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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 001-12351
December 31, 2000 Commission file number
--------------------
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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 Par Value
Securities registered pursuant to section 12(g) of the Act: None
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of March 21, 2001, 62,494,640 shares of the Registrant's Common Stock
were outstanding and the aggregate market value of common stock held by
non-affiliates of the Registrant on that date was approximately $1,287,389,584
based upon the closing price on the New York Stock Exchange on March 21, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Annual Report to Shareholders for the year ended
December 31, 2000, are incorporated by reference in Parts II and IV.
Certain portions of the Proxy Statement for the Annual Meeting of Shareholders
of Metris Companies Inc. to be held on May 9, 2001, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2000, are
incorporated by reference in Part III.
TABLE OF CONTENTS
PART I
Page
Item 1. Business............................................................ 2
Item 2. Properties..........................................................28
Item 3. Legal Proceedings...................................................29
Item 4. Submission of Matters to a Vote of Security Holders.................29
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................29
Item 6. Selected Financial Data.............................................29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................29
Item 7A.Quantitative and Qualitative Disclosures
About Market Risk...............................................30
Item 8. Financial Statements and Supplementary Data.........................31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................71
PART III
Item 10. Directors and Executive Officers of the Registrant.................71
Item 11. Executive Compensation.............................................71
Item 12. Security Ownership of Certain Beneficial
Owners and Management..........................................71
Item 13. Certain Relationships and Related Transactions.....................71
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................72
Signatures..................................................................73
Exhibit Index...............................................................75
PART I
Item 1. Business
Metris Companies Inc. ("MCI") and its subsidiaries which may be referred to
as "we," "us," "our," and the "Company," is an information-based direct marketer
and provider of consumer lending products and enhancement services, primarily to
moderate-income consumers. Our consumer lending products are primarily unsecured
and secured credit cards issued by our subsidiary, Direct Merchants Credit Card
Bank, National Association ("Direct Merchants Bank"). Our customers and
prospects include individuals for whom credit bureau information is available
("external prospects") and persons identified through other third-party sources
including customer lists and databases. We market our enhancement services,
including debt waiver programs, membership clubs, extended service plans, and
third-party insurance, to our credit card customers, customers of third parties
and the broad market.
MCI was incorporated in Delaware on August 20, 1996, and completed an
initial public offering in October 1996. Our principal subsidiaries are Direct
Merchants Bank, Metris Direct, Inc and Metris Receivables, Inc. During the third
quarter of 1998, Fingerhut Companies, Inc., which held approximately 83% of our
common stock, distributed its remaining interest in us to their shareholders in
a tax-free spin off.
Business Segments
We measure performance and operate in two business segments:
* Consumer Lending Products, which are primarily unsecured and secured
credit cards issued by Direct Merchants Bank; and
* Enhancement Services, which include debt waiver programs, membership
clubs, extended service plans and third-party insurance offered to our
credit card customers, customers of third parties and the broad
market.
We receive income from our consumer lending products through:
* interest charges and other finance charges assessed on
outstanding credit card loans;
* credit card fees (including, for example, annual membership, cash
advances, overlimit fees, and past due fees); and
* interchange fees.
The primary expenses of this business are:
* the costs of funding the loans;
* provisions for loan losses and operating expenses including
employee compensation, account solicitation and marketing
expenses; and
* data processing and servicing expenses.
2
Profitability is affected by:
* response and approval rates to solicitation efforts;
* loan growth;
* interest spreads on loans;
* credit card usage;
* credit quality (delinquencies and charge-offs);
* card cancellations; and
* fraud losses.
In addition to sales to third parties, the enhancement services business
derives benefits from our consumer lending products business because we
cross-sell these services to our credit cardholders. Nonetheless, our two
business segments are different with respect to the factors that affect
profitability, including how income is generated and how expenses are incurred.
These differences require us to manage our operations separately.
We receive revenue from our enhancement services through fees for those
services.
Expenses include costs of:
* solicitation;
* underwriting and claims servicing expenses;
* fees paid to third parties; and
* other operating expenses.
The primary factors that affect profitability for this business are:
* response rates to solicitation efforts;
* returns or cancel rates;
* renewal rates; and
* claims rates.
Our consumer lending business primarily targets moderate-income consumers
whom we believe have historically been overlooked by other credit card
companies. We target and evaluate prospective customers in this market by using
our proprietary scoring techniques, together with information from credit
bureaus and other customer lists and databases, to determine a potential
customer's creditworthiness. We also use sophisticated modeling techniques to
evaluate the expected risk, responsiveness, and profitability of each
prospective customer and to offer and price the products and services we believe
to be appropriate for each customer. (See more detailed discussion following
under "Business Lines.")
3
Strategy
The principal components of our strategy are the following:
Identify and solicit additional external prospects for credit cards. We
intend to continue adding moderate-income consumers through the use of our own
internally developed risk models. We have developed our own proprietary credit
risk modeling system. By incorporating individual credit information from the
major credit bureaus into this proprietary modeling system and eliminating those
individuals contained in the Fingerhut suppression and bad debt file, we expect
to generate additional customer relationships from external prospects.
Use risk-based pricing. We determine the specific pricing for an
individual's credit card offer through the prospective customer's risk profile
and expected responsiveness prior to solicitation, a practice known as
"risk-based pricing." We believe the use of risk-based pricing allows us to
maximize the profitability of a customer relationship.
Pursue acquisitions of credit card portfolios and other businesses. We
expect to continue to pursue acquisitions of credit card portfolios and/or other
businesses whose customers fit our product and target market profile or which
otherwise strategically fit with our business.
Increase the number of third-party customers using our products and
services. We will seek to access additional customers for our products and
services by establishing relationships with third parties. Our strategy is to
continue to use our proprietary risk, response and profitability models to
solicit strategic partners' customers for credit cards, and to focus our
cross-selling activities in order to increase the volume of enhancement services
products purchased by these customers.
Sell multiple products and services to each customer. We intend to use
interactions with our customers to sell additional products, thereby leveraging
our account acquisition costs and infrastructure. Currently, we focus our
efforts on selling enhancement services to our credit card customers and
customers of third parties.
Diversify product offerings to our customers. We intend to segment markets
to expand the success of our existing consumer lending products and enhancement
services. To do so, we plan to analyze the data in our proprietary database and
the databases of others to determine the needs of our target markets, then
develop, test and effectively market these new products to our target markets.
Spin Off
During the third quarter of 1998, Fingerhut, which held 83% of our common
stock, distributed its remaining interest in us to their shareholders.
On November 13, 1998, we entered into agreements with affiliates of the
Thomas H. Lee Company to invest $300 million in the Company. We obtained an
agreement from Fingerhut to waive its right to terminate the agreements if a
change of control occurred as a result of the conversion.
4
Business Lines
We operate through two businesses: consumer lending products and
enhancement services.
Consumer Lending Products
Products. Our consumer lending products are primarily unsecured and secured
credit cards, including the Direct Merchants Bank MasterCard(R) and Visa(R). We
offer co-branded credit cards and may also offer other consumer lending products
either directly or through alliances with other companies. At December 31, 2000,
we had approximately 4.5 million credit card accounts with approximately $9.3
billion in managed credit card loans. According to the Nilson Report, at
December 31, 2000, we were the 9th largest MasterCard issuer in the United
States based on the number of cards issued, and the 11th largest bankcard issuer
based on managed credit card loan balances.
Prospects. Our primary sources of prospects to solicit for credit card
offers are obtained from credit bureau queries and individuals in third-party
customer lists and databases. Currently, our most significant source is the
leads obtained from credit bureau inquiries. A significant third-party customer
source in the past has been a database maintained by Fingerhut, a wholly owned
subsidiary of Federated Department Stores, Inc. Fingerhut is a database
marketing firm that sells a broad range of products and services via catalogs,
telemarketing, television, the Internet and other media. We have an agreement
that grants exclusive access to use Fingerhut's database to market our financial
service products through October 31, 2001. At December 31, 2000, Fingerhut
customers represented approximately 30% of our accounts and managed loans.
However, the Fingerhut database currently generates less than 5% of new
customers booked.
Credit Scoring. We use internally and externally developed proprietary
models to enhance our evaluation of prospects. These models help segment these
prospects into narrower ranges within each risk score provided by Fair, Isaac
and Co ("FICO"), allowing us to better evaluate individual credit risk and to
tailor our risk-based pricing accordingly. We also use this segmentation along
with the Fingerhut bad debt and suppression file to exclude certain individuals
from our marketing solicitations.
We generate external prospects from lists obtained from the major credit
bureaus based on criteria established by us as well as from other third-party
sources. We use proprietary models and additional analysis in conjunction with
the files obtained from the credit bureaus to further segment prospects based
upon their likelihood of delinquency.
We believe our methods are effective in further segmenting and evaluating
risk within risk score bands. We have and continue to use the results of our
analysis of prospects to adjust the proprietary models to determine the pricing
for various segments and to exclude certain segments from subsequent direct
marketing efforts. While we believe that the proprietary models and additional
analysis are valuable tools in analyzing relative risks, it is not possible to
accurately predict which consumers will default or the overall level of
defaults.
We have used the Fingerhut database to identify potential customers. We
have effectively applied our experience gained from Fingerhut customers in
developing our proprietary models and additional analysis to develop credit
scores for our proprietary prospect database. This allows us to better evaluate
credit risk and to tailor our risk-based pricing accordingly.
5
We believe that both the proprietary models and our internal credit score
give us a competitive advantage in evaluating the credit risk of moderate-income
consumers. Therefore, we have been willing to solicit certain consumers who have
lower FICO scores if they also have an appropriate internal score. After every
marketing campaign, we monitor the performance of the proprietary models and
continually re-evaluate the effectiveness of these models in segmenting credit
risk, resulting in further refinements to our selection criteria for prospects.
Over time, we believe that we will capture additional credit information on the
behavioral characteristics of prospects which will allow us to further increase
the effectiveness of our proprietary models.
Solicitation. Prospects for solicitation include both external prospects
and customers of third parties. Prospects are contacted on a nationwide basis
primarily through pre-screened direct mail and telephone solicitations. We
receive responses to our solicitations, perform fraud screening, verify name and
address changes, and obtain any information which may be missing from the
application. Applications are sent to third-party data entry providers, which
key the application information and process the applications based on the
criteria provided by us. We then make the credit decisions and approve, deny or
begin the exception processing. We process exceptions for, among other things,
derogatory credit bureau information and fraud warnings. Exception applications
are processed manually by credit analysts based on policies approved by our
credit committee.
Pricing. Through risk-based pricing, we price credit card offers based upon
a prospect's risk profile prior to solicitation or upon receipt of an
application. We evaluate a prospect to determine credit needs, credit risk, and
existing credit availability and then develop a customized offer that includes
the most appropriate product, brand, pricing and credit line. We currently offer
over 100 different pricing structures on our credit card products. After credit
card accounts are opened, we periodically monitor customers' internal and
external credit performance and recalculate delinquency, profitability,
attrition and bankruptcy predictors. As customers evolve through the credit life
cycle and are regularly rescored, the lending relationship may evolve to include
more or less restrictive pricing and product configurations. We reward our rate
rewards customers with consistently lower interest rates for every six months of
consecutive on-time payment, and we offer interest rate reduction in an attempt
to reduce customer attrition.
6
Age of Portfolio. The following table sets forth, as of December 31, 2000,
the number of accounts and the amount of outstanding loans based on the age of
the managed accounts. (Accounts in acquired portfolios are presented based on
when the account was originated with the previous issuer.)
Percentage of
Age Since Number Percentage Loans Loans
Origination of Accounts of Accounts Outstanding Outstanding
----------- ----------- ----------- ----------- -----------
(Dollars in
thousands)
0-6 Months .......... 754,748 16.9% $ 626,709 6.8%
7-12 Months ......... 700,055 15.7% 843,396 9.1%
13-18 Months ........ 456,801 10.2% 819,667 8.8%
19-24 Months ........ 252,058 5.6% 521,530 5.6%
25-36 Months ........ 596,358 13.4% 1,672,647 18.0%
37+ Months .......... 1,703,962 38.2% 4,789,159 51.7%
--------- ----- ---------- -----
Total .......... 4,463,982 100.0% $9,273,108 100.0%
========= ===== ========== =====
Geographic Distribution. We solicit credit card customers on a national
basis and, therefore, maintain a geographically diversified portfolio. The
following table shows the distribution of accounts and amount of outstanding
loans by state, as of December 31, 2000.
Percentage
of
Number Percentage Loans Loans
State of Accounts of Accounts Outstanding Outstanding
- ----- ----------- ----------- ----------- -----------
(Dollars in
thousands)
California ............. 607,333 13.6% $1,170,856 12.6%
Texas .................. 382,037 8.6% 789,888 8.5%
New York ............... 373,952 8.4% 755,207 8.1%
Florida ................ 325,352 7.3% 690,960 7.5%
Ohio ................... 170,282 3.8% 375,759 4.1%
Illinois ............... 180,612 4.0% 371,976 4.0%
Pennsylvania ........... 142,140 3.2% 303,338 3.3%
Michigan ............... 120,718 2.7% 257,569 2.8%
New Jersey ............. 131,746 3.0% 254,643 2.7%
Georgia ................ 116,016 2.6% 250,599 2.7%
Virginia ............... 114,050 2.6% 245,829 2.7%
North Carolina ......... 109,858 2.5% 231,943 2.5%
All others (1) ......... 1,689,886 37.7% 3,574,541 38.5%
- ------------------------ ---------- ----- ---------- -----
Total ............. 4,463,982 100.0% $9,273,108 100.0%
========== ===== ========== =====
(1) No other state accounts for more than 2.5% of loans outstanding.
Credit Lines. Once we approve an account we use automated screening and
credit scoring techniques to establish an initial credit line based on the
individual's risk profile. Excluding the portfolios that were purchased from
other issuers, our credit lines are below the industry average, due to our risk
assessment methods and the higher average risk inherent in our target market. We
may elect, at any time and without prior notice to a cardholder, to prevent or
restrict further credit card use by the cardholder, usually as a result of poor
payment performance or our concern over the creditworthiness of
7
the cardholder. We manage credit lines based on the results of the behavioral
scoring analysis, and in accordance with our internally established criteria.
These analysis models automatically and regularly assign credit line
increases and decreases to individual customers, as well as determine the
systematic collection steps to be taken at the various stages of delinquency. We
use these models to manage the authorization of each transaction, as well as the
collections strategies used for non-delinquent accounts with balances above
their assigned credit lines.
The following tables set forth information with respect to credit limit and
account balance ranges of our managed loan portfolio, as of December 31, 2000.
Percentage Percentage of
Number of of Loans Loans
Credit Limit Range Accounts Accounts Outstanding Outstanding
- ------------------ -------- -------- ----------- -----------
(Dollars in
thousands)
$1,000 or Less .................... 742,667 16.6% $ 386,865 4.2%
$1,001-$2,000 ..................... 614,746 13.8% 673,919 7.2%
$2,001-$3,500 ..................... 804,028 18.0% 1,323,157 14.3%
$3,501-$5,000 ..................... 731,754 16.4% 1,698,768 18.3%
$5,001-$10,000 .................... 1,405,708 31.5% 4,636,867 50.0%
Over $10,000 ...................... 165,079 3.7% 553,532 6.0%
--------- ----- ---------- -----
Total ........................ 4,463,982 100.0% $9,273,108 100.0%
========= ===== ========== =====
Percentage Percentage of
Account Number of of Loans Loans
Balance Range Accounts Accounts Outstanding Outstanding
- ------------- -------- -------- ----------- -----------
(Dollars in
thousands)
Credit Balance ................... 60,809 1.4% $ (6,345) (0.1%)
No Balance ....................... 854,604 19.2% -- --
$1,000 or Less ................... 1,232,581 27.6% 571,426 6.2%
$1,001-$2,000 .................... 631,019 14.1% 978,220 10.5%
$2,001-$3,500 .................... 673,321 15.1% 1,890,114 20.4%
$3,501-$5,000 .................... 460,109 10.3% 1,996,404 21.5%
$5,001-$10,000 ................... 536,680 12.0% 3,612,067 39.0%
Over $10,000 ..................... 14,859 0.3% 231,222 2.5%
--------- ----- ----------- -----
Total ....................... 4,463,982 100.0% $ 9,273,108 100.0%
========= ===== =========== =====
Servicing, Billing and Payment. We have established a relationship with
First Data Resources, Inc. for cardholder processing services. FDR is a
subsidiary of First Data Corporation, a provider of information processing and
related services including cardholder processing (services for financial
institutions which issue credit cards to cardholders), and merchant processing
(services for financial institutions which make arrangements with merchants for
the acceptance of credit cards as methods of payment). FDR provides the
following services for us:
* data processing;
8
* credit card reissuance;
* monthly statements; and
* interbank settlement.
Our processing services agreement with FDR expires in 2006. We handle the
following functions internally:
* applications processing; and
* back office support for mail inquiries and fraud management.
In addition, we handle most in-bound customer service telephone calls for
our customer base.
We generally assess periodic finance charges on an account if the
cardholder has not paid the balance in full from the previous billing cycle. We
base these finance charges on the average daily balance outstanding on the
account during the monthly billing cycle. FDR, our servicer, applies payments in
the following order:
* first to any billed and unpaid fees;
* next to billed and unpaid finance charges; and
* then to billed and unpaid transactions in the order determined by
us.
If we are not paid in full prior to the due date, which is 25 days after
the statement cycle date, we impose finance charges on all purchases from the
date of the transaction to the statement cycle date. We also impose finance
charges on each cash advance from the day we make the advance until the
cardholder pays the advance in full. We apply finance charges to the average
daily balance. For most cardholders, if they pay the entire balance on the
account by the due date, we do not impose a finance charge on purchases.
We assess an annual fee on some credit card accounts. We may waive the
annual fee, or a portion thereof, in connection with the solicitation of new
accounts depending on the credit terms offered, which we determined based on the
prospect's risk profile prior to solicitation, or when we determine a waiver to
be appropriate considering the account's overall profitability. In addition to
the annual fee, we charge accounts other fees, including:
* a late fee with respect to any unpaid monthly balance if we do
not receive the required minimum monthly payment by the due date;
* a cash advance fee for each cash advance;
* a fee with respect to each check submitted by a cardholder in
payment of an account, which the cardholder's bank does not
honor;
* an overlimit charge if, at any time during the billing cycle, the
total amount owed exceeds the cardholder's credit line by at
least $30; and
* card processing or application fees for some card offers.
9
Each cardholder is subject to an agreement governing the terms and
conditions of their account. Pursuant to the agreement, we reserve the right to
change or terminate certain terms, conditions, services and features of the
account (including periodic finance charges, late fees, returned check charges
and any other charges or the minimum payment), subject to the conditions set
forth in the account agreement.
FDR sends monthly billing statements to cardholders on our behalf. When we
establish an account, we assign a billing cycle to it. Currently, there are 20
billing cycles in each month. Each of these cycles has a separate monthly
billing date based on the business day of the calendar month on which the cycle
begins. Each month we send a statement to all accounts with an outstanding
balance greater than $1. All cardholders with open accounts must make a minimum
monthly payment, generally of the greater of: $15, 2.5% of the outstanding
balance, the finance charge or the balance of the account if the balance is less
than $15. If we do not receive the minimum payment by the due date we consider
the account delinquent.
Most merchant transactions by cardholders are authorized online. The
remaining transactions generally are low dollar amounts, typically below $50.
All authorizations are handled through FDR's adaptive control and fraud
detection systems.
Delinquency, Collections and Charge-offs. We consider an account delinquent
if we do not receive a payment due within 25 days from the closing date of the
statement. We manage the collections work internally. We determine the
collection actions to take by using the adaptive control system, which
continually monitors all delinquent accounts. We close accounts that become 60
days contractually delinquent, but do not necessarily charge them off. We charge
off and take accounts as a loss either:
* within 60 days after formal notification of bankruptcy;
* at the end of the month during which unsecured accounts become
contractually 180 days past due; or
* at the end of the month during which secured accounts become
contractually 120 days past due.
We immediately reserve for and charge off accounts that we identify as
fraud losses no later than 90 days after the last activity. We refer charged-off
accounts to our recovery unit for coordination of collection efforts to recover
the amounts owed. When appropriate, we place accounts with external collection
agencies or attorneys. Periodically, we sell a portion of our charged-off
portfolio to third parties.
Asset Securitizations
Securitization involves packaging and selling both current and future
receivable balances of pools of credit card accounts, while retaining the
servicing of such receivables. Our securitizations are treated as sales under
generally accepted accounting principles. As a result, the securitized
receivables are removed from our balance sheet and treated as managed loans.
We primarily securitize receivables by selling the receivables either to
our proprietary trust, the Metris Master Trust, or to bank-sponsored
single-seller and multi-seller conduits.
10
The Metris Master Trust. The Metris Master Trust was formed in May 1995
pursuant to a pooling and servicing agreement, which was amended on July 30,
1998. Metris Receivables, Inc., one of our subsidiaries, transfers receivables
in designated accounts to the trust in exchange for proceeds and an interest in
the trust. Metris Receivables, Inc. may then exchange portions of this interest
for one or more series of securities which it may then sell publicly or
privately to third-party investors. The securities each represent undivided
interests in all of the receivables in the trust, and may be split into separate
classes which have different terms. The different classes of an individual
series are structured to obtain specific credit ratings. As of December 31,
2000, 13 series of securities have been issued by the trust. We currently retain
the most subordinated class of securities in each series and sell all the other
classes.
Generally, each series involves an initial reinvestment period, referred to
as the revolving period, in which principal payments on receivables allocated to
such series are returned to Metris Receivables, Inc. and reinvested in new
receivables arising in the accounts. After the revolving period ends, principal
payments allocated to the series are then used to repay the investors. This
period is referred to as the amortization period. Currently, the trust has no
series in a controlled amortization period. The scheduled amortization period is
set in the agreements governing each series. However, all series set forth
certain events by which amortization can be accelerated, referred to as early
amortization. Usually, this would occur if the portfolio collections less
charge-offs for bad debt, financing costs and operational costs drop below a
minimum amount. Because new receivables in designated accounts cannot be funded
while a series is in amortization, early amortization would accelerate our
funding requirements for new receivables in the accounts. We currently do not
have any series that are in early amortization.
Each month, each series is allocated its share of finance charge
collections which are used to pay investors interest on their securities, to
reimburse them for their share of losses due to charge-offs and to pay their
share of servicing fees. Amounts remaining may be deposited in cash accounts of
the trust as additional protection for future losses. Once each of these
obligations is fully met, any remaining finance charge collections, if any, are
returned to us.
Bank-Sponsored Conduit Programs. We maintain flexibility in our current
securitization program by negotiating with bank-sponsored conduits. These
conduits purchase an interest in receivables arising in designated accounts.
These transactions also feature a revolving period in which principal payments
on receivables allocated to the conduits are returned to us and reinvested in
new receivables. These agreements also have early amortization triggers. Finance
charge collections are used to pay certain obligations, including servicing
fees, interest on the principal amount of the conduits investment in the
applicable receivables, and recouping charge-offs. After such allocation,
remaining finance charge collections, if any, are returned to us.
Additional information regarding asset securitizations is set forth under
the caption "Liquidity, Funding and Capital Resources" on pages 38 to 40 of the
2000 Annual Report and is incorporated herein by reference in Item 7 of this
report.
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Enhancement Services
We sell or offer enhancement services, including:
* debt waiver protection for unemployment, disability and death;
* membership programs such as purchase protection, card
registration and other club memberships;
* extended service plans through a third-party retailer;
* third-party insurance, directly to our credit card customers and
customers of third parties; and
* customized targeted mailing lists for use by unaffiliated
companies in their own financial services product solicitation
efforts that do not directly compete with ours.
We currently market the following programs:
Account Protection PlusSM. Account Protection Plus is a program we have
developed that protects customers from interest charges on our credit cards in
the event that they become disabled or unemployed. The customer's account is
"frozen" for six months, with no payments due or interest accruing during this
time. In the event of death, the amount due, up to the credit limit, is waived
and the account is closed. Because this is an internally administered program,
we are responsible for all of the program's associated costs. We also offer
Account Benefit PlanSM which forgives the customer's balance due in the event of
death but offers no protection in the event of disability or unemployment.
Credit Life. Credit Life is a program that we have developed to provide the
cardholder various coverage options. Depending on which coverage has been
selected, the program will make the minimum payment on the cardholders credit
card balance in the event of disability or unemployment for a period of six
months, pay off the entire balance in the event of death, and provide a death
benefit in the event of accidental death. A third-party insurance company
underwrites the policy and then reinsures those policies with ICOM Limited, our
captive insurance subsidiary. We market this insurance program to our credit
card customers only.
PurchaseShield(R). PurchaseShield is a membership program that offers
various levels of purchase protection to its members. Eligible purchases made on
members' credit cards are protected with the following benefits:
* warranty extension;
* sale price protection; and
* product return guarantee.
In addition, PurchaseShield offers its members a household repair rebate
that can be used on certain existing in-home electro-mechanical item repairs.
Because we administer the program ourselves, we receive all revenues and are
responsible for all of the program's associated costs. We currently offer
PurchaseShield to our credit card customers, credit card customers of third
parties and the broad market.
12
Card Registration. Card registration is a membership service that protects
members from fraudulent charges if their credit cards are lost or stolen and
provides emergency cash and airline tickets, change of address notification and
lost or stolen card notification, valuable property and document registration, a
messaging service and car rental discounts. We currently offer card registration
service under the names Fraud Alert ServicesSM and SafeKeeperSM to our credit
card customers, customers of third parties and the broad market. We are
responsible for all of its associated costs and revenues.
DirectAlertSM. DirectAlert helps members monitor and review their credit
report. Members of DirectAlert receive the following benefits:
* access to their credit report in an easy to read format;
* quarterly updates detailing any changes in their credit report
and the names of anyone who has requested or received a copy of
their credit report;
* toll-free access to credit experts who are ready to answer
questions and assist with any disputes; and
* retirement information verification which can help members
examine their financial future by giving them an idea of what
they will receive from social security after they retire.
We currently offer DirectAlert to our credit card customers, credit
card customers of third parties and the broad market.
TripSaverSM. TripSaver offers discounted travel services through the Metris
travel agency. Members of TripSaver receive benefits of airline, hotel and car
rental discounts, lowest price guarantee, 5% cash back on services booked
through the Metris travel agency and other travel related discounts. We
currently offer TripSaver to our credit card customers, credit card customers of
third parties and the broad market.
Other Membership Clubs. We have cooperative marketing arrangements with
several third parties to market the third party's memberships in clubs that do
not compete with our services or clubs. Additionally, we have other arrangements
with third parties, which we assumed from acquired credit card portfolios, that
provide us with revenue from ongoing membership fees billed to our acquired
credit cardholders.
Extended Service Plans. We administer extended service plans sold by
retailers. Extended service plans provide warranty coverage beyond the
manufacturer's warranty. In general, the extended service plans that we
administer provide customers with the right to have their covered purchases
repaired, replaced, or in certain circumstances, the purchase price of the
product refunded, within certain limits that we determine. Within the warranty
industry, extended service plans are available for a wide variety of products,
including consumer electronics and appliances, furniture, jewelry, automotives,
and household mechanical systems such as heating, plumbing and electrical
systems. We currently administer extended service plans for consumer
electronics, appliances, furniture and jewelry purchased from third-party
retailers.
ServiceEdge(R). ServiceEdge is our extended service plan administered by
the Company for consumer electronics and all other electro-mechanical
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items. ServiceEdge customers have the right to have their purchases repaired or
replaced in the event of electrical or mechanical failure or defects in
materials and workmanship for coverable events after the manufacturer's warranty
expires.
Quality Furniture CareSM is our extended service plan program for
furniture. The services provided to Quality Furniture Care customers include
stain cleaning, structural defect or damage repair, or replacement if the
merchandise cannot be repaired.
Quality Jewelry CareSM is our extended service plan for jewelry. The
services provided to Quality Jewelry Care customers include repair, soldering,
ring sizing, prong re-tipping and cleaning. We contract with third-party
jewelers to perform the services to our customers.
Most of the extended service plans that we administer continue for two
years from the date of the product purchase (three to five years in limited
cases). The customer pays the retail company a one-time fee for this coverage
based on the price of the product, the term of coverage and the loss risk of the
product. Customers may also be offered the opportunity to renew their coverage
in one-year extensions, presently up to six years from the date of purchase,
upon payment of an additional fee for each renewal. We are responsible for
claims risk and claims processing for all extended service plans sold.
Home ServiceEdgeSM. Home ServiceEdge covers repairs for a number of major
appliances in the home. The plan will assist the customer in locating and
arranging for service and, in the event the appliance cannot be fixed, will pay
a fixed dollar amount towards the replacement of the appliance. We currently
offer Home ServiceEdge to our credit card customers and customers of third-party
issuers.
Accidental Death Insurance. We reinsure the risk associated with
underwriting accidental death insurance. Under an arrangement with a third-party
insurance provider, this carrier sells accidental death policies to our
customers for a fee. Our captive insurance company, ICOM Limited, then reinsures
these policies from the third-party insurance provider. When these policies are
reinsured by us, we assume all risk of loss and incur all administrative
expenses related to servicing these policyholders.
Cash Benefit. Cash Benefit pays a set amount per month in the event of
disability or unemployment and has a death benefit. A third-party insurance
company markets, fulfills and underwrites the policies. We currently market Cash
Benefit to our credit card customers only.
Tailored List Development. We currently work with several companies to
develop targeted mailing lists. We earn revenue for each name that is solicited
by these companies from our customer databases. We also earn revenue from the
sale of advertising space included in our monthly billing statements.
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Competition
As a marketer of consumer lending products, we compete with numerous
providers of financial services, many of which have greater resources than we
do. In particular, our credit card business competes with national, regional and
local bankcard issuers as well as other general purpose credit and debit card
issuers. In general, customers are attracted to credit card issuers largely on
the basis of price, credit limit and other product features; as a result,
customer loyalty is often limited. There are numerous competitors in the
enhancement services market, including insurance companies, financial services
institutions and other membership-based or consumer-enhancement service
providers, many of which are larger, better capitalized and more experienced
than we are. However, we believe that our strategy of focusing on the
moderate-income sector and our proprietary prospect database, proprietary models
and internal credit scores allow us to compete effectively in the market for
moderate-income cardholders to market financial services products.
Regulation
The Company and Direct Merchants Bank
Direct Merchants Bank is a limited purpose credit card bank chartered as a
national banking association. It is a member of the Federal Reserve System. Its
deposits are insured by the Bank Insurance Fund which is administered by the
Federal Deposit Insurance Corporation and it is subject to comprehensive
regulation and periodic examination by the Office of the Comptroller of the
Currency, its primary regulator. It is also subject to regulation by the FDIC,
as a back-up regulator. Direct Merchants Bank is not a "bank" as defined under
the Bank Holding Company Act of 1956, as amended, because it:
* engages only in credit card operations;
* does not accept demand deposits or deposits that the depositor
may withdraw by check or similar means for payment to third
parties or others;
* does not accept any savings or time deposits of less than
$100,000, except for deposits pledged as collateral for
extensions of credit;
* maintains only one office that accepts deposits; and
* does not engage in the business of making commercial loans.
As a result, we are not a bank holding company under the BHCA. If Direct
Merchants Bank failed to meet the credit card bank criteria described above,
Direct Merchants Bank's status as an insured bank would make us subject to the
provisions of the BHCA. We believe that becoming a bank holding company would
limit our ability to pursue future opportunities.
15
Exportation of Interest Rates and Fees
Under current judicial interpretations of federal law, national banks such
as Direct Merchants Bank may charge interest at the rate allowed by the laws of
the state where the bank is located and may "export" those interest rates on
loans to borrowers in other states, without regard to the laws of such other
states.
The Supreme Court of the United States has held that national banks may
also impose late payment fees, overlimit fees, annual fees, cash advance fees
and membership fees allowed by the laws of the state where the national bank is
located on borrowers in other states, without regard to the laws of such other
states. The Supreme Court based its opinion largely on its deference to a
regulation adopted by the OCC that has been interpreted to permit national banks
to export interest rates. As a result, national banks such as Direct Merchants
Bank may export such fees.
Dividends and Transfers of Funds
There are various federal law limitations on the extent to which Direct
Merchants Bank can finance or otherwise supply funds to the Company and its
affiliates through dividends, loans or otherwise. These limitations include:
* minimum regulatory capital requirements;
* restrictions concerning the payment of dividends out of net
profits or surplus; and
* Sections 23A and 23B of the Federal Reserve Act governing
transactions between a bank and its affiliates.
In general, Federal law prohibits a national bank such as Direct Merchants
Bank from making dividend distributions on common stock if the dividend would
exceed currently available undistributed profits. In addition, Direct Merchants
Bank must get OCC prior approval for a dividend, if such distribution would
exceed current year net income combined with retained earnings from the prior
two years. Direct Merchants Bank cannot make a dividend if the distribution
would cause the bank to fail to meet applicable capital adequacy standards.
Finally, although not a regulatory restriction, the terms of certain debt
agreements prohibit the payment of dividends in certain circumstances.
Capital Adequacy
The Federal Deposit Insurance Corporation Improvement Act of 1991 requires
the banking agencies to prescribe certain non-capital standards for safety and
soundness relating generally to operations and management, asset quality and
executive compensation. FDICIA also provides that regulatory action may be taken
against a bank that does not meet such standards.
The OCC has adopted regulations that define the five capital categories
(well-capitalized, adequately-capitalized, undercapitalized,
significantly-undercapitalized and critically-undercapitalized) identified by
FDICIA, using the total risk-based capital, Tier 1 risk-based capital and
leveraged capital ratios as the relevant capital measures. Such regulations
establish various degrees of corrective action to be taken when an institution
is considered undercapitalized. Under the regulations, a "well-capitalized"
institution must have a Tier 1 capital ratio of at least 6%, a total capital
ratio of at least
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10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately-capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of at least 8% and a
leverage ratio of at least 4% (3% in some cases). Under these guidelines, Direct
Merchants Bank is considered well-capitalized.
The OCC's risk-based capital standards explicitly consider a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates when evaluating a bank's capital adequacy. Interest rate risk is
the exposure of a bank's current and future earnings and equity capital arising
from adverse movements in interest rates. The evaluation will be made as a part
of the institution's regular safety and soundness examination.
The FDICIA requires the FDIC to implement a system of risk-based premiums
for deposit insurance pursuant to which the premiums paid by a depository
institution will be based on the probability that the FDIC will incur a loss in
respect of such institution. The FDIC has adopted a system that imposes
insurance premiums based upon a matrix that takes into account a bank's capital
level and supervisory rating. Direct Merchants Bank pays the lowest rate on
deposit insurance premiums for its capital level and supervisory rating.
Under FDICIA, only "well-capitalized" and "adequately-capitalized" banks
may accept brokered deposits. "Adequately-capitalized" banks, however, must
first obtain a waiver from the FDIC before accepting brokered deposits and such
deposits may not pay rates that significantly exceed the rates paid on deposits
of similar size and maturity accepted from the bank's normal market area or the
national rate on deposits of comparable maturity, as determined by the FDIC, for
deposits from outside the bank's normal market area. Direct Merchants Bank may
accept deposits as part of its funding and began issuing certificates of deposit
in the first quarter of 1999. These CDs are issued through third-party
registered deposit brokers and to the public in increments of $100,000 or more.
Lending Activities
Direct Merchants Bank's activities as a credit card lender are also subject
to regulation under various federal consumer protection laws including the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Community Reinvestment Act and the Soldiers' and Sailors'
Civil Relief Act. Regulators are authorized to impose penalties for violations
of these statutes and, in certain cases, to order Direct Merchants Bank to pay
restitution to injured cardholders. Cardholders may also bring actions for
certain alleged violations of such regulations. Federal and state bankruptcy and
debtor relief laws also affect Direct Merchants Bank's ability to collect
outstanding balances owed by cardholders who seek relief under these statutes.
The OCC's CRA regulations subject limited purpose banks, including Direct
Merchants Bank, to a "community development" test for evaluating required CRA
compliance. The community development performance of a limited purpose bank is
evaluated pursuant to various criteria involving community development lending,
qualified investments and community development services.
Legislation
Congress has passed a financial services law that will require many of our
business groups to disclose our practices for collection and sharing of
non-public customer information. The regulations associated with this law could
require us to limit or substantially modify our enhancement services and
17
credit card marketing activities and practices with third-party companies
in ways that could adversely affect us if these changes result in limits on
sharing information. Furthermore, there is similar or related legislation
currently pending or under consideration at the federal and state level.
From time to time legislation has been proposed in Congress to limit
interest rates and fees that could be charged on credit card accounts or
otherwise restrict practices of credit card issuers. If this or similar
legislation is proposed and adopted, our ability to collect on account balances
or maintain previous levels of finance charges and other fees could be adversely
affected.
Additionally, the U.S. Senate and House of Representatives have passed
legislation that would amend the federal bankruptcy laws. This legislation,
which is expected to be signed into law, is generally considered to be favorable
to the credit card industry. However, any changes to state debtor relief and
collection laws could adversely affect us if such changes result in, among other
things, accounts being charged off as uncollectible and additional
administrative expenses. Congress may in the future consider other legislation
that would materially affect the credit card and related enhancement services
industries.
Consumer and Debtor Protection Laws
Various federal and state consumer protection laws limit our ability to
offer and extend credit. In addition, the U.S. Congress and the States may
decide to regulate further the credit card industry by enacting laws or
amendments to existing laws to reduce finance charges or other fees or charges
applicable to credit card and other consumer revolving loan accounts. These laws
may adversely affect our ability to collect on account balances or maintain
established levels of periodic rate finance charges and other fees and charges
with respect to the accounts. Similarly, Congress and the States may decide to
further regulate our enhancement services.
Investment in the Company and Direct Merchants Bank
Certain acquisitions of capital stock may be subject to regulatory approval
or notice under federal law. Investors are responsible for insuring that they do
not directly or indirectly acquire shares of our capital stock in excess of the
amount that can be acquired without regulatory approval.
Interstate Taxation
Several states have passed legislation which attempts to tax the income
from interstate financial activities, including credit cards, derived from
accounts held by local state residents. We believe that this legislation will
not materially affect us. Our belief is based upon current interpretations of
the enforceability of legislation, prior court decisions and the volume of
business in states that have passed legislation.
Licensing Requirements
Several state and local government regulators require our subsidiaries to
be licensed in order to offer our enhancement service insurance and warranty
products in these states. We are in the process of obtaining licenses for these
products in the remainder of states. Our captive insurance subsidiary, ICOM
Limited, is licensed in Bermuda under The Insurance Act of 1978 as a Class 2
Insurer. We are restricted from writing any long-term policies or pursuing any
unrelated business in excess of certain limits under Bermuda law.
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Fair Credit Reporting Act
The Fair Credit Reporting Act regulates "consumer reporting agencies."
Under the FCRA, an entity risks becoming a consumer reporting agency if it
furnishes "consumer reports" to third parties. A consumer report is a
communication of information which bears on a consumer's creditworthiness,
credit capacity, credit standing or certain other characteristics and which is
collected or used or expected to be used to determine the consumer's eligibility
for credit, insurance, employment or certain other purposes. The FCRA explicitly
excludes from the definition of consumer report a report containing information
solely as to transactions or experiences between the consumer and the entity
making the report. An entity may share consumer reports with any of its
affiliates so long as that entity provides consumers with an appropriate
disclosure and an opportunity to opt out of such "affiliate sharing."
Our objective is to conduct our operations in a manner that would fall
outside the definition of consumer reporting agency under the FCRA. If we were
to become a consumer reporting agency, however, we would be subject to a number
of complex and burdensome regulatory requirements and restrictions. Such
restrictions could have a significant adverse economic impact on us.
Employees
As of December 31, 2000, we had approximately 4,200 employees, located in
Arizona, Florida, Illinois, Maryland, Minnesota and Oklahoma. None of our
employees are represented by a collective bargaining agreement. We consider our
relations with our employees to be good.
Trademarks, Trade Names and Service Marks
Metris Companies Inc. and its subsidiaries have registered and continue to
register, when appropriate, various trademarks, tradenames and service marks
used in connection with its business and for private label marketing of certain
of its products. We consider these trademarks and service marks to be readily
identifiable with, and valuable to, our business.
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Executive Officers of the Registrant
The following table sets forth certain information concerning the persons
who currently serve as our executive officers. Each executive officer serves at
the discretion of our Board of Directors.
Name Age Position
- ---- --- --------
Ronald N. Zebeck .................... 46 Chairman and Chief Executive Officer
David D. Wesselink .................. 58 Vice Chairman
Douglas L. Scaliti .................. 43 President and Chief Operating Officer, Enhancement Services
Jean C. Benson ...................... 33 Executive Vice President, Finance, Corporate Controller
Joseph A. Hoffman ................... 43 Executive Vice President, Consumer Credit Card
Marketing/Operations
Matthew S. Melius ................... 35 Executive Vice President, Credit Risk Management
David R. Reak ....................... 42 Executive Vice President, Risk Management/Recovery
Benson K. Woo ....................... 46 Chief Financial Officer
Ralph A. Than ....................... 40 Senior Vice President, Treasurer
Lorraine E. Waller .................. 40 Senior Vice President, General Counsel and Secretary
Ronald N. Zebeck has been our Chairman and Chief Executive Officer since
May 2000 and previously served as President and Chief Executive Officer since
our incorporation in August 1996. Mr. Zebeck has been President of Metris
Direct, Inc. since March 1994 and has served as Chairman of the Board of Direct
Merchants Bank since August 1995. Prior to joining us, Mr. Zebeck was Managing
Director, GM Card Operations of General Motors Corporation from 1991 to 1993,
Vice President, Marketing and Strategic Planning of Advanta Corporation
(Colonial National Bank USA) from 1987 to 1991, Director of Strategic Planning
of TSO Financial (later Advanta Corporation) from 1986 to 1987 and held various
credit card and credit-related positions at Citibank affiliates from 1976 to
1986.
David D. Wesselink has been Vice Chairman since September 2000. Mr.
Wesselink previously held the position of Executive Vice President, Chief
Financial Officer from December 1998. Prior to joining us, Mr. Wesselink was
Senior Vice President and Chief Financial Officer of Advanta Corporation from
1993 to 1998. Prior to Advanta Corporation, he held several positions at
Household Finance Corp. and Household International, Inc. from 1971 to 1993,
including Senior Vice President from 1986 to 1993 and Chief Financial Officer
from 1982 to 1993.
Douglas L. Scaliti has been President and Chief Operating Officer,
Enhancement Services since September 2000. Mr. Scaliti previously held the
20
positions of Executive Vice President, Enhancement Services from November 1998,
and Senior Vice President, Enhancement Services from March 1998. Mr. Scaliti was
appointed Senior Vice President, Marketing in December 1996 and served as Vice
President, Marketing from August 1996 to November 1996. He held that same
position at Metris Direct, Inc. since September 1994. Prior to joining us, he
held several positions at Advanta Corporation in its marketing and operations
area, including Senior Marketing Manager, Credit Cards from 1987 to 1994,
Operations Consultant, Profit Improvement from 1985 to 1987 and Credit
Operations Manager from 1982 to 1985. Mr. Scaliti also serves on the First Data
Resources Market Area Advisory Group.
Jean C. Benson has been Executive Vice President, Finance, Corporate
Controller since September 2000. Ms. Benson previously was Senior Vice
President, Finance, Corporate Controller from May 1998 and has been Corporate
Controller since August 1996. In addition, Ms. Benson held various finance
positions at the Company since October 1994. Prior to that, she held various
positions at Deloitte & Touche LLP (public accounting), specializing in the
financial services industry from 1990 to 1994.
Joseph A. Hoffman has been Executive Vice President, Consumer Credit Card
Marketing/Operations since October 1999. Mr. Hoffman previously served as Senior
Vice President, Consumer Credit Marketing from April 1998. Prior to joining us,
Mr. Hoffman was Vice President of Marketing at Advanta Corporation from June
1994 to April 1998, where he held a variety of positions including Directors of
Brand Management and Affinity and Co-Brand Marketing. Before that, Mr. Hoffman
was Vice President, Area Director, in Citibank's Card Product Group, which he
joined in 1980. During his fourteen-year tenure with Citibank, Mr. Hoffman held
a variety of Marketing and Operations positions with Citibank's Bankcard and
Private Label businesses.
Matthew S. Melius has been Executive Vice President, Credit Risk Management
since January 2001. Mr. Melius previously served as Executive Vice President,
E-Commerce from January 2000, Senior Vice President, Portfolio Marketing from
July 1998, Vice President, Portfolio Marketing from January 1997, and Director,
Portfolio Marketing from September 1995. Prior to joining us, Mr. Melius was
Director, Customer Retention of First National Bank of Omaha in the Credit Card
division.
David R. Reak has been Executive Vice President, Risk Management/Recovery
since October 1999. Mr. Reak previously served as Senior Vice President, Credit
Risk from November 1998. Mr. Reak was appointed Vice President, Credit Risk in
October 1996 and previously served as Senior Director, Credit Risk of Metris
Direct, Inc. from December 1995 to October 1996. Prior to joining us, he had
several positions at American Express Travel Related Services Company, including
Senior Manager, Credit Risk Management Europe and Middle East from 1994 to
December 1995, Senior Manager, Credit Risk Management U.S. Consulting Group from
1992 to 1994, and Project Manager, Credit Research and Analysis from 1990 to
1992.
Benson K. Woo has been Chief Financial Officer since September 2000. Mr.
Woo previously held the position of Senior Vice President, Finance from October
1999. Prior to joining us, Mr. Woo was Vice President and Chief Financial
Officer of York International Corporation from 1998 to 1999. Prior to York
International Corporation, he was Vice President and Treasurer of Case
Corporation from 1994 to 1998. Prior to that, he held several positions at
General Motors Corporation from 1979 to 1994, including Finance Director, GM
Credit Card Operations from 1992 to 1994.
21
Ralph A. Than has been Senior Vice President, Treasurer since May 2000.
Prior to joining us, Mr. Than was Vice President, Treasurer of CNH Capital
Corporation, the finance subsidiary of CNH Global N.V., the resulting merger
between Case Corporation and New Holland N.V., from September 1998. Before that,
Mr. Than was Group Controller of the Agricultural Systems Business Unit of Case
Corporation from May 1997. Prior to Case, Mr. Than was involved with investment
banking and merger and acquisitions from 1986 to 1989.
Lorraine E. Waller has been Senior Vice President, General Counsel and
Secretary since September 2000. Ms. Waller previously served as Senior Vice
President, Assistant General Counsel from November 1999, and Vice President,
Assistant General Counsel from November 1998, Assistant General Counsel from
April 1998, and as an attorney advisor from November 1997. Prior to joining us,
Ms. Waller was Associate General Counsel of Household International, Inc. Prior
to that, she worked at the Senate Judiciary Committee and the Federal Reserve
Board.
Our officers are elected by, and hold office at the will of, our Board of
Directors and do not serve a "term of office" as such.
Risk Factors
This annual report on Form 10-K contains certain forward-looking statements
and information relating to the Company that are based on the beliefs of our
management as well as assumptions made by, and information currently available
to, our management. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from such
statements. You should not place undue reliance on these forward-looking
statements as they speak only of our views as of the date the statement was made
and are not a guarantee of future performance.
Forward-looking statements include statements and information as to our
strategies and objectives, growth in earnings per share, return on equity,
growth in our managed loan portfolio, net interest margins, funding costs,
operating costs and marketing expenses, delinquencies and charge-offs and
industry comparisons or projections. Forward-looking statements may be
identified by the use of terminology such as "may," "will," "believes," "does
not believe," "no reason to believe," "expects," "plans," "intends,"
"estimates," "anticipated," or "anticipates" and similar expressions, as they
relate to the Company or our management. These statements reflect management's
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions.
The factors discussed below, among others, could cause our actual results
to differ materially from those expressed in any forward-looking statements.
Although we have attempted to list comprehensively these important factors, we
caution you that other factors may in the future prove to be important in
affecting our results of operations. New factors emerge from time to time and it
is not possible for us to predict all of these factors, nor can we assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
Our Target Market for Consumer Lending Products Has Higher Default and
Bankruptcy Rates
The primary risk associated with secured and unsecured lending to
moderate-income consumers is higher default rates than other income classes of
22
consumers, resulting in more accounts being charged off as uncollectible. In
addition, general economic factors, such as the rate of inflation, unemployment
levels and interest rates, may result in greater delinquencies and credit losses
among moderate-income consumers than among other income classes of consumers. A
recession or economic downturn may cause an increase in default rates and
delinquencies. We may be unable to successfully identify and evaluate the
creditworthiness of our target customers to minimize the expected higher
delinquencies and losses. We also cannot assure you that our risk-based pricing
system can offset the negative impact on profitability that the expected greater
delinquencies and losses may have.
The Lack of Seasoning of Additions to Our Credit Card Portfolio Creates a
Risk of Increasing Loss Levels
Our growth strategy is likely to produce a continued flow of unseasoned
accounts into our portfolio. The average age of a credit card issuer's portfolio
of accounts generally affects the level and stability of delinquency and loss
rates of that portfolio. For example, a portfolio containing mostly older
accounts generally behaves more predictably than a newly originated portfolio.
At December 31, 2000, 48% of our managed accounts and 30% of our loans were less
than 24 months old. The delinquency ratios for the following periods do not
reflect the favorable impact of purchase accounting related to the portfolio
acquisitions. At December 31, 2000, 8.3% of our managed credit card loans were
30 days or more delinquent before the impact of purchase accounting, compared to
7.8% at December 31, 1999, and 7.4% at December 31, 1998. Any material increases
in delinquencies and losses beyond our expectations could have a material
adverse impact on us and the value of our net retained interests in loans
securitized, which are subordinated to the interests sold in such
securitizations.
We May Not be Able to Sustain and Manage Growth
In order to meet our strategic objectives, we plan to continue to expand
our credit card loan portfolio. Continued growth in this area depends largely
on:
* our ability to attract new cardholders;
* growth in both existing and new account balances;
* the degree to which we lose accounts and account balances to
competing card issuers;
* levels of delinquencies and losses;
* the availability of funding, including securitizations, on
favorable terms;
* general economic and other factors such as the rate of inflation,
unemployment levels and interest rates, which are beyond our
control;
* our ability to acquire and integrate portfolios; and
* stability and growth in management.
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Our continued growth also depends on our ability to manage this growth
effectively. Factors that affect our ability to successfully manage growth
include:
* retaining and recruiting experienced management personnel;
* finding and adequately training new employees;
* cost-effectively expanding our facilities;
* growing and updating our management systems; and
* obtaining capital when needed.
We May Not be Able to Successfully Market Our Enhancement Services or Sign
Additional Marketing Alliances
We target our enhancement services to our credit card customers and
customers of third parties. Because of the variety of offers provided and the
diversity of the customers targeted, we are uncertain about how many customers
will respond to our offers for these enhancement services. We may experience
higher than anticipated costs in connection with the internal administration and
underwriting of these enhancement services and lower than anticipated response
or retention rates.
Furthermore, we may be unable to expand the enhancement services business
or maintain historical growth and stability levels if:
* we cannot successfully market credit cards to new customers;
* existing credit card customers close accounts voluntarily or
involuntarily;
* existing enhancement services customers cancel their services;
* we cannot form marketing alliances with other third parties or
existing marketing alliances with third parties terminate; or
* new or restrictive state regulations limit our ability to market
or sell enhancement services.
Our Profitability and Ability to Grow is Dependent on Our Funding Sources
Securitization Markets. We depend heavily upon the securitization of our
credit card loans to fund our operations and growth. As recently as the fourth
quarter of 1998, these markets have undergone disruptions which adversely
affected the ability of companies like us to raise money from these sources.
Furthermore, our ability to securitize our assets depends on the continued
availability of credit enhancements on acceptable terms and the continued
favorable legal, regulatory and tax environment for such transactions.
In addition, even if we are able to securitize our assets consistent with
past practice, poor performance of our securitized assets, including increased
delinquencies and credit losses, could result in a downgrade or withdrawal of
the ratings on the outstanding securities issued in our securitization
transactions, cause early amortization of such securities or result in higher
required credit enhancement levels. As a result, poor performance of our
24
securitized assets could divert significant amounts of cash that would otherwise
be available to us. This could jeopardize our ability to complete other
securitization transactions on acceptable terms, decrease our liquidity and
force us to rely on other potentially more expensive funding sources, to the
extent available. We cannot assure you that the securitization market will
continue to offer suitable funding alternatives.
Credit Facility. We rely on our credit facility to fund our operations and
growth. If we breach any of our covenants under our credit facility, including
various financial covenants, the lenders may terminate the facility. Disruptions
in the securitization market could negatively affect our ability to comply with
these covenants, and therefore our ability to borrow or replace this facility
could be adversely affected.
CD Program. Direct Merchants Bank issues certificates of deposit in
increments of $100,000 or more. We expect to use the proceeds of these deposits
to fund our operations and growth. To maintain our current level of access to
the certificate of deposit market, Direct Merchants Bank must maintain a
"well-capitalized" rating, as that rating is defined by the Office of the
Comptroller of the Currency. If it does not do so, Direct Merchants Bank may be
required to modify the program and may not be able to accept additional
deposits.
Other Funding Sources. We also expect to obtain financing by selling debt
and equity securities. Our ability to obtain such financing is dependent upon
many factors, including general market conditions. We cannot assure you that we
will be able to obtain this financing on favorable terms or at all. In addition,
restrictions contained in our debt agreements may adversely affect our ability
to finance future operations or capital needs or to engage in other business
activities.
Our ability to obtain financing from the various sources available to us is
dependent upon many factors, including those outside of our control. In
addition, disruptions or unfavorable conditions related to one financing source
may negatively affect our ability to access other financing sources, or may
increase our financing costs.
We Require a High Degree of Liquidity to Operate Our Business
We depend on cash flows from operations, asset securitizations, bank loans,
subsidiary bank deposit program, long-term debt and equity issuances to fund our
operations and growth. The loss or interruption of any of these sources of
funding could adversely affect our ability to operate.
Key elements of our strategy are dependent upon us having adequate
available cash. These cash needs include:
* funding receivable growth through marketing campaigns;
* additional credit enhancement in the case of poor performance of
our securitized assets;
* interest and principal payments under our securitizations, our
credit agreement, our existing senior notes and other
indebtedness;
* ongoing operating expenses;
25
* maintenance of the "well-capitalized" status of our subsidiary,
Direct Merchants Bank, which is necessary to maintain the CD
program;
* portfolio and business acquisitions;
* fees and expenses incurred in connection with the securitization
of receivables and the servicing of them; and
* tax payments due on receipt of excess cash flow from
securitization trusts.
Given these cash needs, we anticipate that we will need to enter into
financing transactions on a regular basis. We cannot assure you that we will be
able to secure funds to support our cash needs on terms as favorable as past
transactions. Any adverse change in the funding sources we use could force us to
rely on other potentially more expensive funding sources, to the extent
available, and could have other adverse consequences. If any of our funding
sources become limited it may require us to use more expensive sources of
funding. Any material increase in our costs of financing beyond our expectations
could negatively impact us.
Interest Rate Fluctuations Impact the Yield on Our Assets and Funding
Expense
An increase or decrease in market interest rates could have a negative
impact on the net interest spread between the yield on our assets and our cost
of funding. A rise in market interest rates may indirectly impact the payment
performance of our customers. We try to minimize the impact of changes in market
interest rates on our cash flow, asset value and net income primarily by funding
variable-rate assets with variable-rate funding sources and by using interest
rate derivatives to match asset and liability repricings. However, changes in
market interest rates may have a negative impact on us.
We May Not be Able to Successfully Integrate Portfolio Acquisitions
As previously mentioned, our growth depends in part on our ability to
acquire and successfully integrate new portfolios of credit card customers.
Since our risk-based pricing system depends on information regarding customers,
limited or unreliable historical information on customers within an acquired
portfolio may have an impact on our ability to successfully and profitably
integrate that portfolio. Our success also depends on whether the desirable
customers of an acquired portfolio close their accounts after transfer of the
portfolio. A large attrition rate would result in a lower borrowing base upon
which to assess fees, higher costs relating to closing accounts and less
potential for marketing enhancement services. In addition, if customers reduce
their borrowings after the transfer of accounts, the acquired portfolio may be
less profitable than originally expected.
Current and Proposed Regulation and Legislation Limit Our Business
Activities, Product Offerings and Fees Charged
Various federal and state laws and regulations significantly limit the
activities in which we and Direct Merchants Bank are permitted to engage. Such
laws and regulations, among other things, limit the fees and other charges that
we are allowed to charge, limit or prescribe certain other terms of our products
and services, require specified disclosures to consumers, govern the sale and
terms of products and services we offer and require that we maintain certain
licenses, qualifications, or capital requirements (see "Business -
26
Regulations"). In some cases, the precise application of these statutes and
regulations is not clear. In addition, the regulatory framework at the state and
federal level regarding some of our enhancement services is evolving. The
regulatory framework affects the design or profitability of such products and
our ability to sell certain products. In addition, numerous legislative and
regulatory proposals are advanced each year which, if adopted, could adversely
affect our profitability or further restrict the manner in which we conduct our
activities. The failure to comply with, or adverse changes in, the laws or
regulations to which our business is subject, or adverse changes in the
interpretation thereof, could adversely affect our ability to collect our
receivables and generate fees on the receivables which could have a material
adverse effect on our business.
The Impact of Existing, Pending and Possible Future Privacy Laws Could
Result in Lower Marketing Revenue and Penalties for Non-Compliance
There is a new federal law effective July 2001, commonly known as the Gramm
Leach Bliley Act, that will require many of our business groups to disclose our
practices for collection and sharing of non-public customer information. This
law could require us to limit or substantially modify our enhancement services
and credit card marketing activities and practices with third-party companies in
ways that would most likely decrease our revenue from that business.
Furthermore, there is similar or related legislation currently pending or under
consideration at the federal and state level. These initiatives could require us
to end substantially all of our marketing efforts with third parties and may
even adversely affect the ability of the subsidiary through which we issue our
credit card products, Direct Merchants Bank, to share information about its
customers with other Metris affiliates, particularly enhancement services. The
curtailment of our marketing efforts directed to our customer base and
third-party customers would significantly negatively impact our business.
The privacy laws require us to provide initial and continuing disclosures
regarding our information sharing practices. The laws also require us to monitor
these disclosures and customer responses so that we do not unlawfully disclose
information about a customer who has directed us not to do so. If we do not
adequately manage the new requirements, we may face regulatory sanctions,
including fines, and consumer class action litigation.
Other Industry Risks Related to Consumer Lending Products and Enhancement
Services Could Negatively Impact Us
We face a number of risks associated with unsecured lending. These include
the risk that delinquencies and credit losses will increase because of future
economic downturns; the risk that an increasing number of customers will default
on the payment of their outstanding balances or seek protection under bankruptcy
laws; and the risk that fraud by cardholders and third parties will increase. We
also face the risk that increased criticism from consumer advocates and the
media could hurt consumer acceptance of our products, as well as the risk of
litigation, including class action litigation, challenging our product terms,
rates, disclosures, collections or other practices, under state and federal
consumer protection statutes and other laws.
27
Due to Intense Competition in Our Consumer Lending Products and Enhancement
Services Businesses, We May Not be Able to Compete Successfully
We face intense and increasing competition from numerous financial services
providers, many of which have greater resources than we do. In particular, our
credit card business competes with national, regional and local bankcard
issuers, as well as other general purpose and private label credit card issuers.
There has been a recent increase in solicitations to moderate-income consumers,
as competitors have increasingly focused on this market. Customers are attracted
to credit card issuers largely on the basis of price, credit limit and other
product features; as a result, customer loyalty is often limited. According to
published reports, as of December 2000, the 20 largest issuers accounted for
approximately 90% (based on receivables outstanding) of the market for general
purpose credit cards. Many of these issuers are substantially larger, have more
seasoned credit card portfolios and often compete for customers by offering
lower interest rates and/or fee levels than we do. We cannot assure you that we
will be able to compete successfully in this environment.
We also face competition from numerous enhancement services providers,
including insurance companies, financial services institutions and other
membership-based or consumer services providers, many of which are larger,
better capitalized and more experienced than us. As we continue to expand our
extended service plan business to the customers of third-party retailers, we
compete with manufacturers, financial institutions, insurance companies and a
number of independent administrators, many of which have greater operating
experience and financial resources than we do.
Potential Volatility in the Stock Market May Negatively Affect Our Stock
Price
The Company, which began as a subsidiary of Fingerhut, was incorporated in
1996 and prior to the spin off was 83% owned by Fingerhut. Factors such as
actual or anticipated fluctuations in our operating results, regulatory
developments, conditions and trends in the consumer credit industry, general
market conditions and other factors beyond our control may significantly affect
the market price of our common stock. In addition, the market has, from time to
time, experienced significant price and volume fluctuations that often have been
unrelated to the operating performance of particular companies. These broad
fluctuations may adversely affect the market price of our common stock.
Item 2. Properties
We currently lease our principal executive office space in Minnetonka,
Minnesota, consisting of leases for approximately 300,000 and 19,000 square
feet. These leases expire in December 2011 and February 2005, respectively. We
also lease 15,000 square feet of warehouse space in Minnetonka, Minnesota, which
expires in October 2003. Direct Merchants Bank leases office space in Phoenix,
Arizona, consisting of approximately 26,000 square feet. This lease expires in
June 2004, and may be terminated by us after June 2001. In addition, Direct
Merchants Bank purchased a new 130,000 square foot building in Scottsdale,
Arizona, during the third quarter of 1999. The new building serves as western
regional headquarters for us and Direct Merchants Bank's operation center. In
addition, we lease facilities in Tulsa, Oklahoma, White Marsh, Maryland,
Jacksonville, Florida, and Champaign, Illinois, consisting of
28
approximately 100,000, 115,000, 160,000, and 15,000 square feet, respectively.
These leases expire in December 2010, September 2007, June 2005, and
October 2002, respectively. The leased properties in Oklahoma, Maryland, and
Florida support our collections, customer service and back office operations. We
also own our Hispanic operations center in Orlando, Florida, which consists of
approximately 25,000 square feet. We believe our facilities are suitable to our
businesses and that we will be able to lease or purchase additional facilities
as needed.
Item 3. Legal Proceedings
We are a party to various legal proceedings resulting from the ordinary
business activities relating to our operations. In July 2000 an Amended
Complaint was filed in Hennepin County Court in Minneapolis, Minnesota, against
Metris Companies Inc., Metris Direct, Inc. and Direct Merchants Bank. The
complaint seeks damages in unascertained amounts and purports to be a class
action 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 prepared 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required by Item 201 of Regulation S-K is set forth in the
"Summary of Consolidated Quarterly Financial Information and Stock Data" on
pages 66 and 67 of our Annual Report to Shareholders as of and for the year
ended December 31, 2000, and is incorporated herein by reference.
Item 6. Selected Financial Data
The information required by this item is set forth under the caption
"Selected Financial Data" on pages 25 and 26 of the 2000 Annual Report and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is set forth under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
29
Operations" and "Forward Looking Statements" on pages 27 to 41 of the 2000
Annual Report and is incorporated herein by reference.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk
The information required by this item is set forth under the captions
"Management's Discussion and Analysis-Market Risk" on page 37 of the 2000 Annual
Report and is incorporated herein by reference.
30
Item 8. Financial Statements and Supplementary Data
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per-share data)
December 31,
2000 1999
---- ----
Assets:
Cash and due from banks ................................................ $ 84,938 $ 28,505
Federal funds sold ..................................................... 367,937 118,962
Short-term investments ................................................. 68,565 46,966
----------- -----------
Cash and cash equivalents .............................................. 521,440 194,433
----------- -----------
Retained interests in loans securitized ................................ 2,023,681 1,617,226
Less: Allowance for loan losses ........................................ 640,852 606,853
----------- -----------
Net retained interests in loans securitized ............................ 1,382,829 1,010,373
----------- -----------
Credit card loans (net of allowance for loan losses of $123,123 and
$12,175, respectively)............................................ 1,056,080 133,608
Property and equipment, net ............................................ 128,395 56,914
Deferred income taxes .................................................. 146,345 185,613
Purchased portfolio premium ............................................ 95,537 83,809
Other receivables due from credit card securitizations, net............. 186,694 243,978
Other assets ........................................................... 218,705 136,354
----------- -----------
Total assets ..................................................... $ 3,736,025 $ 2,045,082
=========== ===========
Liabilities:
Deposits ............................................................... $ 2,106,199 $ 775,381
Debt ................................................................... 356,066 345,012
Accounts payable ....................................................... 83,473 45,850
Deferred income ........................................................ 235,507 171,666
Accrued expenses and other liabilities ................................. 71,227 83,372
----------- -----------
Total liabilities ................................................... 2,852,472 1,421,281
----------- -----------
Stockholders' Equity:
Convertible preferred stock - Series C, par value $.01 per share;
10,000,000 shares authorized, 967,573 and 885,178 shares issued
and outstanding, respectively....................................... 360,421 329,729
Common stock, par value $.01 per share; 100,000,000 shares
authorized, 62,242,787 and 57,919,433 shares issued and
outstanding, respectively............................................ 622 386
Paid-in capital ........................................................ 198,077 130,772
Retained earnings ...................................................... 324,433 162,914
----------- -----------
Total stockholders' equity .......................................... 883,553 623,801
----------- -----------
Total liabilities and stockholders' equity .......................... $ 3,736,025 $ 2,045,082
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
31
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per-share data)
Year Ended December 31,
-----------------------
2000 1999 1998
Interest Income:
Credit card loans and retained
interests in loans securitized ................ $ 490,929 $ 229,394 $ 111,118
Federal funds sold ................................. 9,139 4,477 1,065
Other .............................................. 4,710 2,298 1,028
--------- --------- ---------
Total interest income .............................. 504,778 236,169 113,211
--------- --------- ---------
Deposit interest expense ........................... 89,560 19,329 --
Other interest expense ............................. 43,446 36,512 30,513
--------- --------- ---------
Total interest expense ............................. 133,006 55,841 30,513
--------- --------- ---------
Net Interest Income ................................ 371,772 180,328 82,698
Provision for loan losses .......................... 388,234 174,800 77,770
--------- --------- ---------
Net Interest (Loss) Income
After Provision for Loan Losses .............. (16,462) 5,528 4,928
--------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income .............................. 444,254 318,873 138,221
Credit card fees, interchange
and other credit card income .................. 223,333 129,808 68,136
Enhancement services revenues ...................... 266,200 175,091 109,123
--------- --------- ---------
933,787 623,772 315,480
--------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses............ 144,481 107,726 43,471
Employee compensation .............................. 178,592 122,417 62,627
Data processing services and
communications................................. 86,166 65,970 46,519
Warranty and debt waiver underwriting
and claims servicing expense ................. 26,431 21,091 12,279
Credit card fraud losses ........................... 8,886 7,384 4,436
Purchased portfolio premium
amortization ................................. 19,275 31,752 10,051
Other .............................................. 130,583 81,644 47,777
--------- --------- ---------
594,414 437,984 227,160
--------- --------- ---------
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Accounting Change .................. 322,911 191,316 93,248
Income taxes ....................................... 124,320 75,953 35,900
--------- --------- ---------
Income Before Extraordinary Loss and
Cumulative Effect of Accounting
Change ....................................... 198,591 115,363 57,348
Extraordinary loss from early
extinguishment of debt ....................... -- 50,808 --
Cumulative effect of accounting change
(net of income taxes of $2,180) .............. 3,438 -- --
--------- --------- ---------
Net Income ......................................... 195,153 64,555 57,348
Preferred stock dividends-Series B ................. -- 7,506 1,100
Convertible preferred stock
dividends-Series C ........................... 31,624 17,080 --
Adjustment for the retirement of Series
B preferred stock............................. -- 101,615 --
--------- --------- ---------
Net Income (Loss) Applicable to
Common Stockholders ............................. $ 163,529 $ (61,646) $ 56,248
========= ========= =========
32
Earnings per share:
Basic-income (loss) before
extraordinary loss and
cumulative effect of accounting
change ........................ $ 2.78 $ (0.19) $ 0.97
Basic-extraordinary loss .......... -- (0.88) --
Basic-cumulative effect of
accounting change ............. (0.06) -- --
Basic-net income (loss) ........... 2.72 (1.07) 0.97
Diluted-income (loss) before
extraordinary loss and
cumulative effect of accounting
change ........................ 2.15 (0.19) 0.94
Diluted-extraordinary loss ........ -- (0.88) --
Diluted-cumulative effect of
accounting change ............. (0.04) -- --
Diluted-net income (loss) ......... 2.11 (1.07) 0.94
Shares used to compute earnings
per share:
Basic .................................. 60,070 57,855 57,696
Diluted ................................ 92,582 57,855 59,905
See accompanying Notes to Consolidated Financial Statements.
33
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Dollars and shares in thousands)
Total
Number of Shares Preferred Common Paid-In Retained Stockholders'
Preferred Common Stock Stock Capital Earnings Equity
BALANCE, DECEMBER 31, 1997 .... -- 57,675 $ -- $ 192 $ 107,059 $ 68,787 $ 176,038
Net income ............... -- -- -- -- -- 57,348 57,348
Issuance of preferred
stock - Series B ..... 537 -- 200,000 -- -- -- 200,000
Cash dividends and other.. -- -- -- -- -- (961) (961)
Preferred dividends in
kind - Series B ...... 3 -- 1,100 -- -- (1,100) --
Issuance of common stock
under employee benefit
plans ................ -- 104 -- 1 556 -- 557
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 .... 540 57,779 $ 201,100 $ 193 $ 107,615 $ 124,074 $ 432,982
========= ========= ========= ========= ========= ========= =========
Net income ............... -- -- -- -- -- 64,555 64,555
Retirement of preferred
stock - Series B ..... (560) -- (208,606) -- (101,615) -- (310,221)
Issuance of preferred
stock - Series C ..... 840 -- 312,910 -- 122,369 -- 435,279
Cash dividends ........... -- -- -- -- -- (1,390) (1,390)
June 1999 two-for-one
stock split .......... -- -- -- 193 (193) -- --
Preferred dividends in
kind - Series B ...... 20 -- 7,506 -- -- (7,506) --
Preferred dividends in
kind - Series C ...... 45 -- 16,819 -- -- (16,819) --
Issuance of common
stock under employee
benefit plans ........ -- 140 -- -- 2,596 -- 2,596
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1999 .... 885 57,919 $ 329,729 $ 386 $ 130,772 $ 162,914 $ 623,801
========= ========= ========= ========= ========= ========= =========
Net income ............... -- -- -- -- -- 195,153 195,153
Cash dividends ........... -- -- -- -- -- (2,942) (2,942)
June 2000 three-for-
two stock split ...... -- -- -- 201 (201) -- --
Preferred dividends in
kind - Series C ...... 83 -- 30,692 -- -- (30,692) --
Issuance of common stock
under employee benefit
plans ................ -- 4,324 -- 35 67,506 -- 67,541
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2000 .... 968 62,243 $ 360,421 $ 622 $ 198,077 $ 324,433 $ 883,553
========= ========= ========= ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
34
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Operating Activities:
Net income ................................................................... $ 195,153 $ 64,555 $ 57,348
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss from early extinguishment of debt.......................... -- 50,808 --
Cumulative effect of accounting change ....................................... 3,438 -- --
Depreciation and amortization ................................................ 76,256 75,341 48,678
Change in allowance for loan losses .......................................... 144,948 225,745 149,199
Changes in operating assets and liabilities, net:
Deferred income taxes ................................................ 39,268 (32,592) (72,234)
Other receivables due from credit
card securitizations, net........................................ 47,904 (61,144) (112,170)
Accounts payable and accrued expenses ................................ 45,877 65,337 (14,553)
Deferred income ...................................................... 60,403 46,774 75,688
Other ................................................................ (95,563) (106,940) (67,044)
----------- ----------- -----------
Net cash provided by operating activities .................................... 517,684 327,884 64,912
----------- ----------- -----------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans ....................................................... 551,911 960,170 1,491,832
Net loans originated or collected ............................................ (1,827,192) (843,274) (901,740)
Credit card portfolio acquisitions ........................................... (195,597) (1,156,673) (921,558)
Additions to premises and equipment .......................................... (85,007) (41,724) (10,814)
----------- ----------- -----------
Net cash used in investing activities ........................................ (1,555,885) (1,081,501) (342,280)
----------- ----------- -----------
Financing Activities:
Net increase in debt ......................................................... 11,054 134,116 66,896
Net increase in deposits ..................................................... 1,330,818 775,381 --
Cash dividends paid .......................................................... (2,942) (1,390) (961)
(Decrease) increase in preferred equity ...................................... -- (124) 200,000
Increase in common equity .................................................... 26,278 2,720 557
----------- ----------- -----------
Net cash provided by financing activities .................................... 1,365,208 910,703 266,492
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......................... 327,007 157,086 (10,876)
Cash and cash equivalents at beginning of year................................ 194,433 37,347 48,223
----------- ----------- -----------
Cash and cash equivalents at end of year ..................................... $ 521,440 $ 194,433 $ 37,347
=========== =========== ===========
Supplemental disclosures and cash flow information:
Cash paid during the year for:
Interest ................................................................. $ 81,724 $ 29,519 $ 28,412
Income taxes ............................................................. 75,384 116,954 86,053
Tax benefit from employee stock option exercises.............................. 31,174 588 --
Non-cash conversion of Senior Notes:
Accrued expenses and other liabilities .................................. -- (4,250) --
Debt .................................................................... -- (100,000) --
Metris preferred stock .................................................. -- 104,250 --
See accompanying Notes to Consolidated Financial Statements.
35
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except as noted)
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 lending products and enhancement services primarily to
moderate-income consumers.
Prior to September 25, 1998, Fingerhut Companies, Inc. owned 83% of the
Company. On September 25, 1998, Fingerhut distributed its remaining shares of
the Company to Fingerhut shareholders in a tax-free distribution (the "spin
off").
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.
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 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting and reporting
policies used in preparing the consolidated financial statements.
Federal Funds Sold and Short-term Investments
Federal funds sold are short-term loans made to banks through the Federal
Reserve System. It is our policy to make such loans only to banks that are
considered to be in compliance with their regulatory capital requirements.
Short-term investments are investments in money market mutual funds and
commercial paper with maturities less than three months.
36
Credit Card Loans
Credit card loans presented on our balance sheet are receivables from
consumers that we have not securitized, and are recorded at the principal amount
outstanding. We accrue and earn interest income on credit card loans based on
the principal amount of the loans outstanding using the effective-yield method.
Accrued interest which has been billed to the customer but not yet received is
classified on the consolidated balance sheet with the related credit card loans.
Accrued interest which has not yet been billed to the customer is estimated and
classified on the consolidated balance sheet in "Other assets." Interest income
is generally recognized until a loan is charged off. At that time, the accrued
interest portion of the charged off balance is deducted from current period
interest income.
Securitization, Retained Interests in Loans Securitized and Securitization
Income
We publicly and privately securitize a significant portion of our credit
card loans to investors through the Metris Master Trust and third-party,
single-seller and multi-seller receivables conduits. We retain participating
interests in the credit card loans under "Retained interests in loans
securitized" on the consolidated balance sheets. Our retained interests in loans
securitized are subordinate to the interests of investors in the trust and
conduit portfolios. Although we continue to service the securitized credit card
accounts and maintain the customer relationships, these transactions are treated
as sales for financial reporting purposes and the associated loans are not
reflected on the consolidated balance sheets. Retained interests include
contractual subordinated interests, excess transferor's interests and cash
reserve accounts.
We have recorded the sales of these loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Upon sale, we
remove the sold credit card loans from the consolidated balance sheet and
initially measure the related financial and servicing assets controlled and
liabilities incurred at fair value, if practicable. SFAS 125 also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interests, if any, based on their relative fair values at the
date of the transfer.
The securitization and sale of credit card loans changes our interest in
such loans from lender to servicer, with a corresponding change in how revenue
is reported in the consolidated statements of income. For securitized and sold
credit card loans, amounts that otherwise would have been recorded as interest
income, interest expense, fee income and provision for loan losses are instead
reported in other operating income as "Net securitization and credit card
servicing income." We have various receivables from the trust or conduits and
other assets as a result of securitizations, including: amounts deposited in
accounts held by the trust for the benefit of the trust's security holders;
amounts due from interest rate caps and floors; accrued interest and fees on the
securitized receivables; servicing fee receivables and various other
37
receivables. These amounts are reported as "Other receivables due from credit
card securitizations, net" on the consolidated balance sheets.
Allowance for Loan Losses
We provide for loan losses in amounts necessary to maintain the allowance
at a level we estimate to be sufficient to absorb probable losses of principal
and earned interest, net of recoveries, that is inherent in the existing managed
loan portfolio. This effectively reduces our retained interests in loans
securitized to fair value. In evaluating the adequacy of the allowance for loan
losses, we consider several factors, including: historical charge-off and
recovery activity by age (vintage) of each loan portfolio (noting any particular
trends over recent periods); recent delinquency and collection trends by
vintage; current economic conditions and the impact such conditions might have
on borrowers' ability to repay; the risk characteristics of the portfolios; and
other factors. Significant changes in these factors could affect the adequacy of
our allowance for loan losses. In general, we charge off unsecured credit card
accounts at the end of the month during which the loan becomes contractually 180
days past due. In addition, we charge off secured credit card accounts at the
end of the month during which the loan becomes contractually 120 days past due.
Bankrupt accounts are charged off immediately upon formal notification of
bankruptcy. Accounts of deceased cardholders without a surviving, contractually
liable individual, or an estate large enough to pay the debt in full are also
charged off immediately upon notification.
Property and Equipment
We state property and equipment, and computer hardware and software at cost
and depreciate them on a straight-line basis over their estimated economic
useful lives, which range from one to twenty-five years. We capitalize software
developed for internal use that represents major enhancements or replacements of
operating and management information systems. We begin amortization of such
capitalized software when the systems are fully developed and ready for
implementation. We expense repair and maintenance costs as incurred.
Purchased Portfolio Premium
The purchased portfolio premium represents the excess of amounts paid for
portfolio acquisitions over the related credit card loan balances net of
reserves and discounts. The intangible assets are amortized over the estimated
periods of benefit, generally five to seven years, in proportion to the expected
benefits to be recognized.
38
Enhancement Services
Debt Waiver Products
Direct Merchants Bank offers various debt waiver products to its credit
card customers for which it retains the claims risk. Revenue for such products
is recognized ratably over the coverage period, generally one month, and
reserves are provided for pending claims based on Direct Merchants Bank's
historical experience with settlement of such claims. Revenues recorded for debt
waiver products are included in the consolidated statements of income under
"Enhancement services revenues" and were $144.7 million, $106.0 million and
$73.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Unearned revenues and reserves for pending claims are recorded in
the consolidated balance sheets in "Deferred income" and "Accrued expenses and
other liabilities" and combined amounted to $17.3 million and $7.1 million as of
December 31, 2000 and 1999, respectively.
Membership Programs
We generally bill membership fees for enhancement products through
financial institutions, including Direct Merchants Bank, and other
cardholder-based institutions. We record these fees as deferred membership
income upon acceptance of membership and amortize them on a straight-line basis
over the membership period beginning after the contractual cancellation period
is complete. Deferred enhancement revenues totaled $199.8 million and $127.5
million at December 31, 2000 and 1999, respectively.
In accordance with the provisions of Statement of Position 93-7, "Reporting
on Advertising Costs," qualifying membership acquisition costs are deferred and
charged to expense as membership fees are recognized. These costs, which relate
directly to membership solicitations (direct response advertising costs),
principally include: postage, printing, mailings and telemarketing costs. We
amortize these costs on a straight-line basis as we realize revenues over the
membership period. Amortization of membership acquisition costs amounted to
$14.9 million, $9.9 million and $8.9 million for the years ended December 31,
2000, 1999 and 1998, respectively. If deferred membership acquisition costs were
to exceed forecasted future net revenues, we would make an appropriate
adjustment for impairment. All other membership acquisition costs are expensed
as incurred. Deferred membership acquisition costs amounted to $59.3 million and
$30.6 million as of December 31, 2000 and 1999, respectively.
Extended Service Plans
We coordinate the marketing activities for Fingerhut's sales of extended
service plans. We perform administrative services and retain the claims risk for
all extended service plans sold. As a result, we defer and recognize extended
service plan revenues and the incremental direct acquisition costs on a
straight-line basis over the life of the related extended service plan contracts
beginning after the expiration of any manufacturers' warranty coverage. The
provision for service contract returns charged against deferred income for the
years ended December 31, 2000, 1999 and 1998, amounted to $3.0 million, $5.0
million and $4.8 million, respectively. Additionally, prior to 1999, we
reimbursed Fingerhut for the cost of its marketing media and other services
utilized
39
in the sales of extended service plans, based on contracts sold and on
media utilization costs as agreed to by us and Fingerhut. Beginning in 1999,
Fingerhut was responsible for paying a majority of the marketing expense and
therefore retained a larger portion of the related revenue.
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 year ended December 31, 2000.
Because we have applied the provisions of this SAB to our membership programs
since 1998, before the SEC formalized its guidance, no adjustment was required
for our membership services revenues. The proforma effect of adopting SAB 101
was immaterial for the prior-year periods.
Credit Card Fees and Origination Costs
Credit card fees include annual membership, late payment, overlimit,
returned check, cash advance transaction fees and other miscellaneous fees.
These fees are assessed according to the terms of the related cardholder
agreements and, except for annual membership fees, are recognized as revenue
when charged to the cardholder's account.
We defer direct credit card origination costs associated with successful
credit card solicitations that we incur in transactions with independent third
parties, and certain other costs that we incur in connection with loan
underwriting and the preparation and processing of loan documents. We net these
deferred credit card origination costs against the related credit card annual
fee, if any, and amortize them on a straight-line basis over the cardholder's
privilege period, which is generally 12 months. Net deferred fees were $13.1
million and $11.8 million as of December 31, 2000 and 1999, respectively.
Solicitation Expenses
We generally expense credit card account costs, including printing, credit
bureaus, list processing costs, telemarketing and postage, as incurred over the
two-to-three month period during which the related responses to such
solicitation are received.
Credit Card Fraud Losses
We experience credit card fraud losses from the unauthorized use of credit
cards. We expense these fraudulent transactions when identified, through the
establishment of a reserve for the transactions. We charge off these amounts
after 90 days, after all attempts to recover the amounts from these
transactions, including chargebacks to merchants and claims against cardholders,
are exhausted.
40
Interest Rate Risk Management Contracts
The nature and composition of our assets and liabilities and securitized
loans expose us to interest rate risk. We enter into a variety of interest rate
risk management contracts such as interest rate swap, floor and cap agreements
with highly rated counterparties in order to hedge our interest rate exposure on
securitized loans and deposits. The monthly interest rate differential to be
paid or received on these contracts is accrued and included in "Net
securitization and credit card servicing income" or "Deposit interest expense,"
as appropriate, on the consolidated statements of income. Premiums paid for
these contracts and the related interest payable or receivable under these
contracts are classified under "Other receivables due from credit card
securitization, net," on the consolidated balance sheets. We record premiums
paid for interest rate contracts at cost and amortize them on a straight-line
basis over the life of the contract.
Debt Issuance Costs
Debt issuance costs are the costs related to issuing new debt securities
and establishing new securitizations under the trust or conduits. We capitalize
the costs as incurred and amortize them to expense over the term of the new debt
security.
Income Taxes
We determine deferred taxes based on the temporary differences between the
financial statement and the tax bases of assets and liabilities that will result
in future taxable or deductible amounts. The deferred taxes are based on the
enacted rate that is expected to apply when the temporary differences reverse.
For periods prior to the spin off, we were included in the consolidated federal
and certain state income tax returns of Fingerhut Companies, Inc. Based on a tax
sharing agreement between us and Fingerhut Companies, Inc., the 1998 provision
and deferred income taxes were computed based only on our financial results as
if we filed our own federal and state tax returns.
Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income applicable to common stockholders by the weighted average
number of common shares outstanding for the year. Diluted EPS reflects the
potential dilution that could occur if dilutive securities or other contracts to
issue common stock were exercised or converted into common stock.
41
The following table presents the computation of basic and diluted weighted
average shares used in the per-share calculations:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(In thousands)
Income before extraordinary loss and
cumulative effect of accounting
change ................................... $ 198,591 $ 115,363 $ 57,348
Preferred dividends - Series B ................ -- 7,506 1,100
Preferred dividends - Series C ................ 31,624 17,080 --
Adjustment for the retirement of Series B
preferred stock .......................... -- 101,615 --
--------- --------- ---------
Net income (loss) applicable to common
stockholders before extraordinary loss
and cumulative effect of accounting change 166,967 (10,838) 56,248
Extraordinary loss from the early
extinguishment of debt ................... -- 50,808 --
Cumulative effect of accounting change, net ... 3,438 -- --
--------- --------- ---------
Net income (loss) applicable to common
stockholders ............................. $ 163,529 $ (61,646) $ 56,248
========= ========= =========
Weighted average common shares
outstanding (basic common shares) ........ 60,070 57,855 57,696
Adjustments for dilutive securities:
Assumed exercise of outstanding stock
options .................................... 3,348 --(1) 2,209
Assumed conversion of convertible preferred
stock .................................... 29,164 --(1) --
--------- --------- ---------
Diluted common shares ......................... 92,582 57,855 59,905
========= ========= =========
(1) For the year ended December 31, 1999, there were options and convertible
preferred stock outstanding to purchase 3.2 million and 15.3 million common
shares. These potential common shares have been excluded from the
computation of diluted earnings per share because their inclusion would
have been anti-dilutive.
42
Comprehensive Income
Statement of Financial Accounting Standard 130 "Reporting Comprehensive
Income," does not apply to our current financial results and therefore, net
income equals comprehensive income.
NOTE 3 - SECURITIZATION ACTIVITY
Securitization activity as of and for the year ended December 31, 2000, is
as follows:
At December 31, 2000
Principal amount of credit card
receivables sold ...................... $6,070,224
Retained interests in loans securitized..... 2,023,681
Loans more than 30-days contractually
delinquent.............................. 612,523
For the year ended December 31, 2000
Cash flow to/from the Company
Net proceeds from sales and repayments
of securitized loans.................... $ 551,911
Collections reinvested in revolving
period securitizations.................. 3,858,146
Servicing fees ............................. 119,572
Cash flow from retained interests, net...... 401,557
----------
Total ................................... $4,931,186
==========
Loans charged off, net of recoveries ....... $ 645,309
==========
43
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
We maintain an allowance for loan losses for both owned loans and the
retained interests in loans securitized. The portion allocated to the retained
interest in loans securitized represents our estimated valuation adjustment to
report this asset in accordance with SFAS 125. For securitized loans, losses and
related provisions for loan losses are reflected in the calculations of net
securitization and credit card servicing income. We make provisions for loan
losses in amounts necessary to maintain the allowance at a level estimated to be
sufficient to absorb probable losses of principal and earned interest, net of
recoveries, inherent in the existing loan portfolio.
The activity in the allowance for loan losses is as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Balance at beginning of year ............ $ 619,028 $ 393,283 $ 244,084
Allowance related to assets acquired, net 5,963 26,293 20,152
Provision for loan losses ............... 388,234 174,800 77,770
Provision for loan losses (1) ........... 529,671 567,737 456,354
Loans charged off ....................... (854,087) (582,637) (420,875)
Recoveries .............................. 75,166 39,552 15,798
--------- --------- ---------
Net loans charged off ................... (778,921) (543,085) (405,077)
--------- --------- ---------
Balance at end of year .................. $ 763,975 $ 619,028 $ 393,283
========= ========= =========
(1) Amounts are included in "Net securitization and credit card servicing
income."
NOTE 5 - PROPERTY AND EQUIPMENT
The carrying value of property and equipment is as follows:
At December 31,
---------------
2000 1999
---- ----
Furniture and equipment ....................... $ 46,416 $ 12,186
Computer software and equipment ............... 55,399 24,675
Construction in progress ...................... 6,842 24,500
Buildings and land ............................ 27,805 --
Leasehold improvements ........................ 18,537 8,631
-------- --------
Total ......................................... $154,999 $ 69,992
Less: Accumulated depreciation
and amortization............................ 26,603 13,078
-------- --------
Balance at end of year ........................ $128,396 $ 56,914
======== ========
Depreciation and amortization expense for the years ended December 31,
2000, 1999 and 1998, was $16.0 million, $6.8 million and $4.4 million,
respectively.
44
NOTE 6 - PORTFOLIO ACQUISITIONS
On August 25, 2000, Direct Merchants Bank purchased the U.S. Bankcard
Program from Banco Popular. The acquired credit card portfolio had approximately
184,000 active accounts and approximately $186 million in receivables. On June
30, 1999, Direct Merchants Bank purchased a portion of the consumer bankcard
portfolio of GE Capital Consumer Card Co., a unit of General Electric Company.
The acquired credit card portfolio had approximately 485,000 active accounts and
approximately $1.2 billion in receivables. In December 1998, the Company
acquired an $800 million credit card portfolio from PNC Bank Corp. representing
loans from customers outside of PNC's normal banking relationship.
NOTE 7 - CONVERTIBLE PREFERRED STOCK
The Series C Perpetual Convertible Preferred Stock is held by affiliates of
the Thomas H. Lee Company, a private equity firm, and is convertible into common
shares at a conversion price of $12.42 per common share subject to adjustment in
certain circumstances. The Series C Preferred Stock has a 9% dividend payable in
additional shares of Series C Preferred Stock and will also receive any cash
dividends paid on our common stock on a converted basis. One share of Series C
Preferred Stock is convertible into 30 shares of common stock, plus a premium
amount designed to guarantee a portion of seven years' worth of dividends at a
9% annual rate. For conversions in 2000, the premium amount would be equal to
approximately 14% of those future dividends. Assuming conversion of the Series C
Preferred Stock into common stock, the Lee Company would own approximately 32%
of the Company on a diluted basis at December 31, 2000. The Series C Preferred
Stock entitles the holders to elect four members to our Board of Directors. The
Series C Preferred Stock may be redeemed by us in certain circumstances after
December 31, 2001, by paying 103% of the redemption price of $372.50 and any
accrued dividends at the time of redemption. We also have the option to redeem
the Series C Preferred Stock after December 9, 2008, without restriction by
paying the redemption price of $372.50 and any accrued dividends at the time of
redemption.
The Series C Preferred Stock is normally convertible into common stock.
However, in the event that such conversion would result in a stockholder or
group (within the meaning of Rules 13d-3 and 13d-5 promulgated under the
Securities Exchange Act of 1934) obtaining 35% or more of the outstanding voting
stock of the Company, the indenture which governs our outstanding 10% Senior
Notes due 2004 requires us to make an offer to purchase those notes.
Accordingly, for so long as any of our 10% Notes remain outstanding, in the
event that the conversion of the Series C Preferred Stock into common stock
would cause any stockholder or group to beneficially own more than 34.9% of the
outstanding voting stock of the Company, the excess number of shares of Series C
Preferred Stock will be convertible into non-voting stock, currently Series D
Preferred Stock. The Series D Preferred Stock has a liquidation preference of
$.01 per share, is non-voting, except as required by law, and will automatically
convert into common stock at the time such conversion will not trigger the
restrictions set forth in the indenture described above.
Prior to shareholder approval and the receipt of notice that there was no
regulatory objection to the Series C Preferred Stock investment, the Lee Company
agreed to purchase $200 million in Series B Perpetual Preferred Stock and $100
million in 12% Senior Notes due 2006. We also
45
issued the Lee Company 7.5 million ten-year warrants to purchase shares of
our common stock.
On March 12, 1999, shareholders approved the conversion of the Series B
Preferred Stock and 12% Senior Notes into Series C Preferred Stock. Notice was
received on May 28, 1999, that there was no regulatory objection to the
conversion to the Series C Preferred Stock. On June 1, 1999, the Series B
Preferred Stock and the 12% Senior Notes were extinguished, and the warrants
were canceled causing a one-time, non-cash accounting adjustment. The excess of
the fair value of the Series C Preferred Stock over the carrying value of the
Series B Preferred Stock and the 12% Senior Notes at the time of the conversion
was allocated to the 12% Senior Notes and the Series B Preferred Stock based
upon their initial fair values. To arrive at net income applicable to common
stockholders in the calculation of earnings per share, the amount allocated to
the 12% Senior Notes was recognized as an extraordinary loss from the early
extinguishment of debt in the amount of $50.8 million and the amount allocated
to the Series B Preferred Stock was recognized as a reduction of net income
applicable to common stockholders in the amount of $101.6 million. The
extraordinary loss attributable to the 12% Senior Notes is not recorded net of
taxes. These adjustments did not have an impact on total stockholders' equity.
NOTE 8 - STOCK OPTIONS
We offer the Metris Companies Inc. Long-Term Incentive and Stock Option
Plan, which permits a variety of stock-based grants and awards and gives us
flexibility in tailoring our long-term compensation programs. In 2000, the Board
of Directors recommended, and the shareholders approved, an increase in the
number of shares permitted to be granted under the plan to 15.0 million shares
of common stock for awards of stock options or other stock-based awards, subject
to adjustment in certain circumstances. As of December 31, 2000, 1.3 million
shares were available for grant.
The Compensation Committee has the authority to determine the exercise
prices, vesting dates or conditions, expiration dates and other material
conditions upon which options or awards may be exercised, except that the option
price for Incentive Stock Options ("ISOs") may not be less than 100% of the fair
market value of the common stock on the date of grant (and not less than 110% of
the fair market value in the case of an ISO granted to any employee owning more
than 10% of the common stock) and the terms of nonqualified stock options may
not exceed 15 years from the date of grant (not more than 10 years for ISOs and
five years for ISOs granted to any employee owning more than 10% of the common
stock). Full- or part-time employees, consultants or independent contractors are
eligible to receive nonqualified options and awards. Only full- or part-time
employees are eligible to receive ISOs.
During 2000, 1999 and 1998, we granted 4.2 million, 2.7 million and 3.2
million options, respectively, to officers and employees. Restricted stock
grants are also issued under the stock option plan to our executive officers. A
total of 0.1 million and 0.3 million common shares were granted in 2000 and
1999, with an approximate aggregate market value of $2.3 million and $4.0
million at the time of the grant, respectively. The market value of these
restricted shares at the date of grant is amortized into expense over a period
not less than the restriction period. We recognized $1.1 million in 2000 and
$0.6 million in 1999 for these restricted shares. If the restrictions are
removed, generally upon
46
death, disability or retirement, the remaining unamortized market value of
the restricted shares is expensed.
We also offer the Metris Companies Inc. Non-Employee Director Stock Option
Plan which provides up to 750,000 shares of common stock for awards of options,
subject to adjustments in certain circumstances. During 2000, 1999 and 1998, we
granted 82,500, 127,500 and 75,000 options, respectively. At December 31, 2000,
375,000 shares were available for grant.
We have adopted the disclosure-only provisions of SFAS No. 123 "Accounting
for Stock-Based Compensation." Accordingly, we continue to account for
stock-based compensation under the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the guidelines
of Opinion 25, compensation cost for stock-based employee compensation plans is
recognized based on the difference, if any, between the quoted market price of
the stock on the date of grant and the amount an employee must pay to acquire
the stock.
Had compensation cost for these plans been determined based on the fair
value methodology prescribed by SFAS 123, our net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Net income as reported ...................... $ 195,193 $64,555 $57,348
Net income pro forma ........................ 185,356 59,733 47,264
Diluted earnings (loss) per share
as reported .............................. 2.11 (1.07) 0.94
Diluted earnings (loss) per share
pro forma ................................ 2.00 (1.15) 0.79
The above pro forma amounts may not be representative of the effects on
reported net earnings for future years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used for grants in 2000, 1999 and
1998, respectively: dividend yield of 0.10%, 0.10% and 0.10%; expected
volatility of 58.4%, 55.4% and 71.3%; risk-free interest rate of 6.40%, 5.30%
and 4.72%; and expected lives of six years, six years and seven years,
respectively.
47
Information regarding our stock option plans for 2000, 1999 and 1998, is as
follows:
Year Ended December 31,
2000 1999 1998
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding, beginning of
year .......................... 10,129,614 $ 9.72 7,862,100 $ 8.56 5,046,600 $ 5.01
Options exercised ................ 4,212,537 5.46 111,750 6.40 104,250 5.33
Options granted .................. 4,348,685 24.78 2,860,914 13.47 3,241,500 14.52
Options canceled/
forfeited ..................... 358,700 22.64 481,650 13.79 321,750 13.92
--------------------------------------------------------------------------------------------
Options outstanding,
end of year ................... 9,907,062 17.67 10,129,614 9.72 7,862,100 8.56
Weighted-average fair value of
options granted during
the year ...................... -- 13.47 -- 6.53 -- 10.77
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 12/31/00 Life Price at 12/31/00 Price
- -------------- ----------- ---- ----- ----------- -----
$ 5.33-$13.46 ............. 4,351,869 7.6 $10.16 2,411,532 $10.18
$13.47-$24.42 ............. 3,744,642 8.6 22.01 1,144,497 18.86
$24.43-$38.88 ............. 1,810,551 9.5 26.78 82,650 25.79
------ ------ --------- --- ------ ---------- ------
9,907,062 8.3 $17.67 3,638,679 $13.26
========= === ====== ========== ======
Employee Stock Purchase Plan
During the third quarter of 1999, we adopted an employee stock purchase
plan (ESPP), whereby eligible employees may authorize payroll deductions of up
to 15% of their salary to purchase shares of our common stock. Under the plan,
shares of our common stock may be purchased at the end of each monthly offering
period at 85% of the lower of the fair market value on the first or last day of
the monthly offering period. Employees contributed $2.0 million and $0.7 million
to purchase 100,624 and 40,022 shares of common stock under the ESPP for 2000
and 1999, respectively. We are authorized to issue up to 2.6 million shares of
common stock to employees under the plan, and as of December 31, 2000, there
were approximately 2.4 million shares available for future issuance.
48
Management Stock Purchase Plans
We provide management stock purchase plans, whereby any employee who is a
Senior Vice President or higher and who participates in the Metris Management
Incentive Bonus Plan is eligible to participate. Participants may elect to defer
up to 50% of their bonus received under the Management Bonus Plan, which is
credited to a stock purchase account as restricted stock units. We will make a
match of $1 for every $3 contributed by the participant. The participant's
contributions are vested immediately and our matching contributions vest after
three years (two years for contributions made for the year of adoption).
Employees contributed approximately $1.3 million to purchase 52,231 restricted
stock units under the Plans for 2000. The restricted stock units convert to
common stock when distributed from the Plans. We are authorized to issue up to
900,000 shares of common stock to employees under the Plans, and as of December
31, 2000, approximately 830,000 of the authorized shares were available for
future issuance.
NOTE 9 - EMPLOYEE BENEFIT PLANS
We offer a defined contribution plan that is intended to qualify under
section 401(k) of the Internal Revenue Code. The 401(k) Plan provides retirement
benefits for eligible employees. Eligible employees may elect to contribute to
the 401(k) Plan, and we match a portion of employee contributions and make
discretionary contributions based upon our financial performance. For the years
ended December 31, 2000, 1999 and 1998, we contributed $1.4 million, $1.8
million and $0.9 million to the 401(k) Plan, respectively.
In 2000, the Company adopted a new Non-Qualified Deferred Compensation Plan
for a select group of management or highly compensated employees. These
employees are allowed to participate in the 401(k) Plan under the new Plan in
2000, but were unable to participate in the 401(k) Plan under the previous
Non-Qualified Deferred Compensation Plan in 1998. There was no Non-Qualified
Preferred Compensation Plan in effect during 1999. The new Plan provides saving
and investment opportunities to those individuals who elect to defer a portion
of their salary. Participants in the prior Plan were allowed to transfer their
balances to the new Plan. The Company matches a portion of the employee
contribution and makes discretionary contributions based on the Company's
financial performance. For the years ended December 31, 2000 and 1998,
respectively, the Company contributed $0.3 million and $0.2 million to the
Plans.
Supplemental Executive Retirement Plan
Our funded Supplemental Executive Retirement Plan ("SERP"), established in
1999, provides officers and other members of senior management with supplemental
retirement benefits in excess of limits imposed on qualified plans by federal
tax law. The SERP is an account balance plan to which we will make annual
contributions targeted to provide 60% of the average of the participant's final
five years of salary and bonus with us. These benefits will be paid in 15 annual
installments beginning the year after they become eligible to receive benefits.
Participants are eligible to receive benefits upon leaving our employment if
they are at least 65 years of age or at least age 55 with
49
five years of plan participation, if a change of control occurs or in the
event of death. We recognized $0.9 million and $2.2 million of expense in 2000
and 1999, respectively, related to the SERP Plan. Our liability was $3.1 million
and $2.2 million at December 31, 2000 and 1999, respectively, for future
payments under this Plan. This expense and liability are calculated based on
actuarial assumptions regarding years of participation, future investment
returns and participants continuing in the Plan until age 65.
NOTE 10 - INCOME TAXES
The components of the provision for income taxes consisted of the
following:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Current:
Federal ............................... $ 77,185 $ 94,309 $ 98,428
State ................................. 7,867 14,236 8,355
Deferred ................................. 39,268 (32,592) (70,883)
-------- -------- --------
$124,320 $ 75,953 $ 35,900
======== ======== ========
A reconciliation of our effective income tax rate compared to the statutory
federal income tax rate is as follows:
Year Ended
December 31,
------------
2000 1999 1998
---- ---- ----
Statutory federal income tax rate ............ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ... 2.8% 3.2% 3.2%
Other, net ................................... 0.7% 1.5% 0.3%
---- ---- ----
Effective income tax rate .................... 38.5% 39.7% 38.5%
==== ==== ====
Our deferred tax assets and liabilities are as follows:
At December 31,
---------------
2000 1999
---- ----
Deferred income tax assets resulting from
future deductible temporary differences:
Allowance for loan losses ......................... $214,989 $196,840
Deferred revenues ................................. 74,755 48,200
Other ............................................. 18,800 19,378
-------- --------
Total deferred tax assets ............................ $308,544 $264,418
Deferred income tax liabilities resulting from
future taxable temporary differences:
Accrued interest on credit card loans .......... $114,595 $ 65,260
Deferred costs ................................. 30,701 11,464
Intangible amortization ........................ 10,900 750
Other .......................................... 6,003 1,331
-------- --------
Total deferred tax liabilities ....................... $162,199 $ 78,805
-------- --------
Net deferred tax assets .............................. $146,345 $185,613
======== ========
50
We believe, based on our history of operating earnings, expectations for
operating earnings in the future, and the expected reversal of taxable temporary
differences, earnings will be sufficient to fully utilize the deferred tax
assets.
NOTE 11 - RELATED PARTY TRANSACTIONS
Prior to September 1998, Fingerhut owned approximately 83% of our
outstanding common shares. In September 1998, Fingerhut distributed the
remaining shares of the Company to shareholders of Fingerhut in a tax-free
distribution.
Information related to transactions with Fingerhut have not been presented
for the years ended December 31, 2000 and 1999, because Fingerhut is no longer
considered a related party after distributing their remaining shares. Prior to
the distribution of the shares, Fingerhut and its various subsidiaries had
historically provided financial and operational support to us. We believe the
fees paid for the operational support reasonably approximate market rates for
the services performed. The direct and allocated expenses represent charges for
various administrative services. We have also entered into several other
agreements with Fingerhut that detail further business arrangements between the
companies. Each of these agreements was negotiated and we believe they
reasonably approximate contracts between unrelated third parties. Our exclusive
license to use Fingerhut's customer database to market financial service
products will become non-exclusive after October 31, 2001.
The following table summarizes the amounts of revenues, direct expense
charges, cost allocations (including net interest income or expense), and our
costs of the agreements mentioned above for each of the years reflected in our
financial statements for the year ended December 31, 1998.
Revenues:
Enhancement services ................................. $15,439
Expenses:
Credit card account and other product solicitation
and marketing expenses ............................ 10,796
Data processing services and communications........... 2,344
Other ................................................ 659
In the ordinary course of business, our executive officers may have credit
card loans issued by us. Pursuant to our policy, such loans are issued on the
same terms as those available to all eligible employees and do not involve more
than the normal risk of collectibility.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Commitments to extend credit to consumers represent the unused credit
limits on open credit card accounts. These commitments amounted to $11.1
billion, $9.7 billion and $5.9 billion as of December 31, 2000, 1999 and 1998,
respectively. While these amounts represent the total lines of credit available
to our customers, we have not experienced and do not anticipate that all of our
customers will exercise their entire available
51
line at any given point in time. We also have the right to increase, reduce,
cancel, alter or amend the terms of these available lines of credit at
any time.
We lease certain office facilities and equipment under various cancelable
and non-cancelable operating lease agreements that provide for the payment of a
proportionate share of property taxes, insurance and other maintenance expenses.
These leases also may include scheduled rent increases and renewal options.
Rental expense for these operating leases for the years ended December 31, 2000,
1999 and 1998, was $18.1 million, $11.1 million and $6.4 million, respectively.
Future minimum lease commitments at December 31, 2000, under cancelable and
non-cancelable operating leases are as follows:
2001 $ 18,528
2002 15,849
2003 12,354
2004 11,014
2005 8,650
Thereafter 39,027
-------------
Total minimum lease payments $ 105,422
=============
We are a party to various legal proceedings resulting from the ordinary
business activities relating to our operations. In July 2000 an Amended
Complaint was filed in Hennepin County Court in Minneapolis, Minnesota against
Metris Companies Inc., Metris Direct, Inc. and Direct Merchants 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 prepared 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.
Direct Merchants Bank's activities as a credit card lender are subject to
regular review and examination by federal regulators to assess compliance with
various federal consumer protection laws. Regulators are authorized to impose
penalties for violations of these laws and, in certain cases, to order Direct
Merchants Bank to pay restitution to injured cardholders.
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTED PAYMENTS
In the normal course of business, we enter into agreements, or are subject
to regulatory requirements, that result in cash, debt and dividend or other
capital restrictions.
The Federal Reserve Act imposes various legal limitations on the extent to
which banks can finance or otherwise supply funds to their affiliates. In
particular, Direct Merchants Bank is subject to certain
52
restrictions on any extensions of credit to or other covered transactions,
such as certain purchases of assets, with us and our affiliates. Such
restrictions limit Direct Merchants Bank's ability to lend to us and our
affiliates. Additionally, Direct Merchants Bank is limited in its ability to
declare dividends to us in accordance with the national bank dividend rules.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the Office of the Comptroller of Currency. At December 31, 2000 and
1999, Direct Merchants Bank's Tier 1 risk-based capital ratio, risk-based total
capital ratio and Tier 1 leverage ratio exceeded the minimum required capital
levels, and Direct Merchants Bank was considered a "well-capitalized" depository
institution under regulations of the OCC.
We are also bound by restrictions set forth in the indentures related to
the Senior Notes dated November 7, 1997, and July 15, 1999. Pursuant to those
indentures, we may not make dividend payments in the event of a default or if
all such restricted payments would exceed 25% of our aggregate cumulative net
income.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
A concentration of credit risk is defined as significant credit exposure
with an individual or group engaged in similar activities or affected similarly
by economic conditions. We are active in originating credit card loans
throughout the United States, and no individual or group had a significant
concentration of credit risk at December 31, 2000 or 1999. The following table
details the geographic distribution of our retained, sold and managed credit
card loans:
Retained Sold Managed
-------- ---- -------
At December 31, 2000
- --------------------
California ....................... $ 404,947 $ 765,909 $1,170,856
Texas ............................ 273,187 516,701 789,888
New York ......................... 261,192 494,015 755,207
Florida .......................... 238,972 451,988 690,960
Ohio ............................. 129,958 245,801 375,759
Illinois ......................... 128,650 243,326 371,976
Pennsylvania ..................... 104,911 198,427 303,338
All others ....................... 1,661,067 3,154,057 4,815,124
---------- ---------- ----------
Total ......................... $3,202,884 $6,070,224 $9,273,108
========== ========== ==========
Retained Sold Managed
-------- ---- -------
At December 31, 1999
- --------------------
California ....................... $ 224,359 $ 702,254 $ 926,613
Texas ............................ 158,760 496,927 655,687
New York ......................... 134,087 419,700 553,787
Florida .......................... 131,960 413,043 545,003
Ohio ............................. 73,313 229,473 302,786
Illinois ......................... 66,947 209,546 276,493
Pennsylvania ..................... 56,025 175,363 231,388
All others ....................... 917,558 2,872,007 3,789,565
---------- ---------- ----------
Total ......................... $1,763,009 $5,518,313 $7,281,322
========== ========== ==========
53
We target our consumer lending products primarily to moderate-income
consumers. Primary risks associated with lending to this market are that they
may be more sensitive to future economic downturn, which may make them more
likely to default on their obligations.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
We have estimated the fair value of our financial instruments in accordance
with SFAS No. 107, "Disclosures About Fair Value of Financial Instruments."
Financial instruments include both assets and liabilities, whether or not
recognized in our consolidated balance sheets, for which it is practicable to
estimate fair value. Additionally, certain intangible assets recorded on the
consolidated balance sheets, such as purchased credit card relationships, and
other intangible assets not recorded on the consolidated balance sheets (such as
the value of the credit card relationships for originated loans and the
franchise values of our various lines of business) are not considered financial
instruments and, accordingly, are not valued for purposes of this disclosure. We
believe there is substantial value associated with these assets based on current
market conditions, including the purchase and sale of such assets. Accordingly,
the aggregate estimated fair value amounts presented do not represent the entire
underlying value of the Company.
Quoted market prices generally are not available for all of our financial
instruments. Accordingly, in cases where quoted market prices are not available,
fair values were estimated using present value and other valuation techniques
that are significantly affected by the assumptions used, including the discount
rate and estimated future cash flows. These assumptions are based on historical
experience and assessments regarding the ultimate collectibility of assets and
related interest, and estimates of product lives and repricing characteristics
used in our asset/liability management process. These assumptions involve
uncertainties and matters of judgment, and therefore, cannot be determined with
precision. Thus, changes in these assumptions could significantly affect the
fair-value estimates.
A description of the methods and assumptions used to estimate the fair
value of each class of our financial instruments is as follows:
Cash and cash equivalents and accrued interest and fees receivable
The carrying amounts approximate fair value due to the short-term nature of
these instruments.
Net retained interests in loans securitized and net credit card loans
Securitized credit card loans are originated with variable rates of
interest that adjust with changing market interest rates. Thus, the carrying
value of the retained interest in the loans securitized, less the allowance for
loan losses, approximates fair value. This valuation does not include the value
that relates to estimated cash flows generated from new loans from existing
customers over the life of the cardholder relationship. Accordingly, the
aggregate fair value of the credit card loans does not represent the underlying
value of the established cardholder relationships.
54
Interest-only strip
The fair value of the interest-only strip is estimated by discounting the
expected future cash flows from the trust and each of the conduits at rates
which we believe to be consistent with those that would be used by an
independent third party. However, because there is no active market for this,
the fair values presented may not be indicative of the value negotiated in an
actual sale. The future cash flows used to estimate fair value are limited to
the securitized receivables that exist at year end and does not reflect the
value associated with future receivables generated by cardholder activity.
Interest rate cap, floor and swap agreements
The fair values of interest rate cap, floor and swap agreements were
obtained from dealer quoted prices. These values generally represent the
estimated amounts we would receive or pay to terminate the agreements at the
reporting dates, taking into consideration current interest rates and the
current creditworthiness of the counterparties.
Other securitization assets
For other securitization assets, the carrying amount is a reasonable
estimate of the fair value, due to their short-term nature.
Debt
We make short-term borrowings with variable rates of interest that adjust
with changing market interest rates. Thus, carrying value approximates fair
value.
We obtain the fair value of long-term debt from quoted market yields, when
available.
Deposits
The fair value for fixed rate certificates of deposit are estimated based
on quoted market prices of comparable instruments.
55
The estimated fair values of our financial instruments are summarized as
follows:
At December 31,
---------------
2000 1999
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Cash and cash equivalents ................ $ 521,440 $ 521,440 $ 194,433 $ 194,433
Accrued interest and fees receivable...... 30,531 30,531 17,704 17,704
Credit card loans, net ................... 1,056,080 1,056,080 133,608 133,608
Securitization assets:
Retained interest in loans securitized,
net ................................... 1,382,829 1,382,829 1,010,373 1,010,373
Interest rate cap agreements .......... 39,365 15,468 27,113 34,526
Interest rate floor agreements ........ -- -- 23 6
Interest-only strip ................... -- -- -- --
Other ................................. 147,329 147,329 216,842 216,842
Interest rate swap agreements ............ -- 2,716 -- --
Debt ..................................... 356,066 327,917 345,012 346,218
Deposits ................................. 2,106,199 2,109,690 775,381 775,381
We have performed an analysis of the fair market value by discounting
future cash flows of the trust and each of the conduits at rates which we
believe to be consistent with those that would be used by an independent third
party. However, because there is no active market for this, the fair values
presented may not be indicative of the value negotiated in an actual sale. The
future cash flows used to estimate fair value are limited to the securitized
receivables that exist at year end and does not reflect the value associated
with future receivables generated by cardholder activity.
The significant assumptions used at year end for estimating the fair value
of the retained interest in loans securitized and related interest-only strip
are as follows:
At December 31,
2000 1999
---- ----
Annual discount rate(1) ........................ 15% 15%/12%
Monthly payment rate ........................... 7% 7%
Net interest rate spread(2) .................... 14% 14%
Annual principal and finance charge
default rate .............................. 16% 17%
(1) The 1999 discount rate for retained interests was 15% and interest-only
strip was 12%.
(2) Weighted average Annual Percentage Rate (APR) minus weighted average cost
of funds.
56
At December 31, 2000, the sensitivity of the current fair value to
immediate 10 percent and 20 percent adverse changes are as follows (in
millions):
Impact on Fair Value
--------------------
10% adverse change 20% adverse change
------------------ ------------------
Annual discount rate ................... $ 13 $ 26
Monthly payment rate ................... 22 47
Net interest rate spread ............... 109 212
Annual principal and finance charge
default rate ...................... 141 278
The actual life-to-date annual principal and finance charge default rates
for loans securitized are as follows:
December 31, 2000 ......... 13%
December 31, 1999 ......... 13%
December 31, 1998 ......... 12%
We believe these sensitivity analyses do not accurately reflect the
potential impact on the asset values as they do not consider potential
offsetting positive impacts that would occur in the portfolio.
57
NOTE 16- DERIVATIVE FINANCIAL INSTRUMENTS
We enter into interest rate cap, floor and swap agreements to hedge the
cash flow 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 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. We also enter
into interest rate swap agreements to hedge the fair value of a portion of our
fixed rate deposits. These interest rate agreements are for original terms
ranging from two to ten years and will terminate between February 2002 and
January 2010.
Notional Amounts of Interest Rate Swap,
Cap and Floor Agreements Purchased and Sold
-------------------------------------------
Weighted- Weighted-
Year Ended December 31, Average Average
Interest Interest
(Dollars in thousands) 2000 Rate 1999 Rate
---- ---- ---- ----
Interest rate swap
agreements:
Beginning balance ..... $ -- -- $ -- --
Additions ............. 249,000 7.0% -- --
Maturities/terminations -- -- -- --
---------- ----------
Ending balance ........ $ 249,000 7.0% $ -- --
========== ==========
Interest rate caps:
Beginning balance ....... $4,213,021 9.4% $2,393,021 8.7%
Additions ............. 1,260,774 8.5% 2,460,000 9.5%
Maturities/terminations 354,167 9.1% 640,000 7.4%
---------- ----------
Ending balance ........ $5,119,628 9.2% $4,213,021 9.4%
========== ==========
Interest rate floor:
Beginning balance ..... $ 58,333 6.2% $ 467,367 6.2%
Additions ............. -- -- -- --
Maturities/terminations 58,333 6.2% 409,034 6.2%
---------- ----------
Ending balance ........ $ -- -- $ 58,333 6.2%
========== ==========
Interest rate risk management contracts are generally expressed in notional
principal or contract amounts that are much larger than the amounts potentially
at risk for nonpayment by counterparties. Therefore, in the event of
nonperformance by the counterparties, our credit exposure is limited to the
uncollected interest and contract market value related to the contracts that
have become favorable to us. We manage the credit risk of such contracts through
established risk limits and monitoring of the credit ratings of our
counterparties. We currently have no reason to anticipate nonperformance by any
counterparty.
58
NOTE 17 - 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 annual 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 change and extraordinary loss) 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.
59
Our enhancement services operating segment pays a fee to the 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.
2000
----
Consumer
Lending Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
Interest
income ....................... $ 1,596,352 $ 11,848 $(1,103,422)(b) $ 504,778
Interest expense ............... 533,325 -- (400,319)(b) 133,006
----------- ----------- ----------- -----------
Net interest
income ....................... 1,063,027 11,848 (703,103) 371,772
Other revenue .................. 494,155 266,200 173,432 933,787
Total revenue .................. 2,090,507 278,048 (929,990) 1,438,565
Income before
income taxes and
cumulative effect
of accounting change.......... 560,772 (c) 176,756 (c) (414,617)(d) 322,911
Total assets ................... $ 9,013,828 $ 154,236 $(5,432,039)(e) $ 3,736,025
1999
----
Consumer
Lending Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
Interest
income ..................... $1,163,663 $ 4,649 $ (932,143) (b) $ 236,169
Interest expense ............... 340,066 -- (284,225) (b) 55,841
---------- ---------- ----------- ----------
Net interest
income ....................... 823,597 4,649 (647,918) 180,328
Other revenue .................. 368,500 175,091 80,181 623,772
Total revenue .................. 1,532,163 179,740 (851,962) 859,941
Income before
income taxes and
extraordinary loss ........... 392,453 (c) 100,646 (c) (301,783) (d) 191,316
Total assets ................... $7,190,903 $ 116,106 $(5,261,927) (e) $2,045,082
60
1998
----
Consumer
Lending Enhancement
Products Services Reconciliation (a) Consolidated
-------- -------- ------------------ ------------
Interest
income ..................... $ 740,768 $ 2,754 $ (630,311) (b) $ 113,211
Interest expense ............... 237,710 -- (207,197) (b) 30,513
---------- ---------- ---------- ----------
Net interest
income ....................... 503,058 2,754 (423,114) 82,698
Other revenue .................. 239,597 109,123 (33,240) 315,480
Total revenue .................. 980,365 111,877 (663,551) 428,691
Income before
income taxes ................. 188,148 (c) 73,279 (c) (168,179) (d) 93,248
Total assets ................... $5,375,925 $ 58,052 $(4,488,258) (e) $ 945,719
(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 income and interest
expense includes the elimination of $11.8 million, $4.6 million and $2.8 million
of intercompany interest received by the enhancement services segment from the
consumer lending products segment for 2000, 1999 and 1998, respectively.
(c) Income before income taxes, extraordinary loss and cumulative effect of
accounting change, includes intercompany commissions paid by the enhancement
services segment to the consumer lending products segment for successful
marketing efforts to consumer lending products cardholders of $18.3 million,
$6.7 million and $3.3 million for 2000, 1999 and 1998, respectively.
(d) The reconciliation to the owned income before income taxes,
extraordinary loss and cumulative effect of accounting change, 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 18 - DEBT AND DEPOSITS
During July of 2000, we amended and restated our credit facility. The
amended credit facility consists of a $170 million revolving credit facility and
a $100 million term loan which mature in July 2003. At December 31, 2000 and
1999, we had outstanding borrowings of $100 million under the term loan facility
with weighted-average interest rates of 9.9% and 8.7%, respectively. At December
31, 2000, we were in compliance with all financial covenants under these
agreements.
We have $150 million of 10.125% Senior Notes due 2006 outstanding. These
Senior Notes were issued at a discount of $6.3 million to yield an effective
interest rate of 11%. The Senior Notes due 2006 and credit facility are
unconditionally guaranteed on a senior basis, jointly and severally, by Metris
61
Direct, Inc. and Metris Recovery Services, Inc. (the "Guarantors"), and all of
our future subsidiaries that guarantee any of our indebtedness. The guarantee is
an unsecured obligation of the Guarantor and ranks equally with all existing and
future unsubordinated indebtedness. We also have $100 million of 10% Senior
Notes due 2004 outstanding with terms and conditions substantially similar to
the Senior Notes due 2006. We also have approximately $0.9 million of debt with
local governments to support growth in those areas.
Our debt outstanding as of December 31, 2000, matures as follows:
2001 $ 362
2002 1,197
2003 100,434
2004 100,476
2005 8,543
Thereafter 145,054
--------
Total $356,066
========
Direct Merchants Bank issues certificates of deposit of $100,000 or more.
As of December 31, 2000 and 1999, $2.1 billion and $0.8 billion of CDs were
outstanding with original maturities ranging from three months to five years and
three months to three years, respectively. These CDs pay fixed interest rates
ranging from 5.4% to 7.6% and 5.2% to 6.6% at December 31, 2000 and 1999,
respectively.
Our CDs outstanding as of December 31, 2000 and 1999, mature as follows:
2000 1999
---- ----
Three months or less ... $ 359,860 17.3% $ 126,100 16.6%
Over three months
through twelve
months ............ 1,214,288 58.3% 417,100 55.0%
Over one year through
three years ....... 467,652 22.5% 215,300 28.4%
Over three years ....... 39,464 1.9% -- --
---------- ----- ---------- -----
Total certificates of
deposits .......... $2,081,264 100.0% $ 758,500 100.0%
========== ===== ========== =====
We have various indirect subsidiaries which have not guaranteed the Senior
Notes or credit facility. We have prepared condensed consolidating financial
statements of the Company, the Guarantor subsidiaries and the non-guarantor
subsidiaries for purposes of complying with SEC reporting requirements. Separate
financial statements of the guaranteeing subsidiaries and the non-guaranteeing
subsidiaries are not presented because management has determined that the
subsidiaries financial statements would not be material to investors.
62
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 2000
(Dollars in thousands)
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
=========== =========== =========== =========== ============
63
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 1999
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------- ------------
Assets:
Cash and cash equivalents ..... $ 43,619 $ 309 $ 150,505 $ -- $ 194,433
Net retained interests in loans
securitized ................ (228) -- 1,010,601 -- 1,010,373
Credit card loans ............. 2,570 -- 131,038 -- 133,608
Property and equipment, net ... -- 33,152 23,762 -- 56,914
Deferred income taxes ......... (1,835) 25,241 162,207 -- 185,613
Purchased portfolio
premium .................... -- -- 83,809 -- 83,809
Other receivables due from
credit card securitizations,
net ........................ 5 -- 243,973 -- 243,978
Other assets .................. 12,951 34,929 88,474 -- 136,354
Investment in subsidiaries .... 1,184,006 1,105,992 -- (2,289,998) --
----------- ----------- ----------- ----------- -----------
Total assets .................. $ 1,241,088 $ 1,199,623 $ 1,894,369 $(2,289,998) $ 2,045,082
=========== =========== =========== =========== ===========
Liabilities:
Deposits ...................... $ (1,000) $ -- $ 776,381 $ -- $ 775,381
Debt .......................... 569,956 (82,779) (142,165) -- 345,012
Accounts payable .............. 494 12,337 33,019 -- 45,850
Deferred income ............... 22,231 58,856 90,579 -- 171,666
Accrued expenses and other
liabilities ................ 25,606 27,203 30,563 -- 83,372
----------- ----------- ----------- ----------- -----------
Total liabilities ............. 617,287 15,617 788,377 -- 1,421,281
----------- ----------- ----------- ----------- -----------
Total stockholders' equity .... 623,801 1,184,006 1,105,992 (2,289,998) 623,801
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity ....... $ 1,241,088 $ 1,199,623 $ 1,894,369 $(2,289,998) $ 2,045,082
=========== =========== =========== =========== ===========
64
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Year Ended December 31, 2000
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income ... $ (76,200) $ (4,685) $ 452,657 $ -- $ 371,772
Provision for loan losses ....... (4) -- 388,238 -- 388,234
--------- --------- --------- --------- ---------
Net Interest (Expense) Income
After Provision for Loan
Losses ....................... (76,196) (4,685) 64,419 -- (16,462)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit
card servicing income ........ 3,544 (3) 440,713 -- 444,254
Credit card fees, interchange
and other credit card income.. 504 633 222,196 -- 223,333
Enhancement services revenues ... -- 54,747 211,453 -- 266,200
--------- --------- --------- --------- ---------
4,048 55,377 874,362 -- 933,787
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses .......... -- 21,917 122,564 -- 144,481
Employee compensation .......... -- 147,567 31,025 -- 178,592
Data processing services and
communications .............. -- (82,227) 168,393 -- 86,166
Warranty and debt waiver
underwriting and claims
servicing expense ........... -- 1,353 25,078 -- 26,431
Credit card fraud losses ....... 5 -- 8,881 -- 8,886
Purchased portfolio premium
amortization .................. -- -- 19,275 -- 19,275
Other .......................... (119) 57,812 72,890 -- 130,583
--------- --------- --------- --------- ---------
(114) 146,422 448,106 -- 594,414
--------- --------- --------- --------- ---------
(Loss) Income Before Income
Taxes, Equity in Income
of Subsidiaries and
Cumulative Effect of
Accounting Change .......... (72,034) (95,730) 490,675 -- 322,911
Income taxes ..................... (27,733) (38,485) 190,538 -- 124,320
Equity in income of
subsidiaries .................. 239,454 296,699 -- (536,153) --
--------- --------- --------- --------- ---------
Income Before Cumulative
Effect of Accounting Change ... 195,153 239,454 300,137 (536,153) 198,591
Cumulative effect of
accounting change, net ........ -- -- 3,438 -- 3,438
--------- --------- --------- --------- ---------
Net Income ....................... $ 195,153 $ 239,454 $ 296,699 $(536,153) $ 195,153
========= ========= ========= ========= =========
65
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Year Ended December 31, 1999
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income .............. $ (39,529) $ (974) $ 220,831 $ -- $ 180,328
Provision for loan losses .................. 248 -- 174,552 -- 174,800
--------- --------- --------- --------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses ............... (39,777) (974) 46,279 -- 5,528
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ........................ 5,601 (4) 313,276 -- 318,873
Credit card fees, interchange and other
credit card income ...................... 886 (4,088) 133,010 -- 129,808
Enhancement services revenues .............. -- 51,341 123,750 -- 175,091
--------- --------- --------- --------- ---------
6,487 47,249 570,036 -- 623,772
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses ...................... -- 36,751 70,975 -- 107,726
Employee compensation ...................... -- 110,886 11,531 -- 122,417
Data processing services and
communications .......................... -- (66,273) 132,243 -- 65,970
Warranty and debt waiver underwriting and
claims servicing expense ................ -- 2,755 18,336 -- 21,091
Credit card fraud losses ................... 17 -- 7,367 -- 7,384
Purchased portfolio premium
amortization ............................ -- -- 31,752 -- 31,752
Other ...................................... 1,071 32,997 47,576 -- 81,644
--------- --------- --------- --------- ---------
1,088 117,116 319,780 -- 437,984
--------- --------- --------- --------- ---------
(Loss) Income Before Income
Taxes, Equity in Income
of Subsidiaries and
Extraordinary Loss ...................... (34,378) (70,841) 296,535 -- 191,316
Income taxes ............................... (13,647) (28,471) 118,071 -- 75,953
Equity in income of subsidiaries ........... 136,094 178,464 -- (314,558) --
--------- --------- --------- --------- ---------
Income Before Extraordinary Loss ........... 115,363 136,094 178,464 (314,558) 115,363
Extraordinary loss from the early
extinguishment of debt .................. 50,808 -- -- -- 50,808
--------- --------- --------- --------- ---------
Net Income ................................. $ 64,555 $ 136,094 $ 178,464 $(314,558) $ 64,555
========= ========= ========= ========= =========
66
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Year Ended December 31, 1998
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income .... $ (6,553) $ (24,444) $ 113,695 $ -- $ 82,698
Provision for loan losses ........ 532 -- 77,238 -- 77,770
--------- --------- --------- --------- ---------
Net Interest (Expense)
Income After Provision
for Loan Losses ............... (7,085) (24,444) 36,457 -- 4,928
--------- ---------- --------- --------- ---------
Other Operating Income:
Net securitization and
credit card servicing income .. 9,668 (20) 128,573 -- 138,221
Credit card fees, interchange and
other credit card income ...... 636 -- 67,500 -- 68,136
Enhancement services revenues .... -- 28,425 80,698 -- 109,123
--------- ---------- --------- --------- ---------
10,304 28,405 276,771 -- 315,480
--------- ---------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses ............ -- 14,992 28,479 -- 43,471
Employee compensation ............ -- 55,980 6,647 -- 62,627
Data processing services and
communications ................ -- (46,289) 92,808 -- 46,519
Warranty and debt waiver
underwriting and claims
servicing expense ............. -- 1,875 10,404 -- 12,279
Credit card fraud losses ......... 18 -- 4,418 -- 4,436
Purchased portfolio
premium amortization .......... -- -- 10,051 -- 10,051
Other ............................ 529 18,899 28,349 -- 47,777
--------- ---------- --------- --------- ---------
547 45,457 181,156 -- 227,160
--------- ---------- --------- --------- ---------
Income (Loss) Before Income Taxes
and Equity in Income of
Subsidiaries .................. 2,672 (41,496) 132,072 -- 93,248
Income taxes ..................... 1,028 (16,768) 51,640 -- 35,900
Equity in income of
subsidiaries .................. 55,704 80,432 -- (136,136) --
--------- ---------- --------- --------- ---------
Net Income ....................... $ 57,348 $ 55,704 $ 80,432 $(136,136) $ 57,348
========= ========== ========= ========= =========
67
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Year Ended December 31,
(Dollars in thousands)
2000
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
Operating Activities:
Net cash (used in) provided by
operating activities ................................... $ (78,840) $ (13,591) $ 610,115 $ 517,684
----------- ----------- ----------- -----------
Investing Activities:
Net proceeds from sales and repayments
of securitized loans ................................... -- -- 551,911 551,911
Net loans originated or collected ......................... (417) -- (1,826,775) (1,827,192)
Credit card portfolio acquisitions ........................ -- -- (195,597) (195,597)
Additions to premises and equipment ....................... -- (54,552) (30,455) (85,007)
----------- ----------- ---------- ----------
Net cash used in investing activities ..................... (417) (54,552) (1,500,916) (1,555,885)
----------- ----------- ----------- -----------
Financing Activities:
Net increase in deposits .................................. -- -- 1,330,818 1,330,818
Net increase (decrease) in debt ........................... 242,667 (47,376) (184,237) 11,054
Cash dividends paid ....................................... (2,942) -- -- (2,942)
Net (decrease) increase in equity ......................... (139,218) 125,868 39,628 26,278
----------- ----------- ----------- -----------
Net cash provided by financing activities ................. 100,507 78,492 1,186,209 1,365,208
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents ................. 21,250 10,349 295,408 327,007
Cash and cash equivalents at beginning of year ............ 43,619 309 150,505 194,433
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year .................. $ 64,869 $ 10,658 $ 445,913 $ 521,440
=========== =========== =========== ===========
1999
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided by
operating activities ................................... $ (12,089) $ (19,710) $ 359,683 $ 327,884
----------- ----------- ----------- -----------
Investing Activities:
Net proceeds from sales and
repayments of securitized loans ........................ -- -- 960,170 960,170
Net loans originated or collected ......................... (693) -- (842,581) (843,274)
Credit card portfolio acquisitions ........................ -- -- (1,156,673) (1,156,673)
Additions to premises and equipment ....................... -- (20,944) (20,780) (41,724)
----------- ----------- ----------- -----------
Net cash used in investing activities ..................... (693) (20,944) (1,059,864) (1,081,501)
----------- ----------- ----------- -----------
Financing Activities:
Net increase in deposits .................................. -- -- 775,381 775,381
Net increase (decrease) in debt ........................... 351,658 (97,800) (119,742) 134,116
Cash dividends paid ....................................... (1,390) (804) 804 (1,390)
Net (decrease) increase in equity ......................... (288,860) 139,723 151,733 2,596
----------- ----------- ----------- -----------
Net cash provided by financing activities ................. 61,408 41,119 808,176 910,703
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents ................. 48,626 465 107,995 157,086
Cash and cash equivalents at beginning of year ............ (5,007) (156) 42,510 37,347
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year .................. $ 43,619 $ 309 $ 150,505 $ 194,433
=========== =========== =========== ===========
68
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 1998
(Dollars in thousands)
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
Operating Activities:
Net cash provided by (used in) operating
activities ............................................. $ 97,276 $ (22,625) $ (9,739) $ 64,912
----------- ----------- ----------- -----------
Investing Activities:
Net proceeds from sales and repayments
of securitized loans ................................... -- -- 1,491,832 1,491,832
Net loans originated or collected ......................... 8,106 -- (909,846) (901,740)
Credit card portfolio acquisitions ........................ -- -- (921,558) (921,558)
Additions to premises and equipment ....................... -- (8,414) (2,400) (10,814)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities ............................................. 8,106 (8,414) (341,972) (342,280)
----------- ----------- ----------- -----------
Financing Activities:
Net increase in debt ...................................... 40,700 7,046 19,150 66,896
Cash dividends paid ....................................... 20,039 -- (21,000) (961)
Net (decrease) increase in equity ......................... (171,464) 23,447 348,574 200,557
----------- ----------- ----------- -----------
Net cash (used in) provided by financing
activities ............................................. (110,725) 30,493 346,724 266,492
----------- ----------- ----------- -----------
Net decrease in cash and cash equivalents ................. (5,343) (546) (4,987) (10,876)
Cash and cash equivalents at beginning of year ............ 336 390 47,497 48,223
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year .................. $ (5,007) $ (156) $ 42,510 $ 37,347
=========== =========== =========== ===========
69
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Metris Companies Inc.:
We have audited the accompanying consolidated balance sheets of Metris
Companies Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metris
Companies Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of recognizing revenue for its debt waiver products
in 2000.
/s/ KPMG LLP
KPMG LLP
Minneapolis, Minnesota
January 17, 2001
70
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is set
forth under "Proposal One: Election of Directors," in the Company's proxy
statement for the annual meeting of shareholders to be held on May 9, 2001,
which will be filed within 120 days of December 31, 2000 and is incorporated
herein by reference. The information required by this item with respect to
executive officers is, pursuant to instruction 3 of Item 401(b) of Regulation
S-K, set forth in Part I of this Form 10-K under "Executive Officers of the
Registrant." The information required by this item with respect to reports
required to be filed under Section 16(a) of the Securities Exchange Act of 1934
is set forth under "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under "Compensation
Tables and Compensation Matters" in the Proxy Statement and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under "Company Stock
Owned by Officers and Directors" and "Persons Owning More Than Five Percent of
Company's Common Stock" in the Proxy Statement and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under "Corporate
Governance" in the Proxy Statement and is incorporated herein by reference.
With the exception of the information incorporated by reference in Items
10-13 above, the Proxy Statement is not to be deemed filed as part of this Form
10-K.
71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are made part of this report:
1. Consolidated Financial Statements - See Item 8 above.
2. Financial Statement Schedules
All schedules to the consolidated financial statements
normally required by Form 10-K are omitted since they are
either not applicable or the required information is shown
in the financial statements or the notes thereto.
(b) Reports on Form 8-K: None
(c) Exhibits: See Exhibit Index on page 75 of this Report.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 27th day of March,
2001.
METRIS COMPANIES INC.
(Registrant)
By /s/ Ronald N. Zebeck
- -----------------------
Ronald N. Zebeck
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Metris Companies
Inc., the Registrant, and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Principal executive Chairman and March 27, 2001
officer and director: Chief Executive Officer
/s/ Ronald N. Zebeck
- --------------------
Ronald N. Zebeck
Principal financial officer: Vice Chairman March 27, 2001
/s/ David D. Wesselink
- ----------------------
David D. Wesselink
Principal accounting officer: Executive Vice President, March 27, 2001
Finance,
Corporate Controller
/s/ Jean C. Benson
- ------------------
Jean C. Benson
73
Directors:
/s/ Lee R. Anderson, Sr. Director March 27, 2001
- ---------------------------
Lee R. Anderson, Sr.
/s/ C. Hunter Boll Director March 27, 2001
- ---------------------------
C. Hunter Boll
/s/ John A. Cleary Director March 27, 2001
- ---------------------------
John A. Cleary
/s/ Thomas M. Hagerty Director March 27, 2001
- ---------------------------
Thomas M. Hagerty
/s/ David V. Harkins Director March 27, 2001
- ---------------------------
David V. Harkins
/s/ Walter M. Hoff Director March 27, 2001
- ---------------------------
Walter M. Hoff
/s/ Thomas H. Lee Director March 27, 2001
- ---------------------------
Thomas H. Lee
/s/ Derek V. Smith Director March 27, 2001
- ---------------------------
Derek V. Smith
/s/ Edward B. Speno Director March 27, 2001
- ---------------------------
Edward B. Speno
/s/ Frank D. Trestman Director March 27, 2001
- ---------------------------
Frank D. Trestman
74
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -----------------------------
Charter Documents:
- -----------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form 8-A (File No. 1-12351)).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999 (File No. 1-12351)).
Instruments Defining Rights:
- ---------------------------
4.1 Indenture, dated as of November 7, 1997, among the Company, Metris Direct,
Inc. as the Guarantor, and the First National Bank of Chicago, as Trustee,
including form of 10% Senior Note due 2004 and form of Guarantee by Metris
Direct, Inc. (incorporated by reference to Exhibit 4.a to the Company's
Registration Statement on Form S-4 (File No. 333-43771)).
(i) First Supplemental Indenture, dated as of June 25, 1999, among the
Company, the Guarantors named therein and the First National Bank of
Chicago (incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-4 (File No. 333-86695)).
4.2 Certificate of Designation of Series B Perpetual Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Company's Current Report
on Form 8-K dated December 22, 1998 (File No. 1-12351)).
4.3 Certificate of Designation of Series C Perpetual Preferred Stock
(incorporated by reference to Exhibit 4.2 of the Company's Current Report
on Form 8-K dated December 22, 1998 (File No. 1-12351)).
(i) Amended Certificate of Designation of Series C Perpetual Convertible
Preferred Stock (incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-3 (File No. 333-82007)).
4.4 Certificate of Designation of Series D Junior Participating Convertible
Preferred Stock (incorporated by reference to Exhibit 4.3 of the Company's
Current Report on Form 8-K dated December 22, 1998 (File No. 1-12351)).
4.5 Registration Rights Agreement, dated as of December 9, 1998, between the
Company and the Investors named therein (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K dated December 22,
1998 (File No. 1-12351)).
4.6 Form of common stock certificate of the Company (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (File
No. 333-91917)).
4.7 Indenture, dated as of July 13, 1999, by and among the Company, Metris
Direct, Inc. and The Bank of New York, including Form of 10 1/8% Senior
Notes due 2006 and Form of Guarantee (incorporated by
75
reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-4 (File No. 333-86695)).
4.8 Exchange and Registration Rights Agreement, dated as of July 13, 1999, by
and among the Company, Bear, Stearns & Co. Inc., Chase Securities Inc.,
Salomon Smith Barney Inc. and Barclays Capital Inc., relating to the new
notes (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4 (File No. 333-86695)).
Material Contracts
10.1 Amended and Restated Pooling and Servicing Agreement, dated as of July 30,
1998, among Metris Receivables, Inc. ("MRI"), as Transferor, Direct
Merchants Credit Card Bank, National Association ("DMCCB"), as Servicer,
and The Bank of New York (Delaware), as Trustee (incorporated by reference
to Exhibit 4(a) to MRI's Registration Statement on Form S-3 (File No.
333-61343)).
10.2 Amended and Restated Bank Receivables Purchase Agreement, dated as of July
30, 1998, between DMCCB and the Company (incorporated by reference to
Exhibit 4(c) to MRI's Registration Statement on Form S-3 (File No.
333-61343)).
10.3 Amended and Restated Bank Receivables Purchase Agreement, dated as of July
30, 1998, between the Company and MRI (incorporated by reference to Exhibit
4(d) to MRI's Registration Statement on Form S-3 (File No. 333-61343)).
10.4 Owner Trust Agreement, dated as of July 30, 1998, among MRI and Wilmington
Trust Company (incorporated by reference to Exhibit 10.1(ii) to the
Company's Quarterly Report on Form 10-Q for the period ended September 30,
1998 (File No. 1-12351)).
10.5 Liquidity Agreements, each dated July 30, 1998, among Metris Owner Trust,
the Lenders thereto and the Administrative Agent (pursuant to Instruction 2
to Item 601, only one such agreement has been filed) (incorporated by
reference to Exhibit 10.1(iii) to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998 (File No. 1-12351)).
(i) Amendment, dated as of July 27, 2000, to the 364-Day Liquidity
Agreement, dated as of July 30, 1998, among Metris Owner Trust, the
lenders parties thereto and The Chase Manhattan Bank, as
administrative agent for the lenders.
(ii) Amendment, dated as of July 27, 2000, to the 3-Year Liquidity
Agreement, dated as of July 30, 1998, among Metris Owner Trust, the
lenders parties thereto and The Chase Manhattan Bank, as
administrative agent for the lenders.
10.6* Change of Control Severance Agreement, dated as of May 15, 1998, by and
between the Company and Ronald N. Zebeck and a schedule of executive
officers of the Company also having such an agreement with the Company,
indicating the differences from the version of agreement filed (as
permitted by Instruction 2 to Item 601 of Regulation S-K) (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
76
Report on Form 10-Q for the quarter ended September 30, 1998 (File No.
1-12351)).
(i) Amendment to Ronald N. Zebeck's Change of Control Severance Agreement,
dated as of December 9, 1998 (incorporated by reference to Exhibit
10.7(i) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-12351)).
(ii) Amended Schedule of Executive Officers with Change of Control
Severance Agreements.
10.7* Retention Agreement, dated May 17, 1999, between Ronald N. Zebeck and
Metris Companies Inc. (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
(File No. 1-12351)).
10.8 Amended and Restated Credit Agreement, dated as of July 21, 2000, among
Metris Companies Inc.; the lenders from time to time parties thereto; The
Chase Manhattan Bank, as Administrative Agent; Bank of America, N.A., as
Syndicate Agent; Deutsche Bank AG, New York Branch, as Co-Documentation
Agent; U.S. Bank National Association, as Co-Documentation Agent; and
Barclays Bank PLC, as Co-Agent (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No.
1-12351)).
10.9 Transfer and Administration Agreement, dated December 9, 1998, among
Enterprise Funding Corporation, Park Avenue Receivables Corporation,
Sheffield Receivables Corporation, Metris Asset Funding Co. and Direct
Merchants Credit Card Bank, National Association (incorporated by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10-K the year ended
December 31, 1998 (File No. 1-12351)).
10.10 Receivables Purchase Agreement, dated December 9, 1998, between the
Company and Metris Asset Funding Co. (incorporated by reference to Exhibit
3.1 to the Company's Annual Report on Form 10-K the year ended December 31,
1998 (File No. 1-12351)).
10.11* Metris Companies Inc. Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-4/A (File No. 333-86695)).
10.12* Metris Companies Inc. Management Stock Purchase Plan (incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on Form
S-4/A (File No. 333-86695)).
10.13* Metris Companies Inc. Amended and Restated Annual Incentive Plan for
Designated Corporate Officers (incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S-4/A (File No. 333-86695)).
10.14* Metris Companies Inc. Amended and Restated Long-Term Incentive and Stock
Option Plan (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4/A (File No. 333-86695)).
(i)* Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 (File No. 1-12351)).
77
(ii)* Form of Non-Qualified Performance Accelerated Stock Option Agreement.
(iii)* Form of Restricted Stock Award Agreement.
10.15 Transfer and Administration Agreement, dated June 30, 1999, among Direct
Merchants Credit Card Bank, National Association, as Transferor and
Collection Agent; Enterprise Funding Corporation, Sheffield Receivables
Corporation, as Purchasers; Barclays Bank PLC, as Agent; and NationsBank,
N.A., as Bank Investor and Agent Bank (incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-4/A (File No.
333-86695)).
Other Exhibits
11 Computation of Earnings Per Share.
12 (a) Computation of Ratio of Earnings to Fixed Charges.
12 (b) Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividends.
13 Pages 25 to 68 of the 2000 Annual Report to Shareholders. The 2000
Annual Report shall not be deemed to be filed with the Commission except to
the extent that information is specifically incorporated herein by
reference.
21 Subsidiaries of the Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.
78