Prospectus Summary
The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto (the "Financial Statements"), appearing elsewhere in this Prospectus. Metris Companies Inc., a recently formed indirect wholly owned subsidiary of Fingerhut Companies, Inc. ("FCI"), operates certain businesses previously operated as a division of FCI (collectively, the "Financial Services Business"). Except as otherwise noted herein, the information in this Prospectus gives effect to the contribution of such division to the Company, and, as used in this Prospectus, unless the context otherwise requires, (i) "Metris" and "Company" refer, with respect to any date prior to the effective date of such contribution, to the Financial Services Business of FCI, and, with respect to any date on or subsequent to the effective date of such contribution, to Metris Companies Inc. and its subsidiaries and (ii) "FCI" refers to Fingerhut Companies, Inc., and its subsidiaries other than the Company, including its principal operating subsidiary, Fingerhut Corporation ("Fingerhut"). Unless the context otherwise requires, all information contained in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised.
The Company
Metris Companies Inc. is an information-based direct marketer of consumer credit products, extended service plans, and fee-based products and services to moderate income consumers. Management believes the moderate income market (i.e., households with annual incomes of $15,000 to $35,000), which currently represents 31% of all U.S. households, is underserved by the traditional providers of many of the Company's products and services. The Company's strategy is to first establish a profitable customer relationship through the issuance of a general purpose credit card, and then to expand this customer relationship by cross-selling additional fee-based products and services. The Company provides credit to this market by utilizing a risk-based pricing strategy based on proprietary databases and credit scoring systems. The Company's agreements with FCI provide for the exclusive use of Fingerhut's proprietary database (the "Fingerhut Database") to market the Company's products and services. The Fingerhut Database contains demographic, behavioral and credit history information on more than 30 million individuals, the majority of whom are moderate income consumers. Fingerhut does not report its credit information to the credit bureaus, which means this information is not publicly available. The Company's management believes this access to the Fingerhut Database and the ability to utilize Fingerhut's proprietary credit scoring models give it a competitive advantage in targeting and lending to moderate income consumers.
The Company's consumer credit products currently are unsecured and secured credit cards, including the Fingerhut co-branded MasterCard(R) and the Direct Merchants Bank MasterCard. The Company's customers and prospects include both Fingerhut's existing customers ("Fingerhut Customers") and individuals who are not Fingerhut Customers but for whom credit bureau information is available ("External Prospects"). Once a prospective customer is targeted, the Company utilizes its proprietary credit scoring models and a risk-based pricing strategy to assign the annual percentage rate, annual fee and credit line based upon the expected risk of the individual prospect. As a result of the risk profile that is typical of the Company's customers, approximately 82% of the existing credit card accounts carry an annual fee, annual percentage rates range from prime plus 6.45% to prime plus 14.20%, and the average initial credit line is approximately $1,700. Management believes this average initial credit line is below the industry average.
The Company also provides extended service plans on certain categories of products sold by Fingerhut that extend service coverage beyond the manufacturer's warranty. Although these plans historically have been available only on consumer electronics, the Company has recently begun to offer these plans for jewelry and furniture, and may offer plans on additional types of products in the future. Through focused marketing, the Company increased the percentage of Warrantable Products (as defined herein) sold that are covered by its plans from 15% in 1994 to 24% in the first six months of 1996. Management believes that opportunities for growth in extended service plans exist through further increasing the percentage of Fingerhut Warrantable Products sold with an extended service plan, identifying new Warrantable Product categories for Fingerhut products, and marketing extended service plans in conjunction with retailers other than Fingerhut.
Metris markets its fee-based products and services, including third party insurance, membership clubs, card registration and debt waiver programs, to its credit card customers and to Fingerhut's customers. As a result of the Company's direct marketing and cross-selling efforts, approximately 53% of the Company's credit card customers have purchased one or more fee-based products. As an additional service, the Company develops highly tailored marketing lists, derived from its proprietary database, for third parties.
At year-end 1995, the Company was the 23rd largest MasterCard issuer based on number of cards issued, with over 700,000 total credit card accounts and $543.6 million total managed loans outstanding. As of June 30, 1996, the Company had approximately 1.1 million total credit card accounts and $1.068 billion in total managed loans outstanding. For the first six months of 1996, the Company had total revenues of approximately $65.9 million and net income of approximately $8.9 million.
History
Fingerhut, one of the largest catalog marketers in the United States, made the strategic decision in 1993 to directly market general purpose credit cards to its customers. The decision was based on Fingerhut's expertise in extending closed end credit to its customers, the large amount of proprietary information in the Fingerhut Database, and the high responsiveness of Fingerhut's customers to direct marketing efforts. After successfully test marketing credit cards to Fingerhut's customers, Fingerhut began to aggressively expand its credit card business. As part of this strategy, Fingerhut hired a management team led by Ronald Zebeck, whose more than 20 years of experience in the credit card industry includes responsibility for the launch and management of the highly successful GM MasterCard. This management team has since been implementing its strategy to expand its credit card customer base of both Fingerhut Customers and External Prospects and to grow its extended service plan and fee-based products and services businesses.
Based upon a series of targeted credit card marketing campaigns launched over the past 18 months, the Company's management believes that (i) the Company's target market has been highly responsive to direct marketing, allowing the Company to acquire new customers at lower costs than traditional credit card issuers and to pursue marketing strategies that improve the penetration rates of additional products and services, (ii) while the Company's target market includes individuals with relatively high risk profiles, the Company has been able to effectively target and evaluate the creditworthiness of moderate income consumers using proprietary scoring models, traditional credit information and Fingerhut Database information and (iii) the Company's risk-based pricing strategy has allowed it to manage customer relationships based on individual risk profiles. See "Risk Factors--Risks Related to Target Market".
The significant growth to date of the Company's credit card accounts and managed loan balances has been supported by funds from FCI and from the Company's retained earnings. The Offering will provide Metris with additional equity capital to continue to fund its growth.
Business Strategy
The Company's business strategy is to continue its growth by targeting new customers through the issuance of credit cards and expanding its customer relationships through the sale of additional products and services. The principal components of the Company's strategy are the following:
o Increase the number of Fingerhut Customers utilizing the Company's consumer credit products, extended service plans and fee-based products and services.
o Identify and solicit additional External Prospects for credit cards using the Company's proprietary risk, response and profitability models.
o Maximize the profitability of each customer relationship by cross-selling multiple products and services and using individualized risk-based pricing.
o Expand the range of products and services offered. Management believes the Company will make an attractive marketing partner to providers of other financial services such as home equity loans, auto loans, student loans, and supplemental insurance.
o Access additional customers for the Company's products and services by establishing relationships with third parties whose customers fit the Company's target market profile.
o Pursue acquisitions of credit card portfolios and/or other businesses whose customers fit the Company's product and target market profile.
Relationship with FCI Metris Companies Inc. is currently an indirect wholly owned subsidiary of FCI, the business of which historically has been operated as a division of FCI. After completion of the Offering, FCI will beneficially own 84.9% of the outstanding shares of Common Stock (83.0% if the Underwriters' over-allotment option is exercised in full). Accordingly, FCI will have significant influence over the policies and affairs of the Company and will be in a position to determine the outcome of corporate actions requiring stockholder approval, including the election of directors, the adoption of amendments to the Company's Certificate of Incorporation and the approval of mergers and sales of the Company's assets. See "Risk Factors--Control by FCI" and "--Potential Conflicts of Interest; Relationship with FCI".
Metris is significantly dependent on FCI and has entered into a number of intercompany agreements with FCI, including the Co-brand Credit Card Agreement, the Data Sharing Agreement, the Extended Service Plan Agreement, the Database Access Agreement and the Administrative Services Agreement. In addition to providing the Company exclusive use of the Fingerhut Database for the marketing of financial service products, the agreements provide for continued access to information about Fingerhut Customers, for marketing of extended service plans and for a variety of administrative and other services during the term (generally seven years) of these agreements. Additionally, FCI has guaranteed the Company's revolving bank credit facility. See "Transactions Between FCI and the Company".
The Offering
Common Stock offered(1) ............. 2,833,333 Shares Common Stock to be outstanding after the Offering(1)(2)............. 18,800,000 Shares Use of Proceeds...................... The net proceeds of the Offering will be used to repay short-term indebtedness of the Company, and the remainder, if any, will be used for general corporate purposes. See "Use of Proceeds".
Proposed Nasdaq National Market Symbol............................... "MTRS".
Risk Factors......................... See "Risk Factors" for a discussion of certain factors that should be considered in evaluating an investment in the Common Stock.
(1) Assumes the Underwriters do not exercise their option to purchase up to an additional 425,000 shares of Common Stock to cover over-allotments, if any. (2) Excludes [ ] shares of Common Stock issuable upon exercise of outstanding stock options granted or expected to be granted to certain employees and directors of the Company. The Company has reserved a total of 1,880,000 shares of Common Stock for issuance in connection with options issuable under the Company's stock option plan. See "Management--Compensation Programs".
Metris Companies Inc. is a Delaware corporation incorporated on August 20, 1996, and is a wholly owned subsidiary of FFS Holdings, Inc., which is itself an indirect wholly owned subsidiary of FCI. The Company's subsidiaries are Direct Merchants Credit Card Bank, National Association ("Direct Merchants Bank"), Metris Receivables, Inc. ("MRI"), DMCCB, Inc., and Metris Direct, Inc. In anticipation of the Offering, FCI contributed the assets, liabilities and equity of the extended service plan business and all of the outstanding stock of these subsidiaries to the Company (the "Contribution"). The Company's principal executive offices are located at 600 South Highway 169, Suite 1800, St. Louis Park, Minnesota 55426, and its telephone number is (612) 525-5020.
Forward-Looking Statements This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, and is subject to the safe-harbor created by such sections. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the "Risk Factors" described herein.
Summary Financial and Operating Data The following summary historical financial and operating data reflects the assets, liabilities, equity, and revenues and expenses of FCI's businesses engaged in offering certain consumer credit products, extended service plans, and other fee-based products and services to moderate income consumers.
The Income Statement Data, Balance Sheet Data, Net Extended Service Plan Revenues and Fee-Based Product Revenues presented below as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, have been derived from the audited financial statements and the notes thereto appearing elsewhere in this Prospectus. All other summary financial and operating data is unaudited, but reflects, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of such data. The results for the six months ended June 30, 1996, are also not necessarily indicative of the results to be expected for the entire year.
As discussed under "Risk Factors--Lack of Prior Operating History as a Stand-Alone Entity" and "--Recently Commenced Credit Card Operations", the historical financial information presented below may not be indicative of the Company's future performance nor does it necessarily reflect what the financial position and results of operations of the Company would have been had the Company operated as a separate, stand-alone entity during the periods covered. Additionally, the Company's consumer credit products business and a substantial portion of its fee- based products and services business began operations in February 1995 with the opening of Direct Merchants Bank. Therefore, the financial statements and Income Statement Data and Balance Sheet Data derived therefrom prior to 1995 are not comparable to the periods ending in 1995 and thereafter. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the historical financial statements and notes thereto, included elsewhere in this Prospectus.
In order to provide funds for operations and to improve liquidity, the Company securitizes and sells substantially all of its credit card loans to investors through a master trust. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity, Funding and Capital Resources", and "Business--Securitization". The effect of these transactions is to remove credit card loans sold with limited recourse from the Company's balance sheet and record a gain on sale for the difference between the carrying value of the loans and the adjusted sales proceeds. The adjusted sales proceeds are based on a present value estimate of future cash flows to be received over the life of the loans, net of certain funding and servicing costs. The resulting gain is further reduced for estimated loan losses over the life of the related loans under the limited recourse provisions. Because these estimates are influenced by factors outside of the Company's control, the uncertainty inherent in these estimates makes it reasonably possible that these estimates could change in the near term.
The securitization and sale of credit card loans changes the Company's interest in such loans from that of a lender to that of a servicer. Accordingly there is a change in how revenue is reported in the income statement. For securitized and sold credit card loans, amounts that otherwise would have been recorded as interest income, interest expense, fee income and provision for loan losses are instead recorded as net securitization and credit card servicing income, and the Company's allowance for loan losses also does not include amounts for securitized loans. However, the information on the following table under "Credit Card Data" includes both securitized loans and the Company's on-balance sheet loans.
Six Months Ended June 30 Year Ended December 31
1996 1995 1995 1994 1993
(Dollars in thousands,
except per share
data)
Income Statement Data:
Interest income $ 12,619 $ 1,460 $ 7,616 $ 487 $ 279
Interest expense 1,858 280 1,217 -- --
Net interest income 10,761 $ 1,180 $ 6,399 487 279
Provision for loan losses 5,173 534 4,393 -- --
Other operating income 53,296 16,094 51,083 14,238 10,053
Other operating expense 44,422 16,602 45,640 11,222 8,333
Income before income
taxes $ 14,462 $ 138 $ 7,449 $3,503 $ 1,999
Income taxes 5,568 53 2,868 1,305 737
Net income $ 8,894 $ 85 $ 4,581 $2,198 $ 1,262
Adjusted Pro-Forma Income
Statement Data: <F1>
Adjusted Pro-forma net
income per share $0.51 $ 0.33
Balance Sheet Data:
Credit card/other loans <F2> $ 131,963 $ 44,514 $ 95,064 $ 9,375 $ 6,160
Allowance for loan losses 5,303 534 3,679 -- --
Total assets 185,784 78,036 174,428 9,856 6,615
Short-term borrowings 54,318 28,205 63,482 -- --
Division equity 80,212 26,822 71,318 6,737 4,539
Credit Card Data:
Average managed loans $ 741,177 $ 42,576 $183,274 $ -- $ --
Period-end managed loans 1,068,018 190,069 543,619 -- --
Period-end total accounts 1,122,673 319,511 702,891 -- --
Managed net interest
margin %<F3> 13.85% 13.34% 13.14% 7.37% 6.14%
Managed net charge-off
ratio <F4> 5.53% -- 2.19% -- --
Managed delinquency ratio <F5> 3.37% 0.17% 3.95% -- --
Period End Managed Allowance for
loan losses 4.15% 1.49% 4.09% -- --
Extended Service Plan Data:
Net extended service plan
revenue $ 8,615 $ 6,687 $ 17,779 $12,244 $ 7,935
Warrantable Product sales
penetration rates <F6> 23.8% 21.0% 20.4% 15.3% 12.9%
Fee-Based Products and
Services Data:
Fee-based product revenues $ 12,067 $ 1,549 $ 6,662 $ 1,994 $ 2,118
<F1> Pro-Forma per share information is based on 18,800,000 shares assumed to be outstanding upon consummation of the Offering. Amounts also give effect to the application of the estimated net proceeds from the Offering as if the Offering had occurred at the beginning of the respective periods shown. <F2> Credit card/other loans for the years ended December 31, 1994, and 1993 consist exclusively of loans made to FCI. For the year ended December 31, 1995, and thereafter, credit card/other loans are exclusively credit card loans as the Company was in a net borrowing position with FCI. <F3> Includes the Company's actual cost of funds plus all costs associated with asset securitizations, including the interest expense paid to the certificateholders and amortization of the discount and fees. <F4> Net charge-offs reflect actual principal amounts charged-off, less recoveries, as a percentage of average managed principal credit card loans on an annualized basis. <F5> Delinquencies represent credit card loans that were at least 30 days past due at period end. <F6> Warrantable Product sales penetration rates reflect the percentage of extended service plans sold to total Warrantable Products sold. Percentages for all periods presented reflect the inclusion of jewelry and furniture products as Warrantable Products even though extended service plans for such products were not introduced until the middle of 1995.