##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    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.
  Delaware
    
    41-1849591(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 
 
  Yes þ
    
    No o
  Yes þ
    
    No o
  Yes o
    
    No þ




---



METRIS COMPANIES INC.
 FORM 10-Q
 TABLE OF CONTENTS
   
 PagePART I.
    
    
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (unaudited):Consolidated Balance Sheets
    
    4Consolidated Statements of Income
    
    5Consolidated Statements of Changes in Stockholders Equity
    
    6Consolidated Statements of Cash Flows
    
    7Notes to Consolidated Financial Statements
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures about
Market Risk
    
    38Item 4.
    
    Controls and Procedures
    
    39PART II.
    
    
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    39Item 2.
    
    Unregistered Sale of Equity Securities and Use of Proceeds
    
    40Item 3.
    
    Defaults Upon Senior Securities
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    40Item 5.
    
    Other Information
    
    40Item 6.
    
    Exhibits
    
    40Signatures
    
    42Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)Certification of Principal Executive Officer Pursuant to Section 1350Certification of Principal Financial Officer Pursuant to Section 1350
  2




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##### Table of Contents



Forward-Looking Statements
 Securities Act of 1933 Securities
Exchange Act of 1934
 ® ®
   3




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##### Table of Contents



Part I. Financial Information
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 METRIS COMPANIES INC. AND SUBSIDIARIES
 
  (In thousands, except share data)
 September 30,2005
    
    
    December 31,(unaudited)
    
    
    2004AssetsCash and due from banks
    
    $
    25,248
    
    
    $
    25,198Federal funds sold
    
    
    22,005
    
    
    
    22,450Short-term investments
    
    
    58,786
    
    
    
    43,070Cash and cash equivalents
    
    
    106,039
    
    
    
    90,718Available for sale securities
    
    
    61,100
    
    
    
    306,409Liquidity reserve deposit
    
    
    86,284
    
    
    
    79,746Credit card loans, net of allowance of $1,645 and
$12,409, respectively
    
    
    2,586
    
    
    
    55,821Retained interests in loans securitized
    
    
    851,143
    
    
    
    784,135Property and equipment, net
    
    
    21,737
    
    
    
    24,135Other receivables due from credit card
securitizations, net
    
    
    80,874
    
    
    
    68,021Other assets
    
    
    51,707
    
    
    
    72,494Total assets
    
    $
    1,261,470
    
    
    $
    1,481,479LiabilitiesDebt
    
    $
    
    
    
    $
    373,624Accounts payable
    
    
    34,766
    
    
    
    37,619Accrued expenses and other liabilities
    
    
    162,064
    
    
    
    122,934Total liabilities
    
    
    196,830
    
    
    
    534,177Stockholders EquityConvertible preferred stock  par value $.01 per share;
10,000,000 shares authorized, 1,476,680 and
1,381,327 shares issued and outstanding, repectively
    
    
    550,064
    
    
    
    514,545Common stock, par value $.01 per share;
300,000,000 shares authorized, 65,547,601
and 65,182,416 shares issued, respectively
    
    
    655
    
    
    
    652Paid-in capital
    
    
    237,865
    
    
    
    233,989Unearned compensation
    
    
    (286
    )
    
    
    Treasury stock - 7,055,300 shares
    
    
    (58,308
    )
    
    
    (58,308
    )Retained earnings
    
    
    334,650
    
    
    
    256,424Total stockholders equity
    
    
    1,064,640
    
    
    
    947,302Total liabilities and stockholders equity
    
    $
    1,261,470
    
    
    $
    1,481,479
  4




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##### Table of Contents



METRIS COMPANIES INC. AND SUBSIDIARIES
 
  (In thousands, except per-share data) (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004RevenuesLoss on new securitizations of receivables to the
Metris Master Trust
    
    $
    (7,106
    )
    
    $
    
    
    
    $
    (49,313
    )
    
    $
    (91,886
    )Gain (loss) on replenishment of receivables to the
Metris Master Trust
    
    
    736
    
    
    
    (21,972
    )
    
    
    (21,890
    )
    
    
    (71,353
    )Discount accretion
    
    
    58,355
    
    
    
    63,747
    
    
    
    180,187
    
    
    
    185,287Interest-only revenue
    
    
    121,798
    
    
    
    87,316
    
    
    
    307,186
    
    
    
    217,385Change in fair value of retained interests in
loans securitized
    
    
    (20,027
    )
    
    
    25,518
    
    
    
    781
    
    
    
    94,202Transaction and other costs
    
    
    (2,755
    )
    
    
    (6,634
    )
    
    
    (15,253
    )
    
    
    (91,018
    )Securitization income
    
    
    151,001
    
    
    
    147,975
    
    
    
    401,698
    
    
    
    242,617Servicing income on securitized receivables
    
    
    27,947
    
    
    
    32,496
    
    
    
    85,640
    
    
    
    102,580Credit card loan and other interest income
    
    
    2,161
    
    
    
    4,549
    
    
    
    10,320
    
    
    
    14,665Credit card loan fees, interchange and other income
    
    
    652
    
    
    
    3,736
    
    
    
    5,352
    
    
    
    19,816Enhancement services income
    
    
    2,748
    
    
    
    5,692
    
    
    
    9,174
    
    
    
    20,148Gain on sale of membership and warranty business
    
    
    
    
    
    
    
    
    
    
    1,800
    
    
    
    Total revenues
    
    
    184,509
    
    
    
    194,448
    
    
    
    513,984
    
    
    
    399,826ExpensesInterest
    
    
    456
    
    
    
    14,056
    
    
    
    16,357
    
    
    
    46,701(Benefit) provision for loan losses
    
    
    (771
    )
    
    
    1,408
    
    
    
    (6,322
    )
    
    
    (5,175
    )Marketing
    
    
    34,455
    
    
    
    17,190
    
    
    
    87,526
    
    
    
    48,848Employee compensation
    
    
    36,501
    
    
    
    31,554
    
    
    
    111,096
    
    
    
    106,222Data processing services and communications
    
    
    12,608
    
    
    
    12,203
    
    
    
    36,440
    
    
    
    42,452Credit protection claims
    
    
    4,063
    
    
    
    3,421
    
    
    
    13,506
    
    
    
    14,805Occupancy and equipment
    
    
    4,621
    
    
    
    5,442
    
    
    
    14,275
    
    
    
    17,827Other
    
    
    18,346
    
    
    
    23,985
    
    
    
    74,553
    
    
    
    75,095Total expenses
    
    
    110,279
    
    
    
    109,259
    
    
    
    347,431
    
    
    
    346,775Income before income taxes
    
    
    74,230
    
    
    
    85,189
    
    
    
    166,553
    
    
    
    53,051Income tax expense
    
    
    20,569
    
    
    
    23,425
    
    
    
    52,808
    
    
    
    20,003Net income
    
    
    53,661
    
    
    
    61,764
    
    
    
    113,745
    
    
    
    33,048Convertible preferred stock dividends
    
    
    12,104
    
    
    
    11,073
    
    
    
    35,519
    
    
    
    32,494Net income after preferred dividends
    
    
    41,557
    
    
    
    50,691
    
    
    
    78,226
    
    
    
    554Earnings per shareDistributed
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Undistributed
    
    
    0.40
    
    
    
    0.49
    
    
    
    0.75
    
    
    
    0.01Total Basic
    
    $
    0.40
    
    
    $
    0.49
    
    
    $
    0.75
    
    
    $
    0.01Total Diluted
    
    $
    0.39
    
    
    $
    0.48
    
    
    $
    0.74
    
    
    $
    0.01Shares used to compute earnings per shareBasic
    
    
    58,435
    
    
    
    57,981
    
    
    
    58,293
    
    
    
    57,899Diluted
    
    
    59,361
    
    
    
    58,915
    
    
    
    59,095
    
    
    
    58,830
  5




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METRIS COMPANIES INC. AND SUBSIDIARIES
 
  (In thousands) (unaudited)
 Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalNumber of Shares
    
    
    Preferred
    
    
    Common
    
    
    Paid-In
    
    
    Unearned
    
    
    Treasury
    
    
    Retained
    
    
    StockholdersPreferred
    
    
    Common
    
    
    Stock
    
    
    Stock
    
    
    Capital
    
    
    Compensation
    
    
    Stock
    
    
    Earnings
    
    
    EquityBalance at December 31, 2003
    
    
    1,264
    
    
    
    57,807
    
    
    $
    470,728
    
    
    $
    649
    
    
    $
    229,655
    
    
    $
    (27
    )
    
    $
    (58,308
    )
    
    $
    266,496
    
    
    $
    909,193Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,048
    
    
    
    33,048Convertible preferred stock dividends
    
    
    87
    
    
    
    
    
    
    
    32,494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,494
    )
    
    
    Issuance of common stock under
employee benefit plans
    
    
    
    
    
    
    287
    
    
    
    
    
    
    
    2
    
    
    
    3,477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,479Deferred compensation obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )Restricted stock forfeitures
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23Balance at September 30, 2004
    
    
    1,351
    
    
    
    58,044
    
    
    $
    503,222
    
    
    $
    651
    
    
    $
    233,042
    
    
    $
    
    
    
    $
    (58,308
    )
    
    $
    267,050
    
    
    $
    945,657Balance at December 31, 2004
    
    
    1,381
    
    
    
    58,127
    
    
    $
    514,545
    
    
    $
    652
    
    
    $
    233,989
    
    
    $
    
    
    
    $
    (58,308
    )
    
    $
    256,424
    
    
    $
    947,302Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,745
    
    
    
    113,745Convertible preferred stock dividends
    
    
    96
    
    
    
    
    
    
    
    35,519
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,519
    )
    
    
    Issuance of common stock under
employee benefit plans
    
    
    
    
    
    
    327
    
    
    
    
    
    
    
    3
    
    
    
    3,408
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,411Issuance of restricted stock
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    468
    
    
    
    (468
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    182Balance at September 30, 2005
    
    
    1,477
    
    
    
    58,492
    
    
    $
    550,064
    
    
    $
    655
    
    
    $
    237,865
    
    
    $
    (286
    )
    
    $
    (58,308
    )
    
    $
    334,650
    
    
    $
    1,064,640
  6




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##### Table of Contents



METRIS COMPANIES INC. AND SUBSIDIARIES
 
  (In thousands) (unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2004Operating ActivitiesNet income
    
    $
    113,745
    
    
    $
    33,048Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation, amortization and accretion
    
    
    (159,273
    )
    
    
    (157,845
    )Benefit for loan losses
    
    
    (6,322
    )
    
    
    (5,175
    )Loss from credit card securitizations
    
    
    71,203
    
    
    
    163,239Gain on sale of membership and warranty business
    
    
    (1,800
    )
    
    
    Market loss on derivative financial instruments
    
    
    1,297
    
    
    
    8,564Changes in operating assets and liabilities, net:Liquidity reserve deposit
    
    
    (6,538
    )
    
    
    503Fair value of retained interests in loans securitized
    
    
    (781
    )
    
    
    (94,202
    )Spread accounts receivable
    
    
    21,024
    
    
    
    207,520Other receivables due from credit card securitizations, net
    
    
    (12,853
    )
    
    
    5,773Accounts payable
    
    
    (2,853
    )
    
    
    5,883Accrued expenses and other liabilities
    
    
    34,199
    
    
    
    16,290Other
    
    
    16,223
    
    
    
    20,825Net cash provided by operating activities
    
    
    67,271
    
    
    
    204,423Investing ActivitiesProceeds from sales of available for sale securities
    
    
    1,743,076
    
    
    
    1,982,187Purchases of available for sale securities
    
    
    (1,497,767
    )
    
    
    (2,097,891
    )Net loans collected
    
    
    708,692
    
    
    
    1,125,207Net repayments of securitized loans
    
    
    (627,402
    )
    
    
    (1,215,200
    )Proceeds from sales of credit card portfolios to third parties
    
    
    
    
    
    
    27,870Net additions to property and equipment
    
    
    (4,230
    )
    
    
    (1,984
    )Net cash provided by (used in) investing activities
    
    
    322,369
    
    
    
    (179,811
    )Financing ActivitiesProceeds from issuance of debt
    
    
    
    
    
    
    283,974Repayment of debt
    
    
    (375,000
    )
    
    
    (202,724
    )Proceeds from issuance of common stock
    
    
    681
    
    
    
    3,479Net cash (used in) provided by financing activities
    
    
    (374,319
    )
    
    
    84,729Net increase in cash and cash equivalents
    
    
    15,321
    
    
    
    109,341Cash and cash equivalents at beginning of period
    
    
    90,718
    
    
    
    130,510Cash and cash equivalents at end of period
    
    $
    106,039
    
    
    $
    239,851Supplemental disclosures and cash flow informationCash paid (received) during the period for:Interest
    
    $
    24,124
    
    
    $
    36,945Income taxes
    
    
    15,956
    
    
    
    (34,997
    )
  7




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##### Table of Contents



METRIS COMPANIES INC. AND SUBSIDIARIES
 
  (In thousands, except as noted) (unaudited)
 NOTE 1
 ORGANIZATION AND BASIS OF PRESENTATION
    Interim Financial Statements
  Pervasiveness of Estimates
  Comprehensive Income
  8




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NOTE 2
 EARNINGS PER SHARE
 Participating Securities and the two-class method under FASB Statement 128.
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    53,661
    
    
    $
    61,764
    
    
    $
    113,745
    
    
    $
    33,048Convertible preferred stock dividends
    
    
    12,104
    
    
    
    11,073
    
    
    
    35,519
    
    
    
    32,494Net income after preferred dividends
    
    $
    41,557
    
    
    $
    50,691
    
    
    $
    78,226
    
    
    $
    554Convertible preferred stock dividends
    
    $
    12,104
    
    
    $
    11,073
    
    
    $
    35,519
    
    
    $
    32,494Weighted average preferred shares
    
    
    1,444
    
    
    
    1,321
    
    
    
    1,413
    
    
    
    1,293Distributed earnings per share  Preferred
    
    
    8.38
    
    
    
    8.38
    
    
    
    25.14
    
    
    
    25.13Undistributed income
    
    $
    41,557
    
    
    $
    50,691
    
    
    $
    78,226
    
    
    $
    554Preferred ownership on a converted basis
    
    
    44
    %
    
    
    44
    %
    
    
    44
    %
    
    
    44
    %Preferred stockholders interest in undistributed income
    
    $
    18,285
    
    
    $
    22,304
    
    
    $
    34,419
    
    
    $
    244Weighted average preferred shares
    
    
    1,444
    
    
    
    1,321
    
    
    
    1,413
    
    
    
    1,293Undistributed earnings per share  Preferred
    
    $
    12.66
    
    
    $
    16.88
    
    
    $
    24.36
    
    
    $
    0.19Undistributed income
    
    $
    41,557
    
    
    $
    50,691
    
    
    $
    78,226
    
    
    $
    554Common ownership
    
    
    56
    %
    
    
    56
    %
    
    
    56
    %
    
    
    56
    %Common stockholder interest in undistributed income
    
    $
    23,272
    
    
    $
    28,387
    
    
    $
    43,807
    
    
    $
    310Weighted average common shares outstanding  Basic
    
    
    58,435
    
    
    
    57,981
    
    
    
    58,293
    
    
    
    57,899Common share equivalents
    
    
    926
    
    
    
    934
    
    
    
    802
    
    
    
    931Shares used
to compute earnings per common share  Diluted
    
    
    59,361
    
    
    
    58,915
    
    
    
    59,095
    
    
    
    58,830Total basic earnings per share  Common
    
    $
    0.40
    
    
    $
    0.49
    
    
    $
    0.75
    
    
    $
    0.01Total diluted earnings per share  Common
    
    $
    0.39
    
    
    $
    0.48
    
    
    $
    0.74
    
    
    $
    0.01
 9




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##### Table of Contents



NOTE 3
 SHARE-BASED COMPENSATION PLANS
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    53,661
    
    
    $
    61,764
    
    
    $
    113,745
    
    
    $
    33,048Add: Share-based employee compensation
expense included in reported net
income, net of related tax effects
    
    
    1,463
    
    
    
    551
    
    
    
    4,475
    
    
    
    836Deduct: Annual share-based employee
compensation expense (benefit) determined
based on the fair value for all awards, net
of related tax effects
    
    
    1,052
    
    
    
    1,666
    
    
    
    2,788
    
    
    
    (3,212
    )Pro forma net income
    
    $
    54,072
    
    
    $
    60,649
    
    
    $
    115,432
    
    
    $
    37,096Earnings per share:Basic  as reported
    
    $
    0.40
    
    
    $
    0.49
    
    
    $
    0.75
    
    
    $
    0.01Basic  pro forma
    
    $
    0.40
    
    
    $
    0.48
    
    
    $
    0.77
    
    
    $
    0.04Diluted  as reported
    
    $
    0.39
    
    
    $
    0.48
    
    
    $
    0.74
    
    
    $
    0.01Diluted  pro forma
    
    $
    0.40
    
    
    $
    0.47
    
    
    $
    0.76
    
    
    $
    0.04Weighted-average assumptions in option
valuation:Risk-free interest rates
    
    
    4.3
    %
    
    
    3.0
    %
    
    
    4.3
    %
    
    
    3.0
    %Stock volatility factor
    
    
    82.1
    %
    
    
    127.4
    %
    
    
    82.1
    %
    
    
    128.0
    %Expected life of options (in years)
    
    
    2.8
    
    
    
    2.7
    
    
    
    2.8
    
    
    
    2.7
  10




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Accounting for
Stock-Based Compensation, Accounting for
Stock Issued to Employees
 NOTE 4
 AVAILABLE FOR SALE SECURITIES
  Fair Value and Cost of Available for SaleSecurities Outstanding as ofSeptember 30,
    
    
    December 31,Debt Securities
    
    2005
    
    
    2004Legal Final Maturity Date
Less than 1 year
    
    $
    
    
    
    $
    10,0001 year - 5 years
    
    
    
    
    
    
    10,0005 years - 10 years
    
    
    
    
    
    
    Over 10 years
    
    
    23,100
    
    
    
    24,420Total Debt Securities
    
    
    23,100
    
    
    
    44,420Equity Securities
    
    
    38,000
    
    
    
    261,989Total Available for Sale Securities
    
    $
    61,100
    
    
    $
    306,409
  11




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NOTE 5
 ALLOWANCE FOR LOAN LOSSES
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    3,751
    
    
    $
    15,375
    
    
    $
    12,409
    
    
    $
    45,492Allowance related to assets re-acquired
    
    
    
    
    
    
    1
    
    
    
    (170
    )
    
    
    1,946(Benefit) provision for loan losses
    
    
    (771
    )
    
    
    1,408
    
    
    
    (6,322
    )
    
    
    (5,175
    )Principal receivables charged-off
    
    
    (1,613
    )
    
    
    (2,983
    )
    
    
    (6,726
    )
    
    
    (29,904
    )Recoveries
    
    
    278
    
    
    
    492
    
    
    
    2,454
    
    
    
    1,934Net principal receivables charged-off
    
    
    (1,335
    )
    
    
    (2,491
    )
    
    
    (4,272
    )
    
    
    (27,970
    )Balance at end of period
    
    $
    1,645
    
    
    $
    14,293
    
    
    $
    1,645
    
    
    $
    14,293
  NOTE 6
 RETAINED INTERESTS IN LOANS SECURITZED
  September 30,
    
    
    December 31,2005
    
    
    2004Contractual retained interests
    
    $
    542,129
    
    
    $
    537,945Excess transferors interest
    
    
    146,056
    
    
    
    105,237Interest-only strip receivable
    
    
    110,330
    
    
    
    82,672Spread accounts receivable
    
    
    52,628
    
    
    
    58,281Retained interests in loans securitized
    
    $
    851,143
    
    
    $
    784,135
 12




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September 30,
    
    December 31,2005
    

2004Monthly principal payment rate
    
    
    6.7
    %
    
    
    5.9
    %Gross yield (1)
    
    
    26.2
    %
    
    
    25.9
    %Annual interest expense and servicing fees
    
    
    5.8
    %
    
    
    5.0
    %Annual gross principal default rate
    
    
    16.7
    %
    
    
    18.4
    %Discount rate:Contractual retained interests/Excess transferors interest/
Spread accounts receivable
    
    
    15.0
    %
    
    
    16.0
    %Interest-only strip receivable
    
    
    30.0
    %
    
    
    30.0
    %Weighted average months-to-maturity
    
    
    13.7
    
    
    
    20.1Weighted average enhancement level (2)
    
    
    12.7
    %
    
    
    12.1
    %Gross receivables held in the Metris Master Trust, net of discount(3)
    
    
    94.0
    %
    
    
    92.3
    %
 
 (1)Includes expected cash flows from finance charges, late and overlimit fees, debt waiver premiums and bad debt recoveries. Gross yield for
purposes of estimating fair value does not include cash flows from
interchange income or cash advance fees.(2)
Includes contractual retained interest and required minimum spread
reserve deposits.(3)Represents the ratio of Retained interests in loans securitized (contractual retained interests, excess transferors interest, spread
accounts receivable and interest-only strip receivable) plus investors interests in securitized receivables accounted for as sales to gross receivables in
the Metris Master Trust plus the gross spread accounts
receivable.  Adverse Impact on Fair Value10% Adverse Change
    
    
    20% Adverse ChangeAnnual discount rate
    
    $
    14.8
    
    
    $
    29.2Monthly principal payment rate
    
    
    4.2
    
    
    
    9.1Annual gross yield
    
    
    83.0
    
    
    
    160.9Annual interest expense and servicing fees
    
    
    29.2
    
    
    
    57.9Annual gross principal default rate
    
    
    51.7
    
    
    
    98.1
  NOTE
7  CONVERTIBLE PREFERRED STOCK
  13




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NOTE 8
 INCOME TAXES
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Statutory federal income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, net of federal benefit
    
    
    0.8
    
    
    
    0.5
    
    
    
    0.8
    
    
    
    0.8Valuation allowance
    
    
    (2.0
    )
    
    
    (9.1
    )
    
    
    (2.1
    )
    
    
    Tax reserve reduction
    
    
    (6.3
    )
    
    
    
    
    
    
    (2.8
    )
    
    
    Other, net
    
    
    0.2
    
    
    
    1.1
    
    
    
    0.8
    
    
    
    1.9Effective income tax rate
    
    
    27.7
    %
    
    
    27.5
    %
    
    
    31.7
    %
    
    
    37.7
    %
 14




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NOTE 9
 MERGER UPDATE
  15




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ITEM 2.
 METRIS COMPANIES INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Business Overview
  ® ®
  Bankruptcy Abuse Prevention and Consumer Protection Act
 16




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Item 3  Quantitative and Qualitative Disclosures about Market Risk
   17




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18




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Critical Accounting Estimates
       19




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Results of Operations
 Three Months Ended September 30, 2005 and 2004
   Table 1: Analysis of Securitization Income
 (In thousands)
 Three Months EndedSeptember 30,2005
    
    
    2004Loss on new
securitizations of receivables to the Metris Master Trust:Paired series transactions
    
    $
    (7,106
    )(1)
    
    
    (7,106
    )
    
    
    Gain
(loss) on replenishment of receivables to the Metris  Master Trust
    
    
    736
    
    
    
    (21,972
    )Discount accretion
    
    
    58,355
    
    
    
    63,747Interest-only revenue:Gross yield(2)
    
    
    393,419
    
    
    
    428,183Principal defaults
    
    
    (193,587
    )
    
    
    (275,075
    )Interest expense and servicing fees
    
    
    (78,034
    )
    
    
    (65,792
    )121,798
    
    
    
    87,316Change in fair value of retained interests in loans securitized
    
    
    (20,027
    )
    
    
    25,518Transaction and other costs
    
    
    (2,755
    )
    
    
    (6,634
    )Securitization income
    
    $
    151,001
    
    
    $
    147,975
 
 (1)
Loss represents $73.8 million retained bond (9.0% to 9.5%
required subordination) discounted at 15% for 2.3 months and a
$4.6 million decrease in the interest-only strip
receivable.(2)
Includes cash flows from finance charges, late, overlimit, debt
waiver and cash advance fees, bad debt recoveries and interchange
income. 20




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21




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Table 2: Other Expenses  (In thousands)
 Three Months EndedSeptember 30,2005
    
    
    2004MasterCard / Visa assessment and fees
    
    $
    2,136
    
    
    $
    1,625Credit card fraud losses
    
    
    636
    
    
    
    696Legal fees
    
    
    2,220
    
    
    
    2,788Collection and risk management
    
    
    2,741
    
    
    
    3,301Other professional fees
    
    
    5,183
    
    
    
    5,318Purchased portfolio premium amortization
    
    
    1,393
    
    
    
    2,241Asset impairment, lease write-offs and severance
    
    
    259
    
    
    
    1,263Debt prepayment expenses
    
    
    786
    
    
    
    General and administrative expenses and other
    
    
    2,992
    
    
    
    6,753Total other expenses
    
    $
    18,346
    
    
    $
    23,985
   Nine Months Ended September 30, 2005 and 2004
   22




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Table 3: Analysis of Securitization Income  (In thousands)
 Nine Months EndedSeptember 30,2005
    
    
    2004Loss on new securitizations of receivables to the
Metris Master Trust:Defeasance of maturing ABS series into conduit
    
    $
    (34,525
    )(1)
    
    $
    (78,008
    )      (5)Amortizing term series financing
    
    
    
    
    
    
    (1,246
    )      (6)New Term ABS transactions
    
    
    (13,046
    )(2)
    
    
    (12,632
    )      (7)Issuance of BB bonds
    
    
    5,364
    (3)
    
    
    Paired series transactions
    
    
    (7,106
    )(4)
    
    
    (49,313
    )
    
    
    (91,886
    )Loss on
replenishment of receivables to the Metris Master Trust
    
    
    (21,890
    )
    
    
    (71,353
    )Discount accretion
    
    
    180,187
    
    
    
    185,287Interest-only revenue:Gross yield(8)
    
    
    1,198,785
    
    
    
    1,363,721Principal defaults
    
    
    (662,263
    )
    
    
    (955,505
    )Interest expense and servicing fees
    
    
    (229,336
    )
    
    
    (190,831
    )307,186
    
    
    
    217,385Change in fair value of retained interests in loans securitized
    
    
    781
    
    
    
    94,202Transaction and other costs
    
    
    (15,253
    )
    
    
    (91,018
    )Securitization income
    
    $
    401,698
    
    
    $
    242,617
 
 (1)Loss represents $204 million retained bond (18.5% required subordination) discounted at 16% for 15 months and a $33 million
spread account floor discounted at 16% for 15 months, partially offset by the present value of future 15 months assumed excess spread
discounted at 30%.(2) Loss represents $89 million retained bond (14.0% required subordination, including the issuance of BB bonds) discounted at 15%
for 23 months, partially offset by the present value of future
20 months assumed excess spread discounted at 30%.(3) Gain represents the reversal of the remaining discount (16% over 21 months) on a $53 million retained bond, partially offset
by a $7 million interest reserve account discounted at 16% for 21 months and increased interest expense on $53 million of BB bonds discounted
monthly at 30%.(4) Loss represents $74 million retained bond (9.0 to 9.5% required subordination) discounted at 15% for 2.3 months and a $4.6
million decrease in the interest-only strip receivable.(5) Loss represents discount on a $250 million retained bond (18.5% required subordination) at 16% for 24 months and a $47 million
spread account floor discounted at 15.25% for 24 months, partially offset by the present value of future 24 months assumed excess spread
discounted at 30%.(6) Loss represents discount on a $113 million retained bond (18.5% required subordination) at 16% for one month, partially offset
by the present value of future assumed excess spread discounted at
30%.(7) Loss represents discount on $27 million retained bond (12% required subordination) discounted at 16% for 36 months and a $7
million spread account floor discounted at 15.25% for 36 months, partially offset by the present value of future 36 months assumed excess
spread discounted at 30%.(8) Includes cash flows from finance charges, late, overlimit, debt waiver and cash advance fees, bad debt recoveries and
interchange income. 23




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24




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Table 4: Other Expenses  (In thousands)
 Nine Months EndedSeptember 30,2005
    
    
    2004MasterCard / Visa assessment and fees
    
    $
    5,864
    
    
    $
    4,981Credit card fraud losses
    
    
    1,624
    
    
    
    1,639Legal fees
    
    
    5,139
    
    
    
    4,935Collection and risk management
    
    
    8,721
    
    
    
    10,568Other professional fees
    
    
    14,314
    
    
    
    14,727Purchased portfolio premium amortization
    
    
    4,560
    
    
    
    6,743Asset impairment, lease write-offs and severance
    
    
    283
    
    
    
    4,515Debt prepayment expenses
    
    
    21,027
    
    
    
    4,879General and administrative expenses and other
    
    
    13,021
    
    
    
    22,108Total other expenses
    
    $
    74,553
    
    
    $
    75,095
     25




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Retained Interests in Loans Securitized
 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities  a replacement of FASB Statement No. 125 Accounting for Certain
Investments in Debt and Equity Securities,
  Table 5: Retained interest in loans securitized  (In thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004Contractual retained interests
    
    $
    542,129
    
    
    $
    537,945Excess transferors interests
    
    
    146,056
    
    
    
    105,237Interest-only strip receivable
    
    
    110,330
    
    
    
    82,672Spread accounts receivable
    
    
    52,628
    
    
    
    58,281Retained interests in loans securitized
    
    $
    851,143
    
    
    $
    784,135
    26




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##### Table of Contents



Off-Balance Sheet Arrangements Managements Discussion and Analysis of Financial
Condition and Results of Operations
 Critical Accounting Estimates
  Table 6: Significant assumptions used for estimating the fair value of retained interests
 September 30,
    
    
    December 31,2005
    
    
    2004Monthly principal payment rate
    
    
    6.7
    %
    
    
    5.9
    %Gross yield (1)
    
    
    26.2
    %
    
    
    25.9
    %Annual interest expense and servicing fees
    
    
    5.8
    %
    
    
    5.0
    %Annual gross principal default rate
    
    
    16.7
    %
    
    
    18.4
    %Discount rate:Contractual retained interests / Excess
transferors interests / Spread accounts
receivable
    
    
    15.0
    %
    
    
    16.0
    %Interest-only strip receivable
    
    
    30.0
    %
    
    
    30.0
    %Weighted average months-to-maturity
    
    
    13.7
    
    
    
    20.1Weighted average enhancement level(2)
    
    
    12.7
    %
    
    
    12.1
    %Gross receivables held in the Metris Master
Trust, net of discount (3)
    
    
    94.0
    %
    
    
    92.3
    %
 
 (1) Includes expected cash flows from finance charges, late and overlimit fees, debt waiver premiums and bad debt
recoveries. Gross yield for purposes of estimating fair value does not include cash flows from interchange income or cash
advance fees.(2)Includes contractual retained interests and required minimum
spread reserve deposits.(3) Represents the ratio of Retained interests in loans securitized (contractual retained interests, excess
transferors interest, spread accounts receivable and interest-only strip receivable) plus investors interests in securitized
receivables accounted for as sales to gross receivables in the Metris
Master Trust plus the gross spread accounts receivable. 27




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##### Table of Contents



Credit card receivables
    Table 7: Loan Delinquency  (Dollars in thousands)
 September 30,
    
    
    % of
    
    
    December 31,
    
    
    % of
    
    
    September 30,
    
    
    % of2005
    
    
    Total
    
    
    2004
    
    
    Total
    
    
    2004
    
    
    TotalLoans outstanding
    
    $
    4,231
    
    
    
    100
    %
    
    $
    68,230
    
    
    
    100
    %
    
    $
    70,389
    
    
    
    100
    %Loans contractually delinquent:30 to 59 days
    
    
    194
    
    
    
    4.6
    %
    
    
    1,750
    
    
    
    2.6
    %
    
    
    2,445
    
    
    
    3.5
    %60 to 89 days
    
    
    191
    
    
    
    4.5
    %
    
    
    1,722
    
    
    
    2.5
    %
    
    
    1,873
    
    
    
    2.6
    %90 or more days
    
    
    525
    
    
    
    12.4
    %
    
    
    4,309
    
    
    
    6.3
    %
    
    
    4,568
    
    
    
    6.5
    %Total
    
    $
    910
    
    
    
    21.5
    %
    
    $
    7,781
    
    
    
    11.4
    %
    
    $
    8,886
    
    
    
    12.6
    %
  28




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##### Table of Contents



Table 8: Net Charge-offs  (Dollars in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Average credit card loans
    
    $
    5,588
    
    
    $
    72,581
    
    
    $
    32,010
    
    
    $
    93,363Net charge-offs
    
    
    1,335
    
    
    
    2,491
    
    
    
    4,272
    
    
    
    27,970Net charge-off ratio (annualized)
    
    
    94.8
    %
    
    
    13.6
    %
    
    
    17.8
    %
    
    
    40.0
    %
 Balance Sheet Analysis
 Cash and Cash Equivalents Available for Sale Securities
  Net Credit Card Loans
  Other Receivables due from Credit Card Securitizations, Net
  Other Assets
  Debt
  Accrued Expenses and Other Liabilities
  29




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Off-Balance Sheet Arrangements
      30




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Table 9: Cash Restricted from Release  (In thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004Cash restricted due to performance
    
    $
    
    
    
    $
    36,367Cash restricted due to corporate debt ratings
    
    
    13,187
    
    
    
    13,187Other non-performance based cash restricted
    
    
    53,114
    
    
    
    37,770Total cash restricted
    
    $
    66,301
    
    
    $
    87,324
   Table 10: Maximum Cash Restricted in the Metris Master Trust
 Cash Basis Net
    
    MaximumExcess Spread
    
    Restrictedgreater than 5.5%
    
    
    5.0% - 5.5%
    
    
    0.5% - 1.0
    %4.5% - 5.0%
    
    
    0.5% - 1.5
    %4.0% - 4.5%
    
    
    1.0% - 2.0
    %3.5% - 4.0%
    
    
    1.0% - 3.0
    %3.0% - 3.5%
    
    
    1.0% - 4.0
    %less than 3.0%
    
    
    4.5% - 5.0
    %
 Business Overview Managements Discussion and
Analysis of Financial Condition and Results of Operations
  31




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Table 11: Weighted Average Annualized Yields, Defaults, Costs and Excess Spreads  (In thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Gross yield (1)
    
    
    28.49
    %
    
    
    26.49
    %
    
    
    28.40
    %
    
    
    26.91
    %Annual principal defaults
    
    
    13.88
    %
    
    
    16.79
    %
    
    
    15.50
    %
    
    
    18.43
    %Net portfolio yield
    
    
    14.61
    %
    
    
    9.70
    %
    
    
    12.90
    %
    
    
    8.48
    %Annual interest expense and servicing fees
    
    
    6.12
    %
    
    
    4.12
    %
    
    
    5.63
    %
    
    
    3.81
    %Net excess spread
    
    
    8.49
    %
    
    
    5.58
    %
    
    
    7.27
    %
    
    
    4.67
    %
 
 (1) Includes cash flows from finance charges, late, overlimit, debt waiver and cash
advance fees, bad debt recoveries and interchange income.  Table 12: Principal Receivables  (Dollars in thousands)
 September 30,
    
    
    December 31,
    
    
    September 30,2005
    
    
    2004
    
    
    2004Principal receivables
    
    $
    5,478,683
    
    
    $
    6,117,669
    
    
    $
    6,304,7112-cycle plus delinquent principal receivables
    
    $
    369,568
    
    
    $
    470,442
    
    
    $
    514,011Principal delinquency ratio
    
    
    6.8
    %
    
    
    7.7
    %
    
    
    8.2
    %
 Liquidity,
Funding and Capital Resources Critical Accounting Estimates
 Liquidity, Funding and Capital Resources
  32




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Table 13: Liquidity, Funding and Capital Resources  (In thousands)
 September 30, 2005
    
    
    
    
    
    
    
    
    
    
    December 31, 2004MCI and non-bank
    
    
    
    
    
    
    
    
    
    
    MCI and non-bankDMCCB
    
    
    subsidiaries
    
    
    Consolidated
    
    
    DMCCB
    
    
    subsidiaries
    
    
    ConsolidatedCash and due from banks
    
    $
    25,427
    
    
    $
    (179
    )
    
    
    25,248
    
    
    $
    25,340
    
    
    $
    (142
    )
    
    
    25,198Federal funds sold
    
    
    22,005
    
    
    
    
    
    
    
    22,005
    
    
    
    22,450
    
    
    
    
    
    
    
    22,450Short-term investments
    
    
    1,248
    
    
    
    57,538
    
    
    
    58,786
    
    
    
    12,599
    
    
    
    30,471
    
    
    
    43,070Available for sale securities
    
    
    26,000
    
    
    
    35,100
    
    
    
    61,100
    
    
    
    107,138
    
    
    
    199,271
    
    
    
    306,409Total liquid assets
    
    $
    74,680
    
    
    $
    92,459
    
    
    $
    167,139
    
    
    $
    167,527
    
    
    $
    229,600
    
    
    $
    397,127
  Table 14: Outstanding On- and Off-Balance Sheet Funding  (In thousands)
 September 30, 2005
    
    
    December 31, 2004Outstanding
    
    
    Unused Capacity
    
    
    Outstanding
    
    
    Unused CapacityOn-balance sheet funding10.125% senior notes  July 2006
    
    
    
    
    
    
    N/A
    
    
    
    148,624
    
    
    
    N/ATerm loan  May 2007
    
    
    
    
    
    
    N/A
    
    
    
    225,000
    
    
    
    N/ATotal
    
    $
    
    
    
    
    N/A
    
    
    $
    373,624
    
    
    
    N/AOff-balance sheet asset-backed fundingMetris Master Trust:Term asset-backed securitizations
with various maturities through
February 2009
    
    
    4,647,150
    
    
    
    
    
    
    
    4,950,000
    
    
    
    Conduits  maturing April 2006
    
    
    40,000
    
    
    
    160,000
    
    
    
    360,000
    
    
    
    840,000Total
    
    $
    4,687,150
    
    
    $
    160,000
    
    
    $
    5,310,000
    
    
    $
    840,000Off-balance sheet paired series conduit fundingSeries 05-A (paired with Series
2000-3), matures November 2005
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    Series 05-B (paired with Series
1999-3), matures December 2005
    
    
    100,000
    
    
    
    200,000
    
    
    
    
    
    
    
    Total
    
    $
    600,000
    
    
    $
    200,000
    
    
    $
    
    
    
    $
    
 33




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##### Table of Contents



Table 15: Outstanding Term Asset-Backed Securitizations
 Term asset-backed securitization
    
    Amount (in thousands)
    
    
    Expected final payment date(s)Series 2000-3
    
    $
    500,000
    
    
    October 20, 2005 and November 21, 2005Series 1999-3
    
    
    300,000
    
    
    November 21, 2005Series 2001-2
    
    
    750,000
    
    
    May 22, 2006 and June 20, 2006Series 1999-2
    
    
    500,000
    
    
    July 20, 2006Series 2004-2
    
    
    652,800
    
    
    October 20, 2006Series 2005-1
    
    
    544,350
    
    
    March 20, 2007Series 2004-1
    
    
    200,000
    
    
    April 20, 2007Series 2002-4
    
    
    600,000
    
    
    May 21, 2007Series 2002-1
    
    
    300,000
    
    
    January 20, 2009 and February 20, 2009Series 2002-2
    
    
    300,000
    
    
    January 20, 2009 and February 20, 2009Total
    
    $
    4,647,150
    Table 16: Contractual Cash Obligations  (In thousands)
 Operating leases
    
    $
    7,610Deposits
    
    
    2,225Contractual purchase obligations
    
    
    50,144Total
    
    $
    59,979
   34




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##### Table of Contents



Moody's
    
    S & P
    
    FitchMetris Companies Inc.Senior unsecured debt
    
    
    B3
    
    
    
    B-
    
    
    
    B-Direct Merchants BankLong-term deposits
    
    Ba3
    
    BB-
    
    
    B
   
    
    The Bank must maintain minimum Tier 1 capital of $100 million, unless otherwise approved by the OCC.
    
    The Bank may continue to pay dividends in accordance with applicable statutory and regulatory requirements
provided capital remains at the required level.
    
    The Bank must maintain liquid assets at the greater of $35 million or 100% of the average highest daily
funding requirement for managed receivables, which was $34.5 million at September 30, 2005.
    
    The Bank must comply with the terms of the LRDA and the CALMA.
    
    MCI must comply with the CALMA.
  35




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##### Table of Contents



Selected
Operating Data  Managed Basis
   Table 17: Managed Loan Portfolio  (Dollars and accounts in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Account Originations:Partner
    
    
    63
    
    
    
    28
    
    
    
    135
    
    
    
    52Non-partner
    
    
    186
    
    
    
    90
    
    
    
    442
    
    
    
    220Total account originations
    
    
    249
    
    
    
    118
    
    
    
    577
    
    
    
    272
 As ofSeptember 30,
    
    
    December 31,
    
    
    September 30,2005
    
    
    2004
    
    
    2004Gross active accounts:Historical vintages (1)
    
    
    1,355
    
    
    
    1,678
    
    
    
    1,802New vintages(1)
    
    
    858
    
    
    
    499
    
    
    
    3752,213
    
    
    
    2,177
    
    
    
    2,177Period-end loansHistorical vintages(1)
    
    $
    4,576,709
    
    
    $
    5,787,904
    
    
    $
    6,164,106New vintages(1)
    
    
    1,251,844
    
    
    
    792,316
    
    
    
    617,358$
    5,828,553
    
    
    $
    6,580,220
    
    
    $
    6,781,464
 
 (1)New vintages include credit card account originations between 2003 and 2005. Historical vintages
include credit card account originations and portfolio purchases
prior to 2003. 36




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##### Table of Contents



Table 17: Managed Loan Portfolio (continued)  (Dollars in thousands)
 September 30,
    
    
    % of
    
    
    December 31,
    
    
    % of
    
    
    September 30,
    
    
    % of2005
    
    
    Total
    
    
    2004
    
    
    Total
    
    
    2004
    
    
    TotalPeriod-end balances:Credit card loans
    
    $
    4,231
    
    
    
    
    
    
    $
    68,230
    
    
    
    
    
    
    $
    70,389Receivables held by the Metris Master Trust
    
    
    5,824,322
    
    
    
    
    
    
    
    6,511,990
    
    
    
    
    
    
    
    6,711,075Managed
    
    $
    5,828,553
    
    
    
    
    
    
    $
    6,580,220
    
    
    
    
    
    
    $
    6,781,464Loans contractually delinquent:Credit card loans
    
    $
    910
    
    
    
    21.5
    %
    
    $
    7,781
    
    
    
    11.4
    %
    
    $
    8,886
    
    
    
    12.6
    %Receivables held by the Metris Master Trust
    
    
    466,414
    
    
    
    8.0
    %
    
    
    593,819
    
    
    
    9.1
    %
    
    
    648,321
    
    
    
    9.7
    %Managed
    
    $
    467,324
    
    
    
    8.0
    %
    
    $
    601,600
    
    
    
    9.1
    %
    
    $
    657,207
    
    
    
    9.7
    %
  Three Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    
    September 30,2005
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    2004Average balances:Credit card loans
    
    $
    5,588
    
    
    
    
    
    
    $
    72,581
    
    
    
    
    
    
    $
    32,010
    
    
    
    
    
    
    $
    93,363Receivables held in
the Metris Master
Trust
    
    
    5,889,518
    
    
    
    
    
    
    
    6,892,481
    
    
    
    
    
    
    
    6,084,169
    
    
    
    
    
    
    
    7,311,173Managed
    
    $
    5,895,106
    
    
    
    
    
    
    $
    6,965,062
    
    
    
    
    
    
    $
    6,116,179
    
    
    
    
    
    
    $
    7,404,536Net charge-offs:Credit card loans
    
    $
    1,335
    
    
    
    94.8
    %
    
    $
    2,491
    
    
    
    13.6
    %
    
    $
    4,272
    
    
    
    17.8
    %
    
    $
    27,970
    
    
    
    40.0
    %Receivables held in
the Metris Master
Trust
    
    
    177,632
    
    
    
    12.0
    %
    
    
    253,781
    
    
    
    14.6
    %
    
    
    607,620
    
    
    
    13.4
    %
    
    
    888,952
    
    
    
    16.3
    %Managed
    
    $
    178,967
    
    
    
    12.0
    %
    
    $
    256,272
    
    
    
    14.6
    %
    
    $
    611,892
    
    
    
    13.4
    %
    
    $
    916,922
    
    
    
    16.5
    %
   37




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##### Table of Contents



Table 18: Equity Ratios  (Dollar and share counts in thousands, except per share amounts)
 September 30,
    
    
    December 31,
    
    
    September 30,2005
    
    
    2004
    
    
    2004Equity to managed assets:Total equity
    
    $
    1,064,640
    
    
    $
    947,302
    
    
    $
    945,657Total managed assets
    
    $
    5,948,620
    
    
    $
    6,791,478
    
    
    $
    7,042,176Ratio of equity to managed assets
    
    
    17.9
    %
    
    
    13.9
    %
    
    
    13.4
    %Common stockholders book value:Common stockholders equity
    
    $
    514,578
    
    
    $
    432,757
    
    
    $
    442,435Common shares outstanding
    
    
    58,492
    
    
    
    58,127
    
    
    
    58,044Common stockholders book value per share
    
    $
    8.80
    
    
    $
    7.45
    
    
    $
    7.62Total stockholders equity
    
    $
    1,064,640
    
    
    $
    947,302
    
    
    $
    945,657Preferred securities on a converted basis
    
    
    45,054
    
    
    
    45,054
    
    
    
    45,054Diluted shares outstanding
    
    
    103,546
    
    
    
    103,181
    
    
    
    103,098Total book value per share on a converted basis
    
    $
    10.28
    
    
    $
    9.18
    
    
    $
    9.17
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    38




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
   39




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Plan of Acquisition
 2.1
    
    Agreement and Plan of Merger dated as of August 4, 2005 by and
among HSBC Finance Corporation, HSBC Corporation I and Metris Companies Inc.
(Incorporated by reference to Exhibit 2.1 to MCIs Current Report on Form 8-K
filed with the SEC on August 4, 2005 (File No. 1-12351)).
 Charter Documents
 3.1
    
    Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Companys Registration Statement
on Form 8-A12B dated April 26, 1999 (File No. 1-12351)).
 (a)
    
    Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company dated June 4, 2003 (incorporated
by reference to Exhibit 3.1 to the Companys Report on Form 10-K dated April
12, 2004 (File No. 1-12351)).(b)
    
    Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company dated September 19, 2000
(incorporated by reference to Exhibit 3.3 to the Companys Registration
Statement on Form S-3 dated September 29, 2000 (File No. 1-12351)).(c)
    
    Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company dated March 24, 1999 (incorporated
by reference to Exhibit 3.1 to the Companys Registration Statement on Form
8-A12B dated April 26, 1999 (File No. 1-12351)).
 3.2
    
    Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 1999 (File No. 1-12351)).
 40




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##### Table of Contents



Instruments Defining Rights
 4.1
    
    Certificate of Designation of Series C Perpetual Preferred Stock
(incorporated by reference to Exhibit 4.2 of MCIs Current Report on Form 8-K
dated December 22, 1998 (File No. 1-12351)).
 (a)
    
    Amended and Restated Certificate of Designation of Series C
Perpetual Convertible Preferred Stock (incorporated by reference to Exhibit
3.3 to MCIs Registration Statement on Form S-3 (File No. 333-82007)).
 4.2
    
    Certificate of Designation of Series D Junior Participating
Convertible Preferred Stock (incorporated by reference to Exhibit 4.3 of MCIs
Current Report on Form 8-K dated December 22, 1998 (File No. 1-12351)).4.3
    
    Registration Rights Agreement, dated as of December 9, 1998,
between MCI and the Investors named therein (incorporated by reference to Exhibit
10.3 to MCIs Current Report on Form 8-K dated December 22, 1998 (File No.
1-12351)).4.4
    
    Form of common stock certificate of MCI (incorporated by reference
to Exhibit 4.3 to MCIs Registration Statement on Form S-8 (File No. 333-91917)).
 Material Contracts
 10.1
    
    Amendment to the Modified Operating Agreement between Direct
Merchants Credit Card Bank, National Association and the Office of the
Comptroller of the Currency dated April 7, 2005 (Incorporated by reference to
Exhibit 99.1 to MCIs Current Report on Form 8-K filed with the SEC on April 11,
2005 (File No. 1-12351)).Certifications:31.1
    
    Certification of Principal Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).31.2
    
    Certification of Principal Financial Officer Pursuant to Rule
13a-14(a)/15d 14(a).32.1
    
    Certification of Principal Executive Officer Pursuant to Section
1350 of Chapter 63 of Title 18 of the United States Code.32.2
    
    Certification of Principal Financial Officer Pursuant to Section
1350 of Chapter 63 of Title 18 of the United States Code.
 41




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##### Table of Contents



SIGNATURES
  METRIS COMPANIES INC.(Registrant)Date: November 9, 2005
    
    By: /s/ William A. HoulihanWilliam A. HoulihanExecutive Vice President and Chief Financial Officer(Principal Financial Officer and AuthorizedOfficer of Registrant)
 42