allowance for loan losses.
24
The loan loss allowance methodology and calculation was revised in the
first quarter of 2002. The significant changes reflected in this revised
methodology are as follows:
o reserving for twelve months (versus six months) of estimated losses on the
static pool of our core prime receivables; and
o establishing a judgmental reserve for accounts over their credit limit,
accounts under specific payment programs and accounts receiving benefits
under our debt waiver program (versus including these items in our roll
rate methodology).
Retained interest
The Company determines the fair value of the net retained interests by
calculating the present value of future expected cash flows using management's
best estimate of key assumptions including credit losses, weighted-average
spreads, payment rates and a discount rate commensurate with the risks involved.
For purposes of determining the value of the retained interests, we have
included only cash flows associated with the excess spread and principal
receivables included in the retained interests as of the balance sheet date. We
have not included certain expected finance charge receivable cash flows in our
calculation.
The significant assumptions used for estimating the fair value of the
retained interest in loans securitized are as follows:
June 30, December 31,
2002 2001
---- ----
Annual discount rate (1)................................ 15% 15%
Monthly payment rate ................................... 6% 7%
Weighted-average spread (2) ............................ 21% 20%
Annual principal, finance charge and fees default rate.. 20% 18%
(1) If we had included all expected finance charge receivable cash flows, our
effective discount rate would have ranged from 35% to 45%.
(2) Includes finance charges, late fees and overlimit fees, less
weighted-average cost of funds and 2% servicing fee.
Deferred acquisition costs
We defer direct credit card origination costs associated with successful
credit card solicitations that we incur in transactions with independent third
parties, and certain other costs that we incur in connection with loan
underwriting and the preparation and processing of loan documents. We also defer
qualifying acquisition costs associated with our enhancement services products.
These costs, which relate directly to membership solicitations (direct response
advertising costs), principally include postage, printing, mailings and
telemarketing costs. The total amount of deferred costs as of June 30, 2002 and
December 31, 2001 were $91.8 million and $89.5 million, respectively. The most
significant assumption we used in determining the realizability of these
deferred costs is future revenues from our credit cards and enhancement services
products. A significant reduction in revenues could have a material impact on
the values of these balances.
25
Deferred revenue on Enhancement Services products
Direct Merchants Bank offers various debt waiver products to its credit
card accountholders. Revenue for such products is recognized in the month
following completion of the cancellation period, and reserves are provided for
pending claims based on Direct Merchants Bank's historical experience with
settlement of such claims. Unearned revenues and reserves for pending claims are
recorded as "Deferred income" and "Accrued expenses and other liabilities,"
respectively. We record fees on membership programs as deferred income upon
acceptance of membership and amortize them on a straight-line basis over the
membership period beginning after the contractual cancellation period is
complete. We defer and recognize extended service plan revenues and the
incremental direct acquisition costs on a straight-line basis over the life of
the related extended service plan contracts beginning after the expiration of
any manufacturers' warranty coverage.
26
Net interest income consists primarily of interest earned on our credit
card loans and retained interests in loans securitized, less interest expense on
borrowings to fund loans. Table 1 provides an analysis of interest income and
expense, net interest spread, net interest margin and average balance sheet data
for the three- and six month periods ended June 30, 2002 and 2001.
Table 1: Analysis of Average Balances, Interest and Average Yields and Rates
(Dollars in thousands)
Three Months Ended June 30,
2002 2001
------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets:
Interest-earning assets:
Federal funds sold ........... $ 28,222 $ 110 1.6% $ 31,013 $ 329 4.3%
Short-term investments ....... 477,642 2,359 2.0% 256,878 3,176 5.0%
Credit card loans and
retained interests in loans
securitized ................. 3,303,923 134,759 16.4% 3,477,274 168,702 19.5%
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets $ 3,809,787 $ 137,228 14.4% $ 3,765,165 $ 172,207 18.3%
Other assets ................. 658,441 -- -- 831,526 -- --
Allowances for loan
losses and retained interests
valuation allowance ......... (997,311) -- -- (808,087) -- --
----------- -----------
Total assets ................. $ 3,470,917 -- -- $ 3,788,604 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits ..................... $ 1,518,104 $ 18,335 4.8% $ 2,061,761 $ 32,936 6.4%
Debt ......................... 356,693 8,620 9.7% 360,910 11,377 12.6%
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities ............... $ 1,874,797 $ 26,955 5.8% $ 2,422,671 $ 44,313 7.3%
Other liabilities ............ 437,118 -- -- 394,004 -- --
----------- -----------
Total liabilities ............ 2,311,915 -- -- 2,816,675 -- --
Stockholders' equity ......... 1,159,002 -- -- 971,929 -- --
----------- -----------
Total liabilities and equity.. $ 3,470,917 -- -- $ 3,788,604 -- --
=========== ===========
Net interest income and
interest margin (1) ....... -- $ 110,273 11.6% -- $ 127,894 13.6%
Net interest rate spread (2).. -- -- 8.6% -- -- 11.0%
Return on average assets ..... -- -- (4.2%) -- -- 6.6%
Return on average total
equity .................... -- -- (12.6%) -- -- 25.9%
(1) We compute net interest margin 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.
Net increase income decreased from $127.9 million for the three months
ended June 30, 2001 to $110.3 million for the three months ended June 30, 2002.
The decrease primarily relates to a decrease in the yield on credit card loans
and retained interests in loans securitized from 19.5% to 16.4% partially offset
by a rate decrease on interest-bearing liabilities from 7.3% for the three
months ended June 30, 2001 to 5.8% for the three months ended June 30, 2002.
27
Table 1: Analysis of Average Balances, Interest and Average Yields and Rates (cont'd)
(Dollars in thousands)
Six Months Ended June 30,
2002 2001
------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets:
Interest-earning assets:
Federal funds sold ........... $ 28,326 $ 224 1.6% $ 97,425 $ 2,640 5.5%
Short-term investments ....... 375,204 3,563 1.9% 268,564 7,072 5.3%
Credit card loans and
retained interests in loans
securitized ................. 3,594,325 286,973 16.1% 3,410,745 332,224 19.6%
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets $ 3,997,855 $ 290,760 14.7% $ 3,776,734 $ 341,936 18.3%
Other assets ................. 708,540 -- -- 818,830 -- --
Allowances for loan
losses and retained interests
valuation allowance ......... (992,463) -- -- (794,649) -- --
----------- -----------
Total assets ................. $ 3,713,932 -- -- $ 3,800,915 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits ..................... $ 1,722,869 $ 41,988 4.9% $ 2,095,898 $ 69,559 6.7%
Debt ......................... 403,824 17,132 8.6% 360,954 22,589 12.6%
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities ............... $ 2,126,693 $ 59,120 5.6% $ 2,456,852 $ 92,148 7.6%
Other liabilities ............ 430,540 -- -- 403,547 -- --
----------- -----------
Total liabilities ............ 2,557,233 -- -- 2,860,399 -- --
Stockholders' equity ......... 1,156,699 -- -- 940,516 -- --
----------- -----------
Total liabilities and equity.. $ 3,713,932 -- -- $ 3,800,915 -- --
=========== ===========
Net interest income and
interest margin (1) ....... -- $ 231,640 11.7% -- $ 249,788 13.3%
Net interest rate spread (2).. -- -- 9.1% -- -- 10.7%
Return on average assets (3) . -- -- 0.9% -- -- 6.3%
Return on average total
equity (3) ................ -- -- 2.8% -- -- 25.5%
(1) We compute net interest margin 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.
(3) Amounts for the six-month period ended June 30, 2001 are shown before the
cumulative effect of accounting change.
Net increase income decreased from $249.8 million for the six months ended
June 30, 2001 to $231.6 million for the six months ended June 30, 2002. The
decrease primarily relates to a decrease in the yield on credit card loans and
retained interests in loans securitized from 19.6% to 16.1% partially offset by
a rate decrease on interest-bearing liabilities from 7.6% for the six months
ended June 30, 2001 to 5.6% for the six months ended June 30, 2002.
28
Other Operating Income
Other operating income contributes substantially to our results of
operations, representing 64% and 68% of revenues for the three- and six-month
periods ended June 30, 2002, and 68% and 67% for the same periods in 2001,
respectively.
Other operating income decreased $84.0 million and $20.0 million for the
three- and six-month periods ended June 30, 2002 compared to the same periods in
2001. The decrease for the three-month period was primarily due to the decrease
in net securitization and credit card servicing income. For the three-month
period ended June 30, 2002, net securitization and credit card servicing income
decreased $70.0 million primarily due to a decrease in excess spread on
securitized receivables caused by an increased default rate. For the six months
ended June 30, 2002, versus the six months ended June 30, 2001, net
securitization and credit card servicing income decreased $33.0 million caused
by a decreased excess spread on securitized receivables partially offset by a
decrease in the retained interests valuation expense needed to record the
retained interests at fair value.
Credit card fees, interchange and other credit card income decreased $26.7
million and $16.5 million for the three- and six- month periods ended June 30,
2002 compared to the same periods in 2001. The decrease in credit card fees,
interchange and other credit card income is due to lower sales volume,
lower late fees and lower overlimit fee income. The decrease in late fees
reflects lower delinquencies, while the decrease in overlimit fees reflects
tightened criteria in authorizing customers to exceed credit line limits.
Enhancement services revenues increased by $12.7 million and $29.5 million
for the three- and six-month periods ended June 30, 2002. These increases
reflect higher credit protection revenue due to increased receivables and higher
sales of our debt waiver products, as well as the increase in membership program
revenues resulting from additional product offers to third-party cardholders.
Other Operating Expense
Total other operating expenses for the three- and six-month periods ended
June 30, 2002 increased $20.6 million and $23.8 million over the comparable
periods in 2001, largely due to costs associated with the growth of our business
activities. Credit card account and other product solicitation and marketing
expenses increased $4.7 million and $4.5 million over the comparable periods in
2001, largely due to increased costs associated with our credit card marketing
activity which resulted in over 400,000 new credit card accounts and 1.5 million
new enhancement services relationships during the first six months of 2002. The
increase in enhancement services claims expenses primarily reflects higher
claims paid on death benefits as well as an increase in our estimate of
unreported claims as of the balance sheet date. Other expenses increased $10.2
million and $7.1 million for the three- and six-month periods ended June 30,
2002 due to the one-time charge of $10 million associated with a write-down of
portfolios of charged-off loans purchased in 2001 and 2000.
29
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
account portfolio affects the stability of delinquency and loss rates. In order
to minimize losses, we continue to focus our resources on refining our credit
underwriting standards for new accounts, and on collections and post charge-off
recovery efforts. At June 30, 2002, 63% of our outstanding receivables balance
were from credit card accounts that have been with us in excess of two years,
and 38% of outstanding receivables were with us in excess of four years.
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. We manage credit lines on an
ongoing basis and adjust them based on customer usage and payment patterns. To
maximize profitability, we continually monitor customer accounts and initiate
appropriate collection activities when an account is delinquent or overlimit.
Delinquencies
Delinquencies not only have the potential to affect earnings in the form of
net loan losses, but they are also costly in terms of the personnel and other
resources dedicated to their resolution. It is our policy to continue to accrue
interest and fee income on all credit card accounts until we charge off the
credit card account, except in limited circumstances. FFIEC (Federal Financial
Institutions Examination Council) guidelines with respect to credit card issuers
permit the re-aging of past due accounts to current status only after receiving
the equivalent of three minimum payments or one lump sum equivalent.
Furthermore, accounts can only be re-aged to current once every twelve months
and twice every 5 years.
Table 2 presents the delinquency trends of our credit card loan portfolio.
Table 2: Loan Delinquency
(Dollars in thousands)
June 30, % of December 31, % of June 30, % of
2002 Total 2001 Total 2001 Total
---- ----- ---- ----- ---- -----
Loans outstanding.... $1,306,824 100% $2,746,656 100% $2,312,652 100%
Loans contractually
delinquent:
30 to 59 days.... 41,382 3.2% 87,603 3.2% 60,315 2.6%
60 to 89 days.... 35,161 2.7% 66,647 2.4% 47,167 2.0%
90 or more days.. 72,360 5.5% 123,528 4.5% 89,764 3.9%
---------- ----- ---------- ----- ---------- -----
Total ....... $ 148,903 11.4% $ 277,778 10.1% $ 197,246 8.5%
========== ===== ========== ===== ========== =====
The 290-basis-point increase in the delinquency rates over June 30, 2001
primarily reflects various factors, including a deterioration in the economy,
seasoning in the loan portfolio and the impact of our 2001 credit line increase
program. The credit line increase program added pressure to some of our
customers due to increased average outstanding balances, which require higher
monthly payments. This, along with a deteriorating economy, has put pressure on
our collections efforts, resulting in higher delinquencies.
30
Net Charge-Offs
Net charge-offs are the principal amount of losses from credit card
accountholders unwilling or unable to make minimum payments, bankrupt credit
card accountholders and deceased credit card accountholders, 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. The following
table presents our net principal charge-offs for the periods indicated as
reported in the consolidated financial statements.
Table 3: Net Charge-offs
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Average credit card loans .......... $1,478,108 $1,548,810 $1,763,765 $1,424,470
Net charge-offs .................... 85,099 60,160 168,777 108,269
Net charge-off ratio ............... 23.1% 15.6% 19.3% 15.3%
========== ========== ========== ==========
The increase in charge off ratios for the three- and six-month periods
ended June 30, 2002 primarily reflects a decrease in loan growth, deterioration
in the economy and the 2001 credit line increase program.
Provision and Allowance for Loan Losses
We make provisions for loan losses in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable future loan
losses, net of recoveries, inherent in the loan portfolio.
The economy has slowed down significantly over the last year, exacerbated
by the terrorist attacks on September 11, 2001. Also, our 2001 credit line
increase program added pressure to some of our customers due to increased
average outstanding balances which require higher monthly payments. This, along
with a deteriorating economy, has made our collection efforts more difficult,
resulting in higher delinquencies. This changing environment has caused our
delinquencies and losses to increase from prior years' levels. Some of the
actions we are taking to mitigate this slowdown include expanding our
collections strategies to aggressively address any potential delinquency
increases and using our recovery staff to work on precharge-off receivables. We
also leverage debt forbearance programs and credit counseling services for
qualifying credit card accountholders that are experiencing payment
difficulties. These programs include reduced interest rates, reduced or
suspended fees and other incentives to induce the customer to continue making
payments. The amount of customer receivables in debt forbearance programs was
$71.8 million or 5% of credit card loans as of June 30, 2002, compared with
$129.9 million or 5% of credit card loans as of December 31, 2001. All
delinquent receivables in debt forbearance programs are included in Table 2.
The provision for loan losses was $152.8 million and $307.2 million for the
three- and six-month periods ended June 30, 2002, compared to $114.7 million and
$202.4 million for the same periods in 2001. The ratio of allowance for loan
losses to period-end loans was 21.1% at June 30, 2002, compared to 14.9% at
December 31, 2001. The allowance for loan losses as a percentage of 30-day plus
receivables was 184.9% at June 30, 2002 and 147.7% at December 31, 2001.
31
Retained Interest Valuation
We record a valuation allowance to reduce the contractual value of the
retained interests in loans securitized to fair value. The following summarizes
our net retained interests as of June 30, 2002, December 31, 2001, June 30, 2001
and December 31, 2000.
June 30, December 31,
2002 Change 2001
---- ------ ----
Gross retained interests.......................... $ 1,466,442 $ 202,787 $ 1,263,655
Valuation allowance............................... (744,205) (206,706) (537,499)
---------------- -------------- ------------------
Net retained interests............................ $ 722,237 $ (3,919) $ 726,156
================ =============== ==================
June 30, December 31,
2001 Change 2000
---- ------ ----
Gross retained interests.......................... $ 1,069,090 $ (954,591) $ 2,023,681
Valuation allowance............................... (568,084) 72,768 (640,852)
---------------- ---------------- ------------------
Net retained interest............................. $ 501,006 $ (881,823) $ 1,382,829
================ ================ ==================
Gross retained interests in loans securitized increased $202.8 million to
$1.5 billion as of June 30, 2002, compared to $1.3 billion as of December 31,
2001. The increase is due to the sale of approximately $1.6 billion of
receivables from Direct Merchants Bank to the Master Trust during the six months
ended June 30, 2002. The $954.6 million decrease in gross retained interests
during the six months ended June 30, 2001 was primarily due to the maturity of a
securitization that was accounted for as a sale under SFAS 140. As a result,
approximately $855 million of receivables that were classified as retained
interests in loans securitized as of December 31, 2000 were classified as credit
card loans as of June 30, 2001. During the six months ended June 30, 2002 the
valuation allowance increased by $206.7 million primarily due to the higher
gross retained interests and narrowing excess spreads in the Master Trust due to
increasing default rates. The projected default rate increased from 18% as of
December 31, 2001 to 20% as of June 30, 2002. The increase in the projected
default rate is due to increased delinquencies in the Master Trust and the
overall deterioration in the economy. The increase in the projected default rate
caused an increase in the valuation allowance of approximately $140 million. The
weighted average spread less default rate was 1% as of June 30, 2002, compared
to 2% as of December 31, 2001. The $72.8 million decrease in the valuation
adjustment during the six months ended June 30, 2001 primarily reflects lower
gross retained interests.
Balance Sheet Analysis
Cash and Cash Equivalents
Cash and cash equivalents were $898.6 million as of June 30, 2002,
compared to $488.1 million as of December 31, 2001. The $410.5 million increase
is due to the Company's decision to maintain a high level of liquidity in the
current environment.
Credit Card Loans
Credit card loans were $1.3 billion as of June 30, 2002, compared to $2.7
billion as of December 31, 2001. The $1.4 billion decrease is primarily a result
of the transfer of $1.6 billion of receivables from Direct Merchants Bank to the
Master Trust.
32
Deferred Tax Asset
Total deferred tax asset increased to $32.9 million as of June 30, 2002
from $32.2 million as of December 31, 2001. The increase is the result of
various timing differences between accounting principles generally accepted in
the United States of America and tax accounting.
Deposits
Deposits decreased $736.1 million to $1.3 billion as of June 30, 2002,
compared to $2.1 billion as of December 31, 2001. The decrease relates to a
shift in funding from deposits to off-balance sheet asset-backed
securitizations.
Debt
Debt decreased to $356.1 million as of June 30, 2002 from $647.9 million as
of December 31, 2001 due to the paydown of a warehouse financing arrangement
entered into by Direct Merchants Bank in June 2001 that was accounted for as a
collateralized financing.
Deferred Income
Deferred income decreased $17.0 million to $198.0 million as of June 30,
2002 compared to $215.0 million as of December 31, 2001. The decrease primarily
relates to our shift from annual-billed to monthly-billed products.
Stockholders' Equity
Stockholders' equity was $1.1 billion as of June 30, 2002, a decrease of
$15.7 million from December 31, 2001. The decrease results from $33.0 million of
stock repurchases under our stock repurchase program in 2002 partially offset by
current year earnings.
33
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. 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. Table 4 summarizes our funding and liquidity
as of June 30, 2002 and December 31, 2001:
Table 4: Liquidity, Funding and Capital Resources
(Dollars in thousands)
June 30, 2002 December 31, 2001
------------- -----------------
Unused Unused
On-balance sheet funding Outstanding Capacity Outstanding Capacity
------------------------ ----------- -------- ----------- --------
Bank conduit 2002..................... $ -- $ 100,000 $ 292,000 $ 108,000
Revolving credit line 2003............ -- 170,000 -- 170,000
Term loan 2003........................ 100,000 N/A 100,000 N/A
Senior notes 10% 2004................. 100,000 N/A 100,000 N/A
Senior notes 10.125% 2006............. 146,370 N/A 145,924 N/A
Other................................. 9,687 N/A 9,980 N/A
Deposits.............................. 1,321,861 N/A 2,058,008 N/A
Equity................................ 1,126,246 N/A 1,141,955 N/A
----------------- ---------------- ----------------- ----------------
Subtotal......................... $ 2,804,164 $ 270,000 $ 3,847,867 $ 278,000
Off-balance sheet funding
-------------------------
Metris Master Trust................... $ 8,904,497 $ 1,460,003 $ 7,880,342 $ 328,908
Metris facility....................... 20,000 55,000 15,500 59,500
----------------- ---------------- ----------------- ----------------
Subtotal......................... $ 8,924,497 $ 1,515,003 $ 7,895,842 $ 388,408
----------------- ---------------- ----------------- ----------------
Total............................ $ 11,728,661 $ 1,785,003 $ 11,743,709 $ 666,408
================= ================ ================= ================
Under our revolving line of credit agreement, we need to maintain, among
other items, minimum equity plus reserves to managed assets of 10%, minimum
three-month average excess spread (by asset-backed securitization deal) of 1%,
minimum equity of $684 million and a ratio of equity plus reserves to managed
90-day plus delinquencies of 2.25. As of June 30, 2002 and December 31, 2001, we
were in compliance with all financial covenants under our credit agreements.
The Master Trust and the associated securitized debt provide for early
amortization if certain events occur. These events are described in the
applicable prospectus of each securitization transaction. The most significant
events would be three consecutive months of less than zero percent excess spread
or negative transferor's interest within the Master Trust. In addition, there
are various triggers within our securitization agreements that, if met, would
restrict the release of cash to us from the Master Trust. This restricted cash
would provide additional security to the investors of the Master Trust. The
triggers are related to the performance of the Master Trust, specifically the
amount of net excess spread over a one- to three-month period. As of June 30,
2002, we have not met any triggers in our securitization agreements and,
therefore, no cash has been restricted.
Our equity as a percent of managed assets was 9.3% as of June 30, 2002
versus 9.4% as of December 31, 2001. We have historically retained cash flow
generated from earnings (versus declaring larger dividends) to provide
additional equity and liquidity to fund future receivables growth. In addition,
stock incentive plans provide us with a source of equity and liquidity.
34
Capital Adequacy
In the normal course of business, Direct Merchants Bank enters into
agreements, or is subject to regulatory requirements, that result in cash, debt
and dividend or other capital restrictions.
The Federal Reserve Act imposes various legal limitations on the extent to
which banks can finance or otherwise supply funds to their affiliates. In
particular, Direct Merchants Bank is subject to certain restrictions on any
extensions of credit to or other covered transactions, such as certain purchases
of assets, with MCI and its affiliates. Such restrictions limit Direct Merchants
Bank's ability to lend to MCI and its affiliates. Additionally, Direct Merchants
Bank is limited in its ability to declare dividends to MCI in accordance with
the national bank dividend provisions.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC. At June 30, 2002 and December 31, 2001, Direct Merchants
Bank's Tier 1 risk-based capital ratio, risk-based total capital ratio and Tier
1 leverage ratio exceeded the minimum required capital levels, and Direct
Merchants Bank was considered a "well-capitalized" depository institution under
regulations of the OCC, as illustrated in the following table.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Direct Merchants Bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Direct Merchants Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Direct Merchants Bank to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 leverage
capital (as defined) to average assets (as defined). Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material adverse effect on our financial statements.
Additional information about Direct Merchants Bank's actual capital amounts
and ratios are presented in the following table:
For Capital
Adequacy To Be Well
Actual Purposes Capitalized
------ -------- -----------
As of June 30, 2002 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital.................. $ 380,364 27.6% $ 110,901 8.0% $137,605 10.0%
(to risk-weighted
assets)
Tier 1 Capital................. 359,981 26.2% 55,042 4.0% 82,563 6.0%
(to risk-weighted
assets)
Tier 1 Capital................. 359,981 16.7% 86,479 4.0% 108,099 5.0%
(to average assets)
35
For Capital
Adequacy To Be Well
Actual Purposes Capitalized
------ -------- -----------
As of December 30, 2002 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital $ 346,907 13.0% $ 213,733 8.0% $ 267,166 10.0%
(to risk-weighted
assets)
Tier 1 Capital 308,186 11.5% 106,867 4.0% 160,300 6.0%
(to risk-weighted
assets)
Tier 1 Capital 308,186 11.2% 110,573 4.0% 138,216 5.0%
(to average assets)
FFIEC guidelines indicate that an institution with a concentration in
subprime lending should hold one and one-half to three times the normal minimum
capital required. The OCC has regulatory authority to evaluate the safety and
soundness of Direct Merchants Bank under these more stringent guidelines. The
OCC has required Direct Merchants Bank, under the more stringent guidelines, to
maintain two times the normal minimum capital on those credit card loans that
qualify as subprime loans (FICO score of 660 and below) and maintain a minimum
capital ratio of 10%. Under these more stringent guidelines, Direct Merchants
Bank's total capital ratio as of June 30, 2002 was 18.0%.
Regulatory Matters
On April 16, 2002, Direct Merchants Bank entered into an agreement with the
OCC to strengthen the safety and soundness of Direct Merchants Bank's
operations. The agreement formalizes recommendations made and requirements
imposed by the OCC following an examination of Direct Merchants Bank that
covered the 15-month period ended December 31, 2001. On April 17, 2002, MCI
filed the agreement with the Securities and Exchange Commission as an exhibit to
and incorporated it by reference in a current report on Form 8-K. We filed an
amendment to that current report on Form 8-K on October 22, 2002.
Direct Merchants Bank intends to comply with all of the terms of the
agreement in a timely manner. Furthermore, we believe that as of the filing date
of this amended Quarterly Report, Direct Merchants Bank has complied with all of
the terms of the agreement, including with respect to the updating, development,
adoption and delivery in a timely matter of its Strategic Plan, Capital Plan,
Contingency Funding Plan and various other written action plans. Direct
Merchants Bank has implemented the plans for which the OCC has posed no
objection and is revising or planning to implement all others, pending and in
response to comments from the OCC.
If the OCC were to conclude that Direct Merchants Bank failed to implement
in a timely manner any provision of the agreement or that Direct Merchants Bank
otherwise violated the agreement, the OCC could pursue various enforcement
options. Under applicable provisions of the Federal Deposit Insurance Act, the
OCC may, among other things, pursue an order to cease and desist from any
further violations or take affirmative actions to correct conditions resulting
from violations or practices, place limitations on the activities of a bank that
in its opinion violated a written agreement, remove from office members of
management or the board of directors of a bank or prohibit further participation
by those persons in the bank's affairs, and assess civil money penalties. If any
of these events were to actually occur, we could not assure you that the event
would not have a material adverse affect on Direct Merchants Bank's operations
or capital position.
36
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 higher delinquency,
charge-off and bankruptcy rates of our target market of moderate-income
consumers, risks associated with Direct Merchants Bank's ability to comply with
its agreement with the OCC regarding the safety and soundness of its operations,
risks associated with our continuing ability to market our enhancement services
and maintain or expand on current levels in that business, interest rate risks,
risks associated with acquired portfolios, dependence on the securitization
markets and other funding sources, state and federal laws and regulations that
limit our business activities, product offerings and fees, privacy laws that
could result in lower marketing revenue and penalties for non-compliance, 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/A for the year ended December 31, 2001. 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/A for
the year ended December 31, 2001 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.
37
Selected Operating Data - Managed Basis
We analyze the Company's financial performance on a managed loan portfolio
basis. On a managed basis, the balance sheet and income statement includes other
investor's interests in securitized loans that are not assets of the Company,
thereby reversing the effects of sale accounting under SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
We believe this information is meaningful to the reader of the financial
statements. We service receivables that have been securitized and sold and own
the right to the cash flows from those sold receivables in excess of interest
payments due to security holders.
The following information is not in conformity with accounting principles
generally accepted in the Unites States of America, however we believe the
information is relevant to understanding the overall financial condition and
results of operations of the Company.
Table 5: Managed Loan Portfolio
(Dollars in thousands) June 30, % of December 31, % of June 30, % of
2002 Total 2001 Total 2001 Total
---- ----- ---- ----- ---- -----
Period-end balances:
Credit card loans ......... $ 1,306,824 $ 2,746,656 $ 2,312,652
Retained interests in loans
securitized ........... 1,466,442 1,263,655 1,069,090
Investors' interests in
securitized loans
accounted for as sales ....... 8,918,201 7,895,842 6,762,272
----------- ----------- -----------
Total managed loan portfolio . $11,691,467 $11,906,153 $10,144,014
=========== =========== ===========
Loans contractually
delinquent:
30 to 59 days ........... 358,567 3.1% 375,887 3.1% 253,328 2.5%
60 to 89 days ........... 272,599 2.3% 274,278 2.3% 190,381 1.9%
90 or more days ......... 564,973 4.8% 473,003 4.0% 401,162 3.9%
----------- --- ----------- --- ----------- ---
Total ................. $ 1,196,139 10.2% $ 1,123,168 9.4% $ 844,871 8.3%
=========== ===== =========== ===== =========== =====
Three Months Ended
June 30,
--------
2002 2001
---- ----
Average balances:
Total managed loan portfolio.. $ 11,804,716 100% $ 9,854,072 100%
=================== ========= ================== =========
Net charge offs............... $ 441,787 15.0% $ 268,517 10.9%
=================== ========= ================== =========
Six Months Ended
June 30,
--------
2002 2001
---- ----
Average balances:
Total managed loan portfolio.. $ 11,883,342 100% $ 9,625,357 100%
=================== ========= ================== =========
Net charge offs............... $ 825,961 14.0% $ 513,486 10.8%
=================== ========= ================== =========
The 190-basis-point increase in the managed delinquency rates over June 30,
2001 primarily reflects various factors, including a deterioration in the
economy, seasoning in the loan portfolio and the impact of our 2001 credit line
increase program. The credit line increase program added pressure to our
customers due to increased average outstanding balances, which require higher
monthly payments. This, along with a deteriorating economy, has made our
collection efforts more difficult, resulting in higher delinquencies. The
increase in charge off ratios for the three- and six-month periods ended June
30, 2002 primarily reflects a slowdown in loan growth, deterioration in the
economy and the previously discussed credit line increase program.
38
The amount of customer receivables in debt forbearance programs was $828.9
million or 7% of total managed loans as of June 30, 2002 compared with $837.2
million or 7% of managed loans as of December 31, 2001. All delinquent
receivables in debt forbearance programs are included in Table 5.
Net Interest Income
Table 6: Analysis of Average Balances, Interest and Average Yields and Rates
(Dollars in thousands)
Three Months Ended June 30,
2002 2001
--------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Credit card loans ........... $11,804,716 $ 507,352 17.2% $ 9,854,072 $ 478,034 19.5%
Total interest-earning assets 12,310,580 509,821 16.6% 10,141,963 481,540 19.0%
Total interest-bearing
liabilities .............. 10,375,477 80,947 3.1% 8,799,469 126,159 5.7%
Net interest income and
interest margin (1) ...... -- $ 428,874 14.0% -- $ 355,381 14.1%
Net interest rate spread (2) -- -- 13.5% -- -- 13.3%
Return on average assets .... -- -- (1.2%) -- -- 2.5%
Return on average total
equity ................... -- -- (12.6%) -- -- 25.9%
Six Months Ended June 30,
2002 2001
--------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Credit card loans ........... $11,883,342 $ 1,032,712 17.5% $ 9,625,357 $ 938,647 19.7%
Total interest-earning assets 12,286,872 1,036,499 17.0% 9,991,346 948,360 19.1%
Total interest-bearing
liabilities .............. 10,415,653 169,351 3.3% 8,671,464 266,469 6.2%
Net interest income and
interest margin (1) ...... -- $ 867,148 14.2% -- $ 681,891 13.8%
Net interest rate spread (2) -- -- 13.7% -- -- 12.9%
Return on average assets (3) -- -- 0.3% -- -- 2.4%
Return on average total
equity (3) ............... -- -- 2.8% -- -- 25.5%
(1) We compute net interest margin 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.
(3) Amounts for the six-month period ended June 30, 2001 are shown before the
cumulative effect of accounting change.
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 months ended June 30, 2002 was $428.9 million,
compared to $355.4 million for the same period in 2001. For the six months ended
June 30, 2002, managed net interest income was $867.1 million compared to $681.9
million for the same period in 2001. The increase in net interest income is
primarily due to the $2.2 billion and $2.3 billion increases in managed average
interest-earning assets for the three- and six-month periods ended June 30,
2002, compared to the same periods in 2001.
39
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 credit
card accountholders.
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 managed assets are credit card loans, which are virtually all
priced at rates indexed to the variable Prime Rate. We fund credit card loans
through a combination of cash flows from operations, asset securitizations, bank
loans, subsidiary bank deposits, long-term debt and equity issuances. Our
securitized loans are owned by a trust and bank-sponsored single-seller and
multi-seller receivable conduits, which have committed funding primarily indexed
to variable commercial paper rates and LIBOR. The $270 million bank credit
facility has pricing that is also indexed to LIBOR and Prime Rate. The
subsidiary bank deposits and long-term debt are issued at fixed interest rates.
At June 30, 2002 none of the trust and conduit funding of securitized
receivables was funded with fixed rate securities.
In an interest rate environment with rates at or below current rates, 100%
of the securitization funding for the managed 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 fixed rate funding and
interest rate cap contracts.
The approach we use to quantify interest rate risk is a sensitivity
analysis, which we believe 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 that we take no
counteractive measures, as of June 30, 2002, a 200 basis point increase in
interest rates affecting our floating rate financial instruments, including both
debt obligations and loans, would result in an increase in net income of
approximately $69 million relative to a base case over the next 12 months
compared to an approximate $20 million increase as of December 31, 2001. A
decrease of 200 basis points would result in a reduction in net income of
approximately $41 million as of June 30, 2002, compared to a $2 million
reduction as of December 31, 2001. The increased sensitivity to interest rate
fluctuation as of June 30, 2002 is due to a repricing on our credit card
portfolio implemented in the first quarter of 2002. You should not construe our
use of this methodology to quantify the market risk of financial instruments 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 credit card
accountholders. 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.
40
Part II. Other Information
Item 1. Legal Proceedings
We are a party to various legal proceedings resulting from the ordinary
business activities relating to our operations. In July 2000 an Amended
Complaint was filed in Hennepin County District Court in Minneapolis, Minnesota
against MCI and our subsidiaries Metris Direct, Inc. and Direct Merchants Bank.
The complaint seeks damages in unascertained amounts and purports to be a class
action complaint on behalf of all credit card accountholders who were issued a
credit card by Direct Merchants Bank and were allegedly assessed fees or charges
that the cardholder did not authorize. Specifically, the complaint alleges
violations of the Minnesota Prevention of Consumer Fraud Act, the Minnesota
Deceptive Trade Practices Act and breach of contract. A final settlement
approval hearing was held on May 30, 2002, and the Court signed the order
granting final approval of the settlement whereby we will pay approximately $5.6
million for attorneys' fees and costs incurred by attorneys for the plaintiffs
in separate lawsuits filed in Arizona, California and Minnesota in 2000 and
2001. Under the terms of the settlement we denied any wrongdoing or liability.
The time for filing an appeal expired on August 5, 2002, and no appeal was
filed. At this time, we are in the process of implementing the terms of the
settlement.
On May 3, 2001, Direct Merchants Bank entered into a consent order with the
OCC. The consent order required Direct Merchants Bank to pay approximately $3.2
million in restitution to approximately 62,000 credit card accountholders who
applied for and received a credit card in connection with a series of limited
test marketing campaigns from March 1999 to June 2000. Under the terms of the
consent order, Direct Merchants Bank made no admission or agreement on the
merits of the OCC's assertions. The restitution as required by the OCC consent
order was paid and is reflected in our December 31, 2001 financial statements.
We believe that Direct Merchants Bank's agreement with the OCC will not have a
material adverse affect on the financial position of MCI or Direct Merchants
Bank.
In May 2001, the OCC also indicated that it was considering whether to
assess civil money penalties against Direct Merchants Bank. On October 17, 2002,
the OCC notified Direct Merchants Bank that it will not assess civil money
penalties.
On April 16, 2002, Direct Merchants Bank entered into an agreement with the
OCC to strengthen the safety and soundness of Direct Merchants Bank's
operations. For further information, see "Regulatory Matters" on page 36 of this
Report.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
41
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of shareholders on May 7, 2002 and
the following matters were voted on at that meeting.
(b) The directors listed below were elected at that meeting.
(1) The holders of our Common Stock elected two directors for a
three-year term:
Lee R. Anderson, Sr. John A. Cleary
(2) The holders of our Series C Preferred Stock elected four directors
for a one-year term:
C. Hunter Boll Thomas M. Hagerty David V. Harkins
Thomas H. Lee
(3) The following directors, previously elected by the holders of our
Common Stock, continued their terms of office after the meeting:
Derek V. Smith Edward B. Speno Walter Hoff
Frank D. Trestman Ronald N. Zebeck
(c) Matters Voted Upon:
(1) The election of the following directors who will serve until their
successors are elected and qualified, or their earlier death or
resignation:
Broker
Director For Against Withheld Abstentions Non-Vote
-------- --- ------- -------- ----------- --------
Lee R. Anderson, Sr. 53,381,055 None 1,275,327 None None
John A. Cleary 53,576,945 None 1,079,437 None None
C. Hunter Boll 33,359,129 None None None None
Thomas M. Hagerty 33,359,129 None None None None
David V. Harkins 33,359,129 None None None None
Thomas H. Lee 33,359,129 None None None None
(2) The approval of an increase in the number of shares reserved for
issuance pursuant to the Metris Companies Inc. Amended and Restated
Long-Term Incentive and Stock Option Plan from 17,000,000 to
19,000,000 shares.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
61,857,079 26,124,481 None 33,949 None
(3) Ratification of the selection of KPMG LLP as independent auditors
of the Company for 2002.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
85,758,605 2,239,676 None 17,230 None
Item 5. Other Information
Not applicable
42
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Earnings Per Share.
99.1 Certification of Principal Executive Officer Pursuant to Section
1350 of Chapter 63 of Title 18 of the United States Code.
99.2 Certification of Principal Financial Officer Pursuant to Section
1350 of Chapter 63 of Title 18 of the United States Code.
(b) Reports on Form 8-K: On April 17, 2002, we filed a Current Report on
Form 8-K to report that our wholly-owned subsidiary, Direct Merchants
Credit Card Bank, N.A., had entered into an agreement on April 16,
2002 with the Office of the Comptroller of the Currency, the agency
that regulates the Bank, to strengthen certain aspects of the safety
and soundness of the Bank's operations. We filed an amendment to that
current report on Form 8-K on October 22, 2002. See Part 2, Item 1,
"Legal Proceedings" on page 41.
43
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.
(Registrant)
Date: October 22, 2002 By: /s/ David D. Wesselink
-----------------------
David D. Wesselink
Vice Chairman
Principal Financial Officer
Date: October 22, 2002 By: /s/ Mark P. Wagener
--------------------
Mark P. Wagener
Senior Vice President, Controller
Principal Accounting Officer
44
Certifications
I, Ronald N. Zebeck, certify that:
1. I have reviewed this amended Quarterly Report on Form 10-Q/A of Metris
Companies Inc.;
2. Based on my knowledge, this amended Quarterly Report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this amended Quarterly Report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this amended Quarterly Report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
amended Quarterly Report.
Date: October 22, 2002
/s/ Ronald N. Zebeck
--------------------
Ronald N. Zebeck
Chairman and Chief Executive Officer
(Principal Executive Officer)
I, David D. Wesselink, certify that:
4. I have reviewed this amended Quarterly Report on Form 10-Q/A of Metris
Companies Inc.;
5. Based on my knowledge, this amended Quarterly Report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this amended Quarterly Report; and
6. Based on my knowledge, the financial statements, and other financial
information included in this amended Quarterly Report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
amended Quarterly Report.
Date: October 22, 2002
/s/ David D. Wesselink
----------------------
David D. Wesselink
Vice Chairman
(Principal Financial Officer)
45