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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 001-12351
METRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1849591
(State of Incorporation) (I.R.S. Employer Identification No.)
10900 Wayzata Boulevard, Minnetonka, Minnesota 55305-1534
(Address of principal executive offices)
(952) 525-5020
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No _____
-----
As of July 31, 2003, 57,798,577 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
- --------------------------------------------------------------------------------
June 30, 2003
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets..............................3
Consolidated Statements of Income........................4
Consolidated Statements of Changes in
Stockholders' Equity.................................5
Consolidated Statements of Cash Flows....................6
Notes to Consolidated Financial Statements...............7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................................24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......................................46
Item 4. Controls and Procedures.....................................47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................48
Item 2. Changes in Securities.......................................48
Item 3. Defaults Upon Senior Securities.............................48
Item 4. Submission of Matters to a Vote of Security Holders.........48
Item 5. Other Information...........................................49
Item 6. Exhibits and Reports on Form 8-K............................49
Signatures..................................................51
2
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands) (Unaudited)
June 30, December 31,
2003 2002
---- ----
Assets:
Cash and due from banks ............................ $ 86,518 $ 62,813
Federal funds sold ................................. 33,700 88,000
Short-term investments ............................. 346,963 429,419
----------- -----------
Cash and cash equivalents .......................... 467,181 580,232
----------- -----------
Retained interests in loans securitized ............ 1,623,652 1,736,912
Less: Valuation allowance ......................... 858,605 986,517
----------- -----------
Net retained interests in loans securitized ........ 765,047 750,395
----------- -----------
Credit card loans .................................. 632,913 846,417
Less: Allowance for loan losses ................... 109,162 90,315
----------- -----------
Net credit card loans .............................. 523,751 756,102
----------- -----------
Property and equipment, net ........................ 51,510 83,831
Purchased portfolio premium, net ................... 51,584 64,579
Other receivables due from credit card
securitizations, net ............................ 281,233 184,220
Other assets ....................................... 167,783 174,987
----------- -----------
Total assets .................................. $ 2,308,089 $ 2,594,346
=========== ===========
Liabilities:
Deposits ........................................... $ 641,934 $ 892,754
Debt ............................................... 383,237 357,649
Accounts payable ................................... 49,996 53,589
Deferred income .................................... 119,807 159,267
Accrued expenses and other liabilities ............. 92,173 72,062
----------- -----------
Total liabilities ............................. 1,287,147 1,535,321
----------- -----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000
shares authorized, 1,208,695 and 1,156,086
shares issued and outstanding, respectively ... 450,239 430,642
Common stock, par value $.01 per share;
300,000,000 shares authorized, 64,853,877 and
64,223,231 shares issued, respectively ........ 648 642
Paid-in capital .................................... 230,241 227,376
Unearned compensation .............................. (292) --
Treasury stock - 7,055,300 shares .................. (58,308) (58,308)
Retained earnings .................................. 398,414 458,673
----------- -----------
Total stockholders' equity .................... 1,020,942 1,059,025
----------- -----------
Total liabilities and stockholders' equity .... $ 2,308,089 $ 2,594,346
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per-share data) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Interest Income:
Credit card loans ......................... $ 29,713 $ 66,324 $ 59,620 $ 154,850
Federal funds sold ........................ 165 110 524 224
Other ..................................... 1,556 2,359 3,451 3,563
--------- --------- --------- ----------
Total interest income ..................... 31,434 68,793 63,595 158,637
--------- --------- --------- ----------
Deposit interest expense .................. 9,597 18,335 20,505 41,988
Other interest expense .................... 9,120 8,620 17,553 17,132
--------- --------- --------- ----------
Total interest expense .................... 18,717 26,955 38,058 59,120
--------- --------- --------- ----------
Net Interest Income ....................... 12,717 41,838 25,537 99,517
Provision for loan losses ................. 30,033 90,601 74,819 202,477
--------- --------- --------- ----------
Net Interest Expense After
Provision for Loan Losses ............ (17,316) (48,763) (49,282) (102,960)
--------- --------- --------- ----------
Other Operating Income:
Net securitization and credit card
servicing income ..................... 31,110 71,223 87,506 228,642
Credit card fees, interchange and other
credit card income.................... 20,146 32,759 41,903 93,759
Enhancement services revenue .............. 84,954 95,649 178,638 190,645
--------- --------- --------- ----------
136,210 199,631 308,047 513,046
--------- --------- --------- ----------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses... 28,138 56,193 64,192 96,745
Employee compensation ..................... 45,721 54,365 99,102 110,913
Data processing services and communications 17,034 20,795 36,212 43,101
Enhancement services claims expense ....... 8,087 15,917 21,109 27,124
Occupancy and equipment ................... 8,924 12,291 18,537 25,088
Purchased portfolio premium amortization .. 6,499 7,743 12,995 16,198
MasterCard/Visa assessment and fees ....... 2,231 3,583 4,646 7,417
Credit card fraud losses .................. 1,069 2,953 2,009 5,181
Asset impairments, lease write-offs and
severance............................. 6,011 9,523 22,788 9,523
Other ..................................... 18,866 26,161 38,505 42,622
--------- --------- --------- ----------
142,580 209,524 320,095 383,912
--------- --------- --------- ----------
(Loss) Income Before Income Taxes ......... (23,686) (58,656) (61,330) 26,174
Income tax (benefit) expense .............. (7,982) (22,282) (20,668) 10,208
--------- --------- --------- ----------
Net (Loss) Income ......................... (15,704) (36,374) (40,662) 15,966
Convertible preferred stock dividends ..... 9,908 9,394 19,597 18,582
--------- --------- --------- ----------
Net Loss Applicable to Common Stockholders $ (25,612) $ (45,768) $ (60,259) $ (2,616)
========= ========= ========= ==========
Loss per share:
Basic ................................ $ (0.44) $ (0.74) $ (1.05) $ (0.04)
Diluted .............................. $ (0.44) $ (0.74) $ (1.05) $ (0.04)
Shares used to compute loss per share:
Basic ................................ 57,462 61,503 57,360 61,844
Diluted .............................. 57,462 61,503 57,360 61,844
Dividends declared per common share ....... -- $ 0.01 -- $ 0.02
See accompanying Notes to Consolidated Financial Statements.
4
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Total
Number of Shares Preferred Common Paid-in Unearned Treasury Retained Stockholders'
Preferred Common Stock Stock Capital Compensation Stock Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2001 ........ 1,058 63,419 $ 393,970 $ 642 $ 232,413 $ (4,980) $ (13,014) $ 532,924 $1,141,955
Net income .................. -- -- -- -- -- -- -- 15,966 15,966
Cash dividends .............. -- -- -- -- -- -- -- (1,892) (1,892)
Common stock repurchased .... -- (2,720) -- -- -- -- (32,951) -- (32,951)
Preferred dividends in kind . 48 -- 17,928 -- -- -- -- (17,928) --
Issuance of common stock
under employee benefit
plans .................... -- 161 -- 2 2,255 -- -- -- 2,257
Deferred compensation
obligations .............. -- 76 -- 1 967 (968) -- -- --
Amortization of restricted
stock .................... -- -- -- -- -- 911 -- -- 911
------ ------- --------- --------- --------- -------- --------- --------- ----------
BALANCE AT JUNE 30, 2002 .... 1,106 60,936 $ 411,898 $ 645 $ 235,635 $ (5,037) $ (45,965) $ 529,070 $1,126,246
====== ======= ========= ========= ========= ======== ========= ========= ==========
BALANCE AT
DECEMBER 31, 2002 ........ 1,156 57,168 $ 430,642 $ 642 $ 227,376 $ -- $ (58,308) $ 458,673 $1,059,025
Net loss .................... -- -- -- -- -- -- -- (40,662) (40,662)
Preferred dividends in kind . 53 -- 19,597 -- -- -- -- (19,597) --
Issuance of common stock
under employee benefit
plans .................... -- 352 -- 3 2,367 -- -- -- 2,370
Deferred compensation
obligations .............. -- 303 -- 3 546 (549) -- -- --
Restricted stock
forfeitures .............. -- (24) -- -- (48) 46 -- -- (2)
Amortization of restricted
stock .................... -- -- -- -- -- 211 -- -- 211
------ ------- --------- --------- --------- -------- --------- --------- ----------
BALANCE AT JUNE 30, 2003 .... 1,209 57,799 $ 450,239 $ 648 $ 230,241 $ (292) $ (58,308) $ 398,414 $1,020,942
====== ======= ========= ========= ========= ======== ========= ========= ==========
See accompanying Notes to Consolidated Financial Statements.
5
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30,
2003 2002
---- ----
Operating Activities:
Net (loss) income ..................................... $ (40,662) $ 15,966
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ......................... 67,518 52,374
Provision for loan losses ............................. 74,819 202,477
Retained interests valuation (income) expense ......... (131,893) 38,126
Asset impairments, lease write-offs, and severance .... 22,788 9,523
Changes in operating assets and liabilities, net:
Other receivables due from credit card
securitizations
(104,500) 54,024
Accounts payable and accrued expenses ............ (2,111) 43,770
Deferred income .................................. (39,460) (17,045)
Other ............................................ (29,477) 36,398
----------- -----------
Net cash provided by (used in) operating activities ... (182,978) 435,613
----------- -----------
Investing Activities:
Proceeds from transfers of portfolios to the Metris
Master Trust...................................... 315,065 1,486,993
Net proceeds from sales and repayments of securitized
loans............................................. (773,955) (785,856)
Net loans collected ................................... 733,600 337,903
Disposal of premises .................................. 19,252 --
Additions to premises and equipment ................... (727) (3,538)
----------- -----------
Net cash provided by investing activities ............. 293,235 1,035,502
----------- -----------
Financing Activities:
Proceeds from issuance of debt ........................ 125,348 153
Repayment of debt ..................................... (100,206) (292,000)
Net decrease in deposits .............................. (250,820) (736,147)
Cash dividends paid ................................... -- (1,892)
Proceeds from issuance of common stock ................ 2,370 2,257
Repurchase of common stock ............................ -- (32,951)
----------- -----------
Net cash used in financing activities ................. (223,308) (1,060,580)
----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (113,051) 410,535
Cash and cash equivalents at beginning of period ...... 580,232 488,086
----------- -----------
Cash and cash equivalents at end of period ............ $ 467,181 $ 898,621
=========== ===========
Supplemental disclosures and cash flow information:
Cash paid (received) during the period for:
Interest ......................................... $ 21,019 $ 61,345
Income taxes ..................................... (31,846) (16,488)
Tax benefit from employee stock option exercises ...... 1 174
See accompanying Notes to Consolidated Financial Statements.
6
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except as noted) (Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries, including Direct Merchants Credit
Card Bank, National Association ("Direct Merchants Bank" or "DMCCB" or the
"Bank"), which may be referred to as "we," "us," "our" or the "Company." We are
an information-based direct marketer of consumer lending products and
enhancement services.
We have eliminated all significant intercompany balances and transactions
in consolidation. We have reclassified certain prior-period amounts to conform
with the current period's presentation. In prior periods, we classified interest
income, provision for loan losses, and related credit card loan fees generated
from retained interests in loans securitized on the income statement as
"Interest income-credit card loans and retained interests in loans securitized,"
"Provision for loan losses" and "Credit card fees, interchange and other credit
card income." We have reclassified these amounts to "Net securitization and
credit card servicing income." In the second quarter of 2003, certain
subsidiaries were designated as guarantors which had previously been classified
as non-guarantors. The supplemental consolidating financial statements have been
reclassified for all periods presented.
Interim Financial Statements
We have prepared the unaudited interim consolidated financial statements
and related unaudited financial information in the footnotes in accordance with
accounting principles generally accepted in the United States of America and the
rules and regulations of the Securities and Exchange Commission ("SEC") for
interim financial statements. These interim financial statements reflect all
adjustments consisting of normal recurring accruals which, in the opinion of
management, are necessary to present fairly our consolidated financial position
and the results of our operations and our cash flows for the interim periods.
You should read these consolidated financial statements in conjunction with the
financial statements and the notes thereto contained in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2002. The nature of our
business is such that the results of any interim period may not be indicative of
the results to be expected for the entire year.
Pervasiveness of Estimates
We have prepared the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions that affect the reported amounts in
the consolidated financial statements and accompanying notes. The most
significant and subjective of these estimates is our determination of the
adequacy of the allowance for loan losses and our determination of the fair
value of retained interests from assets securitized including the fair value of
cash restricted in the Metris Master Trust. The significant factors susceptible
to future change that have an impact on these estimates include default rates,
net interest spreads, liquidity and overall economic conditions. As a result,
the actual losses in our loan portfolio and the fair value of our retained
interests as of June 30, 2003 and December 31, 2002 could materially differ from
these estimates.
7
Comprehensive Income
SFAS No. 130 "Reporting Comprehensive Income," does not apply to our
current financial results and therefore, net income equals comprehensive income.
NOTE 2 - EARNINGS PER SHARE
The earnings per share calculation for the three- and six-month periods
ended June 30, 2003 and 2002 excludes the assumed conversion of the convertible
preferred stock and the outstanding stock options, as they are anti-dilutive.
NOTE 3 - Stock-Based Compensation Plans
We recognize compensation cost for stock-based employee compensation plans
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. No
expense was reflected in net income related to stock options as all options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant. We recorded $0.2 million of amortization of deferred
compensation obligation, net of related tax benefit, in employee compensation
related to restricted stock granted in 2003.
Pro forma information regarding net (loss) income and (loss) earnings per
share has been determined as if we accounted for our employee stock options
under the fair value method. The fair value of the options was estimated at the
grant date using a Black-Scholes option pricing model. The fair value of the
options is amortized to expense over the options' vesting periods. Under the
fair value method, our net (loss) earnings and (loss) earnings per share would
have been recorded at the pro forma amounts indicated below:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net (loss) income, as reported ...................... $ (15,704) $ (36,374) $ (40,662) $ 15,966
Deduct: Annual stock-based employee
compensation expense (benefit) determined
based on the fair value for all awards,
net of related tax effects........................ 3,003 8,631 (4,894) 13,004
--------- --------- --------- ---------
Pro forma net (loss) income ......................... $ (18,707) $ (45,005) $ (35,768) $ 2,962
========= ========= ========= =========
Loss per share:
Basic-as reported ................................ (0.44) (0.74) (1.05) (0.04)
========= ========= ========= =========
Basic-pro forma .................................. (0.50) (0.88) (0.97) (0.25)
========= ========= ========= =========
Diluted-as reported .............................. (0.44) (0.74) (1.05) (0.04)
========= ========= ========= =========
Diluted-pro forma ................................ (0.50) (0.88) (0.97) (0.25)
========= ========= ========= =========
Weighted-average assumptions in option valuation:
Risk-free interest rates ......................... 1.5% 3.7% 1.5% 3.7%
Dividend yields .................................. -- 1.6% -- 1.6%
Stock volatility factor .......................... 124.2% 92.9% 110.1% 92.9%
Expected life of options (in years) .............. 2.7 6.0 4.2 6.0
The above pro forma amounts may not be representative of the effects on
reported net (loss) earnings for future periods.
8
NOTE 4 - ACCOUNTING CHANGES
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes accounting and reporting standards for goodwill and
other intangible assets. It requires enterprises to test these assets for
impairment upon adoption of SFAS 142 as well as on an annual basis, and reduce
the carrying amount of these assets if they are found to be impaired. Goodwill
and other intangible assets with an indefinite useful life will no longer be
amortized. Other intangible assets with an estimable useful life will continue
to be amortized over their useful lives. The adoption of the new standard did
not have a material impact on our financial statements.
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
supersedes FASB Statement No. 121, and provides a single accounting model for
long-lived assets which are to be disposed. The adoption of the new standard did
not have a material impact on our financial statements.
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The
statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when a liability is incurred. Under EITF Issue No. 94-3,
a liability for an exit cost as generally defined in Issue No. 94-3 was
recognized at the date of an entity's commitment to an exit plan. The provisions
of SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of this standard did not have a material
impact on our financial statements.
In January 2003, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent disclosures in financial statements about the effects of stock-based
compensation. SFAS No. 148 requirements are effective for fiscal years ending
after December 15, 2002. There was not a material impact on our financial
statements upon adoption of SFAS No. 148.
In January 2003, the Federal Financial Institutions Examination Council
("FFIEC") issued guidance with respect to account management, risk management,
and loss allowance practices for institutions engaged in credit card lending.
The guidance provides requirements for certain operational and accounting
policies, which are designed to bring consistency in practice between
institutions. At this time we are reviewing the impact of the guidance and there
can be no assurance that adoption of the guidance will not have a material
adverse effect on our financial condition.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
FASB Interpretation No. 46 requires a variable interest entity to be
consolidated by a company, if that company is subject to a majority of the risk
of loss from the variable interest entity activities or entitled to receive a
majority of the entity's residual returns or both. The
9
Interpretation also requires disclosures about variable interest entities that
the company is not required to consolidate, but in which it has a significant
variable interest. The consolidation requirements of Interpretation No. 46 apply
immediately to variable interest entities created after January 31, 2003, and
apply to existing variable interest entities in the first fiscal year or interim
period beginning after June 15, 2003. Interpretation No. 46 provides a specific
exemption for entities qualifying as Qualified Special Purpose Entities as
described in SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities-a replacement of FASB Statement No.
125." All of our non-consolidated entities are Qualified Special Purpose
Entities under the definition in SFAS No. 140. We do not expect the adoption of
this Interpretation to have a material impact on our financial statements.
In April 2003, FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003. In addition, certain provisions relating to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered into
after June 30, 2003. We do not expect the adoption of SFAS No. 149 to have a
material impact on our financial statements.
In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for classification and measurement of certain instruments
with characteristics of both liabilities and equity. It requires that financial
instruments within its scope be classified as a liability (or asset in some
circumstances). Many of those instruments were classified as equity under
previous accounting guidance. The statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 does not have a material impact on our
financial statements at this time.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning of period ........ $ 125,357 $ 416,914 $ 90,315 $ 410,159
Allowance related to assets transferred
to the Metris Master Trust......... (2,526) (147,137) (3,981) (168,580)
Provision for loan losses ............. 30,033 90,601 74,819 202,477
Principal receivables charged-off ..... (44,789) (91,595) (53,470) (180,486)
Recoveries ............................ 1,087 6,496 1,479 11,709
--------- --------- --------- ---------
Net principal receivables charged-off . (43,702) (85,099) (51,991) (168,777)
--------- --------- --------- ---------
Balance at end of period .............. $ 109,162 $ 275,279 $ 109,162 $ 275,279
========= ========= ========= =========
Credit card loans greater than 30 days contractually past due for the
periods ended June 30, 2003, December 31, 2002 and June 30, 2002 were $48.3
million, $7.9 and $148.9 million, respectively.
10
NOTE 6 - RETAINED INTERESTS IN LOANS SECURITIZED
Activity in retained interests is as follows:
June 30, December 31,
-------- ------------
2003 Change 2002
---- ------ ----
Contractual retained interests... $ 920,908 $ (70,145) $ 991,053
Excess transferor's interests.... 76,140 29,680 46,460
Finance charge receivables ...... 626,604 (72,795) 699,399
----------- ----------- -----------
Gross retained interests ........ 1,623,652 (113,260) 1,736,912
Valuation allowance ............. (858,605) 127,912 (986,517)
----------- ----------- -----------
Net retained interests .......... $ 765,047 $ 14,652 $ 750,395
=========== =========== ===========
June 30, December 31,
-------- ------------
2002 Change 2001
---- ------ ----
Contractual retained interests... $ 903,629 $ 126,220 $ 777,409
Excess transferor's interests.... 18,807 (21,117) 39,924
Finance charge receivables ...... 630,124 108,279 521,845
----------- ----------- -----------
Gross retained interests ........ 1,552,560 213,382 1,339,178
Valuation allowance ............. (744,205) (206,706) (537,499)
----------- ----------- -----------
Net retained interests .......... $ 808,355 $ 6,676 $ 801,679
=========== =========== ===========
Activity in the valuation allowance on retained interests in loans
securitized is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning of period ......... $ 931,052 $ 551,385 $ 986,517 $ 537,499
Transfers related to assets transferred
to the Metris Master Trust........... 2,526 147,137 3,981 168,580
Retained interests valuation (income)
expense.............................. (74,973) 45,683 (131,893) 38,126
--------- --------- --------- ---------
Balance at end of period ............... $ 858,605 $ 744,205 $ 858,605 $ 744,205
========= ========= ========= =========
NOTE 7 - 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 cardholders include customers obtained from third-party
lists and other customers for whom general credit bureau information is
available.
We market our enhancement services, including: (1) debt waiver protection
for unemployment, disability, death and family leave; (2) membership programs
such as card registration, purchase protection and other club memberships; and
(3) third-party insurance, directly to our credit card customers and customers
of third parties. We administer extended service plans issued through a third
party retailer, which are no longer being sold, and will expire by first
quarter, 2005. We sell extended service plans for homeowners through third party
distribution partnerships as well as directly to consumers.
11
On July 29, 2003, CPP Holdings Limited, a privately owned provider of
assistance products and services throughout Europe, and CPP US Operations Group
(collectively with CPP Holdings Limited "CPP") purchased the membership and
warranty products and operations of the Company's enhancement services segment.
Further details are described in Footnote 8 "Subsequent Events." The Company
will retain the credit protection and insurance business, and CPP will become
the Company's preferred provider of membership and warranty products.
We have presented the segment information reported below on a managed
basis. We use this basis to review segment performance and to make operating
decisions. In doing so, the income statement and balance sheet are adjusted to
reverse the effects of securitizations. Presentation on a managed basis is not
in conformity with accounting principles generally accepted in the United States
of America. The adjustment columns in the segment table include adjustments to
present the information on an owned basis as reported in the financial
statements of this quarterly report.
We do not allocate the expenses, assets and liabilities attributable to
corporate functions to the operating segments, such as employee compensation,
data processing services and communications, third-party servicing expenses, and
other expenses including occupancy, depreciation and amortization, professional
fees, and other general and administrative expenses. We include these expenses
in the reconciliation of the income before income taxes, for the reported
segments to the consolidated total. We do not allocate capital expenditures for
leasehold improvements, capitalized software and furniture and equipment to
operating segments. There were no material operating assets located outside of
the United States for the periods presented.
The enhancement services operating segment has paid fees to our consumer
lending products segment for successful marketing efforts to cardholders at a
rate similar to those paid to other third parties. The enhancement services
segment reports interest income and our consumer lending products segment
reports interest expense at our weighted-average borrowing rate for the excess
cash flow generated by the enhancement services segment and used by the consumer
lending products segment to fund the growth of cardholder balances.
12
Three Months Ended June 30,
2003
----
Consumer
Lending Enhancement Securitization Other
Products Services Adjustments(a) Adjustments(b) Consolidated
-------- -------- -------------- -------------- ------------
Interest income. $ 451,205 $ 34 $ (419,771) $ (34) $ 31,434
Interest
expense .... 60,198 -- (41,447) (34) 18,717
----------- ---------- ----------- ----------- -----------
Net interest
income ....... 391,007 34 (378,324) -- 12,717
Other operating
income........ 88,293 84,954 (37,037) -- 136,210
Total revenue... 479,300 84,988 (415,361) -- 148,927
Income before
income taxes.. 22,968 (c) 58,632 (c) -- (105,286) (23,686)
Total assets ... $ 9,502,200 $ 77,614 $(7,860,000) $ 588,275 (d) $ 2,308,089
Three Months Ended June 30,
2002
----
Consumer
Lending Enhancement Securitization Other
Products Services Adjustments(a) Adjustments(b) Consolidated
-------- -------- -------------- -------------- ------------
Interest income. $ 509,821 $ 58 $ (441,028) $ (58) $ 68,793
Interest
expense ...... 81,005 -- (53,992) (58) 26,955
----------- ----------- ----------- ----------- -----------
Net interest
income ....... 428,816 58 (387,036) -- 41,838
Other operating
income........ 119,317 95,649 (15,335) -- 199,631
Total revenue .. 548,133 95,707 (402,371) -- 241,469
Income before
income taxes.. 21,145 (c) 54,660 (c) -- (134,461) (58,656)
Total assets ... $10,985,709 $ 142,705 $(8,924,497) $ 1,007,792 (d) $ 3,211,709
13
Six Months Ended June 30,
2003
----
Consumer
Lending Enhancement Securitization Other
Products Services Adjustments(a) Adjustments(b) Consolidated
-------- -------- -------------- -------------- ------------
Interest income $ 936,434 $ 63 $ (872,839) $ (63) $ 63,595
Interest
expense .... 124,209 -- (86,088) (63) 38,058
----------- ---------- ------------ ----------- -----------
Net interest
income ....... 812,225 63 (786,751) -- 25,537
Other operating
income...... 187,583 178,638 (58,174) -- 308,047
Total revenue .. 999,808 178,701 (844,925) -- 333,584
Income before
income taxes. 61,478 (c) 109,977 (c) -- (232,785) (61,330)
Total assets ... $ 9,502,200 $ 77,614 $(7,860,000) $ 588,275 (d) $ 2,308,089
Six Months Ended June 30,
2002
----
Consumer
Lending Enhancement Securitization Other
Products Services Adjustments(a) Adjustments(b) Consolidated
-------- -------- -------------- -------------- ------------
Interest income. $ 1,036,499 $ 2,386 $ (877,862) $ (2,386) $ 158,637
Interest
expense .... 171,737 -- (110,231) (2,386) 59,120
----------- ---------- ----------- ----------- -----------
Net interest
income ..... 864,762 2,386 (767,631) -- 99,517
Other operating
income...... 250,080 190,645 72,321 -- 513,046
Total revenue .. 1,114,842 193,031 (695,310) -- 612,563
Income before
income taxes 161,469 (c) 119,567 (c) -- (254,862) 26,174
Total assets ... $10,985,709 $ 142,705 $(8,924,497) $ 1,007,792 (d) $3,211,709
(a) This column reflects adjustments to the Company's internal financial
statements, which are prepared on a managed basis, to eliminate investors'
interests in securitized loans.
(b) The other adjustments column includes: intercompany eliminations and
amounts not allocated to segments.
(c) Income before income taxes includes intercompany commissions paid by the
enhancement services segment to the consumer lending products segment for
successful marketing efforts to cardholders of $3.1 million for the three
months ended June 30, 2003 and $3.0 million for the three months ended June
30, 2002, $6.1 million for the six months ended June 30, 2003 and $6.3
million for the six months ended June 30, 2002.
(d) Total assets include the assets attributable to corporate functions not
allocated to operating segments and the removal of investors' interests in
securitized loans to present total assets on an owned basis.
14
NOTE 8 - SUBSEQUENT EVENTS
On July 29, 2003, we announced the sale of the membership and warranty
business of the Enhancement Services segment for proceeds of approximately $45.0
million. We anticipate being able to record a gain related to the sale in the
third quarter, 2003.
In July of 2003, the Office of the Comptroller of the Currency ("OCC")
requested and Direct Merchants Bank agreed to eliminate federally insured
deposits at the Bank, or the risk thereof to the Federal Deposit Insurance
Corporation ("FDIC"), by September 30, 2003. We have received preliminary
proposals from financing sources, and we are working with our financial advisors
on a variety of options to achieve this goal, however, there can be no assurance
that we will be successful. These options may include additional conduit
financing or the sale of credit card receivables to third parties.
NOTE 9 - SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS
We have various indirect subsidiaries that do not guarantee Company debt.
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 non-guaranteeing subsidiaries are not presented
because we have determined that the subsidiaries' financial information would
not be material to investors. In the second quarter of 2003, certain
subsidiaries were designated as guarantors which had previously been classified
as non-guarantors. The supplemental consolidating financial statements have been
reclassified for all periods presented.
15
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
June 30, 2003
(Dollars in thousands)
Unaudited
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ................. $ (49) $ 1,234 $ 465,996 $ -- $ 467,181
Net retained interests in
loans securitized....................... 31,883 -- 733,164 -- 765,047
Net credit card loans ..................... 8,393 -- 515,358 -- 523,751
Property and equipment, net ............... -- 50,997 513 -- 51,510
Purchased portfolio premium,
net..................................... 107 -- 51,477 -- 51,584
Other receivables due from
credit card
securitizations, net.................... 7 -- 281,226 -- 281,233
Other assets .............................. 38,277 38,285 130,630 (39,409) 167,783
Investment in subsidiaries ................ 1,409,140 1,016,665 -- (2,425,805) --
----------- ----------- ----------- ----------- -----------
Total assets .............................. $ 1,487,758 $ 1,107,181 $ 2,178,364 $(2,465,214) $ 2,308,089
=========== =========== =========== =========== ===========
Liabilities:
Deposits .................................. $ (1,000) $ -- $ 642,934 $ -- $ 641,934
Debt ...................................... 417,023 9,214 -- (43,000) 383,237
Accounts payable .......................... 97 22,026 32,230 (4,357) 49,996
Deferred income ........................... -- 10,003 111,879 (2,075) 119,807
Accrued expenses and other liabilities
50,696 (343,202) 374,656 10,023 92,173
----------- ----------- ----------- ----------- -----------
Total liabilities ......................... 466,816 (301,959) 1,161,699 (39,409) 1,287,147
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ................ 1,020,942 1,409,140 1,016,665 (2,425,805) 1,020,942
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity.................... $ 1,487,758 $ 1,107,181 $ 2,178,364 $(2,465,214) $ 2,308,089
=========== =========== =========== =========== ===========
16
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 2002
(Dollars in thousands)
Unaudited
Metris Companies Guarantor Non-Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ................. $ (3,795) $ 8,109 575,918 $ -- $ 580,232
Net retained interests in
loans securitized....................... -- -- 750,395 -- 750,395
Net credit card loans ..................... 3,814 -- 752,288 -- 756,102
Property and equipment, net ............... -- 63,395 20,436 -- 83,831
Purchased portfolio premium,
net..................................... 129 -- 64,450 -- 64,579
Other receivables due from
credit card
securitizations, net.................... 13 -- 184,207 -- 184,220
Other assets .............................. 10,098 44,738 181,278 (61,127) 174,987
Investment in subsidiaries ................ 1,606,930 1,580,650 -- (3,187,580) --
----------- ----------- ----------- ----------- -----------
Total assets .............................. $ 1,617,189 $ 1,696,892 $ 2,528,972 $(3,248,707) $ 2,594,346
=========== =========== =========== =========== ===========
Liabilities:
Deposits .................................. $ (1,000) $ -- $ 893,754 $ -- $ 892,754
Debt ...................................... 391,228 9,421 -- (43,000) 357,649
Accounts payable .......................... 71 20,683 38,949 (6,114) 53,589
Deferred income ........................... -- 16,681 146,097 (3,511) 159,267
Accrued expenses and other
liabilities............................. 167,865 43,177 (130,478) (8,502) 72,062
----------- ----------- ----------- ----------- -----------
Total liabilities ......................... 558,164 89,962 948,322 (61,127) 1,535,321
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ................ 1,059,025 1,606,930 1,580,650 (3,187,580) 1,059,025
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity.................... $ 1,617,189 $ 1,696,892 $ 2,528,972 $(3,248,707) $ 2,594,346
=========== =========== =========== =========== ===========
17
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 2003
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest Income (Expense)............... $ (8,682) $ 915 $ 20,484 $ -- $ 12,717
Provision for loan losses .................. 540 -- 29,759 (266) 30,033
--------- --------- --------- --------- ---------
Net Interest Expense After
Provision for Loan Losses ............... (9,222) 915 (9,275) 266 (17,316)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit
card servicing income.................... (539) -- 33,009 (1,360) 31,110
Credit card fees, interchange
and other credit card
income................................... 1,036 19,004 18,162 (18,056) 20,146
Enhancement services revenues............... -- 7,100 80,120 (2,266) 84,954
Intercompany allocations ................... 5,264 73,725 8,247 (87,236) --
--------- --------- --------- --------- ---------
5,761 99,829 139,538 (108,918) 136,210
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses....................... -- 14,315 32,733 (18,910) 28,138
Employee compensation ...................... -- 40,971 4,750 -- 45,721
Data processing services and
communications........................... 5 (19,716) 39,061 (2,316) 17,034
Enhancement services claims
expense.................................. -- (97) 8,184 -- 8,087
Occupancy and equipment .................... -- 8,844 80 -- 8,924
Purchased portfolio premium
amortization ............................ 10 -- 7,621 (1,132) 6,499
MasterCard/Visa assessment
and fees................................. -- -- 2,231 -- 2,231
Credit card fraud losses ................... 10 -- 1,059 -- 1,069
Asset impairments, lease
write-offs and severance ................ 5,128 889 (6) -- 6,011
Other ...................................... 130 16,498 2,245 (7) 18,866
Intercompany allocations ................... 24 27,420 59,792 (87,236) --
--------- --------- --------- --------- ---------
5,307 89,124 157,750 (109,601) 142,580
--------- --------- --------- --------- ---------
(Loss) Income Before Income
Tax Benefit and Equity in
Loss of Subsidiaries..................... (8,768) 11,620 (27,487) 949 (23,686)
Income tax (benefit) expense................ (2,955) 1,989 (7,337) 321 (7,982)
Equity in loss of
subsidiaries............................. (9,891) (20,150) -- 30,041 --
--------- --------- --------- --------- ---------
Net Loss ................................... $ (15,704) $ (10,519) $ (20,150) $ 30,669 $ (15,704)
========= ========= ========= ========= =========
18
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended June 30, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income............... $ (3,017) $ (60) $ 44,915 $ -- $ 41,838
Provision for loan losses .................. (797) -- 91,398 -- 90,601
--------- --------- --------- --------- ---------
Net Interest Expense After
Provision for Loan Losses ............... (2,220) (60) (46,483) -- (48,763)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit
card servicing income.................... (1,777) -- 73,000 -- 71,223
Credit card fees, interchange
and other credit card
income................................... 189 5,796 31,474 (4,700) 32,759
Enhancement services revenues............... -- 2,662 92,987 -- 95,649
Intercompany allocations ................... 41 72,193 15,127 (87,361) --
--------- --------- --------- --------- ---------
(1,547) 80,651 212,588 (92,061) 199,631
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses....................... -- 4,594 51,653 (54) 56,193
Employee compensation ...................... (1,505) 45,753 10,117 -- 54,365
Data processing services and
communications........................... 13 (23,809) 43,018 1,573 20,795
Enhancement services claims
expense.................................. -- 444 15,473 -- 15,917
Occupancy and equipment .................... -- 11,399 892 -- 12,291
Purchased portfolio premium
amortization ............................ -- -- 8,568 (825) 7,743
MasterCard/Visa assessment
and fees................................. -- -- 3,583 -- 3,583
Credit card fraud losses ................... 135 -- 2,818 -- 2,953
Asset impairments, lease
write-offs and severance ................ -- 9,523 -- -- 9,523
Other ...................................... (153) 27,325 5,218 (6,229) 26,161
Intercompany allocations ................... 555 23,510 63,296 (87,361) --
--------- --------- --------- --------- ---------
(955) 98,739 204,636 (92,896) 209,524
--------- --------- --------- --------- ---------
(Loss) Before Income Taxes
and Equity in (Loss) Income
of Subsidiaries.......................... (2,812) (18,148) (38,531) 835 (58,656)
Income tax (benefit) expense................ (1,134) 12,591 (14,487) (19,252) (22,282)
Equity in income of
subsidiaries............................. (34,696) (24,044) -- 58,740 --
--------- --------- --------- --------- ---------
Net Loss ................................... $ (36,374) $ (54,783) $ (24,044) $ 78,827 $ (36,374)
========= ========= ========= ========= =========
19
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 2003
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest Income (Expense) .............. $ (17,388) $ 98 $ 42,827 $ -- $ 25,537
Provision for loan losses .................. 1,387 -- 73,534 (102) 74,819
--------- --------- --------- --------- ---------
Net Interest Expense After
Provision for Loan Losses ............... (18,775) 98 (30,707) 102 (49,282)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit
card servicing income.................... (2,863) -- 92,408 (2,039) 87,506
Credit card fees, interchange and other
credit card income....................... 1,091 31,547 40,050 (30,785) 41,903
Enhancement services revenues............... -- 16,279 168,377 (6,018) 178,638
Intercompany allocations ................... 5,340 139,332 18,237 (162,909) --
--------- --------- --------- --------- ---------
3,568 187,158 319,072 (201,751) 308,047
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses....................... -- 28,902 66,489 (31,199) 64,192
Employee compensation ...................... -- 88,539 10,563 -- 99,102
Data processing services and
communications........................... 4 (41,704) 83,713 (5,801) 36,212
Enhancement services claims
expense.................................. -- 12 21,097 -- 21,109
Occupancy and equipment .................... -- 18,373 164 -- 18,537
Purchased portfolio premium
amortization ............................ 21 -- 15,318 (2,344) 12,995
MasterCard/Visa assessment
and fees................................. -- -- 4,646 -- 4,646
Credit card fraud losses ................... 11 -- 1,998 -- 2,009
Asset impairments, lease
write-offs and severance ................ 5,129 16,527 1,132 -- 22,788
Other ...................................... 213 34,073 4,226 (7) 38,505
Intercompany allocations ................... 35 53,047 109,827 (162,909) --
--------- --------- --------- --------- ---------
5,413 197,769 319,173 (202,260) 320,095
--------- --------- --------- --------- ---------
Loss Before Income Tax
Benefit and Equity in Loss
of Subsidiaries.......................... (20,620) (10,513) (30,808) 611 (61,330)
Income tax benefit ......................... (6,949) (6,968) (6,957) 206 (20,668)
Equity in loss of
subsidiaries............................. (26,991) (23,851) -- 50,842 --
--------- --------- --------- --------- ---------
Net Loss ................................... $ (40,662) $ (27,396) $ (23,851) $ 51,247 $ (40,662)
========= ========= ========= ========= =========
20
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Six Months Ended June 30, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income .............. $ (8,499) $ (1,456) $ 109,472 $ -- $ 99,517
Provision for loan losses .................. (732) -- 153,209 50,000 202,477
--------- --------- --------- --------- ---------
Net Interest Expense After
Provision for Loan Losses ............... (7,767) (1,456) (43,737) (50,000) (102,960)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit
card servicing income ................... (1,742) -- 230,384 -- 228,642
Credit card fees, interchange
and other credit card
income................................... 452 13,719 90,722 (11,134) 93,759
Enhancement services revenues............... -- 18,826 171,819 -- 190,645
Intercompany allocations ................... 72 125,266 24,788 (150,126) --
--------- --------- --------- --------- ---------
(1,218) 157,811 517,713 (161,260) 513,046
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other
product solicitation and
marketing expenses....................... -- 7,254 89,545 (54) 96,745
Employee compensation ...................... (1,101) 94,921 17,093 -- 110,913
Data processing services and
communications........................... 36 (43,371) 88,230 (1,794) 43,101
Enhancement services claims
expense.................................. -- 500 26,624 -- 27,124
Occupancy and equipment .................... -- 23,205 1,883 -- 25,088
Purchased portfolio premium
amortization .............................. -- -- 17,930 (1,732) 16,198
MasterCard/Visa assessment
and fees................................. -- -- 7,417 -- 7,417
Credit card fraud losses ................... 127 -- 5,054 -- 5,181
Asset impairments, lease
write-offs and severance ................ -- 9,523 -- -- 9,523
Other ...................................... (110) 41,826 9,094 (8,188) 42,622
Intercompany allocations ................... 46 41,588 108,491 (150,125) --
--------- --------- --------- --------- ---------
(1,002) 175,446 371,361 (161,893) 383,912
--------- --------- --------- --------- ---------
(Loss) Income Before Income
Taxes and Equity in (Loss)
Income of Subsidiaries................... (7,983) (19,091) 102,615 (49,367) 26,174
Income tax (benefit) expense................ (3,114) (8,207) 40,781 (19,252) 10,208
Equity in income of
subsidiaries............................. 20,835 61,834 -- (82,669) --
--------- --------- --------- --------- ---------
Net Income ................................. $ 15,966 $ 50,950 $ 61,834 $(112,784) $ 15,966
========= ========= ========= ========= =========
21
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2003
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided
by operating activities ................. $(201,937) $ (8,440) $ 344,956 $(317,557) $(182,978)
--------- --------- --------- --------- ---------
Investing Activities:
Net proceeds from sales and
repayments of securitized
loans ................................... (34,950) -- (423,940) -- (458,890)
Net loans (originated)
collected ............................... (6,632) -- 740,232 -- 733,600
Additions to (disposals of)
property and equipment .................. -- (1,259) 19,784 -- 18,525
Investment in subsidiaries ................. 219,546 173,426 -- (392,972) --
--------- --------- --------- --------- ---------
Net cash provided by
investing activities..................... 177,964 172,167 336,076 (392,972) 293,235
--------- --------- --------- --------- ---------
Financing Activities:
Net increase (decrease) in
debt..................................... 25,349 (207) -- -- 25,142
Net decrease in deposits ................... -- -- (250,820) -- (250,820)
Proceeds from issuance of
common stock............................. 2,370 -- -- -- 2,370
Capital contributions ...................... -- (170,395) (540,134) 710,529 --
--------- --------- --------- --------- ---------
Net cash (used in) provided
by financing activities ................. 27,719 (170,602) (790,954) 710,529 (223,308)
--------- --------- --------- --------- ---------
Net (decrease) increase in
cash and cash equivalents ............... 3,746 (6,875) (109,922) -- (113,051)
Cash and cash equivalents at
beginning of period ..................... (3,795) 8,109 575,918 -- 580,232
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of period............................ $ (49) $ 1,234 $ 465,996 $ -- $ 467,181
========= ========= ========= ========= =========
22
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Operating Activities:
Net cash provided by
operating activities..................... $ 195,499 $ 67,362 $ 285,536 $ (112,784) $ 435,613
----------- ----------- ----------- ----------- -----------
Investing Activities:
Net proceeds from sales and
repayments of securitized
loans.................................... -- -- 701,137 -- 701,137
Net loans (originated)
collected................................ 120 (2) 337,785 -- 337,903
Additions to (disposals of)
property and equipment .................. -- (4,776) 1,238 -- (3,538)
Investment in subsidiaries ................. (23,855) (34,721) -- 58,576 --
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided
by investing activities ................. (23,735) (39,499) 1,040,160 58,576 1,035,502
----------- ----------- ----------- ----------- -----------
Financing Activities:
Increase (decrease) in debt ................ 447 (294) (292,000) -- (291,847)
Decrease in deposits ....................... -- -- (736,147) -- (736,147)
Cash dividends paid ........................ (1,892) -- -- -- (1,892)
Proceeds from issuance of
common stock................................ 2,257 -- -- -- 2,257
Repurchase of common stock ................. (32,951) -- -- -- (32,951)
Capital contributions ...................... -- (27,096) (27,112) 54,208 --
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided
by financing activities ................. (32,139) (27,390) (1,055,259) 54,208 (1,060,580)
----------- ----------- ----------- ----------- -----------
Net increase in cash and cash
equivalents.............................. 139,625 473 270,437 -- 410,535
Cash and cash equivalents at
beginning of period ..................... 17,613 1,505 468,968 -- 488,086
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period............................ $ 157,238 $ 1,978 $ 739,405 $ -- $ 898,621
=========== =========== =========== =========== ===========
23
ITEM 2.
METRIS COMPANIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results of
operations of Metris Companies Inc. ("MCI") and its subsidiaries, including
Direct Merchants Credit Card Bank, National Association ("Direct Merchants Bank"
or "DMCCB" or the "Bank"), which may be referred to as "we," "us," "our" or the
"Company." You should read this discussion along with the following documents
for a full understanding of our financial condition and results of operations:
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the fiscal year ended December
31, 2002; and our Proxy Statement for the 2003 Annual Meeting of Stockholders.
In addition, you should read this discussion along with our Quarterly Report on
Form 10-Q for the period ended June 30, 2003, of which this commentary is a
part, and the condensed consolidated financial statements and related notes
thereto.
Results of Operations
Net loss for the three months ended June 30, 2003 was $15.7 million, down
from a net loss of $36.4 million for the second quarter of 2002. Diluted loss
per share for the three months ended June 30, 2003 was $0.44 compared to a
diluted loss per share of $0.74 for the second quarter of 2002. The decrease in
net loss is primarily due to a decrease in the provision for loan losses and
reduction in operating expense, partially offset by a decrease in net interest
margin and a decrease in net securitization and credit card servicing income.
Net margin has declined due to a decrease in average interest-earning assets of
$1.0 billion. The decrease of $40.1 million in net securitization revenue is
primarily due to decreases in excess spread as a result of an increased default
rate and credit card receivables attrition in the Master Trust. In addition, the
credit card receivables attrition in the Master Trust caused a decrease in
servicing fees. The provision for loan losses decreased 66.9% to $30 million for
the second quarter of 2003 from $90.6 million for the same period in 2002. The
decrease is primarily due to a $684 million decline in owned credit card
receivables and lower delinquency levels, partially offset by higher charge-off
rates. Total other operating expenses decreased to $142.6 million in the second
quarter of 2003 from $209.5 million for the same period in 2002. During the
second quarter of 2003, credit card account and other product solicitation and
marketing expenses decreased $28.1 million, largely due to a decrease in credit
card marketing expenditures and decreased enhancement services marketing.
Employee compensation decreased $8.6 million for the three months ended June 30,
2003, due to lower staffing requirements. Enhancement services claims expense
decreased $7.8 million for the three months ended June 30, 2003, primarily due
to a decrease in covered receivable balances on our debt waiver products.
Net loss for the six months ended June 30, 2003 was $40.7 million, down
from net income of $16.0 million for the first six months of 2002. Diluted loss
per share for the six months ended June 30, 2003 was $1.05 compared to diluted
loss per share of $0.04 for the six months ended June 30, 2002. The $56.7
million decrease in net income primarily relates to a $141.1 million reduction
in net securitization and credit card servicing income, a decrease of $74.0
million in net interest income and a $51.9 million decrease in credit card fees
and interchange revenues, offset by a $127.7 million decrease in provision for
loan losses and a $63.8 million decrease in operating expenses.
24
Critical Accounting Policies
The Company's most significant accounting policies are our determination of
the allowance for loan losses, valuation of retained interests and accounting
for deferred acquisition costs and revenue recognition on enhancement services
products.
Allowance for loan losses
We maintain an allowance for loan losses sufficient to absorb anticipated
probable loan losses inherent in the credit card loan portfolio as of the
balance sheet date. At the time of charge-off, all principal balances are
written off against the allowance and all fees and finance charges are netted
against the applicable income statement line item. The allowance is based on
management's consideration of all relevant factors including management's
assessment of applicable economic and seasonal trends.
We segment the loan portfolio into several individual liquidating pools
with similar credit risk characteristics, and estimate (based on historical
experience for similar pools and existing environmental conditions) the dollar
amount of principal, accrued finance charges and fees that will ultimately
charge-off. We then aggregate these pools into prime and subprime portfolios
based on the prescribed FICO score cuts, credit counseling and various pools of
other receivables. We also isolate other potentially higher risk segments such
as accounts that are over their credit limit by more than 10%, accounts in
suspended status under our debt waiver benefits and other programs as deemed
necessary. We separately analyze the reserve requirement on each of these groups
or portfolios.
We continually evaluate the homogenous liquidating risk pools using a
roll-rate model which uses historical delinquency levels and pay-down levels (12
months of historical data, with influence given to the last six months'
performance to capture current economic and seasonal trends), loan seasoning and
other measures of asset quality to estimate charge-offs for both credit losses
and bankruptcy losses.
Additionally, in evaluating the adequacy of the loan loss reserves, we
consider several subjective factors which may be overlaid into the credit risk
roll-rate model in determining the necessary loan loss reserve, including:
o national and economic trends and business conditions, including the
condition of various market segments;
o changes in lending policies and procedures, including those for
underwriting, collection, charge-off and recovery, as well as in the
experience, ability and depth of lending management and staff;
o trends in volume and the product pricing of accounts, including any
concentrations of credit; and
o impacts from external factors - such as changes in competition, and
legal and regulatory requirements - on the level of estimated credit
losses in the current portfolio.
Significant changes in these factors could impact our financial projections
and thereby affect the adequacy of our allowance for loan losses.
25
Valuation of Retained Interests
We determine the fair value of the net retained interests in loans
securitized by calculating the present value of future expected cash flows using
management's best estimate of key assumptions including credit losses, gross
yield, interest expense, servicing fees, payment rates and a discount rate
commensurate with the risks involved. Our fair value analysis considers cash
flows associated with the current receivable balances as of the balance sheet
date. We assume no new sales or increases in outstanding receivables in
conjunction with the accounts in the portfolio. The significant assumptions are
applied to the existing receivable balance to determine the expected future cash
flows. Our funding costs are primarily variable based on the London Interbank
Offered Rate ("LIBOR"), and the income earned on our receivable balance is
substantially variable based on Prime. We assume a flat interest rate
environment and when interest rates change, we assume our assets and liabilities
will reprice in a consistent manner.
Our estimate of the assumptions considers several subjective factors,
including:
o national and economic trends and business conditions, including the
condition of various market segments;
o changes in lending policies and procedures, including those for
underwriting, collection, charge-off and recovery, as well as changes
in the experience, ability and depth of lending management and staff;
o trends in volume and the product pricing of accounts, including any
concentrations of credit; and
o impacts from external factors, such as changes in competition, and
legal and regulatory requirements.
Furthermore, we consider the impact of conduit/asset-backed transaction
enhancement levels. Significant changes in these factors could impact our
financial projections and thereby affect the valuation of the retained
interests. At June 30, 2003, $214.4 million of cash was trapped in the Master
Trust and is recorded at a discounted value of $179.0 million and classified as
"Other due from credit card securitizations, net" on the consolidated balance
sheets.
The significant assumptions used for estimating the fair value of the
retained interests in loans securitized are as follows:
June 30, December 31,
2003 2002
---- ----
Annual discount rate ........................ 20.0% 20.0%
Monthly payment rate ........................ 6.8% 6.8%
Gross yield (1) ............................. 21.1% 21.4%
Annual interest expense and servicing fees... 4.1% 4.3%
Annual gross principal default rate ......... 20.6% 19.9%
(1) Includes finance charges, late and overlimit fees and bad debt recoveries,
net of finance charge and fee charge-offs. Gross yield for purposes of our
valuation does not include interchange income, debt waiver fees, or cash
advance fees.
26
Deferred Acquisition Costs on Enhancement Services Products
We defer qualifying acquisition costs associated with our enhancement
services products. These costs, which relate directly to membership
solicitations (direct response advertising costs), principally include postage,
printing, mailing, telemarketing costs, and commissions paid to third parties.
The total amount of enhancement services deferred costs as of June 30, 2003 and
December 31, 2002 were $46.9 million and $73.2 million, respectively. If
deferred acquisition costs were to exceed forecasted future cash flows, we would
make an appropriate adjustment for impairment. The most significant assumption
used by the Company in determining the realizability of these deferred costs is
future revenues from our enhancement services products. A significant reduction
in revenues could have a material impact on the values of these balances.
Debt Waiver Products
Qualifying membership acquisition costs are deferred and charged to
expense as debt waiver product fees are recognized. We amortize these costs
using an accelerated methodology, which approximates our historical
cancellation experience for debt waiver products. Amortization of debt
waiver acquisition costs was $1.3 million and $2.7 million for the three-
and six-month periods ended June 30, 2003. All other debt waiver
acquisition costs are expensed as incurred. Deferred debt waiver
acquisition costs were $2.3 million and $2.6 million as of June 30, 2003
and December 31, 2002, respectively, and were classified as "Other assets"
on the consolidated balance sheets.
Membership Program Products
Qualifying membership acquisition costs are deferred and charged to
expense as membership fees are recognized. We amortize all deferred costs
on a straight-line basis for all annually billed products, and on an
accelerated method for all monthly billed products, which approximates our
historical cancellation experience for membership program products.
Amortization of membership deferred costs was $13.3 million and $11.9
million for the three months ended June 30, 2003 and 2002, respectively.
Amortization of membership deferred costs was $33.9 million and $19.7
million for the six months ended June 30, 2003 and 2002, respectively. All
other membership acquisition costs are expensed as incurred. Deferred
membership acquisition costs were $42.8 million and $66.9 million as of
June 30, 2003 and December 31, 2002, respectively, and were classified as
"Other assets" on the consolidated balance sheets.
Warranty Products
Qualifying warranty acquisition costs are deferred and charged to
expense as warranty product fees are recognized. Those direct acquisition
costs that cannot be associated with a successful contract, are charged to
expense as incurred. A successful effort conversion percentage is applied
to these incremental direct acquisition costs, which approximates our
historical successful effort rate percentage in selling warranty products.
We amortize these deferred costs using an accelerated amortization
methodology, which approximates our historical cancellation experience
following the expiration of the manufacturer's contractual cancellation
period for the warranty products. Amortization of warranty acquisition
costs were $0.8 million and $3.0 million for the three months ended June
30, 2003 and 2002, respectively. Amortization of warranty acquisition costs
were $2.8 million and $6.1 million for the six months ended June 30, 2003
and 2002, respectively. All other warranty acquisition costs are
27
expensed as incurred. Deferred warranty acquisition costs amount to $1.4
million and $3.0 million as of June 30, 2003 and December 31, 2002,
respectively, and were classified as "Other assets" on the consolidated
balance sheets.
Revenue Recognition on Enhancement Services Products
Debt Waiver Products
Direct Merchants Bank offers various debt waiver products on
receivables it owns as well as securitized receivables. Direct Merchants
Bank records deferred revenue when the debt waiver customer is billed.
Revenue is recognized in the month following the completion of the
cancellation period, which is one-month. Direct Merchants Bank incurs the
related claims and marketing expenses. A reserve is maintained for future
death and finance charge 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 $45.3 million and $58.9 million
for the three months ended June 30, 2003 and 2002, respectively. Revenues
were $95.4 million and $119.6 million for the six months ended June 30,
2003 and 2002, respectively. Unearned revenues and reserves for pending
claims and incurred but not reported claims are recorded in the
consolidated balance sheets in "Deferred income" and "Accrued expenses and
other liabilities," respectively. Unearned revenues as of June 30, 2003
were $14.4 million compared to $16.9 million as of December 31, 2002.
Reserves for pending and incurred but not reported claims were $7.8 million
as of June 30, 2003, compared to $8.2 million as of December 31, 2002.
Membership Program Products
We bill membership fees for enhancement services 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 for all annually billed products, and on an accelerated amortization
method for all monthly billed products over the membership period beginning
after the contractual cancellation period is complete. A liability is
established and netted against the related receivable in the consolidated
balance sheets in "Other assets" from inception of the membership through
the end of the cancellation period that reflects our historical
cancellation experience with these products. Gross receivables as of June
30, 2003 on the membership program products were $13.3 million compared to
$22.0 million as of December 31, 2002. Cancellation reserves were $11.3
million and $19.5 million as of June 30, 2003 and December 31, 2002,
respectively. Revenues recorded for membership products are included in the
consolidated statements of income under "Enhancement services revenues" and
were $28.6 million and $21.1 million for the three months ended June 30,
2003 and 2002, respectively. Revenues for membership products were $59.2
million and $38.3 million for the six months ended June 30, 2003 and 2002,
respectively. Unearned revenues on membership program products are recorded
in the consolidated balance sheets in "Deferred income." Unearned revenues
as of June 30, 2003 were $85.3 million compared to $114.2 million as of
December 31, 2002.
Warranty Products
We coordinate the marketing activities for Direct Merchants Bank and
third-party 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
28
costs on an accelerated amortization method over the life of the related
extended service plan contracts beginning after the expiration of any
manufacturer's warranty coverage. A liability is established and netted
against the related receivable in the consolidated balance sheets in "Other
assets" from inception of the extended service plan through the end of the
cancellation period that reflects our historical cancellation experience
with these products. Gross receivables as of June 30, 2003 on the warranty
products were $3.3 million compared to $3.8 million as of December 31,
2002. Cancellation reserves were $3.0 million and $5.3 million as of June
30, 2003 and December 31, 2002, respectively. Revenues recorded for
warranty products are included in the consolidated statements of income
under "Enhancement services revenues" and were $8.4 million and $12.0
million for the three months ended June 30, 2003 and 2002, respectively.
Revenues for warranty were $18.4 million and $25.0 million for the six
months ended June 30, 2003 and 2002, respectively. Unearned revenues on
warranty products are recorded in the consolidated balance sheets in
"Deferred income." Unearned revenues as of June 30, 2003 were $10.4 million
compared to $17.6 million as of December 31, 2002. Reserves for pending and
incurred but not reported claims, included in "Accrued expenses and other
liabilities," were $0.4 and $0.7 million as of June 30, 2003 and December
31, 2002, respectively.
Net Interest Income
Net interest income consists primarily of interest earned on our credit
card loans, less interest expense on borrowings to fund loans. Table 1 provides
an analysis of interest income and expense, net interest spread, net interest
margin and average balance sheet data for the three- and six-month periods ended
June 30, 2003 and 2002.
Table 1: Analysis of Average Balances, Interest and Average Yields and Rates
(Dollars in thousands)
Three Months Ended June 30,
2003 2002
----------------------------------------------- ----------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets:
Interest-earning assets:
Federal funds sold ........... $ 53,441 $ 165 1.2% $ 28,222 $ 110 1.6%
Short-term investments ....... 448,612 1,556 1.4% 477,642 2,359 2.0%
Credit card loans ............ 690,903 29,713 17.2% 1,737,626 66,324 15.3%
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets. $ 1,192,956 $ 31,434 10.6% $ 2,243,490 $ 68,793 12.3%
Other assets ................. 1,395,501 1,534,543
Allowances for loan
losses ...................... (124,485) (309,827)
----------- -----------
Total assets ................. $ 2,463,972 $ 3,468,206
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits ..................... $ 729,021 $ 9,597 5.3% $ 1,518,104 $ 18,335 4.8%
Debt ......................... 359,378 9,120 10.2% 356,693 8,620 9.7%
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities ............... $ 1,088,399 $ 18,717 6.9% $ 1,874,797 $ 26,955 5.8%
Other liabilities ............ 269,420 434,407
----------- -----------
Total liabilities ............ 1,357,819 2,309,204
Stockholders' equity ......... 1,106,153 1,159,002
----------- -----------
Total liabilities and equity.. $ 2,463,972 $ 3,468,206
=========== ===========
Net interest income and
interest margin (1) ....... $ 12,717 4.3% $ 41,838 7.5%
Net interest rate spread (2).. 3.7% 6.5%
(1) We compute "net interest margin" by dividing annualized net interest income
by average total interest-earning assets.
29
(2) The "net interest rate spread" is the annualized yield on average
interest-earning assets minus the annualized funding rate on average
interest-bearing liabilities.
Net interest income decreased from $41.8 million for the three months ended
June 30, 2002 to $12.7 million for the three months ended June 30, 2003. The
decrease is primarily due to a decrease in average interest-earning assets of
$1.1 billion and a 320 basis point reduction in net interest margin. The
decrease in average interest-earning assets is primarily due to the transfer of
$1.0 billion of receivables to the Master Trust since June 30, 2002. The
decrease in margin is primarily due to a $1.0 billion reduction in average
credit card loans, which has resulted in short-term, lower yielding investments
increasing to 42% of average interest-earning assets, versus 23% in the second
quarter of 2002. In addition, we have experienced a 110 basis point increase in
our funding costs versus the second quarter of 2002.
Table 1: Analysis of Average Balances, Interest and Average Yields and Rates
(cont'd)
(Dollars in thousands)
Six Months Ended June 30,
2003 2002
----------------------------------------------- ----------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets:
Interest-earning assets:
Federal funds sold ........... $ 85,370 $ 524 1.2% $ 28,326 $ 224 1.6%
Short-term investments ....... 493,723 3,451 1.4% 375,204 3,563 1.9%
Credit card loans ............ 721,121 59,620 16.7% 2,115,683 154,850 14.8%
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets. $ 1,300,214 $ 63,595 9.9% $ 2,519,213 $ 158,637 12.7%
Other assets ................. 1,383,374 1,551,933
Allowances for loan
losses .................... (118,572) (358,577)
----------- -----------
Total assets ................. $ 2,565,016 $ 3,712,569
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits ..................... $ 783,951 $ 20,505 5.3% $ 1,722,869 $ 41,988 4.9%
Debt ......................... 374,425 17,553 9.5% 403,824 17,132 8.6%
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities ............... $ 1,158,376 $ 38,058 6.6% $ 2,126,693 $ 59,120 5.6%
Other liabilities ............ 330,288 429,177
----------- -----------
Total liabilities ............ 1,488,664 2,555,870
Stockholders' equity ......... 1,076,352 1,156,699
----------- -----------
Total liabilities and equity.. $ 2,565,016 $ 3,712,569
=========== ===========
Net interest income and
interest margin (1) ....... $ 25,537 4.0% $ 99,517 8.0%
Net interest rate spread (2).. 3.3% 7.1%
(1) We compute "net interest margin" by dividing annualized net interest income
by average total interest-earning assets.
(2) The "net interest rate spread" is the annualized yield on average
interest-earning assets minus the annualized funding rate on average
interest-bearing liabilities.
Net interest income decreased from $99.5 million for the six months ended
June 30, 2002 to $25.5 million for the six months ended June 30, 2003. The
decrease is primarily due to a decrease in average interest-earning assets of
$1.2 billion and a 400 basis point reduction in net interest margin. The
decrease in average interest-earning assets is primarily due to the transfer of
$1.0 billion of receivables to the Master Trust since June 30, 2002. The
decrease in margin is primarily due to a $1.4 billion reduction in average
credit card loans, which has resulted in short-term, lower
30
yielding investments increasing to 45% of average interest-earning assets,
versus 16% for the six months ended June 30, 2002. In addition, we have
experienced a 100 basis point increase in our funding costs versus the same
period in 2002.
Other Operating Income
Other operating income represented 91.5% and 92.3% of revenues for the
three- and six-month periods ended June 30, 2003, versus 82.7% and 83.8% for the
same periods in 2002, respectively.
Other operating income decreased $63.4 million and $205.0 million for the
three- and six-month periods ended June 30, 2003 compared to the same periods in
2002. For the three-month period ended June 30, 2003, net securitization and
credit card servicing income decreased $40.1 million primarily due to a decrease
in excess spread on securitized receivables caused by an increased default rate
and attrition in the Master Trust. In addition, credit card receivables
attrition in the Master Trust has caused a decrease in servicing income of $2.2
million. For the six-month period ended June 30, 2003, net securitization and
credit card servicing income decreased $141.1 million primarily due to lower
excess spreads caused by increased default rates on securitized receivables.
Credit card fees and interchange revenue decreased $12.6 million and $51.9
million for the three- and six-month periods ended June 30, 2003 compared to the
same periods in 2002. The decrease in credit card fees, interchange and other
credit card income, for both the three- and six-month periods, is primarily due
to a decrease in average owned credit card receivables of $1.0 billion and $1.4
billion for the respective three- and six-month periods. Partially offsetting
this decline was an amendment to the core transaction documents of the Master
Trust agreement, effective June 2002, resulting in interchange income earned on
receivables held by the Master Trust being recorded as contribution to the
excess spread earned.
Enhancement services revenues decreased by $10.7 million and $12.0 million
for the three- and six-months ended June 30, 2003. This decrease was primarily
due to a decrease in credit card receivables covered by our debt waiver products
due to portfolio attrition, as well as a decrease in ServiceEdge(R) revenue due
to the expiration of the ServiceEdge(R) extended warranty contracts.
31
Table 2: Enhancement Services Revenues and Active Memberships (In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
Revenues 2003 2002 2003 2002
---- ---- ---- ----
Credit Protection Products.. $ 46,148 $ 59,859 $ 97,124 $121,542
Membership Program Products. 28,609 21,108 59,163 38,268
Warranty / Other .......... 10,197 14,682 22,351 30,835
-------- -------- -------- --------
Total ................... $ 84,954 $ 95,649 $178,638 $190,645
======== ======== ======== ========
June 30, December 31, June 30,
Active Memberships 2003 2002 2002
---- ---- ----
Credit Protection Products.. 773 905 1,056
Membership Program Products. 2,823 3,248 3,085
Warranty / Other ........... 686 941 1,346
----- ----- -----
Total ................... 4,282 5,094 5,487
===== ===== =====
Other Operating Expense
Total other operating expenses for the three- and six-month periods ended
June 30, 2003, decreased $66.9 million and $63.8 million over the comparable
periods in 2002. Credit card account and other product solicitation and
marketing expenses decreased $28.1 million and $32.6 million over the comparable
periods in 2002, largely due to fewer new credit card accounts and decreased
enhancement services marketing expenses. Employee compensation decreased $8.6
million and $11.8 million over comparable periods in 2002, due to lower staffing
requirements. Data processing services and communications decreased $3.8 million
and $6.9 million for the three- and six-month periods ended June 30, 2003,
primarily due to the reduction in our credit card portfolio. Enhancement
services claims expense decreased $7.8 million and $6.0 million for the three-
and six-month periods ended June 30, 2003, primarily due to a decrease in
receivable balances covered by our debt waiver products. Occupancy and Equipment
expenses decreased $3.4 million and $6.6 million over comparable periods in 2002
due to decreased space requirements. Asset impairments, lease write-offs and
severance decreased $3.5 million and increased $13.3 million for the three- and
six-month periods ended June 30, 2003 to $6.0 million and $22.8 million from
$9.5 million and $9.5 million for the same periods in 2002. During the first
quarter of 2003, we recorded approximately $12.0 million of write-downs of
excess property, equipment, and operating leases and a $4.8 million charge for a
workforce reduction. In the second quarter of 2003, we recorded an additional
$0.9 million for a workforce reduction and wrote off the unamortized portion of
the commitment fee of $5.1 million related to a backup financing facility
entered into in March of 2003 with Thomas H. Lee Equity Fund IV, L.P. The
commitment was replaced in June 2003. In the second quarter of 2002, a
write-down of $10 million was taken for portfolios of charged-off loans
purchased in 2001 and 2000. Other expenses decreased $7.3 million and $4.1
million for the three- and six-month periods ended June 30, 2003, compared to
comparable periods in 2002. The decreases were primarily due to reductions in
professional fees of $5.3 million and $1.5 million and travel and entertainment
of $1.2 million and $2.2 million for the three- and six-month periods ended June
30, 2003, respectively.
32
Asset Quality
Our delinquency and net loan charge-off rates at any point in time reflect,
among other factors, the credit risk of loans, the average age of our various
credit card account portfolios, the success of our collection and recovery
efforts, and general economic conditions. The average age of our credit card
portfolio affects the stability of delinquency and loss rates. In order to
minimize losses, we continue to focus our resources on refining our credit
underwriting standards for new accounts, and on collections and post charge-off
recovery efforts. At June 30, 2003, 47% of our outstanding receivables balance
were from credit card accounts that have been with us in excess of two years,
and 22% of outstanding receivables were with us in excess of four years.
We use credit line analyses, account management and customer transaction
authorization procedures to minimize loan losses. Our risk models determine
initial credit lines at the time of underwriting. We manage credit lines on an
ongoing basis and adjust them based on customer usage and payment patterns. We
continually monitor customer accounts and initiate appropriate collection
activities when an account is delinquent or overlimit.
Delinquencies
It is our policy to accrue interest and fee income on all credit card
accounts, except in limited circumstances, until we charge-off the account. In
November 2002, we stopped billing late fees once an account became 120 days
contractually delinquent and in March 2003, we stopped billing overlimit fees
once an account became 120 days contractually delinquent. Past due accounts are
re-aged to current status only after we receive at least three minimum payments
or the equivalent cumulative amount. Accounts can only be re-aged to current
status once every twelve months and two times every five years. Accounts
entering long-term fixed payment forbearance programs may receive a workout
re-age upon entering the debt management program ("workout re-age"). Workout
re-ages can only occur after receipt of at least three consecutive minimum
monthly payments, or the equivalent cumulative amount, as defined by the debt
management program. Workout re-ages can only occur once in five years. This is
in accordance with FFIEC guidance. Table 3 presents the delinquency trends of
our credit card loan portfolio.
Table 3: Loan Delinquency
(Dollars in thousands)
June 30, % of December 31, % of June 30, % of
2003 Total 2002 Total 2002 Total
---- ----- ---- ----- ---- -----
Loans outstanding .... $ 632,913 100% $ 846,417 100% $1,317,238 100%
Loans contractually
delinquent:
30 to 59 days ... 19,699 3.1% 1,673 0.2% 41,382 3.1%
60 to 89 days ... 17,668 2.8% 2,121 0.2% 35,161 2.7%
90 or more days.. 10,899 1.7% 4,082 0.5% 72,360 5.5%
---------- ----- ---------- ----- ---------- -----
Total ......... $ 48,266 7.6% $ 7,876 0.9% $ 148,903 11.3%
========== ===== ========== ===== ========== =====
The decrease in the delinquency rates as of June 30, 2003 and December 31,
2002 compared to June 30, 2002, primarily reflects the sale of approximately
$120 million delinquent receivables during September and December 2002 and an
additional sale of $29.1 million of delinquent receivables in July 2003. These
receivables were accounted
33
for as held-for-sale as of June 30, 2003 and are recorded at fair value in other
assets.
Net Charge-Offs
Net charge-offs are the principal amount of losses from cardholders
unwilling or unable to make minimum payments, bankrupt cardholders and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged-off against the applicable revenue
line item at the time of charge-off. We charge-off and take accounts as a loss
either 60 days after formal notification of bankruptcy, at the end of the month
during which most unsecured accounts become contractually 180 days past due, at
the end of the month during which unsecured accounts that have entered into a
credit counseling or other similar program and later become contractually 120
days past due, or at the end of the month during which secured accounts become
contractually 120 days past due after first reducing the loss by the secured
deposit.
Charge-offs due to bankruptcies were $6.8 million, representing 15.1% of
total gross charge-offs for the three-month period ended June 30, 2003 and $16.6
million, representing 18.1% of total gross charge-offs for the three-month
period ended June 30, 2002. Charge-offs due to bankruptcies were $12.3 million,
representing 23.4% of total gross charge-offs for the six-month period ended
June 30, 2003 and $41.9 million, representing 23.2% of total gross charge-offs
for the six-month period ended June 30, 2002. We charge-off accounts that are
identified as fraud losses no later than 90 days after the last activity. We
enter into forward flow agreements with third parties for the sale of a majority
of charged-off credit card receivables. We also 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.
Table 4: Net Charge-offs
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Average credit card loans.. $ 690,903 $1,737,626 $ 721,121 $2,115,683
Net charge-offs............ 43,702 85,099 51,991 168,777
Net charge-off ratio....... 25.4% 19.6% 14.5% 16.1%
========== ========== ========= ==========
The increase in the net charge-off ratio for the three months ended June
30, 2003 is primarily due to a $27.0 million charge-off related to the sale of
approximately $29.1 million of delinquent receivables in July 2003, which were
accounted for as held-for-sale as of June 30, 2003. The decrease in the
charge-off ratio for the six-month period ended June 30, 2003 is primarily due
to the sale of approximately $120.0 million of delinquent receivables in
September and December of 2002 which reduced the charge-offs required in the
first six months of 2003, offset by charge-offs related to the $29.1 million of
delinquent assets held-for-sale at June 30, 2003.
Provision and Allowance for Loan Losses
We record provisions for loan losses in amounts necessary to maintain the
allowance at a level sufficient to absorb anticipated probable loan losses
inherent in the existing loan portfolio as of the balance sheet date.
34
In order to mitigate credit losses, we have expanded our collections
strategies to aggressively address any potential delinquency increases. We also
leverage forbearance programs and credit counseling services for qualifying
cardholders that are experiencing payment difficulties. These programs include
reduced interest rates, reduced or suspended fees and other incentives to induce
the customer to continue making payments. The amount of customer receivables in
debt forbearance programs was $33.8 million or 5% of total credit card loans as
of June 30, 2003, compared to $34.7 million or 4% of total credit card loans as
of December 31, 2002. All delinquent receivables in debt forbearance programs
are included in Table 3.
The provision for loan losses was $30.0 million and $74.8 million for the
three- and six-month periods ended June 30, 2003, compared to a provision of
$90.6 million and $202.5 million for the same periods in 2002. The decrease in
the provision for loan losses in 2003 compared to 2002 is primarily due to lower
credit card loans. The allowance for loan losses was $109 million as of June 30,
2003, versus $90 million as of December 31, 2002. Our roll-rate models,
including management contingency, indicated our required allowance for loan
losses was in the range of $99 million to $109 million as of June 30, 2003,
versus $75 million to $90 million as of December 31, 2002. The ratio of
allowance for loan losses to period-end credit card loans was 17.2% at June 30,
2003, compared to 10.7% at December 31, 2002. The allowance for loan losses as a
percentage of 30-day plus receivables was 226.2% at June 30, 2003, compared to
1146.7% at December 31, 2002.
We believe the allowance for loan losses is adequate to cover probable
future losses inherent in the loan portfolio under current conditions. However,
we cannot give assurance as to future credit losses that may be incurred in
connection with our loan portfolio, nor can we provide assurance that the
established allowance for loan losses will be sufficient to absorb future
losses.
Retained Interests Valuation
We record a valuation allowance to reduce the contractual value of the
retained interests in loans securitized to fair value. The following summarizes
our retained interests as of June 30, 2003, December 31, 2002, June 30, 2002 and
December 31, 2001.
June 30, December 31,
2003 Change 2002
---- ------ ----
Contractual retained interests.. $ 920,908 $ (70,145) $ 991,053
Excess transferor's interests... 76,140 29,680 46,460
Finance charge receivables...... 626,604 (72,795) 699,399
------------ ----------- -----------
Gross retained interests........ $ 1,623,652 $ (113,260) $ 1,736,912
Valuation allowance............. (858,605) 127,912 (986,517)
------------ ----------- -----------
Net retained interests.......... $ 765,047 $ 14,652 $ 750,395
============ =========== ===========
June 30, December 31,
2002 Change 2001
---- ------ ----
Contractual retained interests. $ 903,629 $ 126,220 $ 777,409
Excess transferor's interests.. 18,807 (21,117) 39,924
Finance charge receivables..... 630,124 108,279 521,845
------------ ----------- -----------
Gross retained interests....... $ 1,552,560 $ 213,382 $ 1,339,178
Valuation allowance............ (744,205) (206,706) (537,499)
------------ ----------- -----------
Net retained interests......... $ 808,355 $ 6,676 $ 801,679
============ =========== ===========
35
Gross retained interests in loans securitized decreased by $113.3 million
between December 31, 2002 and June 30, 2003, to $1.6 billion. The decrease
reflects a $1.1 billion reduction in loans in the Master Trust partially offset
by higher conduit enhancement levels. The $213.4 million increase in gross
retained interests during the six months ended June 30, 2002 was due to the sale
of approximately $1.6 billion of receivables from Direct Merchants Bank to the
Master Trust during the six months ended June 30, 2002.
During the six months ended June 30, 2003, the valuation allowance
decreased by $127.9 million, of which $64.3 million was due to the decrease in
the gross retained interests and $63.6 million due to a decrease in projected
funding costs due to lower projected LIBOR, partially offset by higher projected
default rates. The higher default rates are due to a slower than expected
economic recovery. During the six months ended June 30, 2002, the valuation
allowance increased $206.7 million, primarily due to the higher gross retained
interests and narrowing excess spreads in the Master Trust due to increased
default rates. In addition, at June 30, 2003, $214.4 million of cash was trapped
in the Master Trust and is recorded at a discounted value of $179 million and
classified as "Other due from credit card securitizations, net" on the
consolidated balance sheets, as of June 30, 2003.
Balance Sheet Analysis
Cash and Cash Equivalents
Cash and cash equivalents decreased $113.0 million to $467.2 million as of
June 30, 2003, compared to $580.2 million as of December 31, 2002. The decrease
is primarily due to the reduction in deposits of $250.9 million offset by sales
of receivables from Direct Merchants Bank to the Master Trust.
Credit Card Loans
Credit card loans were $632.9 million as of June 30, 2003, compared to
$846.4 million as of December 31, 2002. The $213.5 million decrease is primarily
a result of the transfer of $319.6 million of receivables from Direct Merchants
Bank to the Master Trust.
Deposits
Deposits decreased $250.9 million to $641.9 million as of June 30, 2003,
from $892.8 million as of December 31, 2002. The decrease relates to a shift in
funding from certificates of deposit ("CDs") to off-balance sheet asset-backed
securitizations.
Property and equipment
Property and equipment decreased to $51.5 million at June 30, 2003, mainly
due to the sale of our Arizona facility on May 1, 2003 for cash proceeds of
$19.3 million, which approximated its carrying value.
Deferred Income
Deferred income decreased $39.5 million to $119.8 million as of June 30,
2003 compared to $159.3 million as of December 31, 2002. The decrease primarily
relates to declining enhancement services enrollments, decrease in covered
receivables under our debt waiver product, our migration from annual-billed to
monthly-billed enhancement service products and the expiration of the
ServiceEdge(R) extended warranty contracts.
36
Liquidity, Funding and Capital Resources
One of our primary financial goals is to maintain an adequate level of
liquidity through active management of assets and liabilities. Liquidity
management is a dynamic process, affected by changes in the characteristics of
our assets and liabilities and short- and long-term interest rates. We use a
variety of financing sources to manage liquidity, funding, and interest rate
risks. Table 5 summarizes our funding and liquidity as of June 30, 2003 and
December 31, 2002:
Table 5: Liquidity, Funding and Capital Resources
June 30, 2003 December 31, 2002
------------- -----------------
DMCCB Other Consolidated DMCCB Other Consolidated
----- ----- ------------ ----- ----- ------------
Cash and due
from banks......... $ 85,412 $ 1,106 $ 86,518 $ 58,399 $ 4,414 $ 62,813
Federal funds
sold...............
33,700 -- 33,700 88,000 -- 88,000
Short-term
investments........
289,747 57,216 346,963 322,039 107,380 429,419
----------- ---------- ------------- ------------ ----------- -------------
Total cash and
cash equivalents... $ 408,859 $ 58,322 $ 467,181 $ 468,438 $ 111,794 $ 580,232
=========== ========== ============= ============ =========== =============
June 30, 2003 December 31, 2002
------------- -----------------
Unused Unused
On-balance sheet funding Outstanding Capacity Outstanding Capacity
----------- -------- ----------- --------
Revolving credit line - July
2003.......................... $ -- $ -- $ -- $ 162,696
Term loan - June 2003 ........... -- N/A 100,000 N/A
10% senior notes - November
2004.......................... 100,000 N/A 100,000 N/A
10.125% senior notes -
July 2006 .................... 147,270 N/A 146,824 N/A
Term loan - June 2004 ........... 125,000 N/A -- --
Other ........................... 10,967 N/A 10,825 N/A
Deposits - various
maturities through
February 2007 ................ 641,934 N/A 892,754 N/A
----------- ----------- ---------- -----------
Subtotal ..................... $ 1,025,171 $ -- $1,250,403 $ 162,696
Off-balance sheet funding
Master Trust:
Term asset backed
securitizations -
various maturities
through January 2009.......... 7,010,000 -- 7,610,000 --
Conduits - various
maturities through
March 2004.................... 850,000 -- 1,177,957 422,043
Metris facility - March 2003 .... -- -- 48,900 26,100
----------- --------- ----------- -----------
Subtotal ................... 7,860,000 -- 8,836,857 448,143
----------- --------- ----------- -----------
Total ...................... $ 8,885,171 $ -- $10,087,260 $ 610,839
=========== ========= =========== ===========
37
For the six months ended June 30, 2003 and 2002, we had net repayments of
approximately $977.0 million and net proceeds of approximately $737.0 million
respectively, from sales of credit card loans to the Master Trust and the Metris
facility referred to in the above table.
Our contractual cash obligations during the next twelve months as of June
30, 2003 are as follows:
Long-term debt.... $126,167
Operating leases.. 13,019
Deposits ......... 182,705
--------
Total ............ $321,891
========
In addition to the contractual cash obligations, open-to-buy on credit card
accounts as of June 30, 2003 was $10.1 billion.
As of June 30, 2003, $2.0 billion of off-balance sheet funding in the
Master Trust is scheduled to amortize over the next twelve months. We base the
amortization amounts on estimated amortization periods, which are subject to
change based on the Master Trust performance.
The following table shows the annualized yields, defaults, costs and excess
spreads for the Master Trust on a cash basis:
Three Months Ended June 30,
(In thousands) 2003 2002
---- ----
Gross yield (1) .............. $ 608,762 26.86% $ 616,011 25.98%
Annual principal defaults .... 477,392 21.06% 373,257 15.74%
---------- ----- ---------- -----
Net portfolio yield .......... 131,370 5.80% 242,754 10.24%
Annual interest expense and
servicing fees............. 83,575 3.86% 100,048 4.33%
---------- ----- ---------- -----
Net excess spread .......... $ 47,795 1.94% $ 142,706 5.91%
========== ===== ========== =====
Six Months Ended June 30,
(In thousands) 2003 2002
---- ----
Gross yield (1) .............. $1,266,543 27.29% $1,202,691 26.27%
Annual principal defaults .... 985,592 21.23% 687,636 15.02%
---------- ----- ---------- -----
Net portfolio yield .......... 280,951 6.06% 515,055 11.25%
Annual interest expense and
servicing fees............. 171,744 3.90% 206,350 4.54%
---------- ----- ---------- -----
Net excess spread .......... $ 109,207 2.16% $ 308,705 6.71%
========== ===== ========== =====
(1) Includes finance charges, late, overlimit and cash advance fees, bad debt
recoveries, interchange income and debt waiver fees, less finance charge
and fee charge-offs.
The Master Trust and the associated off-balance sheet debt provide for
early amortization if certain events occur. These events are described in the
applicable series supplement of each securitization transaction. The significant
events are (i) three-month average excess spreads below levels between 0.0% and
1.0%, (ii) negative transferor's interest within the Master Trust or (iii)
failure to obtain funding during an accumulation period for a maturing term
asset-backed securitization. In addition, there are various triggers within our
securitization agreements that, if broken, would restrict the release of cash to
us from the Master Trust. This restricted cash provides additional security to
the investors in the Master Trust. We reflect cash restricted from release in
the Master Trust as "Other receivables due from credit card
38
securitizations, net" in the consolidated balance sheet. The restricted cash is
discounted to reflect the present value of the future cash release. The triggers
are primarily related to the performance of the Master Trust, in particular the
average of net excess spread over a one- to three-month period.
The cash restricted from release is limited to the amount of excess spread
generated in the Master Trust on a cash basis. During periods of lower excess
spreads, the required amount of cash to be restricted in the Master Trust may
not be achieved. During those periods, all excess cash normally released to
Metris Receivables, Inc. ("MRI") will be restricted from release. Once the
maximum required amount of cash is restricted from release or excess spreads
improve, cash can again be released to us. Based on the performance of our
Master Trust, the amount of cash required to be restricted was $463 million at
June 30, 2003 and $304 million at December 31, 2002. As of June 30, 2003, $177.1
million has been restricted from release in the Master Trust due to performance,
$21.4 million has been restricted from release in the Master Trust due to
corporate debt ratings at the inception of the securitization transactions and
$15.9 million has been restricted from release in the Master Trust for maturity
reserves. As of December 31, 2002, $29.1 million had been restricted from
release in the Master Trust due to performance and $21.4 million had been
restricted from release in the Master Trust due to corporate debt ratings at the
inception of the securitization transactions. The $148.0 million increase in
this restricted cash is a result of approximately $109.2 million of net excess
cash generated by the Master Trust being restricted within the Master Trust and
approximately $38.8 million that was funded as additional enhancements. We
expect all cash basis excess spread to be restricted from release to us until at
least 2004.
On March 17, 2003 we obtained a $425 million extension through March 2004
of an $850 million conduit which was scheduled to mature in June of 2003. We
also secured a $425 million conduit through March 2004, which replaced conduits
and warehouse facilities that matured during March through May 2003.
Furthermore, these conduits provided for the financing of a term asset-backed
securitization that matured in July 2003. The continued availability of funding
under these facilities is subject to various conditions, including a minimum
three-month average excess spread of 1% and a commitment, no later than
September 30, 2003, for funding of a $610 million term asset backed
securitization that matures in January and February 2004. On June 26, 2003, we
paid approximately $4.3 million of prepaid interest and related fees to reduce
the interest rate on one of these financing facilities.
On March 31, 2003, Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV")
committed to provide a term loan to the Company in an aggregate amount of $125
million as a backup financing facility, secured by assets of the Company. On
June 27, 2003 the term loan commitment was terminated and replaced with a $125
million senior secured loan funded by a consortium of lenders. With the
termination of the THL Fund IV commitment, we wrote off $5.1 million of
capitalized commitment fees.
The $125 million term loan was issued pursuant to an Amended and Restated
Senior Secured Credit Agreement dated as of June 18, 2003 (the "Credit
Agreement"). The loan matures June 27, 2004 and carries a fixed interest rate of
12% plus a monthly performance interest payment, which is indexed to the monthly
excess spread in the Master Trust. The funds were used to pay off a $100 million
term loan that matured in June of 2003. The terms of the Credit Agreement, under
which the loan was issued, require mandatory prepayment of a portion of the
principal if the Company receives funds due to the sale of certain Company
assets. We were therefore required to make a $22.5 million principal repayment
from the proceeds of the sale of our membership and warranty business in July,
2003. We are bound by certain covenants under the Credit Agreement as filed July
11, 2003 on Form 8-K. As of June 30, 2003, we were in compliance with all
39
covenants under the Credit Agreement. In addition, under the Agreement,
DirectMerchants Bank dividends paid to MCI are limited to Bank earnings not to
exceed $20 million per quarter.
The Internal Revenue Service ("IRS") has recently completed its examination
of the Company's tax returns through December 31, 1998. The IRS has proposed
adjustments to increase the Company's federal income tax by $42.9 million, plus
interest of more than $15 million, pertaining to the Company's treatment of
certain credit card fees as original issue discount ("OID"). Although these fees
are primarily reported as income when billed for financial reporting purposes,
we believe the fees constitute OID and must be deferred and amortized over the
life of the underlying credit card receivables for tax purposes. Cumulatively
through the year ended December 31, 2002, the Company has deferred more than
$212 million in federal income tax under the OID rules.
The Company believes its treatment of the fees is appropriate and continues
to work with the IRS to resolve the proposed adjustments. The Company's position
on the treatment of credit card fees is consistent with that of many other U.S.
credit card issuers. We do not expect any additional tax to be paid or
settlement to be reached over the next twelve months. However, both the timing
and amount of the final resolution of this matter is uncertain.
In July of 2003, the OCC requested and Direct Merchants Bank agreed to
eliminate federally insured deposits at the Bank, or the risk thereof to the
FDIC, by September 30, 2003. The Bank estimates that it will have approximately
$565 million of insured deposits at September 30, 2003. The Bank also estimates
it will have approximately $375 million of unencumbered cash and approximately
$500 million of available gross receivables at September 30, 2003 to meet this
obligation. We have received preliminary proposals from financing sources, and
we are working with our financial advisors on a variety of options to achieve
this goal. These options may include additional conduit financing or the sale of
credit card receivables to third parties.
During the next twelve months we have contractual cash obligations of $322
million and off-balance sheet funding scheduled to amortize of $2.0 billion,
which includes funding for a $610 million term asset-backed securitization
maturing in January and February 2004. In addition, we require funding for
approximately $565 million of deposits to be paid-off or defeased by September
30, 2003. We have historically utilized a variety of funding vehicles, as well
as ongoing cash generated from operations, to finance credit card receivables,
maturing debt obligations and general operating needs. During the next twelve
months we intend to reduce outstanding credit card receivables in the Master
Trust through lower credit card account acquisitions, attrition in the portfolio
and third party sales as necessary. This reduction in the size of the portfolio
will significantly reduce our need for additional bank conduits or the issuance
of new asset-backed securities. We believe that we will be able to obtain the
requisite funding that will provide us with adequate liquidity to meet
anticipated cash needs, although no assurance can be given to that effect.
Capital Adequacy
In the normal course of business, Direct Merchants Bank enters into
agreements, or is subject to regulatory requirements, that result in cash, debt
and dividend or other capital restrictions.
The Federal Reserve Act imposes various legal limitations on the extent to
which banks can finance or otherwise supply funds to their affiliates. In
particular, Direct Merchants Bank is subject to certain restrictions on any
extensions of credit to or other covered transactions, such as certain purchases
of assets, with MCI and its
40
affiliates. Such restrictions limit Direct Merchants Bank's ability to lend to
MCI and its affiliates. Additionally, Direct Merchants Bank is limited in its
ability to declare dividends to MCI in accordance with the national bank
dividend provisions.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC. At June 30, 2003 and December 31, 2002, 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, as illustrated in
the following table.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Direct Merchants Bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Direct Merchants Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Additionally, the Bank must maintain minimum capital in the aggregate
amount of (i) liquid assets deposited pursuant to the Liquidity Reserve Deposit
Agreement discussed below; (ii) the capital required as a result of the 200%
risk-weight applied to on-book subprime credit card receivables; and (iii) the
minimum capital required under Federal law for a "well capitalized" institution
for all remaining assets owned by the Bank. Under these more stringent
guidelines, Direct Merchants Bank's total capital ratio as of June 30, 2003 was
17.2%, and Direct Merchants Bank was considered a "well-capitalized" depository
institution under regulations of the OCC (including FFIEC subprime guidelines).
Quantitative measures established by regulation to ensure capital adequacy
require Direct Merchants Bank to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 leverage
capital (as defined) to average assets (as defined). Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material adverse effect on our financial statements.
Additional information about Direct Merchants Bank's actual capital amounts
and ratios are presented in the following table:
To be
Adequately To Be Well
Actual Capitalized Capitalized
As of June 30, 2003 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital ..... $259,364 39.4% $ 52,614 8.0% $ 65,768 10.0%
(to risk-weighted
assets)
Tier 1 Capital .... 249,917 38.0% 26,307 4.0% 39,461 6.0%
(to risk-weighted
assets)
Tier 1 Capital .... 249,917 21.8% 45,841 4.0% 57,301 5.0%
(to average assets)
41
To be
Adequately To Be Well
Actual Capitalized Capitalized
As of December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital ..... $402,891 30.9% $104,465 8.0% $130,581 10.0%
(to risk-weighted
assets)
Tier 1 Capital .... 385,658 29.5% 52,233 4.0% 78,349 6.0%
(to risk-weighted
assets)
Tier 1 Capital .... 385,658 24.4% 63,219 4.0% 79,024 5.0%
(to average assets)
Regulatory Matters
On March 18, 2003, we entered into an operating agreement with the OCC
designed to ensure that Direct Merchants Bank continues to operate in a safe and
sound manner.
The operating agreement requires, among other things, the following:
o The Bank must reduce its on-balance-sheet credit card receivables to
no more than $550 million by December 31, 2003 and to zero by December
31, 2004. During the time the Bank is reducing these receivables, the
mix of subprime receivables may not exceed 60% of all credit card
receivables. As of June 30, 2003, 56.2% of the Bank's credit card
receivables were subprime. The Bank will continue to sell credit card
receivables on a daily basis to MCI under the purchase agreement
currently in effect between MCI and the Bank.
o The Bank must maintain minimum capital in the aggregate amount of
(i) liquid assets deposited pursuant to the Liquidity Reserve Deposit
Agreement discussed below; (ii) the capital required as a result of
the 200% risk-weight applied to on-book subprime credit card
receivables; and (iii) the minimum capital required under Federal law
for a "well capitalized" institution for all remaining assets owned by
the Bank.
o The Bank must meet certain liquidity requirements, including
maintaining, on a daily basis, liquid assets of not less than 100% of
the deposits and other liabilities coming due within the next 30 days,
maintaining marketable assets in an amount equal to or in excess of
the Bank's insured deposits, maintaining cash and cash equivalents in
excess of 46% of outstanding CDs, and entering into the Liquidity
Reserve Deposit Agreement discussed below to support the Bank's credit
card receivables funding needs.
o The Bank is working with the OCC to develop a written strategic plan
establishing objectives for the Bank's overall risk profile, earning
performance, growth, balance sheet mix, off-balance sheet activities,
liability structure, capital adequacy, product line development and
marketing segments.
The terms of the operating agreement required Direct Merchants Bank and MCI
to enter into a Capital Assurance and Liquidity Maintenance Agreement ("CALMA")
which also was executed on March 18, 2003. The effect of the CALMA is to
potentially require MCI
42
to make such capital infusions or provide Direct Merchants Bank with financial
assistance so as to permit Direct Merchants Bank to meet its liquidity
requirements.
As required by the operating agreement, Direct Merchants Bank, a
third-party depository bank and the OCC executed a Liquidity Reserve Deposit
Agreement ("LRDA").
If the OCC were to conclude that the Bank failed to implement any provision
of the agreement, the OCC could pursue various enforcement options.
Upon signing these agreements Direct Merchants Bank declared and paid a
$155 million dividend to us. An additional dividend of $15.8 million was
declared and paid during the second quarter of 2003.
In July of 2003, the OCC requested and Direct Merchants Bank agreed to
eliminate federally insured deposits at the Bank, or the risk thereof to the
FDIC, by September 30, 2003. The Bank estimates that it will have approximately
$565 million of insured deposits at September 30, 2003. The Bank also estimates
it will have approximately $375 million of unencumbered cash and approximately
$500 million of available gross receivables at September 30, 2003 to meet this
obligation. We have received preliminary proposals from financing sources, and
we are working with our financial advisors on a variety of options to achieve
this goal. These options may include additional conduit financing or the sale of
credit card receivables to third parties. If we do not eliminate federally
insured deposits, or the risk thereof by September 30, 2003, the OCC could
pursue various enforcement optons.
On August 5, 2003, we received notification from the Securities and
Exchange Commission that we are the subject of a formal, nonpublic
investigation. We believe that this investigation relates primarily to the
Company's treatment of loan loss allowances in 2001 and subsequent years, the
Company's 2001 credit line increase program and other related matters.
The SEC specifically advised us that this is a fact-finding inquiry and
that it has not reached any conclusions related to this matter. We are
cooperating fully with the SEC in this investigation.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are subject to the "safe harbor" created by those sections.
Forward-looking statements include, without limitation: expressions of the
"belief," "anticipation," or "expectations" of management; statements and
information as to our strategies and objectives; return on equity; changes in
our managed loan portfolio; net interest margins; funding costs; liquidity; cash
flow; operating costs and marketing expenses; delinquencies and charge-offs and
industry comparisons or projections; statements as to industry trends or future
results of operations of the Company and its subsidiaries; and other statements
that are not historical fact. 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. Forward-looking statements are based on certain
assumptions by management and are subject to risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements.
These risks and uncertainties include, but are not limited to, our high
liquidity requirement; our higher delinquency rate, credit loss rates and
charge-off rates of our
43
credit card receivables; the higher charge-off and bankruptcy rates of the
Company's target market of moderate-income consumers; the success and impact of
our existing or modified strategic initiatives; risks associated with Direct
Merchants Bank's ability to comply with its agreement with regulators regarding
the safety and soundness of its operations; interest rate risks; risks
associated with acquired portfolios; dependence on the securitization markets
and other funding sources to fund our business, including the refinancing of
existing indebtedness; the effects of government policy and regulation, whether
of general applicability or specific to us, including restrictions and/or
limitations relating to our minimum capital requirements, deposit taking
abilities, reserving methodologies, dividend policies and payments, growth,
and/or underwriting criteria; reduced funding availability and increased funding
costs; privacy laws that could result in lower marketing revenue and penalties
for non-compliance; and general economic conditions that can have a negative
impact on the performance of loans and marketing of enhancement services.
These and other risks and uncertainties are discussed in "Legal
Proceedings" (page 48), "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (pages 24-46) and "Quantitative and
Qualitative Disclosures About Market Risk" (pages 46-47). Although we have
attempted to list comprehensively the major risks and uncertainties, other
factors may in the future prove to be important in causing actual results to
differ materially from those contained in any forward-looking statement. Readers
are cautioned not to place undue reliance on any forward-looking statement,
which speaks only as of the date thereof. We undertake no obligation to update
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Selected Operating Data - Managed Basis
In addition to analyzing the Company's performance on an owned basis, we
analyze the Company's financial performance on a managed loan portfolio basis.
On a managed basis, the balance sheets and income statements include other
investors' interests in securitized loans that are not assets of the Company,
thereby reversing the effects of sale accounting under SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." We believe this information is meaningful to the reader of the
financial statements. We service the receivables that have been securitized and
sold and own the right to the cash flows from those receivables sold in excess
of amounts owed to security holders.
The following information is not in conformity with accounting principles
generally accepted in the United States of America, however, we believe the
information is relevant to understanding the overall financial condition and
results of operations of the Company.
44
Table 6: Managed Loan Portfolio
(Dollars in thousands) June 30, % of December 31, % of June 30, % of
2003 Total 2002 Total 2002 Total
---- ----- ---- ----- ---- -----
Period-end balances:
Credit card loans ................ $ 632,913 $ 846,417 $ 1,317,238
Retained interests and
investors' interests in
loans securitized............ 9,483,652 10,573,769 10,477,057
----------- ----------- ------------
Managed .......................... $10,116,565 $11,420,186 $11,794,295
============ =========== ============
Loans contractually
delinquent:
Credit card loans ................ 48,266 7.6% 7,876 0.9% 148,903 11.3%
Retained interests and
investors' interests in
loans securitized............ 1,084,241 11.4% 1,252,073 11.8% 1,047,236 10.0%
----------- ----------- -----------
Managed .......................... $ 1,132,507 11.2% $ 1,259,949 11.0% $ 1,196,139 10.1%
=========== =========== ===========
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Average balances:
Credit card loans ........... $ 690,903 $ 1,737,626 $ 721,121 $ 2,115,683
Retained interests and
investors' interests in
loans securitized........ 9,771,210 10,163,087 10,086,551 9,856,534
----------- ---------- ----------- -----------
Managed ..................... $10,462,113 $11,900,713 $10,807,672 $11,972,217
=========== =========== =========== ===========
Net charge-offs:
Credit card loans ........... $ 43,702 25.4% $ 85,099 19.6% $ 51,991 14.6% $ 168,777 16.1%
Retained interests and
investors' interests in
loans securitized......... 454,914 18.7% 356,688 14.1% 942,431 18.8% 657,687 13.5%
----------- ----------- ----------- -----------
Managed ..................... $ 498,616 19.1% $ 441,787 14.9% $ 994,422 18.6% $ 826,464 13.9%
=========== =========== =========== ===========
The increase in the managed delinquency rates as of June 30, 2003 over
December 31, 2002 and June 30, 2002 reflects various factors, including
declining receivable balances, a deterioration in the economy and the impact of
our 2001 credit line increase program. The credit line increase program added
pressure to our customers due to increased average outstanding balances, which
require higher monthly payments. This, along with a deteriorating economy, has
made our collections efforts more difficult, resulting in higher delinquencies.
Total managed loans decreased $1.3 billion to $10.1 billion as of June
30, 2003, compared to $11.4 billion as of December 31, 2002. This was primarily
due to a reduction in credit lines, tighter underwriting standards implemented
in 2002 and lower new accounts. The amount of credit card receivables in debt
forbearance programs was $856.0 million or 8.5% of total managed loans as of
June 30, 2003, compared with $860.1 million or 7.5% of managed loans as of
December 31, 2002. All delinquent receivables in debt forbearance programs are
included in Table 6.
Managed net charge-offs increased $56.8 million and $168.0 million for the
three- and six-month periods ended June 30, 2003 compared to the same periods in
2002 primarily due to the impact of the 2001 credit line increase program and
deterioration in the economy.
45
We charge-off bankrupt accounts 60 days following formal notification.
Charge-offs due to bankruptcies were $181.2 million, representing 34.5% of total
managed gross charge-offs for the three months ended June 30, 2003 and $133.2
million, representing 25.3% of total managed gross charge-offs for the three
months ended June 30, 2002. Charge-offs due to bankruptcies were $367.2 million,
representing 35.1% of total managed gross charge-offs for the six months ended
June 30, 2003 and $285.8 million, representing 32.8% of total managed gross
charge-offs for the six months ended June 30, 2002. In addition to those
bankrupt accounts that were charged-off, we received formal notification of
$89.7 million and $103.3 million of managed bankrupt accounts as of June 30,
2003 and 2002, respectively.
Net Interest Income
Table 7: Analysis of Average Balances, Interest and Average Yields and Rates
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in thousands)
Average interest-earning assets:
Owned .............................................. $ 1,192,956 $ 2,243,490 $ 1,300,214 $ 2,519,213
Retained interests and investors'
interests in loans securitized.................... 9,771,210 10,163,201 10,086,551 9,856,591
----------- ----------- ----------- -----------
Managed ................................................ $10,964,166 $12,406,691 $11,386,765 $12,375,804
=========== =========== =========== ===========
Net interest income:
Owned .............................................. $ 12,717 $ 41,838 $ 25,537 $ 99,516
Retained interests and investors'
interests in loans securitized.................... 378,324 387,036 786,751 767,631
----------- ----------- ----------- -----------
Managed ................................................ $ 391,041 $ 428,874 $ 812,288 $ 867,147
=========== =========== =========== ===========
Net interest margin (1):
Owned ............................................... 4.3% 7.5% 4.0% 8.0%
Retained interests and investors'
interests in loans securitized ................... 15.5% 15.3% 15.7% 15.7%
Managed ................................................ 14.3% 13.9% 14.4% 14.1%
(1) We compute net interest margin by dividing annualized net interest income
by average total interest-earning assets.
Managed net interest income decreased $37.8 million and $54.9 million for
the three- and six-month periods ended June 30, 2003, compared to the same
periods in 2002. Net interest income consists primarily of interest earned on
our credit card loans less interest expense on borrowing to fund the loans. The
decrease is primarily due to a $1.4 billion and $989.0 million decrease in
managed average interest-earning assets, for the three- and six-month periods
ended June 30, 2003, compared to the same periods in 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our principal market risk is due to changes in interest rates. This
affects us directly in our lending and borrowing activities, as well as
indirectly, as interest rates may impact the payment performance of our
cardholders.
46
To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our owned
and managed balance sheet to minimize the impact that changes in interest rates
have on the fair value of assets, net income and cash flow. We seek to minimize
that impact primarily by matching asset and liability repricings.
Our primary managed assets are credit card loans, which are virtually all
priced at rates indexed to the variable Prime rate. We fund credit card loans
through a combination of cash flows from operations, asset securitizations, bank
loans, subsidiary bank deposits, long-term debt and equity issuances. Our
securitized loans are owned by the Master Trust and bank-sponsored multi-seller
receivables conduits within the Master Trust, which have committed funding
primarily indexed to variable commercial paper rates and LIBOR. The long-term
debt is at fixed interest rates. At June 30, 2003 and 2002, none of the
securities issued out of the Master Trust and conduit funding of securitized
receivables was funded with fixed rate securities.
In an interest rate environment with rates significantly above current
rates, the potential negative impact on earnings of higher interest expense is
partially mitigated by fixed rate funding and interest rate cap contracts.
The approach we use to quantify interest rate risk is a sensitivity
analysis, which we believe best reflects the risk inherent in our business. This
approach calculates the impact on net income from an instantaneous and sustained
change in interest rates of 200 basis points. In this analysis, interest rates
on our floating rate debt are not allowed to decrease below zero percent.
Assuming that we take no counteractive measures, as of June 30, 2003, a
200-basis-point increase in interest rates affecting our floating rate financial
instruments, including both debt obligations and loans, would result in a
decrease in net income of approximately $24.1 million relative to a base case
over the next 12 months, compared to an approximate $11.0 million decrease as of
December 31, 2002 relative to a base case over the next 12 months. A decrease of
200 basis points would result in an increase in net income of approximately
$35.6 million as of June 30, 2003, and an increase of $55.0 million as of
December 31, 2002.
The change in the 12 month sensitivity to both a 200 basis point increase
and decrease in the market interest rate is mainly due to an increase in loan
balances in the second quarter where the interest rate charged on customer loan
balances is below the floor rate and a continued decrease in the forecasted
future loan balances. You should not construe our use of this methodology to
quantify the market risk of financial instruments as an endorsement of its
accuracy or the accuracy of the related assumptions. In addition, this
methodology does not take into account the indirect impact interest rates may
have on the payment performance of our cardholders, or the fact that LIBOR and
Prime rates may not move in tandem in an increasing or decreasing rate
environment. The quantitative information about market risk is necessarily
limited because it does not take into account operating transactions or other
costs associated with managing immediate changes in interest rates.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Chairman and Chief Executive Officer ("CEO") and the
Chief Financial Officer ("CFO"), we evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO, have concluded
that, as of the end of the period covered by this report, the Company's
disclosure controls and procedures are effective in ensuring that information
required to be disclosed in the reports it files under the
47
Securities Exchange Act of 1934 as amended (the "Exchange Act") are recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. During the quarter ended June 30, 2003, there has been no
change in the Company's internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
There were no material changes in the status of any legal proceedings as of
June 30, 2003.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of shareholders on June 4,
2003 and the following matters were voted on at that meeting.
(b) The directors listed below were elected at that meeting.
(1) The holders of our Common Stock elected six directors for a
one-year term:
Lee R. Anderson, Sr. Edward B. Speno
John A. Cleary Frank D. Trestman
Walter M. Hoff David D. Wesselink
(2) The holders of our Series C Preferred Stock elected four
directors for a one-year term:
C. Hunter Boll David V. Harkins
Thomas M. Hagerty Thomas H. Lee
(c) Matters Voted Upon:
(1) Amendment to the Company's Amended and Restated
Certificate of Incorporation to declassify the Board of Directors
and provide for one-year terms of office for all directors.
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
81,712,933 1,439,178 None 76,558 None
(2) The election of the following directors who will serve
until their successors are elected and qualified, or their
earlier death or resignation:
48
Broker
Director For Against Withheld Abstentions Non-Vote
-------- --- ------- -------- ----------- --------
Lee R. Anderson, Sr. 51,948,579 None 1,366,628 None None
John A. Cleary 45,405,966 None 7,909,241 None None
Walter M. Hoff 41,037,943 None 12,277,264 None None
Edward B. Speno 45,352,848 None 7,962,359 None None
Frank D. Trestman 51,918,402 None 1,396,805 None None
David D. Wesselink 51,589,291 None 1,725,916 None None
C. Hunter Boll 29,913,461 None None None None
Thomas M. Hagerty 29,913,461 None None None None
David V. Harkins 29,913,461 None None None None
Thomas H. Lee 29,913,461 None None None None
(3) Ratification of the selection of KPMG LLP as independent
auditor of the Company for the fiscal year ending December 31,
2003:
Broker
For Against Withheld Abstentions Non-Vote
--- ------- -------- ----------- --------
81,794,163 1,396,435 None 38,069 None
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amended and Restated Senior Secured Credit Agreement, dated
as of June 18, 2003, among Metris Companies Inc., the
Lenders from time to time parties thereto, Goldman Sachs
Credit Partners L.P. as Administrative Agent, and Deutsche
Bank Trust Companies America as Collateral Agent
(Incorporated by reference to Exhibit 10 to MCI's Current
Report on Form 8-K dated July 11, 2003 (File No. 1-12351).
10.2 First Amendment to the Amended and Restated Senior Secured
Credit Agreement and to credit Agreement Reserve Securities
Account Control Agreement, dated as of July 29, 2003 among
Metris Companies Inc., the Lenders from time to time parties
to the Senior Secured Credit Agreement, Goldman Sachs Credit
Partners L.P. as Administrative Agent, and Deutsche Bank
Trust Companies America as Collateral Agent
10.3 Asset Purchase Agreement Dated July 29, 2003 by and among
Metris Companies Inc., Metris Direct, Inc., Metris Direct
Services, Inc., Metris Travel Services Inc., Metris Club
Services, Inc., Metris Warranty Services, Inc., and Metris
Warranty Services of Florida, Inc., CPP Holdings Limited and
CPP US Operations Group, LLC
10.4 Transition Services Agreement dated July 29, 2003 by and
among CPP Holdings Limited and CPP US Operations Group, LLC
and Metris Companies Inc. and MES Insurance Agency, LLC
49
10.5 Employee Leasing Agreement dated July 29, 2003, by and
between CPP Holdings Limited and CPP US Operations Group,
LLC and Metris Companies Inc.
31.1 Certification of Principal Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
31.2 Certification of Principal Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
32.1 Certification of Principal Executive Officer Pursuant to
Section 1350 of Chapter 63 of Title 18 of the United States
Code.
32.2 Certification of Principal Financial Officer Pursuant to
Section 1350 of Chapter 63 of Title 18 of the United States
Code.
(b) Reports on Form 8-K:
On April 16, 2003, we filed a Current Report on Form 8-K to
report the submission of unaudited financial statements in a
press release dated April 16, 2003.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METRIS COMPANIES INC.
(Registrant)
Date: August 14, 2003 By: /s/ John A. Witham
-------------------
John A. Witham
Executive Vice President, Chief Financial Officer
Principal Financial Officer
Date: August 14, 2003 By: /s/ Mark P. Wagener
--------------------
Mark P. Wagener
Senior Vice President, Controller
Principal Accounting Officer
51