UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2001
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, 2001, 64,038,903 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
June 30, 2001
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............................................22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.....................................34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................35
Item 2. Changes in Securities........................................35
Item 3. Defaults Upon Senior Securities..............................35
Item 4. Submission of Matters to a Vote of Security Holders..........35
Item 5. Other Information............................................36
Item 6. Exhibits and Reports on Form 8-K.............................36
Signatures...................................................38
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,
2001 2000
----------- --------------
Assets:
Cash and due from banks ................................................... $ 101,661 $ 84,938
Federal funds sold ........................................................ 494,425 367,937
Short-term investments .................................................... 89,297 68,565
----------- -----------
Cash and cash equivalents ................................................. 685,383 521,440
----------- -----------
Retained interests in loans securitized ................................... 1,069,090 2,023,681
Less: Allowance for loan losses .......................................... 568,084 640,852
----------- -----------
Net retained interests in loans securitized ............................... 501,006 1,382,829
----------- -----------
Credit card loans (net of allowance for loan
losses of $258,057 and $123,123,
respectively)........................................................... 2,054,595 1,056,080
Property and equipment, net ............................................... 124,263 128,395
Deferred income taxes ..................................................... 107,181 146,345
Purchased portfolio premium ............................................... 80,291 95,537
Other receivables due from credit card
securitizations, net ................................................... 169,035 186,694
Other assets .............................................................. 234,578 218,705
----------- -----------
Total assets ......................................................... $ 3,956,332 $ 3,736,025
=========== ===========
Liabilities:
Deposits .................................................................. $ 2,174,945 $ 2,106,199
Debt ...................................................................... 356,337 356,066
Accounts payable .......................................................... 137,969 83,473
Deferred income ........................................................... 211,331 235,507
Accrued expenses and other liabilities .................................... 68,502 71,227
----------- -----------
Total liabilities .................................................... 2,949,084 2,852,472
----------- -----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000
shares authorized, 1,011,604 and 967,573
shares issued and outstanding, respectively .......................... 376,822 360,421
Common stock, par value $.01 per share;
100,000,000 shares authorized, 63,793,584
and 62,242,787 shares issued and
outstanding, respectively ............................................ 638 622
Paid-in capital ........................................................... 224,068 198,077
Unearned compensation ..................................................... (4,779) --
Retained earnings ......................................................... 410,499 324,433
----------- -----------
Total stockholders' equity ........................................... 1,007,248 883,553
----------- -----------
Total liabilities and stockholders' equity ........................... $ 3,956,332 $ 3,736,025
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per-share data) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
2001 2000 2001 2000
---- ---- ---- ----
Interest Income:
Credit card loans and retained
interests in loans securitized ....................................... $ 168,702 $ 113,168 $ 332,224 $ 208,527
Federal funds sold ........................................................ 329 1,727 2,640 3,096
Other ..................................................................... 3,176 864 7,072 1,937
--------- --------- --------- ---------
Total interest income ..................................................... 172,207 115,759 341,936 213,560
Deposit interest expense .................................................. 32,936 18,306 69,559 32,048
Other interest expense .................................................... 11,377 10,476 22,589 20,842
--------- --------- --------- ---------
Total interest expense .................................................... 44,313 28,782 92,148 52,890
--------- --------- --------- ---------
Net Interest Income ....................................................... 127,894 86,977 249,788 160,670
Provision for loan losses ................................................. 114,682 98,215 202,411 186,008
--------- --------- --------- ---------
Net Interest Income (Expense) After
Provision for Loan Losses............................................. 13,212 (11,238) 47,377 (25,338)
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ..................................................... 119,712 120,509 206,804 251,568
Credit card fees, interchange and
other credit card income ............................................. 74,837 53,530 137,669 104,327
Enhancement services revenues ............................................. 82,900 63,984 161,164 123,600
--------- --------- --------- ---------
277,449 238,023 505,637 479,495
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses................................... 51,481 36,316 92,246 68,458
Employee compensation ..................................................... 56,115 42,782 110,851 86,554
Data processing services and communications ............................... 22,141 20,819 44,520 41,444
Warranty and debt waiver underwriting
and claims servicing expense ........................................ 8,250 6,760 14,929 13,492
Credit card fraud losses .................................................. 2,200 2,431 4,851 4,572
Purchased portfolio premium amortization .................................. 7,418 5,225 15,246 10,192
Other ..................................................................... 41,325 33,834 77,510 63,578
--------- --------- --------- ---------
188,930 148,167 360,153 288,290
--------- --------- --------- ---------
Income Before Income Taxes and Cumulative
Effect of Accounting Changes......................................... 101,731 78,618 192,861 165,867
Income taxes .............................................................. 38,963 30,338 74,048 64,191
--------- --------- --------- ---------
Income Before Cumulative Effect of
Accounting Changes................................................... 62,768 48,280 118,813 101,676
Cumulative effect of accounting changes
(net of income taxes of $9,000 and
$2,180, respectively)................................................. -- -- 14,499 3,438
--------- --------- --------- ---------
Net Income ................................................................ 62,768 48,280 104,314 98,238
Convertible preferred stock
dividends-Series C .................................................. 8,593 7,770 16,996 15,368
--------- --------- --------- ---------
Net Income Applicable To Common
Stockholders......................................................... $ 54,175 $ 40,510 $ 87,318 $ 82,870
========= ========= ========= =========
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Earnings per share:
Basic-income before cumulative
effect of accounting changes ...... $ 0.64 $ 0.55 $ 1.22 $ 1.16
Basic-cumulative effect of accounting
changes ........................... -- -- (0.15) (0.04)
Basic-net income ...................... 0.64 0.55 1.07 1.12
Diluted-income before cumulative
effect of accounting changes ...... 0.63 0.53 1.20 1.12
Diluted-cumulative effect of accounting
changes ........................... -- -- (0.15) (0.04)
Diluted-net income .................... 0.63 0.53 1.05 1.08
Shares used to compute earnings per share:
Basic ...................................... 97,633 88,002 97,117 87,564
Diluted .................................... 99,841 91,568 99,055 91,118
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Total
Number of Shares Preferred Common Paid-in Unearned Retained Stockholders'
Preferred Common Stock Stock Capital Compensation Earnings Equity
--------- ------ ----- ----- ------- ------------ -------- ------
BALANCE AT DECEMBER 31, 1999 . 885 57,919 $ 329,729 $ 386 $ 130,772 $ -- $ 162,914 $ 623,801
Net income .............. -- -- -- -- -- -- 98,238 98,238
Cash dividends .......... -- -- -- -- -- -- (1,137) (1,137)
Preferred dividends in
kind - Series C ..... 40 -- 15,004 -- -- -- (15,004) --
June 2000 three-for-two
stock split ......... -- -- -- 201 (201) -- -- --
Issuance of common stock
under employee
benefit plans ....... -- 2,480 -- 17 33,899 -- -- 33,916
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 2000 ..... 925 60,399 $ 344,733 $ 604 $ 164,470 $ -- $ 245,011 $ 754,818
========= =========== =========== =========== =========== =========== =========== ===========
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 ....... -- 1,551 -- 16 25,991 (5,121) -- 20,886
Compensation expense
related to restricted
stock granted ....... -- -- -- -- -- 342 -- 342
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 2001 ..... 1,012 63,794 $ 376,822 $ 638 $ 224,068 $ (4,779) $ 410,499 $ 1,007,248
========= =========== =========== =========== =========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
2001 2000
---- ----
Operating Activities:
Net income ........................................... $ 104,314 $ 98,238
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting changes ......... 14,499 3,438
Depreciation and amortization ................... 47,929 37,137
Change in allowance for loan losses ............. 62,166 58,093
Change in value of derivative instruments ....... (2,990) --
Changes in operating assets and liabilities, net:
Deferred income taxes ....................... 39,164 (15,275)
Other receivables due from credit card
securitizations ........................ (3,522) 54,198
Accounts payable and accrued expenses ....... 50,669 26,213
Deferred income ............................. (24,176) 44,916
Other ....................................... (23,143) (82,039)
--------- ---------
Net cash provided by operating activities ............ 264,910 224,919
--------- ---------
Investing Activities:
Net proceeds (uses) from sales and repayments of
securitized loans................................ 692,051 (34,075)
Net loans originated ................................. (870,122) (561,449)
Additions to property and equipment .................. (3,990) (41,168)
--------- ---------
Net cash used in investing activities ................ (182,061) (636,692)
--------- ---------
Financing Activities:
Net increase in debt ................................. 271 444
Net increase in deposits ............................. 68,746 469,592
Cash dividends paid .................................. (1,847) (1,137)
Increase in common equity ............................ 13,924 33,916
--------- ---------
Net cash provided by financing activities ............ 81,094 502,815
--------- ---------
Net increase in cash and cash equivalents ............ 163,943 91,042
Cash and cash equivalents at beginning of period ..... 521,440 194,433
--------- ---------
Cash and cash equivalents at end of period ........... $ 685,383 $ 285,475
========= =========
Supplemental disclosures and cash flow
information:
Cash paid during the period for:
Interest ........................................ $ 86,731 $ 40,114
Income taxes .................................... 25,366 70,284
Tax benefit from employee stock option
exercises........................................ 6,651 16,531
See accompanying Notes to Consolidated Financial Statements.
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." The Company is an information-based direct
marketer of consumer credit products and enhancement services primarily to
moderate-income consumers.
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain prior-year amounts have been reclassified to conform
with the current year's presentation.
Interim Financial Statements
We have prepared the unaudited interim consolidated financial statements
and related unaudited financial information in the footnotes in accordance with
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 for the fiscal year ended December 31, 2000. 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 amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements as well as the reported amount
of revenues and expenses during the reporting periods. Actual results could
differ from these estimates.
NOTE 2 - 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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Income before cumulative effect of
accounting changes.............................. $ 62,768 $ 48,280 $118,813 $101,676
Preferred dividends - Series C ...................... 8,593 7,770 16,996 15,368
-------- -------- -------- --------
Net income applicable to common stockholders
before cumulative effect of accounting
changes ........................................ 54,175 40,510 101,817 86,308
Cumulative effect of accounting changes, net ........ -- -- 14,499 3,438
-------- -------- -------- --------
Net income applicable to common stockholders ........ $ 54,175 $ 40,510 $ 87,318 $ 82,870
======== ======== ======== ========
Weighted-average common shares outstanding .......... 62,788 58,838 62,547 58,400
Adjustments for dilutive securities:
Assumed conversion of convertible preferred
stock .......................................... 34,845 29,164 34,570 29,164
-------- -------- -------- --------
Basic common shares (1) ............................. 97,633 88,002 97,117 87,564
Assumed exercise of outstanding stock
options ........................................ 2,208 3,566 1,938 3,554
-------- -------- -------- --------
Diluted common shares ............................... 99,841 91,568 99,055 91,118
======== ======== ======== ========
(1) In accordance with an announcement of the Financial Accounting
Standards Board's Staff at the Emerging Issues Task Force meeting in April,
2001, codified as EITF Topic No. D-95 ("Topic D-95"), the Company revised its
computation of basic earnings per common share (EPS). As required by Topic
D-95, the dilutive effect of the Company's Series C Convertible Preferred Stock
is now included in the computation of basic EPS, utilizing the if-converted
method. The Series C Convertible Preferred Stock participates in dividends on an
as-converted basis with the Company's common stock. For all periods presented,
there is no impact to diluted earnings per share. The Company restated the basic
EPS amounts for the three- and six-month periods ended June 30, 2000 to be
consistent with the revised methodology. Before the impact of Topic D-95, basic
earnings per common share would have been $0.86, $0.69, $1.40 and $1.42 for the
three- and six-month periods ended June 30, 2001 and 2000, respectively.
NOTE 3 - ACCOUNTING CHANGES
During the quarter ended March 31, 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. This statement
is effective for all quarters of fiscal years beginning after June 15, 2000. As
a result of the adoption of SFAS 133 effective January 1, 2001 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.
We use derivatives to assist us in achieving our strategy of balanced asset
and liability interest rate exposure. Our principal market risk is due to
changes in interest rates. 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. The majority of this funding is indexed to variable rate
LIBOR. We seek to minimize the impact of changes in interest rates primarily by
matching asset and liability repricings. We enter into interest rate cap, floor
and swap agreements to hedge the cash flow, fair value and earnings impact of
fluctuating market interest rates on the spread between the floating rate loans
and the floating and fixed rate debt issued to fund the loans.
In connection with the issuance of term asset-backed securities by the
Metris Master Trust ("trust"), we enter into term interest rate cap agreements
with highly rated bank counterparties to effectively cap the potentially
negative impact to us from increases in the floating interest rate of the
securities. These agreements are for original terms ranging from two to ten
years and are scheduled to terminate between February 2002 and January 2010. The
contracted strike rate on the interest rate caps were above the current market
interest rates at December 31, 2000 and June 30, 2001. Therefore, these caps are
considered ineffective in hedging the interest rate movements. SFAS 133 required
us to reduce the carrying value of these caps to their current market values.
The reduction related to the adoption of SFAS 133 effective January 1, 2001 was
recorded as a one-time, non-cash, after-tax charge to earnings of $14.7 million.
This one-time charge is included in the "Cumulative effect of accounting change"
in the consolidated statements of income for the six months ended June 30, 2001.
The adjustment to increase the carrying value of the caps for the three- and
six-month periods ended June 30, 2001 was recorded as a non-cash, pre-tax
benefit of $6.7 million and $3.0 million, respectively, to "Net securitization
and credit card servicing income" in the consolidated statements of income.
We also enter into interest rate swap agreements to hedge a portion of our
fixed rate deposits. The interest rate swaps are designated as fair value hedges
under SFAS 133. At adoption, the change in the fair value of the swaps exceeded
the change in fair value of the fixed rate deposits. This difference of $0.2
million was recorded as a one-time, non-cash, after-tax benefit to earnings.
This one-time benefit is included in the "Cumulative effect of accounting
change" in the consolidated statements of income for the six months ended June
30, 2001. The interest rate swaps were substantially effective in offsetting
changes in the fair value of the hedged CD portfolio during the six months ended
June 30, 2001. These interest rate swap agreements are for original terms
ranging from one to two years and are scheduled to terminate between April 2002
and January 2003.
During the quarter ended March 31, 2000 we adopted Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," for our
debt waiver products. This SAB formalized the accounting for services sold where
the right to a full refund exists, requiring all companies to defer recognition
of revenues until the cancellation period is complete. Previously, we recognized
half of the revenues in the month billed and half in the following month. We now
recognize all of the revenue the month following completion of the cancellation
period. This change resulted in a one-time, non-cash net charge to earnings of
$3.4 million, which is reflected as a "Cumulative effect of accounting change"
in the consolidated statements of income for the six months ended June 30, 2000.
Because we have applied the provisions of this SAB to our membership programs
since 1998, before the SEC formalized its guidance, no adjustment was required
for our membership services revenues.
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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Balance at beginning of period $ 786,798 $ 645,089 $ 763,975 $ 619,028
Provision for loan losses .... 114,682 98,215 202,411 186,008
Provision for loan losses (1) 193,178 114,387 373,241 231,064
Loans charged off ............ (297,071) (196,552) (569,152) (390,042)
Recoveries ................... 28,554 15,982 55,666 31,063
--------- --------- --------- ---------
Net loans charged off ........ (268,517) (180,570) (513,486) (358,979)
--------- --------- --------- ---------
Balance at end of period ..... $ 826,141 $ 677,121 $ 826,141 $ 677,121
========= ========= ========= =========
(1) Amounts are included in "Net securitization and credit card servicing income."
NOTE 5 - SEGMENTS
We operate in two principal areas: consumer lending products and
enhancement services. Our consumer lending products are primarily unsecured and
secured credit cards, including the Direct Merchants Bank MasterCard(R) and
Visa(R). Our credit card accountholders include customers obtained from
third-party lists and other customers for whom general credit bureau information
is available.
We market our enhancement services, including (i) debt waiver protection
for unemployment, disability, and death; (ii) membership programs such as card
registration, purchase protection and other club memberships; and (iii)
third-party insurance, directly to our credit card customers and customers of
third parties. We currently administer our extended service plans sold through a
third-party retailer, and the customer pays the retailer directly. In addition,
we develop customized targeted mailing lists from information contained in our
databases for use by unaffiliated companies in their own product solicitation
efforts that do not directly compete with our efforts.
We have presented the segment information reported below on a managed
basis. We use this basis to review segment performance and to make operating
decisions. To do so, the income statement and balance sheet are adjusted to
reverse the effects of securitizations. Presentation on a managed basis is not
in conformity with generally accepted accounting principles. The elimination
column in the segment table includes adjustments to present the information on
an owned basis as reported in the financial statements of this quarterly report.
We do not allocate the expenses, assets and liabilities attributable to
corporate functions to the operating segments, such as employee compensation,
data processing services and communications, third-party servicing expenses, and
other expenses including occupancy, depreciation and amortization, professional
fees, and other general and administrative expenses. We include these expenses
in the reconciliation of the income before income taxes and cumulative effect of
accounting changes for the reported segments to the consolidated total. We do
not allocate capital expenditures for leasehold improvements, capitalized
software and furniture and equipment to operating segments. There were no
operating assets located outside of the United States for the periods presented.
Our enhancement services operating segment pays a fee to our consumer
lending products segment for successful marketing efforts to the consumer
lending products segment's cardholders at a rate similar to those paid to our
other third parties. Our enhancement services segment reports interest income
and the consumer lending products segment reports interest expense at our
weighted-average borrowing rate for the excess cash flow generated by the
enhancement services segment and used by the consumer lending products segment
to fund the growth of cardholder balances.
Three Months Ended June 30,
2001
----
Consumer
Lending Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
Interest income....... $ 481,540 $ 3,202 $ (312,535) (b) $ 172,207
Interest expense...... 129,361 -- (85,048) (b) 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 ........ 641,780 86,102 (278,226) 449,656
Income before
income taxes...... 173,672 (c) 55,058 (c) (126,999) (d) 101,731
Total assets ......... $9,777,687 $ 138,076 $ (5,959,431) (e) $3,956,332
Three Months Ended June 30,
2000
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
Interest income....... $ 376,022 $ 2,697 $ (262,960)(b) $ 115,759
Interest expense...... 122,768 -- (93,986)(b) 28,782
----------- ---------- ----------- -----------
Net interest
income ........... 253,254 2,697 (168,974) 86,977
Other revenue ........ 119,452 63,984 54,587 238,023
Total revenue ........ 495,474 66,681 (208,373) 353,782
Income before
income taxes........ 138,611 (c) 42,666 (c) (102,659)(d) 78,618
Total assets ......... $ 7,737,289 $ 150,025 $(5,174,697)(e) $ 2,712,617
Six Months Ended June 30,
2001
----
Consumer
Lending Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
Interest income ........ $ 948,360 $ 6,822 $ (613,246) (b) $ 341,936
Interest expense ....... 273,291 -- (181,143) (b) 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 .......... 1,233,971 167,986 (554,384) 847,573
Income before
income taxes and
cumulative effect of
accounting changes.. 331,251 (c) 109,737 (c) (248,127) (d) 192,861
Total assets ............ $9,777,687 $ 138,076 $(5,959,431) (e) $3,956,332
Six Months Ended June 30,
2000
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
Interest income ........ $ 735,524 $ 4,902 $ (526,866)(b) $ 213,560
Interest expense ....... 237,502 -- (184,612)(b) 52,890
----------- ---------- ----------- -----------
Net interest
income ............. 498,022 4,902 (342,254) 160,670
Other revenue .......... 244,705 123,600 111,190 479,495
Total revenue .......... 980,229 128,502 (415,676) 693,055
Income before
income taxes and
cumulative effect of
accounting changes.. 283,092 (c) 84,543 (c) (201,768)(d) 165,867
Total assets ........... $ 7,737,289 $ 150,025 $(5,174,697)(e) $ 2,712,617
(a) The reconciliation column includes: intercompany eliminations; amounts not
allocated to segments; and adjustments to the amounts reported on a managed
basis to reflect the effects of securitization.
(b) The reconciliation to consolidated owned interest revenue and interest
expense includes the elimination of $3.2 million, $2.7 million, $6.8 million
and $4.9 million of intercompany interest received by the enhancement services
segment from the consumer lending products segment for the three months ended
June 30, 2001 and 2000 and the six months ended June 30, 2001 and 2000,
respectively.
(c) Income before income taxes (and cumulative effect of accounting changes)
includes intercompany commissions paid by the enhancement services segment to
the consumer lending products segment for successful marketing efforts to
consumer lending products cardholders of $3.0 million, $4.1 million, $6.2
million and $4.4 million for the three months ended June 30, 2001 and 2000 and
the six months ended June 30, 2001 and 2000, respectively.
(d) The reconciliation to the owned income before income taxes and cumulative
effect of accounting changes includes: unallocated costs related to employee
compensation; data processing and communications; third-party servicing
expenses; and other expenses. The majority of these expenses, although not
allocated for the internal segment reporting used by management, relate to the
consumer lending products segment.
(e) Total assets include the assets attributable to corporate functions not
allocated to operating segments and the removal of investors interests in
securitized loans to present total assets on an owned basis.
NOTE 6 - DEBT AND DEPOSITS
We have a credit facility that consists of a $170 million revolving credit
facility and a $100 million term loan which mature in July 2003 and June 2003,
respectively. At June 30, 2001 and December 31, 2000 we had outstanding
borrowings of $100 million under the term loan facility with weighted-average
interest rates of 7.3% and 9.9%, respectively. There were no outstanding
borrowings under the revolving credit facility for these periods. At June 30,
2001 we were in compliance with all financial covenants under the credit
facility.
Direct Merchants Bank issues certificates of deposit of $100,000 or more.
As of June 30, 2001 and December 31, 2000, $2.1 billion of CDs were outstanding
with original maturities ranging from six months to five years and three months
to five years, respectively. These CDs pay fixed interest rates ranging from
4.2% to 7.6% and 5.4% to 7.6%, respectively.
We have various indirect subsidiaries which have not guaranteed the senior
notes or credit facility. The following condensed consolidating financial
statements of the Company, the guarantor subsidiaries and the non-guarantor
subsidiaries are presented for purposes of complying with SEC reporting
requirements. Separate financial statements of the guarantor subsidiaries and
the non-guarantor subsidiaries are not presented because management has
determined that the subsidiaries' financial statements would not be material to
investors.
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
June 30, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ................ $ 1,725 $ 935 $ 682,723 $ -- $ 685,383
Net retained interests in loans
securitized ........................... (3,009) -- 504,015 -- 501,006
Credit card loans ........................ 60,045 -- 1,994,550 -- 2,054,595
Property and equipment, net .............. -- 85,103 39,160 -- 124,263
Deferred income taxes .................... (3,438) 8,613 102,006 -- 107,181
Purchased portfolio premium .............. 248 -- 82,631 (2,588) 80,291
Other receivables due from credit card
securitizations, net...................
17 1,353 167,665 -- 169,035
Other assets ............................. 13,651 33,687 194,807 (7,567) 234,578
Investment in subsidiaries ............... 1,768,597 1,658,571 -- (3,427,168) --
----------- ----------- ----------- ----------- -----------
Total assets ............................. $ 1,837,836 $ 1,788,262 $ 3,767,557 $(3,437,323) $ 3,956,332
=========== =========== =========== =========== ===========
Liabilities:
Deposits ................................. $ (1,000) $ -- $ 2,175,945 $ -- $ 2,174,945
Debt ..................................... 345,470 877 9,990 -- 356,337
Accounts payable ......................... 6,120 14,996 120,541 (3,688) 137,969
Deferred income .......................... 8,602 31,155 175,262 (3,688) 211,331
Accrued expenses and other
liabilities............................ 468,617 (27,363) (372,752) -- 68,502
----------- ----------- ----------- ----------- -----------
Total liabilities ........................ 827,809 19,665 2,108,986 (7,376) 2,949,084
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ............... 1,010,027 1,768,597 1,658,571 (3,429,947) 1,007,248
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity................... $ 1,837,836 $ 1,788,262 $ 3,767,557 $(3,437,323) $ 3,956,332
=========== =========== =========== =========== ===========
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ............ $ 64,869 $ 10,658 $ 445,913 $ -- $ 521,440
Net retained interests in
loans securitized ................. 311 -- 1,382,518 -- 1,382,829
Credit card loans .................... 2,232 -- 1,053,848 -- 1,056,080
Property and equipment, net .......... -- 77,693 50,702 -- 128,395
Deferred income taxes ................ (2,415) 17,104 131,656 -- 146,345
Purchased portfolio premium .......... 248 -- 95,289 -- 95,537
Other receivables due from credit
card securitizations, net.......... 14 84 186,596 -- 186,694
Other assets ......................... 13,806 41,946 173,583 (10,630) 218,705
Investment in subsidiaries ........... 1,588,918 1,442,295 -- (3,031,213) --
----------- ----------- ----------- ----------- -----------
Total assets ......................... $ 1,667,983 $ 1,589,780 $ 3,520,105 $(3,041,843) $ 3,736,025
=========== =========== =========== =========== ===========
Liabilities:
Deposits ............................. $ (1,000) $ -- $ 2,107,199 $ -- $ 2,106,199
Debt ................................. 345,024 880 10,162 -- 356,066
Accounts payable ..................... 259 14,536 73,993 (5,315) 83,473
Deferred income ...................... 12,718 49,934 178,170 (5,315) 235,507
Accrued expenses and other
liabilities........................ 427,429 (64,488) (291,714) -- 71,227
----------- ----------- ----------- ----------- -----------
Total liabilities .................... 784,430 862 2,077,810 (10,630) 2,852,472
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ........... 883,553 1,588,918 1,442,295 (3,031,213) 883,553
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity .............. $ 1,667,983 $ 1,589,780 $ 3,520,105 $(3,041,843) $ 3,736,025
=========== =========== =========== =========== ===========
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)
Income 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
Warranty and debt waiver
underwriting and claims
servicing 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, Equity in Income
of Subsidiaries and
Cumulative Effect of
Accounting Change.................. (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
========= ========= ========= ========= =============
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense)
Income .............................. $ (20,834) $ (1,227) $ 109,038 $ -- $ 86,977
Provision for loan losses .............. (7) -- 98,222 -- 98,215
--------- --------- --------- --------- ---------
Net Interest (Expense)
Income After Provision
for Loan Losses...................... (20,827) (1,227) 10,816 -- (11,238)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and
credit card servicing
income............................... 2,378 24 118,107 -- 120,509
Credit card fees,
interchange and other
credit card income................... (1,649) (238) 55,417 -- 53,530
Enhancement services
revenues............................. -- 11,385 52,599 -- 63,984
--------- --------- --------- --------- ---------
729 11,171 226,123 -- 238,023
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and
other product
solicitation and
marketing expenses................... -- 2,878 33,438 -- 36,316
Employee compensation .................. -- 35,902 6,880 -- 42,782
Data processing services
and communications .................. -- (19,109) 39,928 -- 20,819
Warranty and debt waiver
underwriting and claims
servicing expense.................... -- 24 6,736 -- 6,760
Credit card fraud losses ............... 1 -- 2,430 -- 2,431
Purchased portfolio premium
amortization......................... -- -- 5,225 -- 5,225
Other .................................. 56 15,471 18,307 -- 33,834
--------- --------- --------- --------- ---------
57 35,166 112,944 -- 148,167
--------- --------- --------- --------- ---------
(Loss) Income Before
Income Taxes and Equity in
Income of Subsidiaries............... (20,155) (25,222) 123,995 -- 78,618
Income taxes ........................... (7,789) (9,802) 47,929 -- 30,338
Equity in income of
subsidiaries......................... 60,646 76,066 -- (136,712) --
--------- --------- --------- --------- ---------
Net Income ............................. $ 48,280 $ 60,646 $ 76,066 $(136,712) $ 48,280
========= ========= ========= ========= =========
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
Warranty and debt waiver
underwriting and claims
servicing 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
========= ========= ========= ========= ===========
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense)
Income............................... $ (32,881) $ (1,798) $ 195,349 $ -- $ 160,670
Provision for loan losses .............. (22) -- 186,030 -- 186,008
--------- --------- --------- --------- ----------
Net Interest (Expense) Income After
Provision for Loan Losses (32,859) (1,798) 9,319 -- (25,338)
--------- --------- --------- --------- -----------
Other Operating Income:
Net securitization and
credit card servicing
income............................... 4,764 (4) 246,808 -- 251,568
Credit card fees,
interchange and other
credit card income................... (3,197) 870 106,654 -- 104,327
Enhancement services
revenues............................. -- 27,719 95,881 -- 123,600
--------- --------- --------- --------- -----------
1,567 28,585 449,343 -- 479,495
--------- --------- --------- --------- -----------
Other Operating Expense:
Credit card account and
other product
solicitation and
marketing expenses................... -- 10,648 57,810 -- 68,458
Employee compensation .................. -- 70,773 15,781 -- 86,554
Data processing services
and communications .................. -- (37,853) 79,297 -- 41,444
Warranty and debt waiver
underwriting and claims
servicing expense.................... -- 818 12,674 -- 13,492
Credit card fraud losses ............... 3 -- 4,569 -- 4,572
Purchased portfolio premium
amortization ........................ -- -- 10,192 -- 10,192
Other .................................. 93 33,462 30,023 -- 63,578
--------- --------- --------- --------- -----------
96 77,848 210,346 -- 288,290
--------- --------- --------- --------- -----------
(Loss) Income Before Income
Taxes, Equity in Income
of Subsidiaries and
Cumulative Effect of
Accounting Change.................... (31,388) (51,061) 248,316 -- 165,867
Income taxes ........................... (12,147) (20,140) 96,478 -- 64,191
Equity in income of
subsidiaries......................... 117,479 148,400 -- (265,879) --
--------- --------- --------- --------- -----------
Income Before Cumulative
Effect of Accounting
Change .............................. 98,238 117,479 151,838 (265,879) 101,676
Cumulative effect of
accounting change, net .............. -- -- 3,438 -- 3,438
--------- --------- --------- --------- -----------
Net Income ............................. $ 98,238 $ 117,479 $ 148,400 $(265,879) $ 98,238
========= ========= ========= ========= ===========
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 Consolidated
-------------- ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided by operating
activities......................................... $ (77,889) $ (69,120) $ 411,919 $ 264,910
--------- --------- --------- ---------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans ................................ -- -- 692,051 692,051
Net loans originated ................................ (57,267) -- (812,855) (870,122)
Dispositions of (additions to) property
and equipment..................................... -- (14,636) 10,646 (3,990)
--------- --------- --------- ---------
Net cash (used in) provided by investing activities
(57,267) (14,636) (110,158) (182,061)
--------- --------- --------- ---------
Financing Activities:
Net increase (decrease) in debt ..................... 95,081 73,890 (168,700) 271
Net increase in deposits ............................ -- -- 68,746 68,746
Cash dividends paid ................................. (1,847) -- -- (1,847)
Net (decrease) increase in equity ................... (21,222) 143 35,003 13,924
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities ....................................... 72,012 74,033 (64,951) 81,094
--------- --------- --------- ---------
Net (decrease) increase 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
========= ========= ========= =========
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 31, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided by operating
activities........................................ $ (86,740) $ (49,918) $ 361,577 $ 224,919
--------- --------- --------- ---------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans ............................... -- -- (34,075) (34,075)
Net loans collected (originated).................... 2,043 -- (563,492) (561,449)
Additions to property and equipment ................ -- (17,550) (23,618) (41,168)
--------- --------- --------- ---------
Net cash provided by (used in) investing
activities ...................................... 2,043 (17,550) (621,185) (636,692)
--------- --------- --------- ---------
Financing Activities:
Net increase (decrease) in debt .................... 96,452 17,723 (113,731) 444
Net increase in deposits ........................... -- -- 469,592 469,592
Cash dividends paid ................................ (1,137) -- -- (1,137)
Net (decrease) increase in equity .................. (16,615) 50,529 2 33,916
--------- --------- --------- ---------
Net cash provided by financing activities .......... 78,700 68,252 355,863 502,815
--------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents...................................... (5,997) 784 96,255 91,042
Cash and cash equivalents at beginning of
period........................................... 43,619 309 150,505 194,433
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......... $ 37,622 $ 1,093 $ 246,760 $ 285,475
========= ========= ========= =========
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." This discussion should be
read in conjunction with the following documents for a full understanding of our
financial condition and results of operations: Management's Discussion and
Analysis of Financial Condition and Results of Operations in our 2000 Annual
Report to Shareholders; our annual report on Form 10-K for the fiscal year ended
December 31, 2000; and our Proxy Statement for the 2001 Annual Meeting of
Shareholders. In addition, this discussion should be read in conjunction with
our quarterly report on Form 10-Q for the period ended June 30, 2001, of which
this commentary is a part, and the condensed consolidated financial statements
and related notes thereto.
Results of Operations
Net income for the three months ended June 30, 2001 was $62.8 million, up
from $48.3 million for the second quarter of 2000. Diluted earnings per share
for the three months ended June 30, 2001 was $0.63 compared to $0.53 per share
for the second quarter of 2000. The increase in net income is the result of
increases in net interest income and other operating income, partially offset by
increases in the provision for loan losses and other operating expenses. These
increases are largely attributable to the growth in average managed loans to
$9.9 billion for the second quarter 2001 from $7.6 billion for the second
quarter 2000, an increase of 29%, and growth in total credit card accounts to
4.6 million at June 30, 2001, from 4.1 million at June 30, 2000. Enhancement
services revenue also increased 30% to $82.9 million for the second quarter of
2001 compared to the same period in 2000.
Net income for the six months ended June 30, 2001 was $104.3 million, up
from $98.2 million for the first six months of 2000. Net income reported for the
six-month periods ended June 30, 2001 and 2000 includes $14.5 million and $3.4
million, respectively, of cumulative effect of accounting changes described
below. Without these items, reported earnings would have been $118.8 million and
$101.7 million for the six-month periods ended June 30, 2001 and 2000,
respectively. Diluted earnings per share for the six-months ended June 30, 2001
was $1.05 compared to $1.08 for the same period in 2000. Without the impact of
the cumulative effect of accounting changes, diluted earnings per share would
have been $1.20 and $1.12 for the six months ended June 30, 2001 and 2000,
respectively. The increase in net income is the result of increases in net
interest income and other operating income, partially offset by increases in the
provision for loan losses and other operating expenses. These increases are
largely attributable to the growth in average managed loans to $9.6 billion for
the six months ended June 30, 2001 from $7.5 billion for the same period in
2000, an increase of 29%, along with the previously discussed growth in credit
card accounts. Enhancement services revenue also increased 30% to $161.2 million
for the six months ended June 30, 2001 compared to the same period in 2000.
During the quarter ended March 31, 2001 we adopted Statement of Financial
Accounting Standards 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 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.
During the quarter ended March 31, 2000 we adopted Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," for our debt
waiver products. This SAB formalized the accounting for services sold where the
right to a full refund exists, requiring all companies to defer recognition of
revenues until the cancellation period is complete. Previously, we recognized
half of the revenues in the month billed and half in the following month. We now
recognize all of the revenue the month following completion of the cancellation
period. This change resulted in a one-time, non-cash net charge to earnings of
$3.4 million, which is reflected as a "Cumulative effect of accounting change"
in the consolidated statements of income for the six months ended June 30, 2000.
Because we have applied the provisions of this SAB to our membership programs
since 1998, before the SEC formalized its guidance, no adjustment was required
for our membership services revenues.
In September 2000 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaces SFAS No. 125, and revises the standards for accounting for
securitizations and transfers of financial assets and collateral and requires
certain disclosures. It requires enterprises to recognize, upon transfer of
financial assets, the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. This statement is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after March 31, 2001. The statement is effective for
recognition and reclassification of collateral and for disclosures related to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. We implemented the disclosure requirements in our 2000 Annual
Report to comply with the new standard. The adoption of the accounting portion
of the new standard did not have a material impact on our financial statements.
Managed Loan Portfolio
We analyze our financial performance on a managed loan portfolio basis. To
do so, we adjust the income statement and balance sheet to reverse the effects
of securitization. Our discussion of revenues, where applicable, and provision
for loan losses includes comparisons to amounts reported in our consolidated
statements of income ("owned basis"), as well as on a managed basis.
Our managed loan portfolio is comprised of credit card loans, retained
interests in loans securitized and the investors' share of securitized credit
card loans. The investors' share of securitized credit card loans is not an
asset of the Company. Therefore, we do not show it on our consolidated balance
sheets. The following tables summarize our managed loan portfolio:
June 30, December 31, June 30,
2001 2000 2000
---- ---- ----
(Dollars in thousands)
Period-end balances:
Credit card loans:
Credit card loans ......... $ 2,312,652 $ 1,179,203 $ 543,836
Retained interests in loans
securitized ........... 1,069,090 2,023,681 1,815,047
Investors' interests in
securitized loans ..... 6,762,272 6,070,224 5,484,238
----------- ----------- -----------
Total managed loan portfolio . $10,144,014 $ 9,273,108 $ 7,843,121
=========== =========== ===========
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Average balances
Credit card loans:
Credit card loans ......... $1,548,810 $ 453,780 1,424,470 340,516
Retained interests in loans
securitized ............ 1,928,464 1,851,563 1,986,275 1,791,754
Investors' interests in
securitized loans ...... 6,376,798 5,306,617 6,214,612 5,349,908
---------- ---------- ---------- ----------
Total managed loan portfolio.. $9,854,072 $7,611,960 $9,625,357 $7,482,178
========== ========== ========== ==========
Impact of Credit Card Securitizations
The following table provides a summary of the effects of credit card
securitizations on selected line items of our statements of income for each of
the periods presented, as well as selected financial information on both an
owned and managed loan portfolio basis:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Statements of Income
(owned basis):
Net interest income ........ $ 127,894 $ 86,977 $ 249,788 $ 160,670
Provision for loan losses .. 114,682 98,215 202,411 186,008
Other operating income ..... 277,449 238,023 505,637 479,495
Other operating expense .... 188,930 148,167 360,153 288,290
--------- --------- --------- ---------
Income before income taxes
and cumulative effect of
accounting changes ..... $ 101,731 $ 78,618 $ 192,861 $ 165,867
========= ========= ========= =========
Adjustments for
Securitizations:
Net interest income ........ $ 227,487 $ 168,974 $ 432,103 $ 342,254
Provision for loan losses .. 193,178 114,387 373,241 231,064
Other operating income ..... (34,309) (54,587) (58,862) (111,190)
Other operating expense .... -- -- -- --
--------- --------- --------- ---------
Income before income taxes
and cumulative effect of
accounting changes ..... $ -- $ -- $ -- $ --
========= ========= ========= =========
Statements of Income
(managed basis):
Net interest income ........ $ 355,381 $ 255,951 $ 681,891 $ 502,924
Provision for loan losses .. 307,860 212,602 575,652 417,072
Other operating income ..... 243,140 183,436 446,775 368,305
Other operating expense .... 188,930 148,167 360,153 288,290
--------- --------- --------- ---------
Income before income taxes
and cumulative effect of
accounting changes ..... $ 101,731 $ 78,618 $ 192,861 $ 165,867
========= ========= ========= =========
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Other Data:
Owned Basis:
Average interest-earning assets .. $ 3,765,165 $ 2,475,510 $ 3,776,734 $ 2,306,263
Return on average assets (1) ..... 6.6% 7.5% 6.3% 8.2%
Return on average total equity (1) 25.9% 26.9% 25.5% 28.7%
Net interest margin (2) .......... 13.6% 14.1% 13.3% 14.0%
Managed Basis:
Average interest-earning assets .. $ 10,141,963 $ 7,782,127 $ 9,991,346 $ 7,656,171
Return on average assets (1) ..... 2.5% 2.5% 2.4% 2.6%
Return on average total equity (1) 25.9% 26.9% 25.5% 28.7%
Net interest margin (2) .......... 14.1% 13.2% 13.8% 13.2%
(1) Amounts for the six-month period ended June 30, 2001 are shown before
the impact of the adoption of SFAS 133.
(2) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets.
Net Interest Income
Net interest income consists primarily of interest earned on our credit
card loans, less interest expense on borrowings to fund the loans. Managed net
interest income for the three- and six-month periods ended June 30, 2001 was
$355.4 million and $681.9 million compared to $256.0 million and $502.9 million
for the same periods in 2000. The increase in net interest income is primarily
due to $2.4 billion and $2.3 billion increases in managed interest-earning
assets and increases in net interest margin to 14.1% and 13.8% from 13.2% and
13.2% in the same periods in 2000. The managed net interest margin increase is
primarily due to lower cost of funds resulting from decreases in LIBOR.
Financing costs as a percentage of borrowings for the second quarter and
year-to-date periods of 2001 were 5.7% and 6.2% compared with 7.1% and 7.0% in
the same periods of 2000.
Analysis of Average Balances, Interest and Average Yields and Rates
The following tables provide an analysis of interest income and expense,
net interest spread, net interest margin and average balance sheet data for the
three- and six-month periods ended June 31, 2001 and 2000:
Three Months Ended June 30,
2001 2000
--------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Owned Basis
Assets:
Interest-earning assets:
Federal funds sold .......... $ 31,013 $ 329 4.3% $ 110,300 $ 1,727 6.3%
Short-term investments ...... 256,878 3,176 5.0% 59,867 864 5.8%
Credit card loans and
retained interests in loans
securitized ................ 3,477,274 168,702 19.5% 2,305,343 113,168 19.7%
------------ ------------ ---- ------------ ------------ ----
Total interest-earning assets $ 3,765,165 $ 172,207 18.3% $ 2,475,510 $ 115,759 18.8%
Other assets ................ 831,526 -- -- 770,797 -- --
Allowances for loan losses .. (808,087) -- -- (661,743) -- --
------------ ------------
Total assets ................ $ 3,788,604 -- -- $ 2,584,564 -- --
============ ============
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 2,061,761 $ 32,936 6.4% $ 1,104,424 $ 18,306 6.7%
Debt ........................ 360,910 11,377 12.6% 350,899 10,476 12.0%
------------ ------------ ---- ------------ ------------ ----
Total interest-bearing
liabilities .............. $ 2,422,671 $ 44,313 7.3% $ 1,455,323 $ 28,782 8.0%
Other liabilities ........... 394,004 -- -- 408,204 -- --
------------ ------------
Total liabilities ........... 2,816,675 -- -- 1,863,527 -- --
Stockholders' equity ........ 971,929 -- -- 721,037 -- --
------------ ------------
Total liabilities and equity $ 3,788,604 -- -- $ 2,584,564 -- --
============ ============
Net interest income and
interest margin (1) ...... -- $ 127,894 13.6% -- $ 86,977 14.1%
Net interest rate spread (2) -- -- 11.0% -- -- 10.8%
Managed Basis
Credit card loans ........... $ 9,854,072 $ 478,034 19.5% $ 7,611,960 $ 373,431 19.7%
Total interest-earning assets 10,141,963 481,540 19.0% 7,782,127 376,022 19.4%
Total interest-bearing
liabilities .............. 8,799,469 126,159 5.7% 6,761,940 120,071 7.1%
Net interest income and
interest margin (1) ...... -- $ 355,381 14.1% -- $ 255,951 13.2%
Net interest rate spread (2) -- -- 13.3% -- -- 12.3%
(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.
Six Months Ended June 30,
2001 2000
--------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Owned Basis
Assets:
Interest-earning assets:
Federal funds sold .......... $ 97,425 $ 2,640 5.5% $ 103,492 $ 3,096 6.0%
Short-term investments ...... 268,564 7,072 5.3% 70,501 1,937 5.5%
Credit card loans and
retained interests in loans
securitized ................ 3,410,745 332,224 19.6% 2,132,270 208,527 19.7%
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets $ 3,776,734 $ 341,936 18.3% $ 2,306,263 $ 213,560 18.6%
Other assets ................ 818,830 -- -- 752,518 -- --
Allowances for loan losses .. (794,649) -- -- (655,698) -- --
----------- -----------
Total assets ................ $ 3,800,915 -- -- $ 2,403,083 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 2,095,898 $ 69,559 6.7% $ 993,286 $ 32,048 6.5%
Debt ........................ 360,954 22,589 12.6% 351,899 20,842 11.9%
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities .............. $ 2,456,852 $ 92,148 7.6% $ 1,345,185 $ 52,890 7.9%
Other liabilities ........... 403,547 -- -- 370,241 -- --
----------- -----------
Total liabilities ........... 2,860,399 -- -- 1,715,426 -- --
Stockholders' equity ........ 940,516 -- -- 687,657 -- --
----------- -----------
Total liabilities and equity $ 3,800,915 -- -- $ 2,403,083 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 249,788 13.3% -- $ 160,670 14.0%
Net interest rate spread (2) -- -- 10.7% -- -- 10.7%
Managed Basis
Credit card loans ........... $ 9,625,357 $ 938,647 19.7% $ 7,482,178 $ 730,491 19.6%
Total interest-earning assets 9,991,346 948,360 19.1% 7,656,171 735,524 19.3%
Total interest-bearing
liabilities .............. 8,671,464 266,469 6.2% 6,695,094 232,600 7.0%
Net interest income and
interest margin (1) ...... -- $ 681,891 13.8% -- $ 502,924 13.2%
Net interest rate spread (2) -- -- 12.9% -- -- 12.3%
(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.
Other Operating Income
Other operating income contributes substantially to our results of
operations, representing 68% and 67% of owned revenues for the three- and
six-month periods ended June 30, 2001, respectively.
Other operating income increased $39.4 million and $26.1 million for the
three- and six-month periods ended June 30, 2001 over the comparable periods in
2000. These increases are primarily due to the $21.3 million and $33.3 million
increases in income generated from credit card fees, interchange and other
credit card income, due to the growth in total accounts and loans in the managed
credit card portfolio for the three- and six-month periods ended June 31, 2001
over the comparable periods in 2000. For the three- and six-month periods ended
June 30, 2001, net securitization and credit card income decreased $0.1 million
and $44.8 million, respectively, from the comparable periods in 2000. These
decreases are primarily the result of the increased provision for securitized
loans. For the six-month period ended June 30, 2000, other operating income
included the $12.1 million favorable impact related to the operational policy
change in the billing of overlimit fees. This impact is reflected in net
securitization and credit card servicing income and credit card fees,
interchange and other credit card income in the consolidated statements of
income.
Enhancement services revenues increased by $18.9 million and $37.6 million
for the three- and six-month periods ended June 30, 2001. These increases
reflect the strong sales of our debt waiver product and the increase in
membership program revenues resulting from additional product offers to
third-party cardholders. At June 30, 2001 combined active enhancement members
totaled approximately 5.9 million.
Other Operating Expense
Total other operating expenses for the three- and six-month periods ended
June 30, 2001 increased $40.8 million and $71.9 million over the comparable
periods in 2000, largely due to costs associated with the growth of our business
activities. Employee compensation increased $13.3 million and $24.3 million for
the three- and six-month periods ended June 30, 2001, due to increased staffing
needs to support the increase in credit card accounts and enhancement services
active member growth. Other expenses increased $7.5 million and $13.9 million
for the three- and six-month periods ended June 30, 2001, due to increased fees
associated with higher credit card volume. Also, credit card account and other
product solicitation and marketing expenses increased $15.2 million and $23.8
million over the comparable periods in 2000, largely due to increased
enhancement services marketing activity and costs associated with our credit
card marketing activity, which resulted in over 510,000 new credit card
accounts and 1.7 million new enhancement relationships during the first six
months of 2001.
Income Taxes
Our provision for income taxes, which includes both federal and state
income taxes, represents an effective tax rate of 38.4% for the six-month period
ended June 30, 2001, compared to 38.7% for the same period in 2000.
Asset Quality
Our delinquency and net loan charge-off rates at any point in time reflect,
among other factors, the credit risk of loans, the average age of our various
credit card account portfolios, the success of our collection and recovery
efforts, and general economic conditions. The average age of our credit card
portfolio affects the stability of delinquency and loss rates. In order to
minimize losses, we continue to focus our resources on refining our credit
underwriting standards for new accounts, and on collections and post charge-off
recovery efforts. At June 30, 2001, 49% of managed accounts and 31% of managed
loans were less than 24 months old.
For the quarter ended June 30, 2001, our managed net charge-off ratio was
10.9% compared to 9.5% for the quarter ended June 30, 2000. For the six months
ended June 30, 2001, the net charge-off rate stood at 10.8% compared to 9.6% for
the six months ended June 30, 2000. Without the impact of purchase accounting
related to acquired portfolios, the charge-off rate was 10.9% and 10.8% for the
three- and six-month periods ended June 30, 2001 compared to 9.7% and 10.0% for
the same periods of 2000. Our charge-offs without the impact of purchase
accounting have been stable, with losses between 9.5% and 11.0% for the last 10
quarters. We believe, consistent with our statistical models and other credit
analysis, that this rate will continue to fluctuate between this range over the
next few quarters.
We use credit line analyses, account management and customer transaction
authorization procedures to minimize loan losses. Our risk models determine
initial credit lines at the time of solicitation and generally result in lower
credit lines than the industry average. We manage credit lines on an ongoing
basis and adjust them based on customer usage and payment patterns. To maximize
profitability, we continually monitor customer accounts 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 are also costly in terms of the personnel and other
resources dedicated to their resolution. We monitor delinquency levels on a
managed basis, since delinquency on either an owned or managed basis subjects us
to credit loss exposure. A credit card account is contractually delinquent if we
do not receive the minimum payment by the specified date on the cardholder's
statement. It is our policy to continue to accrue interest and fee income on all
credit card accounts, except in limited circumstances, until we charge off the
account and all related loans, interest and other fees. The following table
presents the delinquency trends of our credit card loan portfolio on a managed
portfolio basis:
Managed Loan Delinquency
June 30, % of December 31, % of June 30, % of
2001 Total 2000 Total 2000 Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Managed loan
portfolio
$10,144,014 100% $ 9,273,108 100% $ 7,843,121 100%
Loans contractually
delinquent:
30 to 59 days ... 253,328 2.5% 228,238 2.5% 189,322 2.4%
60 to 89 days ... 190,381 1.9% 173,531 1.9% 137,513 1.8%
90 or more days . 401,162 3.9% 365,963 3.9% 274,968 3.5%
----------- ----- ----------- ----- ----------- -----
Total ......... $ 844,871 8.3% $ 767,732 8.3% $ 601,803 7.7%
=========== ===== =========== ===== =========== =====
The increase in the managed delinquency rates over June 30, 2000 reflects a
slight deterioration in the economy, increased delinquencies in our secured card
portfolio and the adoption of recent FFIEC guidelines on re-aging accounts
effective January 1, 2001, which required us to report an additional $39.3
million of receivables as delinquent as of June 30, 2001. We intend to continue
to focus our resources on our collection efforts to minimize the negative impact
to net loan losses that results from increased delinquency levels.
Net Charge-Offs
Net charge-offs are the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged against the related income at the
time of charge-off. The following table presents our net charge-offs for the
periods indicated as reported in the consolidated financial statements and on a
managed portfolio basis:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Owned basis:
Average loans and retained
interests in loans securitized
outstanding .................... $3,477,274 $2,305,343 $3,410,745 $2,132,270
Net charge-offs ................... 92,494 55,723 173,931 103,297
Net charge-offs as a percentage
of average loans outstanding (1) 10.7% 9.7% 10.3% 9.7%
========== ========== ========== ==========
Managed basis:
Average loans outstanding ......... $9,854,072 $7,611,960 $9,625,357 $7,482,178
Net charge-offs ................... 268,517 180,570 513,486 358,979
Net charge-offs as a percentage of
average loans outstanding(1) ... 10.9% 9.5% 10.8% 9.6%
========== ========== ========== ==========
(1) Annualized
Provision and Allowance for Loan Losses
We maintain an allowance for loan losses for both owned loans and the
retained interest in loans securitized. The portion allocated to the retained
interest in loans securitized represents our estimate of a valuation adjustment
to report this asset in accordance with SFAS 140. For securitized loans,
anticipated losses and related provisions for loan losses are reflected in the
calculation of net securitization and credit card servicing income. We make
provisions for loan losses in amounts necessary to maintain the allowance at a
level estimated to be sufficient to absorb probable future loan losses, net of
recoveries, inherent in the existing loan portfolio.
The provision for loan losses on a managed basis for the three- and
six-month periods ended June 30, 2001 totaled $307.9 million and $575.7 million
compared to provisions of $212.6 million and $417.1 million for the three- and
six-month periods ended June 30, 2000. The increase for the three- and six-month
periods ended June 30, 2001, as compared to the three- and six-month periods
ended June 30, 2000, is reflective of the increase in loans and an increase in
charge-offs. The allowance for loan losses on a managed basis was 8.1% at June
30, 2001 compared to 8.6% at June 30, 2000.
Derivatives Activities
We use derivative financial instruments for the purpose of managing our
exposure to interest rate risks. We have a number of procedures in place to
monitor and control both market and credit risk from these derivatives
activities. Our senior management approves all derivative strategies and
transactions.
Liquidity, Funding and Capital Resources
One of our primary financial goals is to maintain an adequate level of
liquidity through active management of assets and liabilities. Because the
pricing and maturing characteristics of our assets and liabilities change,
liquidity management is a dynamic process, affected by changes in short- and
long-term interest rates. We use a variety of financing sources to manage
liquidity, refunding and interest rate risks.
Weighted- Weighted-
June 30, Average December 31, Average
2001 Interest Rate 2000 Interest Rate
---- ------------- ---- -------------
Total period-end
funding .......... $10.3 billion 5.3% $9.4 billion 7.1%
Bank loans ............ 1.0% 7.2% 1.0% 9.4%
Bank conduit
securitizations.. -- -- 2.3% 7.6%
Long-term debt ........ 2.5% 10.8% 2.7% 10.9%
Equity ................ 9.8% -- 9.4% --
Deposits .............. 21.1% 6.2% 22.4% 6.8%
Metris Master Trust ... 65.6% 4.8% 62.2% 7.0%
------ -----
100.0% 100.0%
====== ======
We finance the growth of our credit card loan portfolio through cash flows
from operations, asset securitizations, bank loans, subsidiary bank deposits,
long-term debt and equity issuances.
During the three- and six-month periods ended June 30, 2001, we received
net proceeds of $591.9 million and $692.0 million, respectively, from sales of
credit card loans to the trust and conduits. We used cash generated from these
transactions to fund credit card loan portfolio growth. During the three-month
period ended June 30, 2000 we received net proceeds of $248.0 million and
distributed net proceeds of $34.1 million during the six-month period ended June
30, 2000, to the trust and conduits. We financed these receivables on our
balance sheet with the growth in our subsidiary bank deposit program.
Direct Merchants Bank issues certificates of deposit of $100,000 or more.
As of June 30, 2001 and December 31, 2000, $2.1 billion of CDs were outstanding,
with original maturities ranging from six months to five years and three months
to five years, respectively. These CDs pay fixed interest rates ranging from
4.2% to 7.6% and 5.4% to 7.6%, respectively.
We have a $170 million, three-year revolving credit facility and a $100
million five-year term loan. At June 30, 2001 and December 31, 2000 we were in
compliance with all financial covenants under these agreements. At June 30,
2001, and December 31, 2000, we had outstanding borrowings of $100 million under
the term loan facility and no outstanding borrowings under the revolving credit
facility. We have also issued and sold $150 million of 10.125% Senior Notes due
2006 and $100 million of 10% Senior Notes due 2004.
As the portfolio of credit card loans grows our funding needs will increase
accordingly. We believe that our cash flows from operations, asset
securitizations, bank loans, subsidiary bank deposits, long-term debt and equity
issuances will provide us with adequate liquidity for meeting anticipated cash
needs, although no assurance can be given to that effect.
Newly Issued Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 No. 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 to their residual value over their useful
lives. This statement is effective for goodwill and intangible assets included
on the balance sheet for all fiscal years beginning after December 15, 2001. The
adoption of the new standard will not have a material impact on our financial
statements.
Forward-Looking Statements
This quarterly report contains some forward-looking statements.
Forward-looking statements give our current expectations of future events. You
will recognize these statements because they do not strictly relate to
historical or current facts. Such statements may use words such as "anticipate,"
"estimate," "expect," "project," "intend," "think," "believe" and other words or
terms of similar meaning in connection with any discussion of future performance
of the Company. For example, these include statements relating to future
actions, future performance of current or anticipated products, solicitation
efforts, expenses, the outcome of contingencies such as litigation, and the
impact of the capital markets on liquidity. From time to time, we also may
provide oral or written forward-looking statements in other material released to
the public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors, which can not be predicted with certainty, will be important in
determining future results. Among such factors are the lack of seasoning of our
credit card accounts which renders predictability of delinquencies more
difficult, higher default and bankruptcy rates of our target market of
moderate-income consumers, interest rate risks, risks associated with acquired
portfolios, dependence on the securitization markets and other funding sources,
state and federal laws and regulations 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 for the year ended
December 31, 2000. As a result of these factors, we cannot guarantee any
forward-looking statements. Actual future results may vary materially. Also,
please note that the factors we provide are those we think could cause our
actual results to differ materially from expected and historical results. Other
factors besides those listed here or in our 10-K for the year ended December 31,
2000 could also adversely affect us.
We undertake no obligations to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosure we make on related
subjects in our periodic filings with the Securities and Exchange Commission.
This discussion is provided to you as permitted by the Private Securities
Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our principal market risk is due to changes in interest rates. This
affects us directly in our lending and borrowing activities, as well as
indirectly, as interest rates may impact the payment performance of our
cardholders.
To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our owned
and managed balance sheet to minimize the impact changes in interest rates have
on the fair value of assets, net income and cash flow. We seek to minimize the
impact of changes in interest rates on us primarily by matching asset and
liability repricings.
Our primary 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 the London Interbank Offered Rate
("LIBOR"). The $270 million bank credit facility has pricing that is also
indexed to LIBOR or Prime Rate. The subsidiary bank deposits are issued at fixed
interest rates. We have entered into interest rate swap agreements which
effectively converted $420 million of deposits to rates indexed to LIBOR. The
long-term debt is at fixed interest rates. At June 30, 2001 approximately 10.7%
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, 89.3%
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 used by management to quantify interest rate risk is a
sensitivity analysis, which management believes best reflects the risk inherent
in our business. This approach calculates the impact on net income from an
instantaneous and sustained change in interest rates by 200 basis points.
Assuming no counteractive measures by management, a 200 basis point increase in
interest rates affecting our floating rate financial instruments, including both
debt obligations and loans, will result in an increase in net income of
approximately $17.2 million relative to a base case over the next 12 months;
while a decrease of 200 basis points will result in a reduction in net income of
approximately $5.4 million. Our use of this methodology to quantify the market
risk of financial instruments should not be construed as an endorsement of its
accuracy or the accuracy of the related assumptions. In addition, this
methodology does not take into account the indirect impact interest rates may
have on the payment performance of our cardholders. The quantitative information
about market risk is necessarily limited because it does not take into account
operating transactions or other costs associated with managing immediate changes
in interest rates.
Part II. Other Information
Item 1. Legal Proceedings
We are a party to various legal proceedings resulting from the
ordinary business activities relating to our operations. In July
2000 an Amended Complaint was filed in Hennepin County Court in
Minneapolis, Minnesota against Metris Companies Inc. 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 cardholders 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. We filed our answer to the
complaint in August 2000. To date, the complaint has not been
certified as a class action claim. We believe we have numerous
substantive legal defenses to these claims and are continuing to
vigorously defend the case. There can be no assurance that
defense or resolution of these matters will not have a material
adverse effect on our financial position.
On May 3, 2001, Direct Merchants Bank entered into a consent
order with the Office of the Comptroller of the Currency ("OCC").
The consent order requires Direct Merchants Bank to pay
approximately $3.2 million in restitution to about 62,000 credit
card customers who applied for and received a credit card in
connection with a series of limited test marketing campaigns from
March 1999 to June 1, 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 is reflected in our June 30, 2001 financial
statements. We believe that Direct Merchants Bank's agreement
with the OCC will not have a material adverse effect on the
financial position of Metris Companies Inc. or Direct Merchants
Bank.
The OCC also indicated that it is considering whether or not
to pursue an assessment of civil money penalties and gave Direct
Merchants Bank the opportunity to provide information to the OCC
bearing on whether imposing a penalty would be appropriate and
the severity of any penalty. The statutory provisions pursuant to
which a civil money penalty could be assessed give the OCC broad
discretion in determining whether or not a penalty will be
assessed and, if so, the amount of the penalty. Because we are
unable at this time to determine whether or not any civil money
penalty will be assessed, there can be no assurance that the
resolution of this matter will not have a material adverse effect
on our financial position.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on May 9,
2001 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 three directors
for a three-year term:
Walter Hoff
Frank D. Trestman
Ronald N. Zebeck
(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 term of office
after the meeting:
Lee R. Anderson, Sr.
John A. Cleary
Derek V. Smith
Edward B. Speno
(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
-------- --- ------- -------- ----------- --------
Walter Hoff 55,882,884 None 1,256,856 None None
Frank D. Trestman 55,878,869 None 1,260,871 None None
Ronald Zebeck 47,571,238 None 9,568,502 None None
C. Hunter Boll 33,693,403 None None None None
Thomas M. Hagerty 33,693,403 None None None None
David V. Harkins 33,693,403 None None None None
Thomas H. Lee 33,693,403 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 15,000,000 to 17,000,000 shares.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
76,120,065 14,589,353 None 123,725 None
(3) Ratification of the selection of KPMG LLP as independent
auditors of the Company for 2001.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
88,911,019 1,898,048 None 24,076 None
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Transfer and Administration Agreement, dated June 15,
2001, among Direct Merchants Credit Card Bank, National
Association, as Transferor, Variable Funding Capital
Corporation, as a Conduit Investor, First Union
National Bank, as a Committed Investor and as Liquidity
Agent, and First Union Securities, Inc., as Deal Agent.
10.2 Amendment No. 1, dated as of April 26, 2001, to the
Amended and Restated Pooling and Servicing Agreement
dated as of July 30, 1998, among Metris Receivables,
Inc., as Transferor, Direct Merchants Credit Card Bank,
National Association, as Servicer, and U.S. Bank
National Association, as Trustee (incorporated by
reference to exhibit 4.2 to Metris Receivables, Inc.'s
Registration Statement on Form S-3 (File No.
333-60530)).
10.3 Amendment No. 2, dated as of May 31, 2001, to the
Amended and Restated Pooling and Servicing Agreement
dated as of July 30, 1998, among Metris Receivables,
Inc., as Transferor, Direct Merchants Credit Card Bank,
National Association, as Servicer, and U.S. Bank
National Association, as Trustee (incorporated by
reference to exhibit 4.3 to Metris Receivables, Inc.'s
Registration Statement on Form S-3 (File No.
333-60530)).
11 Computation of Earnings Per Share.
(b) Reports on Form 8-K: On May 4, 2001 the Company filed a Current Report on
Form 8-K to report an agreement reached with the Office of the Comptroller
of the Currency by Direct Merchants Bank, National Association, a
subsidiary of Metris Companies Inc.
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: August 13, 2001 By: /s/ David D. Wesselink
-----------------------
David D. Wesselink
Vice Chairman
Principal Financial Officer
Date: August 13, 2001 By: /s/ Jeffrey D. Grosklags
-------------------------
Jeffrey D. Grosklags
Senior Vice President, Assistant Secretary
Principal Accounting Officer