UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 001-12351
METRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1849591
(State of Incorporation) (I.R.S. Employer Identification No.)
10900 Wayzata Boulevard, Minnetonka, Minnesota 55305-1534
(Address of principal executive offices)
(952) 525-5020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 2002, 62,257,143 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
________________________________________________________________________________
March 31, 2002
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets..............................3
Consolidated Statements of Income........................4
Consolidated Statements of Changes in
Stockholders' Equity............................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............................................ 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................32
Item 2. Changes in Securities........................................32
Item 3. Defaults Upon Senior Securities..............................32
Item 4. Submission of Matters to a Vote of Security Holders..........32
Item 5. Other Information............................................32
Item 6. Exhibits and Reports on Form 8-K.............................33
Signatures...................................................34
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per-share data) (Unaudited)
March 31, December 31,
2002 2001
----------- -----------
Assets:
Cash and due from banks ................................ $ 108,597 $ 109,812
Federal funds sold ..................................... 183,809 243,772
Short-term investments ................................. 120,491 134,502
----------- -----------
Cash and cash equivalents .............................. 412,897 488,086
----------- -----------
Retained interests in loans securitized ................ 1,338,437 1,263,655
Less: Allowance for loan losses ....................... 551,385 537,499
----------- -----------
Net retained interests in loans securitized ............ 787,052 726,156
----------- -----------
Credit card loans ...................................... 2,210,847 2,746,656
Less: Allowance for loan losses ....................... 416,914 410,159
----------- -----------
Net credit card loans .................................. 1,793,933 2,336,497
----------- -----------
Property and equipment, net ............................ 111,695 114,913
Deferred tax asset ..................................... -- 32,167
Purchased portfolio premium, net ....................... 86,338 94,793
Other receivables due from credit card
securitizations, net ................................ 190,816 179,868
Other assets ........................................... 268,219 256,206
----------- -----------
Total assets ...................................... $ 3,650,950 $ 4,228,686
=========== ===========
Liabilities:
Deposits ............................................... $ 1,725,886 $ 2,058,008
Debt ................................................... 355,930 647,904
Accounts payable ....................................... 103,011 83,475
Deferred income ........................................ 204,528 215,031
Deferred tax liability ................................. 26,200 --
Accrued expenses and other liabilities ................. 57,393 82,313
----------- -----------
Total liabilities ................................. 2,472,948 3,086,731
----------- -----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000
shares authorized, 1,081,435 and 1,057,638
shares issued and outstanding, respectively........ 402,834 393,970
Common stock, par value $.01 per share;
300,000,000 shares authorized, 64,341,570
and 64,224,878 shares issued, respectively ........ 643 642
Paid-in capital ........................................ 234,235 232,413
Unearned compensation .................................. (4,576) (4,980)
Treasury stock - 2,098,400 and 806,300 shares,
respectively ...................................... (30,596) (13,014)
Retained earnings ...................................... 575,462 532,924
----------- -----------
Total stockholders' equity ........................ 1,178,002 1,141,955
----------- -----------
Total liabilities and stockholders' equity ........ $ 3,650,950 $ 4,228,686
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except earnings per-share data) (Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Interest Income:
Credit card loans and retained interests in loans securitized .................. $ 152,214 $ 163,522
Federal funds sold ............................................................. 114 2,311
Other .......................................................................... 1,204 3,896
--------- ---------
Total interest income .......................................................... 153,532 169,729
Deposit interest expense ....................................................... 23,653 36,623
Other interest expense ......................................................... 8,512 11,212
--------- ---------
Total interest expense ......................................................... 32,165 47,835
--------- ---------
Net Interest Income ............................................................ 121,367 121,894
Provision for loan losses ...................................................... 189,776 87,729
--------- ---------
Net Interest (Expense) Income After Provision for Loan Losses................... (68,409) 34,165
--------- ---------
Other Operating Income:
Net securitization and credit card servicing income............................. 159,524 87,092
Credit card fees, interchange and other credit card income...................... 73,107 62,832
Enhancement services revenues .................................................. 94,996 78,264
--------- ---------
327,627 228,188
--------- ---------
Other Operating Expense:
Credit card account and other product solicitation and marketing
expenses ................................................................... 40,552 40,765
Employee compensation .......................................................... 56,548 54,736
Data processing services and communications .................................... 22,306 22,379
Enhancement services claims expense ............................................ 11,207 6,679
Credit card fraud losses ....................................................... 2,228 2,651
Purchased portfolio premium amortization ....................................... 8,455 7,828
Other .......................................................................... 33,092 36,185
--------- ---------
174,388 171,223
--------- ---------
Income Before Income Taxes and Cumulative Effect of Accounting
Change....................................................................... 84,830 91,130
Income taxes ................................................................... 32,490 35,085
--------- ---------
Income Before Cumulative Effect of Accounting Change............................ 52,340 56,045
Cumulative effect of accounting change (net of income taxes of
$9,000)...................................................................... -- 14,499
--------- ---------
Net Income ..................................................................... 52,340 41,546
Convertible preferred stock dividends-Series C ................................. 9,188 8,403
--------- ---------
Net Income Applicable to Common Stockholders ................................... $ 43,152 $ 33,143
========= =========
Earnings per share:
Basic-income before cumulative effect of accounting change .................. $ 0.55 $ 0.58
Basic-cumulative effect of accounting change ................................ -- (0.15)
Basic-net income ............................................................ 0.55 0.43
Diluted-income before cumulative effect of accounting change ................ 0.54 0.57
Diluted-cumulative effect of accounting change .............................. -- (0.15)
Diluted-net income .......................................................... 0.54 0.42
Shares used to compute earnings per share:
Basic ....................................................................... 96,032 96,660
Diluted ................................................................... 96,973 98,445
Dividends declared per common share ............................................ $ 0.01 $ 0.01
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Total
Number of Shares Preferred Common Paid-in Unearned Treasury Retained Stockholders'
Preferred Common Stock Stock Capital Compensation Stock Earnings Equity
-----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 968 62,243 $ 360,421 $ 622 $198,077 $ -- $ -- $ 324,433 $ 883,553
Net income ............. -- -- -- -- -- -- -- 41,546 41,546
Cash dividends ......... -- -- -- -- -- -- -- (916) (916)
Preferred dividends in
kind - Series C .... 21 -- 8,109 -- -- -- -- (8,109) --
Issuance of common stock
under employee
benefit plans ...... -- 662 -- 7 9,029 (4,241) -- -- 4,795
----- ------ --------- ----- -------- -------- ---------- --------- -----------
BALANCE AT MARCH 31, 2001 ... 989 62,905 $ 368,530 $ 629 $207,106 $ (4,241) $ -- $ 356,954 $ 928,978
===== ====== ========= ===== ======== ======== ========== ========= ===========
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 ............. -- -- -- -- -- -- -- 52,340 52,340
Cash dividends ......... -- -- -- -- -- -- -- (938) (938)
Common stock repurchased -- (1,292) -- -- -- -- (17,582) -- (17,582)
Preferred dividends in
kind - Series C .... 23 -- 8,864 -- -- -- -- (8,864) --
Issuance of common stock
under employee
benefit plans ...... -- 116 -- 1 1,822 -- -- -- 1,823
Amortization of
restricted stock ... -- -- -- -- -- 404 -- -- 404
----- ------ --------- ----- -------- -------- ---------- --------- -----------
BALANCE AT MARCH 31, 2002 ... 1,081 62,243 $ 402,834 $ 643 $234,235 $ (4,576) $ (30,596) $ 575,462 $ 1,178,002
===== ====== ========= ===== ======== ======== ========== ========= ===========
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Operating Activities:
Net income ........................................... $ 52,340 $ 41,546
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change .......... -- 14,499
Depreciation and amortization ................... 27,240 18,176
Change in allowance for loan losses ............. 20,641 22,823
Loss on derivative instruments .................. 9,272 3,710
Changes in operating assets and liabilities, net:
Deferred income taxes ....................... 58,367 (3,994)
Other receivables due from credit card
securitizations ........................ (20,220) 7,982
Accounts payable and accrued expenses ....... (5,384) 37,815
Deferred income ............................. (10,503) (23,128)
Other ....................................... (23,531) (15,345)
--------- ---------
Net cash provided by operating activities ............ 108,222 104,084
--------- ---------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans................................. (111,244) 115,592
Net loans originated or collected .................... 572,271 (225,684)
Additions to property and equipment .................. (3,645) (2,867)
--------- ---------
Net cash provided by (used in) investing activities .. 457,382 (112,959)
--------- ---------
Financing Activities:
(Decrease) increase in debt .......................... (291,974) 134
Decrease in deposits ................................. (332,122) (31,810)
Cash dividends paid .................................. (938) (916)
Issuance of common stock ............................. 1,823 9,036
Repurchase of common stock ........................... (17,582) --
--------- ---------
Net cash used in financing activities ................ (640,793) (23,556)
--------- ---------
Net decrease in cash and cash equivalents ............ (75,189) (32,431)
Cash and cash equivalents at beginning of period ..... 488,086 521,440
--------- ---------
Cash and cash equivalents at end of period ........... $ 412,897 $ 489,009
========= =========
Supplemental disclosures and cash flow
information:
Cash paid during the period for:
Interest ........................................ $ 34,261 $ 42,090
Income taxes .................................... (17,948) (7,831)
Tax benefit from employee stock option
exercises........................................ 170 743
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except as noted) (Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries, including Direct Merchants Credit
Card Bank, N.A. ("Direct Merchants Bank"), which may be referred to as "we,"
"us," "our" and the "Company." We are an information-based direct marketer of
consumer lending products and enhancement services.
We have eliminated all significant intercompany balances and transactions
in consolidation. We have reclassified certain prior-period amounts to conform
with the current period's presentation.
Interim Financial Statements
We have prepared the unaudited interim consolidated financial statements
and related unaudited financial information in the footnotes in accordance with
accounting principles generally accepted in the United States of America and the
rules and regulations of the Securities and Exchange Commission ("SEC") for
interim financial statements. These interim financial statements reflect all
adjustments consisting of normal recurring accruals which, in the opinion of
management, are necessary to present fairly our consolidated financial position
and the results of our operations and our cash flows for the interim periods.
You should read these consolidated financial statements in conjunction with the
financial statements and the notes thereto contained in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2001. The nature of our
business is such that the results of any interim period may not be indicative of
the results to be expected for the entire year.
Pervasiveness of Estimates
We have prepared the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions that affect the reported amounts in
the consolidated financial statements and accompanying notes. The most
significant and subjective of these estimates is our determination of the
adequacy of the allowance for loan losses and our determination of the fair
value of retained interests from assets securitized. The significant factors
susceptible to future change that have an impact on these estimates include
default rates, net interest spreads, liquidity and overall economic conditions.
As a result, the actual losses in our loan portfolio and the fair value of our
retained interests as of March 31, 2002 and December 31, 2001 could materially
differ from these estimates.
NOTE 2 - EARNINGS PER SHARE
The following table presents the computation of basic and diluted weighted-
average shares used in the per-share calculations:
Three Months Ended
March 31,
2002 2001
---- ----
(In thousands)
Income before cumulative effect of accounting change ......... $52,340 $56,045
Preferred dividends - Series C ............................... 9,188 8,403
------- -------
Net income applicable to common stockholders before cumulative
effect of accounting change .............................. 43,152 47,642
Cumulative effect of accounting change, net .................. -- 14,499
------- -------
Net income applicable to common stockholders ................. $43,152 $33,143
======= =======
Weighted-average common shares outstanding ................... 62,188 62,303
Adjustments for dilutive securities:
Assumed conversion of convertible preferred stock ............ 33,844 34,357
------- -------
Basic common shares .......................................... 96,032 96,660
Assumed exercise of outstanding stock options ................ 941 1,785
------- -------
Diluted common shares ........................................ 96,973 98,445
======= =======
NOTE 3 - ACCOUNTING CHANGES
On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments. SFAS 133 requires enterprises to recognize all derivatives as
either assets or liabilities in the statement of financial position and to
measure those instruments at fair market value. As a result of the adoption of
SFAS 133, we marked our derivatives to market value and recognized a one-time,
non-cash, after-tax charge to earnings of $14.5 million. This one-time charge is
reflected as a "Cumulative effect of accounting change" in the consolidated
statements of income for the three months ended March 31, 2001.
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes accounting and reporting standards for goodwill and
other intangible assets. It requires enterprises to test these assets for
impairment upon adoption of SFAS 142 as well as on an annual basis, and reduce
the carrying amount of these assets if they are found to be impaired. Goodwill
and other intangible assets with an indefinite useful life will no longer be
amortized. Other intangible assets with an estimable useful life will continue
to be amortized over their useful lives. The adoption of the new standard did
not have a material impact on our financial statements.
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
supersedes FASB Statement No. 121, and provides a single accounting model for
long-lived assets to be disposed of. The adoption of the new standard did not
have a material impact on our financial statements.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the managed allowance for loan losses is as follows:
Three Months Ended
March 31,
2002 2001
---- ----
Balance at beginning of period $ 947,658 $ 763,975
Provision for loan losses .... 189,776 87,729
Provision for loan losses (1) 215,039 180,063
Loans charged off ............ (404,066) (272,081)
Recoveries ................... 19,892 27,112
--------- ---------
Net loans charged off ........ (384,174) (244,969)
--------- ---------
Balance at end of period ..... $ 968,299 $ 786,798
========= =========
(1) Amounts are included in "Net securitization and credit card servicing
income."
As of March 31, 2002 and December 31, 2001, we had $51.6 million and $5.4
million in loans classified as non-accrual, respectively. As of March 31, 2001,
we had no loans classified as non-accrual. Managed loans contractually 90 or
more days past due and still accruing interest amounted to $529.1 million,
$467.6 million and $390.4 million as of March 31, 2002, December 31, 2001 and
March 31, 2001, respectively.
NOTE 5 - SEGMENTS
We operate in two principal areas: consumer lending products and
enhancement services. Our consumer lending products are primarily unsecured
credit cards, including the Direct Merchants Bank MasterCard(R) and Visa(R). Our
credit card accountholders include 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, and death; (2) membership programs such as card
registration, purchase protection and other club memberships; and (3)
third-party insurance, directly to our credit card customers and customers of
third parties. We currently administer our extended service plans sold through a
third-party retailer, and the customer pays the retailer directly. In addition,
we develop customized targeted mailing lists from information contained in our
databases for use by unaffiliated companies in their own product solicitation
efforts that do not directly compete with our efforts.
We have presented the segment information reported below on a managed
basis. We use this basis to review segment performance and to make operating
decisions. 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 elimination column in the segment table includes adjustments to
present the information on an owned basis as reported in the financial
statements of this quarterly report.
We do not allocate the expenses, assets and liabilities attributable to
corporate functions to the operating segments, such as employee compensation,
data processing services and communications, third-party servicing expenses, and
other expenses including occupancy, depreciation and amortization, professional
fees, and other general and administrative expenses. We include these expenses
in the reconciliation of the income before income taxes and cumulative effect of
accounting changes for the reported segments to the consolidated total. We do
not allocate capital expenditures for leasehold improvements, capitalized
software and furniture and equipment to operating segments. There were no
material operating assets located outside of the United States for the periods
presented. Our enhancement services operating segment pays a fee to our consumer
lending products segment for successful marketing efforts to the consumer
lending products segment's cardholders at a rate similar to those paid to our
other third parties. Our enhancement services segment reports interest income
and our consumer lending products segment reports interest expense at our
weighted-average borrowing rate for the excess cash flow generated by the
enhancement services segment that is used by the consumer lending products
segment to fund the growth of cardholder balances.
Three Months Ended March 31,
2002
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
Interest income $ 526,678 $ 2,328 $ (375,474)(b) $ 153,532
Interest expense 90,732 -- (58,567)(b) 32,165
----------- ----------- ----------- -----------
Net interest
income ..... 435,946 2,328 (316,907) 121,367
Other revenue .. 130,763 94,996 101,868 327,627
Total revenue .. 566,709 97,324 (215,039) 448,994
Income before
income taxes 140,324(c) 64,907(c) (120,401)(d) 84,830
Total assets ... $11,177,901 $ 151,429 $(7,678,380)(e) $ 3,650,950
Three Months Ended March 31,
2001
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
Interest income $ 466,820 $ 3,620 $ (300,711)(b) $ 169,729
Interest expense 143,930 -- (96,095)(b) 47,835
----------- ----------- ----------- -----------
Net interest
income ..... 322,890 3,620 (204,616) 121,894
Other revenue .. 125,371 78,264 24,553 228,188
Total revenue .. 448,261 81,884 (180,063) 350,082
Income before
income taxes
and cumulative
effect of
accounting
change ....... 157,580(c) 54,678(c) (121,128)(d) 91,130
Total assets ... $ 9,181,949 $ 138,599 $(5,556,087)(e) $ 3,764,461
(a) The reconciliation column includes: intercompany eliminations; amounts not
allocated to segments; and adjustments to the amounts reported on a managed
basis to reflect the effects of securitization.
(b) The reconciliation to consolidated owned interest revenue and interest
expense includes the elimination of $2.3 million for the three months ended
March 31, 2002 and $3.6 million for the three months ended March 31, 2001 of
intercompany interest received by the enhancement services segment from the
consumer lending products segment.
(c) Income before income taxes (and cumulative effect of accounting change)
includes intercompany commissions paid by the enhancement services segment to
the consumer lending products segment for successful marketing efforts to
consumer lending products cardholders of $3.3 million for the three months ended
March 31, 2002 and $3.2 million for the three months ended March 31, 2001.
(d) The reconciliation to the owned income before income taxes (and cumulative
effect of accounting change) includes: unallocated costs related to employee
compensation; data processing and communications; third-party servicing
expenses; and other expenses. The majority of these expenses, although not
allocated for the internal segment reporting used by management, relate to the
consumer lending products segment.
(e) Total assets include the assets attributable to corporate functions not
allocated to operating segments and the removal of investors interests in
securitized loans to present total assets on an owned basis.
NOTE 6 - SHAREHOLDERS' EQUITY
On February 6, 2001, the board of directors authorized a share repurchase
program of up to $200 million of its outstanding common stock over a period
ending December 31, 2002. The amount of common shares the company can repurchase
in a calendar year is limited under its various debt agreements. For the three
months ended March 31, 2002, 1,292,100 common shares had been repurchased under
the program for $17.6 million. In 2002, the Company may repurchase up to an
additional $77 million of common shares.
NOTE 7 - SUBSEQUENT EVENT
On April 16, 2002, Direct Merchants Bank entered into an agreement with the
Office of the Comptroller of the Currency ("OCC") to strengthen the safety and
soundness of Direct Merchants Bank's operations. The agreement formalizes
recommendations made and requirements imposed by the OCC following an
examination of Direct Merchants Bank that covered the 15-month period ended
December 31, 2001. On April 17, 2002, Metris Companies Inc. filed the agreement
with the Securities and Exchange Commission as an exhibit to a current report on
Form 8-K.
NOTE 8 - SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS
We have various indirect subsidiaries which do not guarantee company debt.
We have presented the following condensed consolidating financial statements of
the Company, the guarantor subsidiaries and the non-guarantor subsidiaries to
comply with SEC reporting requirements. We have not presented separate financial
statements of the guarantor and non-guarantor subsidiaries because management
has determined that the subsidiaries' financial statements would not be material
to investors.
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
March 31, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ................ $ 5,092 $ 1,870 $ 405,935 $ -- $ 412,897
Net retained interests in loans
securitized ........................... -- -- 787,052 -- 787,052
Credit card loans ........................ 9,451 -- 1,784,482 -- 1,793,933
Property and equipment, net .............. -- 76,032 35,663 -- 111,695
Purchased portfolio premium .............. 248 -- 86,090 -- 86,338
Other receivables due from credit card
securitizations, net................... 7 -- 190,809 -- 190,816
Other assets ............................. 9,866 52,204 211,987 (5,838) 268,219
Investment in subsidiaries ............... 1,956,055 1,778,331 -- (3,734,386) --
----------- ----------- ----------- ------------ -----------
Total assets ............................. $ 1,980,719 $ 1,908,437 $ 3,502,018 $(3,740,224) $ 3,650,950
=========== =========== =========== =========== ===========
Liabilities:
Deposits ................................. $ (1,000) $ -- $ 1,726,886 $ -- $ 1,725,886
Debt ..................................... 346,146 69 9,715 -- 355,930
Accounts payable ......................... 4,362 11,807 89,761 (2,919) 103,011
Deferred income .......................... 804 25,897 180,746 (2,919) 204,528
Deferred tax liability ................... 4,795 (7,207) 28,612 -- 26,200
Accrued expenses and other
liabilities............................ 447,610 (78,184) (312,033) -- 57,393
----------- ----------- ----------- ----------- -----------
Total liabilities ........................ 802,717 (47,618) 1,723,687 (5,838) 2,472,948
----------- ----------- ----------- ------------- -----------
Total stockholders' equity ............... 1,178,002 1,956,055 1,778,331 (3,734,386) 1,178,002
----------- ----------- ----------- ------------- -----------
Total liabilities and
stockholders' equity................... $ 1,980,719 $ 1,908,437 $ 3,502,018 $(3,740,224) $ 3,650,950
=========== =========== =========== =========== ===========
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ............ $ 17,613 $ 1,505 $ 468,968 $ -- $ 488,086
Net retained interests in loans
securitized ....................... -- -- 726,156 -- 726,156
Credit card loans .................... 1,646 -- 2,334,851 -- 2,336,497
Property and equipment, net .......... -- 78,425 36,488 -- 114,913
Deferred income taxes ................ (31,921) 4,937 59,151 -- 32,167
Purchased portfolio premium .......... 248 -- 94,545 -- 94,793
Other receivables due from credit card
securitizations, net............... 34 644 179,190 -- 179,868
Other assets ......................... 10,145 50,794 201,525 (6,258) 256,206
Investment in subsidiaries ........... 1,900,528 1,745,701 -- (3,646,229) --
----------- ----------- ----------- ----------- -----------
Total assets ......................... $ 1,898,293 $ 1,882,006 $ 4,100,874 $(3,652,487) $ 4,228,686
=========== =========== =========== =========== ===========
Liabilities:
Deposits ............................. $ (1,000) $ -- $ 2,059,008 $ -- $ 2,058,008
Debt ................................. 345,924 171 301,809 -- 647,904
Accounts payable ..................... 3,070 15,461 68,073 (3,129) 83,475
Deferred income ...................... 3,270 30,615 184,275 (3,129) 215,031
Accrued expenses and other
liabilities........................ 405,074 (64,769) (257,992) -- 82,313
----------- ----------- ----------- ----------- -----------
Total liabilities .................... 756,338 (18,522) 2,355,173 (6,258) 3,086,731
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ........... 1,141,955 1,900,528 1,745,701 (3,646,229) 1,141,955
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ............................ $ 1,898,293 $ 1,882,006 $ 4,100,874 $(3,652,487) $ 4,228,686
=========== =========== =========== =========== ===========
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended March 31, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income ......... $ (5,482) $ (1,173) $ 128,022 $ -- $ 121,367
Provision for loan losses ............. 65 -- 139,711 50,000 189,776
---------- --------- --------- ---------- ---------
Net Interest Expense After
Provision for Loan Losses .......... (5,547) (1,173) (11,689) (50,000) (68,409)
---------- --------- --------- ---------- ---------
Other Operating Income:
Net securitization and credit card
servicing income.................... 2,378 -- 157,146 -- 159,524
Credit card fees, interchange and other
credit card income.................. (2,079) 7,923 131,709 (64,446) 73,107
Enhancement services revenues.......... -- 16,163 78,833 -- 94,996
Intercompany allocations .............. 30 53,073 9,661 (62,764) --
---------- --------- --------- ---------- ---------
329 77,159 377,349 (127,210) 327,627
---------- --------- --------- ---------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses -- 3,229 37,323 -- 40,552
Employee compensation ................. 404 49,168 6,976 -- 56,548
Data processing services and
communications ..................... 23 (19,562) 45,211 (3,366) 22,306
Enhancement services claims expense -- (513) 11,720 -- 11,207
Credit card fraud losses .............. (8) -- 2,236 -- 2,228
Purchased portfolio premium
amortization ....................... -- -- 10,444 (1,989) 8,455
Other ................................. 43 26,348 8,661 (1,960) 33,092
Intercompany allocations .............. (509) 18,078 45,195 (62,764) --
---------- --------- --------- ---------- ---------
(47) 76,748 167,766 (70,079) 174,388
---------- --------- --------- ---------- ---------
(Loss) Income Before Income Taxes and
Equity in Income of Subsidiaries.... (5,171) (762) 197,894 (107,131) 84,830
Income taxes .......................... (1,980) (292) 75,793 (41,031) 32,490
Equity in income of subsidiaries....... 55,531 122,101 -- (177,632) --
---------- --------- --------- ---------- ---------
Net Income ............................ $ 52,340 $ 121,631 $ 122,101 $ (243,732) $ 52,340
========== ========= ========= ========== =========
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended March 31, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income ............. $ (35,551) $ (1,430) $ 158,875 $ -- $ 121,894
Provision for loan losses ................. 204 -- 87,525 -- 87,729
--------- --------- --------- --------- ---------
Net Interest (Expense) Income After
Provision for Loan Losses (35,755) (1,430) 71,350 -- 34,165
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ....................... 2,378 -- 84,714 -- 87,092
Credit card fees, interchange and other
credit card income ..................... (1,289) (6,788) 71,111 (202) 62,832
Enhancement services revenues -- 17,118 61,146 -- 78,264
--------- --------- --------- --------- ---------
1,089 10,330 216,971 (202) 228,188
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses .... -- 6,120 34,645 -- 40,765
Employee compensation ..................... -- 43,411 11,325 -- 54,736
Data processing services and
communications ......................... -- (30,533) 52,912 -- 22,379
Enhancement services claims expense ....... -- 167 6,512 -- 6,679
Credit card fraud losses .................. -- -- 2,651 -- 2,651
Purchased portfolio premium
amortization ............................. -- -- 7,828 -- 7,828
Other ..................................... 38 18,462 17,685 -- 36,185
--------- --------- --------- --------- ---------
38 37,627 133,558 -- 171,223
--------- --------- --------- --------- ---------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries and
Cumulative Effect of Accounting Change . (34,704) (28,727) 154,763 (202) 91,130
Income taxes .............................. (13,361) (11,970) 60,494 (78) 35,085
Equity in income of subsidiaries .......... 62,889 79,770 -- (142,659) --
--------- --------- --------- --------- ---------
Income Before Cumulative Effect of
Accounting Change ...................... 41,546 63,013 94,269 (142,783) 56,045
Cumulative effect of
accounting change, net ................. -- -- 14,499 -- 14,499
--------- --------- --------- --------- ---------
Net Income ................................ $ 41,546 $ 63,013 $ 79,770 $(142,783) $ 41,546
========= ========= ========= ========= =========
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2002
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Operating Activities:
Net cash provided by operating
activities............................ $ 67,286 $ 36,732 $ 115,736 $(111,532) $ 108,222
--------- --------- --------- --------- ---------
Investing Activities:
Net proceeds from sales and
repayments of securitized loans ...... -- -- (111,244) -- (111,244)
Net loans originated or collected ....... (7,805) -- 580,076 -- 572,271
Additions to property and equipment ..... -- (3,631) (14) -- (3,645)
Investment in subsidiaries .............. (55,527) (32,630) -- 88,157 --
--------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities ................. (63,332) (36,261) 468,818 88,157 457,382
--------- --------- --------- --------- ---------
Financing Activities:
Increase (decrease) in debt ............. 222 (102) (292,094) -- (291,974)
Decrease in deposits .................... -- -- (332,122) -- (332,122)
Cash dividends paid ..................... (938) -- -- -- (938)
Issuance of common stock ................ 1,823 -- -- -- 1,823
Repurchase of common stock .............. (17,582) -- -- -- (17,582)
Capital contributions ................... -- (4) (23,371) 23,375 --
--------- --------- --------- --------- ---------
Net cash used in financing activities ... (16,475) (106) (647,587) 23,375 (640,793)
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents ..................... (12,521) 365 (63,033) -- (75,189)
Cash and cash equivalents at beginning of
period ............................... 17,613 1,505 468,968 -- 488,086
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period ............................... $ 5,092 $ 1,870 $ 405,935 $ -- $ 412,897
========= ========= ========= ========= =========
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided by
operating activities ............. $ (7,013) $ 86,318 $ 167,313 $(142,534) $ 104,084
--------- --------- --------- --------- ---------
Investing Activities:
Net proceeds from sales and
repayments of securitized loans .. 1,487 4 114,101 -- 115,592
Net loans originated or collected ... (12,157) -- (213,527) -- (225,684)
Dispositions of (additions to)
property and equipment ........... -- 4,271 (7,138) -- (2,867)
Investment in subsidiaries .......... (63,034) (94,322) -- 157,356 --
--------- --------- --------- --------- ---------
Net cash used in investing activities (73,704) (90,047) (106,564) 157,356 (112,959)
--------- --------- --------- --------- ---------
Financing Activities:
Increase (decrease) in debt ......... 222 (3) (85) -- 134
Decrease in deposits ................ -- -- (31,810) -- (31,810)
Cash dividends paid ................. (916) -- -- -- (916)
Issuance of common stock ............ 9,036 -- -- -- 9,036
Capital contributions ............... -- 145 14,677 (14,822) --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ............. 8,342 142 (17,218) (14,822) (23,556)
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents ................. (72,375) (3,587) 43,531 -- (32,431)
Cash and cash equivalents at
beginning of period .............. 64,869 10,658 445,913 -- 521,440
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period ........................... $ (7,506) $ 7,071 $ 489,444 $ -- $ 489,009
========= ========= ========= ========= =========
ITEM 2.
METRIS COMPANIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results of
operations of Metris Companies Inc. ("MCI") and its subsidiaries, including
Direct Merchants Credit Card Bank, N.A. ("Direct Merchants Bank"), which may be
referred to as "we," "us," "our" and the "Company." You should read this
discussion along with the following documents for a full understanding of our
financial condition and results of operations: Management's Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2001; and our Proxy
Statement for the 2002 Annual Meeting of Shareholders. In addition, you should
read this discussion along with our Quarterly Report on Form 10-Q for the period
ended March 31, 2002, of which this commentary is a part, and the condensed
consolidated financial statements and related notes thereto.
Results of Operations
Net income for the three months ended March 31, 2002 was $52.3 million, up
from $41.5 million for the first quarter of 2001. Net income reported for the
three months ended March 31, 2001 includes $14.5 million of a cumulative effect
of accounting change described below. Without this item, reported earnings would
have been $56.0 million for the three months ended March 31, 2001. Diluted
earnings per share for the three months ended March 31, 2002 was $0.54 compared
to $0.42 per share for the first quarter of 2001. Without the impact of the
cumulative effect of accounting change, diluted earnings per share would have
been $0.57 for the three months ended March 31, 2001. The $3.7 million reduction
in income before the cumulative effect of accounting change is primarily due to
an increase in provision for loan losses, offset by increases in other operating
income. The increase in the provision relates to the estimated required balance
in the allowance for loan losses to cover future charge-offs inherent in our
owned loan portfolio as of March 31, 2002. Higher credit card loan balances,
increased net charge-offs, increased delinquency rates and the current economic
environment were some of the factors considered by management in determining the
necessary balance in the allowance for loan losses. Other operating income
increased 44% to $327.6 million for the three months ended March 31, 2002 from
$228.2 million for the same period in 2001. Net securitization and credit card
servicing income, a component of other operating income, increased 83% to $159.5
for the first quarter of 2002 from $87.1 million for the same period in 2001,
primarily due to the $2.1 billion increase in securitized receivables and lower
costs of funds offset by increased charge-offs. Enhancement services revenue
also increased 21% to $95.0 million for the first quarter of 2002 compared to
the same period in 2001. These increases were primarily due to the growth in
total credit card accounts, an increase in outstanding receivables in the
managed credit card loan portfolio, development of new third-party relationships
and the creation of new products.
On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments. SFAS 133 requires enterprises to recognize all derivatives as
either assets or liabilities in the statement of financial position and to
measure those instruments at fair value. Prior to SFAS 133, we amortized the
costs of interest rate contracts on a straight-line basis over the expected life
of the contract. The adoption of SFAS 133 resulted in a one-time, non-cash,
after-tax charge to earnings of $14.5 million reflected as a "Cumulative effect
of accounting change" in the consolidated statements of income for the three
months ended March 31, 2001.
Critical Accounting Policies
The Company's most significant accounting policies are our determination of
the allowance for loan losses, valuation of retained interests and accounting
for deferred origination costs.
Allowance for loan losses
We maintain the allowance for loan losses on our owned loan portfolio to
cover management's estimate of the inherent losses as of the balance sheet date
and an amount to reduce the contractual value of the retained interests in
securitized loans to fair value. In evaluating the adequacy of the allowance for
loan losses, we consider several factors, including: historical charge-off and
recovery activity by age (vintage) of each loan portfolio (noting any particular
trends over recent periods); recent delinquency and collection trends by
vintage; current economic conditions and the impact such conditions might have
on borrowers' ability to repay; the risk characteristics of the portfolios;
overall payment trends; bankruptcy rates; and other factors. These factors are
reflected in financial projections prepared by the Company to estimate future
charge-offs in the portfolio, which the Company uses to support the amount of
the allowance for loan losses as of the balance sheet date. Significant changes
in these factors could impact our financial projections and thereby affect the
adequacy of our allowance for loan losses.
Retained interest
We maintain an allowance for loan losses on our sold credit card
receivables that effectively reduces our retained interests to fair value. We
validate the fair value of the net retained interests by calculating the present
value of future expected cash flows using management's best estimate of key
assumptions including credit losses, net spreads, revolver rates and a discount
rate commensurate with the risks involved. The significant assumptions used for
estimating the fair value of the retained interest in loans securitized are as
follows:
March 31, December 31,
--------- ------------
2002 2001
---- ----
Annual discount rate ............................. 15% 15%
Monthly payment rate ............................. 6% 7%
Weighted-average spread (1) ...................... 21% 20%
Annual principal and finance charge default rate.. 19% 18%
(1) Includes finance charges, late fees and overlimit fees, less
weighted-average cost of funds and 2% servicing fee.
Deferred acquisition costs
We defer direct credit card origination costs associated with successful
credit card solicitations that we incur in transactions with independent third
parties, and certain other costs that we incur in connection with loan
underwriting and the preparation and processing of loan documents. These costs,
which relate directly to membership solicitations (direct response advertising
costs), principally include postage, printing, mailings and telemarketing costs.
The total amount of deferred costs as of March 31, 2002 and December 31, 2001
were $89.3 million and $89.5 million, respectively. The most significant
assumption used by the Company in determining the realizability of these
deferred costs is future revenues from our credit cards and enhancement services
products. A significant reduction in revenues could have a material impact on
the values of these balances.
Deferred revenue on Enhancement Services products
Direct Merchants Bank offers various debt waiver products to its credit
card customers. Revenue for such products is recognized in the month following
completion of the cancellation period, and reserves are provided for pending
claims based on Direct Merchants Bank's historical experience with settlement of
such claims. Unearned revenues and reserves for pending claims are recorded as
"Deferred income" and "Accrued expenses and other liabilities," respectively. We
record fees on membership programs as deferred income upon acceptance of
membership and amortize them on a straight-line basis over the membership period
beginning after the contractual cancellation period is complete. We defer and
recognize extended service plan revenues and the incremental direct acquisition
costs on a straight-line basis over the life of the related extended service
plan contracts beginning after the expiration of any manufacturers' warranty
coverage.
Managed Loan Portfolio
We analyze our financial performance on a managed loan portfolio basis. We
do this by adjusting the income statement and balance sheet to reverse the
effects of securitization. Our discussion of revenues, where applicable, and
provision for loan losses includes comparisons to amounts reported in our
consolidated statements of income ("owned basis"), as well as on a managed
basis.
Our managed loan portfolio is comprised of credit card loans, retained
interests in loans securitized and investors' interests in securitized credit
card loans. The investors' interests in securitized credit card loans are not
assets of the Company. Therefore, we do not show them on our consolidated
balance sheets. Table 1 summarizes our managed loan portfolio:
Table 1: Managed Loan Portfolio
(Dollars in thousands) March 31, December 31, March 31,
2002 2001 2001
---- ---- ----
Period-end balances:
Credit card loans ............. $ 2,210,847 $ 2,746,656 $ 1,402,808
Retained interests in loans
securitized ............... 1,338,437 1,263,655 1,910,168
Investors' interests in
securitized loans accounted
for as sales............... 8,223,360 7,895,842 6,170,416
----------- ----------- -----------
Total managed loan portfolio ..... $11,772,644 $11,906,153 $ 9,483,392
=========== =========== ===========
Three Months Ended
March 31,
---------
2002 2001
---- ----
Average balances:
Credit card loans ....................... $ 2,052,596 $ 1,298,748
Retained interests in loans securitized . 1,835,359 2,044,729
Investors' interests in securitized loans
accounted for as sales................ 8,074,887 6,050,624
----------- -----------
Total managed loan portfolio ............... $11,962,842 $ 9,394,101
=========== ===========
Impact of Credit Card Securitizations Accounted for as Sales
Table 2 provides a summary of the effects of credit card securitizations
accounted for as sales on selected line items of our statements of income for
each of the periods presented, as well as selected financial information on both
an owned and managed loan portfolio basis:
Table 2: Impact of Credit Card Securitizations Accounted for as Sales
(Dollars in thousands)
Three Months Ended
March 31,
---------
2002 2001
---- ----
Statements of Income
Owned Basis:
Net interest income ..................... $ 121,367 $ 121,894
Provision for loan losses ............... 189,776 87,729
Other operating income .................. 327,627 228,188
Other operating expense ................. 174,388 171,223
------------ ------------
Income before income taxes and cumulative
effect of accounting change .......... $ 84,830 $ 91,130
============ ============
Adjustments for
Securitizations:
Net interest income ..................... $ 316,907 $ 204,616
Provision for loan losses ............... 215,039 180,063
Other operating income .................. (101,868) (24,553)
Other operating expense ................. -- --
------------ ------------
Income before income taxes and cumulative
effect of accounting change .......... $ -- $ --
============ ============
Statements of Income
Managed Basis:
Net interest income ..................... $ 438,274 $ 326,510
Provision for loan losses ............... 404,815 267,792
Other operating income .................. 225,759 203,635
Other operating expense ................. 174,388 171,223
------------ ------------
Income before income taxes and cumulative
effect of accounting change .......... $ 84,830 $ 91,130
============ ============
Other Data:
Owned Basis:
Average interest-earning assets ............ $ 4,188,014 $ 3,788,430
Return on average assets (1) ............... 5.4% 6.0%
Return on average total equity (1) ......... 18.4% 25.0%
Net interest margin (2) .................... 11.8% 13.0%
Managed Basis:
Average interest-earning assets ............ $ 12,262,900 $ 9,839,055
Return on average assets (1) ............... 1.8% 2.3%
Return on average total equity (1) ......... 18.4% 25.0%
Net interest margin (2) .................... 14.5% 13.5%
(1) Amounts for the three months ended March 31, 2001 are shown before the
cumulative effect of accounting change.
(2) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets.
Net Interest Income
Net interest income consists primarily of interest earned on our credit
card loans, less interest expense on borrowings to fund the loans. Managed net
interest income for the three months ended March 31, 2002 was $438.3 million
compared to $326.5 million for the same period in 2001. The increase in net
interest income is primarily due to a $2.4 billion increase in managed average
interest-earning assets and increases in net interest margin to 14.5% for the
three months ended March 31, 2002, compared to 13.5% for the same period in
2001. The managed net interest margin increase is primarily due to lower cost of
funds offset by lower portfolio yield.
The owned net interest income decreased $0.6 million to $121.4 million for
the quarter ended March 31, 2002 from $122.0 million for the quarter ended March
31, 2001. The decrease is due to lower portfolio yield partially offset by lower
funding costs.
Table 3: Analysis of Average Balances, Interest and Average Yields and Rates
Three Months Ended March 31,
2002 2001
----------------------------------------------- -------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
(owned basis)
Assets:
Interest-earning assets:
Federal funds sold .......... $ 28,431 $ 114 1.6% $ 164,574 $ 2,311 5.7%
Short-term investments ...... 271,628 1,204 1.8% 280,379 3,896 5.6%
Credit card loans and
retained interests in loans
securitized ................ 3,887,955 152,214 15.9% 3,343,477 163,522 19.8%
------------ ------------ ---- ------------ ------------ ----
Total interest-earning assets $ 4,188,014 $ 153,532 14.9% $ 3,788,430 $ 169,729 18.2%
Other assets ................ 759,353 -- -- 806,136 -- --
Allowances for loan losses .. (988,054) -- -- (781,211) -- --
------------ ------------ ---- ------------ ------------ ----
Total assets ................ $ 3,959,313 -- -- $ 3,813,355 -- --
============ ============
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 1,930,007 $ 23,653 5.0% $ 2,130,414 $ 36,623 7.0%
Debt ........................ 356,019 8,512 9.7% 360,999 11,212 12.6%
------------ ------------ ---- ------------ ------------ ----
Total interest-bearing
liabilities .............. $ 2,286,026 $ 32,165 5.7% $ 2,491,413 $ 47,835 7.8%
Other liabilities ........... 519,185 -- -- 412,839 -- --
------------ ------------ ---- ------------ ------------ ----
Total liabilities ........... 2,805,211 -- -- 2,904,252 -- --
Stockholders' equity ........ 1,154,102 -- -- 909,103 -- --
------------ ------------ ---- ------------ ------------ ----
Total liabilities and equity $ 3,959,313 -- -- $ 3,813,355 -- --
============ ============
Net interest income and
interest margin (1) ...... -- $ 121,367 11.8% -- $ 121,894 13.0%
Net interest rate spread (2) -- -- 9.2% -- -- 10.4%
Managed Basis
Credit card loans ........... $ 11,962,842 $ 525,360 17.8% $ 9,394,101 $ 460,613 19.9%
Total interest-earning assets 12,262,900 526,678 17.4% 9,839,055 466,820 19.2%
Total interest-bearing
liabilities .............. 10,360,913 88,404 3.5% 8,542,037 140,310 6.7%
Net interest income and
interest margin (1) ...... -- $ 438,274 14.5% -- $ 326,510 13.5%
Net interest rate spread (2) -- -- 13.9% -- -- 12.5%
(1) We compute net interest margin by dividing annualized net interest income by
average total interest-earning assets.
(2) The net interest rate spread is the annualized yield on average
interest-earning assets minus the annualized funding rate on average
interest-bearing liabilities.
Other Operating Income
Other operating income contributes substantially to our results of
operations, representing 73% and 65% of owned revenues for the three-month
periods ended March 31, 2002 and 2001, respectively.
Other operating income increased $99.4 million for the three months ended
March 31, 2002 over the comparable period in 2001. This increase is primarily
due to the $10.3 million increase in income generated from credit card fees,
interchange and other credit card income due to the growth in loans in the
credit card portfolio for the three months ended March 31, 2002 over the
comparable period in 2001. For the three months ended March 31, 2002 net
securitization and credit card servicing income increased $72.4 million from the
comparable period in 2001. The components of net securitization revenue for the
three-month periods ended March 31, 2002 and 2001 are shown in table 4:
Table 4: Components of Net Securitization and Credit Card Servicing Income
(in thousands) 2002 2001
---- ----
Finance charges ................ $ 373,147 $ 297,091
Interest expense ............... (63,009) (101,022)
Provision for loan losses ...... (215,039) (180,063)
Credit card fees ............... 69,475 68,765
Loss on interest rate caps ..... (9,272) (3,710)
Other, net ..................... 4,222 6,031
--------- ---------
Total net securitization revenue $ 159,524 $ 87,092
========= =========
Enhancement services revenues increased by $16.7 million for the three
months ended March 31, 2002, compared to the three months ended March 31, 2001.
This increase reflects higher credit protection revenue due to increased covered
receivables and higher sales of our debt waiver products, as well as the
increase in membership program revenues resulting from additional product offers
to third-party cardholders.
Other Operating Expense
Total other operating expenses for the three months ended March 31, 2002
increased $3.2 million over the comparable period in 2001, largely due to costs
associated with the growth of our business activities. Employee compensation
increased $1.8 million for the three month ended March 31, 2002 due to increased
staffing needs. Enhancement services claims expense increased $4.5 million for
the three months ended March 31, 2002 due to growth in debt waiver covered
receivables. Other expenses decreased $3.1 million for the three months ended
March 31, 2002 due to decreased professional fees, related legal expenses and
insurance reimbursements.
Asset Quality
Our delinquency and net loan charge-off rates at any point in time reflect,
among other factors, the credit risk of loans, the average age of our various
credit card account portfolios, the success of our collection and recovery
efforts, and general economic conditions. The average age of our credit card
portfolio affects the stability of delinquency and loss rates. In order to
minimize losses, we continue to focus our resources on refining our credit
underwriting standards for new accounts, and on collections and post charge-off
recovery efforts. At March 31, 2002, 74% of our outstanding receivables balance
were from accounts that have been with us in excess of two years, and 41% of
outstanding receivables were with us in excess of four years.
We use credit line analyses, account management and customer transaction
authorization procedures to minimize loan losses. Our risk models determine
initial credit lines at the time of solicitation. We manage credit lines on an
ongoing basis and adjust them based on customer usage and payment patterns. To
maximize profitability, we continually monitor customer accounts and initiate
appropriate collection activities when an account is delinquent or overlimit.
Delinquencies
We monitor delinquency levels on a managed basis, since delinquency on
either an owned or managed basis subjects us to credit loss exposure. A credit
card account is contractually delinquent if we do not receive the minimum
payment by the specified date on the cardholder's statement. It is our policy to
continue to accrue interest and fee income on all credit card accounts, except
in limited circumstances, until we charge off the account and all related loans,
interest and other fees. Table 5 presents the delinquency trends of our credit
card loan portfolio on a managed portfolio basis:
Table 5: Loan Delinquency
(Dollars in thousands)
March 31, % of December 31, % of March 31, % of
2002 Total 2001 Total 2001 Total
---- ----- ---- ----- ---- -----
Managed Basis:
Loans outstanding ... $11,772,644 100% $11,906,153 100% $ 9,483,392 100%
Loans contractually
delinquent:
30 to 59 days .. 316,638 2.7% 375,887 3.1% 229,368 2.4%
60 to 89 days .. 256,776 2.2% 274,278 2.3% 178,898 1.9%
90 or more days. 580,697 4.9% 473,003 4.0% 390,402 4.1%
----------- ----- ----------- ----- ----------- -----
Total ........ $ 1,154,111 9.8% $ 1,123,168 9.4% $ 798,668 8.4%
=========== ===== =========== ===== =========== =====
The 140 basis point increase in the managed delinquency rates over March
31, 2001 primarily reflects a deterioration in the economy and seasoning in the
loan portfolio. We continue to focus our resources on collection efforts to
minimize delinquency levels.
In the owned loan portfolio, loans contractually delinquent were $226.5
million as of March 31, 2002, compared to $273.2 million as of December 31,
2001.
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 against the related income at the
time of charge-off. The following table presents our net charge-offs for the
periods indicated as reported in the consolidated financial statements on a
managed portfolio basis:
Table 6: Net Charge-offs
(Dollars in thousands) Three Months Ended
March 31,
2002 2001
---- ----
Owned basis:
Average loans and retained
interests in loans securitized
outstanding ................... $ 3,887,955 $ 3,343,477
Net charge-offs .................. 127,175 81,437
Net charge-offs as a percentage of
average loans outstanding (1).. 13.3% 9.9%
=========== ===========
Managed basis:
Average loans outstanding ........ $11,962,842 $ 9,394,101
Net charge-offs .................. 384,174 244,969
Net charge-offs as a percentage of
average loans outstanding (1).. 13.0% 10.6%
=========== ===========
(1) Annualized
The increase in the managed and owned net charge off ratios for the three
months ended March 31, 2002 primarily reflects a deterioration in the economy.
Provision and Allowance for Loan Losses
We make provisions for loan losses in amounts necessary to maintain the
allowance at a level estimated to be sufficient to absorb probable future loan
losses, net of recoveries, inherent in the existing owned loan portfolio and an
amount to reduce the contractual value of retained interests in loans
securitized to fair value. For securitized loans, anticipated losses and related
provisions for loan losses are reflected in the calculations of net
securitization and credit card servicing income.
The provision for on-balance sheet loans was $189.8 million for the three
months ended March 31, 2002, compared to $87.7 million for the three months
ended March 31, 2001. The amount of provision recognized to reduce the
contractual value of the retained interests to fair value was $215.0 million for
the three months ended March 31, 2002 and $180.1 million for the three months
ended March 31, 2001. The increase in the provision for loan losses in 2002
compared to 2001 reflects the growth in credit card loans, an increase in
delinquencies as a percentage of managed loans outstanding and the current
economic environment.
The economy has slowed down significantly over the last year, exacerbated
by the terrorist attacks on September 11, 2001. This changing environment has
caused our delinquencies and losses to increase from prior years' levels. Some
of the actions we are taking to mitigate this slowdown include expanding our
collections strategies to aggressively address any potential delinquency
increases and utilizing our recovery staff to work on precharge-off receivables.
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 forbearance programs was $775.1 million or 7% of total
managed loans as of March 31, 2002 compared with $837.0 million or 7% of managed
loans as of December 31, 2001. All delinquent receivables in forbearance
programs are included in Table 5.
The ratio of allowance for loan losses to period-end loans on a managed
basis was 8.2% at March 31, 2002 compared to 8.0% at December 31, 2001. The
allowance for loan losses as a percentage of 30-day plus receivables was 84% at
March 31, 2002 and December 31, 2001.
Balance Sheet Analysis
Credit Card Loans
Credit card loans were $2.2 billion as of March 31, 2002, compared to $2.7
billion as of December 31, 2001. The $0.5 billion decrease is primarily a result
of the transfer of $610 million of receivables from Direct Merchants Bank to the
Metris Master Trust.
Deferred Tax Asset/Liability
Total deferred tax asset/liability decreased to a net liability of $26.2
million as of March 31, 2002 from a net tax asset of $32.2 million as of
December 31, 2001. The decrease in net asset/liability is the result of various
timing differences between Generally Accepted Accounting Principles and tax
accounting.
Debt
Debt decreased to $355.9 million as of March 31, 2002 from $647.9 million
as of December 31, 2001 due to the paydown of a warehouse financing arrangement
entered into by Direct Merchants Bank in June 2001 that was accounted for as a
collateralized financing.
Deferred Income
Deferred income decreased $10.5 million to $204.5 million as of March 31,
2002 compared to $215.0 million as of December 31, 2001. The decrease primarily
relates to our migration from annual billed to monthly billed products.
Stockholders' Equity
Stockholders' equity was $1.2 billion as of March 31, 2002, an increase of
$36.0 million over December 31, 2001 stockholders' equity of $1.1 billion. The
increase results from net income of $52.3 million and $1.8 million stock
issuances under employee benefit plans offset by cash dividends of $0.9 million
and $17.6 million of stock repurchases under our stock repurchase program.
Liquidity, Funding and Capital Resources
One of our primary financial goals is to maintain an adequate level of
liquidity through active management of assets and liabilities. Because the
pricing and maturity characteristics of our assets and liabilities change,
liquidity management is a dynamic process, affected by changes in short- and
long-term interest rates. We use a variety of financing sources to manage
liquidity, refunding, and interest rate risks. Table 7 summarizes our funding
and liquidity as of March 31, 2002 and December 31, 2001:
Table 7: Liquidity, Funding and Capital Resources
(Dollars in thousands)
March 31, 2002 December 31, 2001
-------------- -----------------
Unused Unused
On-balance sheet funding Outstanding Capacity Outstanding Capacity
------------------------ ----------- -------- ----------- --------
Bank conduit 2002 ........ $ -- $ 400,000 $ 292,000 $ 108,000
Revolving credit line 2003 -- 170,000 -- 170,000
Term loan 2003 ........... 100,000 N/A 100,000 N/A
Senior notes 10% 2004 .... 100,000 N/A 100,000 N/A
Senior notes 10.125% 2006 146,146 N/A 145,924 N/A
Other .................... 9,784 N/A 9,980 N/A
Deposits ................. 1,725,886 N/A 2,058,008 N/A
Equity ................... 1,178,002 N/A 1,141,955 N/A
---------- ------------ ---------- -------------
Subtotal ............ $3,259,818 $ 570,000 $ 3,847,867 $ 278,000
Off-balance sheet funding
-------------------------
Metris Master Trust ...... $ 8,223,360 $ 585,890 $ 7,880,342 $ 328,908
Metris facility .......... -- 75,000 15,500 59,500
Various conduits ......... -- 850,000 -- --
----------- ----------- ----------- -------------
Subtotal ............ $ 8,223,360 $ 1,510,890 $ 7,895,842 $ 388,408
----------- ----------- ----------- -------------
Total ............... $11,483,178 $ 2,080,890 $11,743,709 $ 666,408
=========== =========== =========== =============
Under our revolving line of credit agreement, we need to maintain, among
other items, minimum equity plus reserves to managed assets of 10%, minimum
three-month average excess spread (by ABS deal) of 1%, minimum equity of $684
million and a ratio of equity plus reserves to managed 90-day plus delinquencies
of 2.25. As of March 31, 2002 and December 31, 2001, we were in compliance with
all financial covenants under our credit agreements.
Capital Adequacy
In the normal course of business, Direct Merchants Bank enters into
agreements, or is subject to regulatory requirements, that result in cash, debt
and dividend or other capital restrictions.
The Federal Reserve Act imposes various legal limitations on the extent to
which banks can finance or otherwise supply funds to their affiliates. In
particular, Direct Merchants Bank is subject to certain restrictions on any
extensions of credit to or other covered transactions, such as certain purchases
of assets, with MCI and its affiliates. Such restrictions limit Direct Merchants
Bank's ability to lend to MCI and its affiliates. Additionally, Direct Merchants
Bank is limited in its ability to declare dividends to MCI in accordance with
the national bank dividend provisions.
Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC. At March 31, 2002 and December 31, 2001, Direct Merchants
Bank's Tier 1 risk-based capital ratio, risk-based total capital ratio and Tier
1 leverage ratio exceeded the minimum required capital levels, and Direct
Merchants Bank was considered a "well-capitalized" depository institution under
regulations of the OCC, as illustrated in the following table.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Direct Merchants Bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Direct Merchants Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Direct Merchants Bank to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 leverage
capital (as defined) to average assets (as defined). Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material adverse effect on our financial statements.
Additional information about Direct Merchants Bank's actual capital amounts
and ratios are presented in the following table:
For Capital
Adequacy To Be Well
Actual Purposes Capitalized
------ -------- -----------
As of March 31, 2002 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital ... $390,623 18.8% $166,273 8.0% $207,841 10.0%
(to risk-weighted
assets)
Tier 1 Capital .. 359,825 17.3% 83,136 4.0% 124,705 6.0%
(to risk-weighted
assets)
Tier 1 Capital .. 359,825 14.1% 102,357 4.0% 127,947 5.0%
(to average assets)
For Capital
Adequacy To Be Well
Actual Purposes Capitalized
------ -------- -----------
As of December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital ..... $345,717 13.4% $206,027 8.0% $257,534 10.0%
(to risk-weighted
assets)
Tier 1 Capital .... 308,185 12.0% 103,013 4.0% 154,520 6.0%
(to risk-weighted
assets)
Tier 1 Capital .... 308,185 11.6% 106,459 4.0% 133,073 5.0%
(to average assets)
FFIEC guidelines indicate that an institution with a concentration in
subprime lending should hold one and one-half to three times the normal minimum
capital required. The OCC has regulatory authority to evaluate the safety and
soundness of Direct Merchants Bank under these more stringent guidelines. The
OCC has required Direct Merchants Bank, under the more stringent guidelines, to
maintain two times the normal minimum capital on those credit card loans that
qualify as subprime loans (FICO score of 660 and below) and maintain a minimum
capital ratio of 10%. Under these more stringent guidelines, Direct Merchants
Bank's total capital ratio as of March 31, 2002 was 12.0%.
Regulatory Matters
On April 16, 2002, Direct Merchants Bank entered into an agreement with the
Office of the Comptroller of the Currency ("OCC") to strengthen the safety and
soundness of Direct Merchants Bank's operations. The agreement formalizes
recommendations made and requirements imposed by the OCC following an
examination of Direct Merchants Bank that covered the 15-month period ended
December 31, 2001. On April 17, 2002, Metris Companies Inc. filed the agreement
with the Securities and Exchange Commission as an exhibit to a current report on
Form 8-K. We have also incorporated the agreement by reference herein.
Direct Merchants Bank intends to comply with all of the terms of the
agreement in a timely manner. If the OCC were to conclude that Direct Merchants
Bank failed to implement in a timely manner any provision of the agreement or
that Direct Merchants Bank otherwise violated the agreement, the OCC could
pursue various enforcement options. Under applicable provisions of the Federal
Deposit Insurance Act, the OCC may, among other things, pursue an order to cease
and desist from any further violations or take affirmative actions to correct
conditions resulting from violations or practices, place limitations on the
activities of a bank that in its opinion violated a written agreement, remove
from office members of management or the board of directors of a bank or
prohibit further participation by those persons in the bank's affairs, and
assess civil money penalties. If any of these events were to actually occur, we
could not assure you that the event would not have a material adverse effect on
Direct Merchants Bank's operations or capital position.
Forward-Looking Statements
This Quarterly Report contains some forward-looking statements.
Forward-looking statements give our current expectations of future events. You
will recognize these statements because they do not strictly relate to
historical or current facts. Such statements may use words such as "anticipate,"
"estimate," "expect," "project," "intend," "think," "believe" and other words or
terms of similar meaning in connection with any discussion of future performance
of the Company. For example, these include statements relating to future
actions, future performance of current or anticipated products, solicitation
efforts, expenses, the outcome of contingencies such as litigation, and the
impact of the capital markets on liquidity. From time to time, we also may
provide oral or written forward-looking statements in other material released to
the public.
Any or all of our forward-looking statements in this Report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors, which can not be predicted with certainty, will be important in
determining future results. Among such factors are higher delinquency,
charge-off and bankruptcy rates of our target market of moderate-income
consumers, risks associated with Direct Merchants Bank's ability to comply with
its agreement with regulators regarding the safety and soundness of its
operations, risks associated with our continuing ability to market our
enhancement services and maintain or expand on current levels in that business,
interest rate risks, risks associated with acquired portfolios, dependence on
the securitization markets and other funding sources, state and federal laws and
regulations that limit our business activities, product offerings and fees,
privacy laws that could result in lower marketing revenue and penalties for
non-compliance, and general economic conditions that can have a major impact on
the performance of loans. Each of these factors and others are more fully
discussed under the caption "Business--Risk Factors" contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001. As a result of
these factors, we cannot guarantee any forward-looking statements. Actual future
results may vary materially. Also, please note that the factors we provide are
those we think could cause our actual results to differ materially from expected
and historical results. Other factors besides those listed here or in our 10-K
for the year ended December 31, 2001 could also adversely affect us.
We undertake no obligations to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosure we make on related
subjects in our periodic filings with the Securities and Exchange Commission.
This discussion is provided to you as permitted by the Private Securities
Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our principal market risk is due to changes in interest rates. This
affects us directly in our lending and borrowing activities, as well as
indirectly, as interest rates may impact the payment performance of our
cardholders.
To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our owned
and managed balance sheet to minimize the impact changes in interest rates have
on the fair value of assets, net income and cash flow. We seek to minimize the
impact of changes in interest rates on us primarily by matching asset and
liability repricings.
Our primary managed assets are credit card loans, which are virtually all
priced at rates indexed to the variable Prime Rate. We fund credit card loans
through a combination of cash flows from operations, asset securitizations, bank
loans, subsidiary bank deposits, long-term debt and equity issuances. Our
securitized loans are owned by a trust and bank-sponsored single-seller and
multi-seller receivable conduits, which have committed funding primarily indexed
to variable commercial paper rates and LIBOR. The $270 million bank credit
facility has pricing that is also indexed to LIBOR and Prime Rate. The
subsidiary bank deposits and long-term debt are issued at fixed interest rates.
At March 31, 2002 approximately 8.8% of the trust and conduit funding of
securitized receivables was funded with fixed rate securities. As of April 22,
2002, we had no fixed rate trust or conduit funding of securitized receivables.
In an interest rate environment with rates at or below current rates, 91.2%
of the securitization funding for the managed loan portfolio is indexed to
floating commercial paper and LIBOR rates. In an interest rate environment with
rates significantly above current rates, the potentially negative impact on
earnings of higher interest expense is mitigated by fixed rate funding and
interest rate cap contracts.
The approach we use to quantify interest rate risk is a sensitivity
analysis, which we believe best reflects the risk inherent in our business. This
approach calculates the impact on net income from an instantaneous and sustained
change in interest rates by 200 basis points. Assuming that we take no
counteractive measures, a 200 basis point increase in interest rates affecting
our floating rate financial instruments, including both debt obligations and
loans, will result in an increase in net income of approximately $78.0 million
relative to a base case over the next 12 months; while a decrease of 200 basis
points will result in a reduction in net income of approximately $59.1 million.
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. The quantitative information about market risk is
necessarily limited because it does not take into account operating transactions
or other costs associated with managing immediate changes in interest rates.
Part II. Other Information
Item 1. Legal Proceedings
We are a party to various legal proceedings resulting from the ordinary
business activities relating to our operations. In July 2000 an Amended
Complaint was filed in Hennepin County District Court in Minneapolis, Minnesota
against MCI and our subsidiaries Metris Direct, Inc. and Direct Merchants Bank.
The complaint seeks damages in unascertained amounts and purports to be a class
action complaint on behalf of all cardholders who were issued a credit card by
Direct Merchants Bank and were allegedly assessed fees or charges that the
cardholder did not authorize. Specifically, the complaint alleges violations of
the Minnesota Prevention of Consumer Fraud Act, the Minnesota Deceptive Trade
Practices Act and breach of contract. On February 1, 2002, preliminary approval
of a class action settlement was signed by the Court whereby we will pay
approximately $5.5 million for attorneys' fees and costs incurred by attorneys
for the plaintiffs in separate lawsuits filed in Arizona, California and
Minnesota in 2000 and 2001. Under the terms of the settlement, we denied any
wrongdoing or liability. A final settlement approval hearing is scheduled for
May 30, 2002.
On May 3, 2001, Direct Merchants Bank entered into a consent order with the
Office of the Comptroller of the Currency ("OCC"). The consent order required
Direct Merchants Bank to pay approximately $3.2 million in restitution to
approximately 62,000 credit card customers who applied for and received a credit
card in connection with a series of limited test marketing campaigns from March
1999 to June 2000. Under the terms of the consent order, Direct Merchants Bank
made no admission or agreement on the merits of the OCC's assertions. The
restitution as required by the OCC consent order was paid and is reflected in
our December 31, 2001 financial statements. We believe that Direct Merchants
Bank's agreement with the OCC will not have a material adverse effect on the
financial position of MCI or Direct Merchants Bank.
In May 2001, the OCC also indicated that it was considering whether to
pursue an assessment of civil money penalties and gave Direct Merchants Bank the
opportunity to provide information to the OCC bearing on whether imposing a
penalty would be appropriate and the severity of any penalty. The statutory
provisions pursuant to which a civil money penalty could be assessed give the
OCC broad discretion in determining whether or not a penalty will be assessed
and, if so, the amount of the penalty. Because we are unable at this time to
determine whether or not any civil money penalty will be assessed, there can be
no assurance that the resolution of this matter will not have a material adverse
effect on our financial position.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Earnings Per Share.
99.1 Agreement between Direct Merchants Credit Card Bank, N.A.
and the Office of the Comptroller of the Currency, dated April
16, 2002 (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated April 17, 2002 (File
No. 1-12351)).
(b) Reports on Form 8-K: On April 17, 2002, we filed a Current Report
on Form 8-K to report that our wholly-owned subsidiary, Direct
Merchants Credit Card Bank, N.A., had entered into an agreement
on April 16, 2002 with the Office of the Comptroller of the
Currency, the agency that regulates the Bank, to strengthen
certain aspects of the safety and soundness of the Bank's
operations. See Part 1, Item 2, "Regulatory Matters" on page 29.
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: May 15, 2002 By: /s/ David D. Wesselink
-----------------------
David D. Wesselink
Vice Chairman
Principal Financial Officer
Date: May 15, 2002 By: /s/ Mark P. Wagener
--------------------
Mark P. Wagener
Senior Vice President, Controller
Principal Accounting Officer