##### 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 June 30, 2005
  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
(State of Incorporation)
    
    41-1849591
(I.R.S. Employer Identification No.)
 
 
  þ o
  þ o




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METRIS
COMPANIES INC.
 FORM 10-Q
 TABLE OF CONTENTS
 June 30, 2005
 PagePART I.FINANCIAL INFORMATIONItem 1.Consolidated Financial Statements: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
    
    
    23Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4.Controls and Procedures
    
    
    44PART II.OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    44Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3.Defaults Upon Senior Securities
    
    
    44Item 4.Submission of Matters to a Vote of Security Holders
    
    
    45Item 5.Other Information
    
    
    46Item 6.Exhibits
    
    
    46Signatures
    
    
    48Certification of Principal Executive Officer - Rule 13a-14(a)Certification of Principal Financial Officer - Rule 13a-14(a)Certification of Principal Executive Officer - Section 1350Certification of Principal Financial Officer - Section 1350
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Forward-Looking Statements
  ® ®
  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 per share and share data)
 June 30,2005
    
    December 31,(Unaudited)
    
    2004AssetsCash and due from banks
    
    $
    23,487
    
    
    $
    25,198Federal funds sold
    
    
    27,395
    
    
    
    22,450Short-term investments
    
    
    126,083
    
    
    
    43,070Cash and cash equivalents
    
    
    176,965
    
    
    
    90,718Available for sale securities
    
    
    109,991
    
    
    
    306,409Liquidity reserve deposit
    
    
    70,044
    
    
    
    79,746Credit card loans, net of allowance of $3,751
and $12,409, respectively
    
    
    2,754
    
    
    
    55,821Retained interests in loans securitized
    
    
    769,184
    
    
    
    784,135Property and equipment, net
    
    
    22,936
    
    
    
    24,135Other receivables due from credit card
securitizations, net
    
    
    66,847
    
    
    
    68,021Other assets
    
    
    47,345
    
    
    
    72,494Total assets
    
    $
    1,266,066
    
    
    $
    1,481,479LiabilitiesDebt
    
    $
    78,626
    
    
    $
    373,624Accounts payable
    
    
    34,448
    
    
    
    37,619Accrued expenses and other liabilities
    
    
    142,828
    
    
    
    122,934Total liabilities
    
    
    255,902
    
    
    
    534,177Stockholders EquityConvertible preferred stock, par value $.01 per share;
10,000,000 shares authorized, 1,444,186 and 1,381,327
shares issued and outstanding, respectively
    
    
    537,960
    
    
    
    514,545Common stock, par value $.01 per share;
300,000,000 shares authorized, 65,501,049 and
65,182,416 issued, respectively
    
    
    655
    
    
    
    652Paid-in capital
    
    
    237,168
    
    
    
    233,989Unearned compensation
    
    
    (404
    )
    
    
    Treasury
stock  7,055,300 shares
    
    
    (58,308
    )
    
    
    (58,308
    )Retained earnings
    
    
    293,093
    
    
    
    256,424Total stockholders equity
    
    
    1,010,164
    
    
    
    947,302Total liabilities and stockholders equity
    
    $
    1,266,066
    
    
    $
    1,481,479
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METRIS COMPANIES INC. AND SUBSIDIARIES
 
 (In thousands, except per-share data) (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004RevenuesLoss on new securitizations of receivables to the
Metris Master Trust
    
    $
    (13,046
    )
    
    $
    (90,640
    )
    
    $
    (42,207
    )
    
    $
    (91,886
    )Loss on replenishment of receivables to
the Metris Master Trust
    
    
    (11,129
    )
    
    
    (25,454
    )
    
    
    (22,626
    )
    
    
    (49,381
    )Discount accretion
    
    
    60,503
    
    
    
    61,570
    
    
    
    121,832
    
    
    
    121,540Interest-only revenue
    
    
    96,503
    
    
    
    55,137
    
    
    
    185,388
    
    
    
    130,069Change in fair value of retained interests in loans securitized
    
    
    15,696
    
    
    
    20,718
    
    
    
    20,808
    
    
    
    68,683Transaction and other costs
    
    
    (5,886
    )
    
    
    (45,674
    )
    
    
    (12,498
    )
    
    
    (84,383
    )Securitization income (expense)
    
    
    142,641
    
    
    
    (24,343
    )
    
    
    250,697
    
    
    
    94,642Servicing income on securitized receivables
    
    
    28,273
    
    
    
    33,847
    
    
    
    57,693
    
    
    
    70,084Credit card loan and other interest income
    
    
    3,211
    
    
    
    5,010
    
    
    
    8,159
    
    
    
    10,116Credit card loan fees, interchange and other income
    
    
    1,920
    
    
    
    5,264
    
    
    
    4,700
    
    
    
    16,080Enhancement services income
    
    
    2,961
    
    
    
    6,976
    
    
    
    6,426
    
    
    
    14,456Gain on sale of membership and warranty business
    
    
    
    
    
    
    
    
    
    
    1,800
    
    
    
    Total revenues
    
    
    179,006
    
    
    
    26,754
    
    
    
    329,475
    
    
    
    205,378ExpensesInterest
    
    
    4,520
    
    
    
    18,714
    
    
    
    15,901
    
    
    
    32,645Benefit for loan losses
    
    
    (4,603
    )
    
    
    (491
    )
    
    
    (5,551
    )
    
    
    (6,583
    )Marketing
    
    
    33,924
    
    
    
    15,726
    
    
    
    53,071
    
    
    
    31,658Employee compensation
    
    
    38,086
    
    
    
    35,723
    
    
    
    74,595
    
    
    
    74,668Data processing services and communications
    
    
    11,832
    
    
    
    13,777
    
    
    
    23,832
    
    
    
    30,249Credit protection claims
    
    
    4,030
    
    
    
    5,036
    
    
    
    9,443
    
    
    
    11,384Occupancy and equipment
    
    
    4,761
    
    
    
    5,984
    
    
    
    9,654
    
    
    
    12,385Other
    
    
    36,448
    
    
    
    28,735
    
    
    
    56,207
    
    
    
    51,110Total expenses
    
    
    128,998
    
    
    
    123,204
    
    
    
    237,152
    
    
    
    237,516Income (loss) before income taxes
    
    
    50,008
    
    
    
    (96,450
    )
    
    
    92,323
    
    
    
    (32,138
    )Income tax expense (benefit)
    
    
    17,505
    
    
    
    (26,124
    )
    
    
    32,239
    
    
    
    (3,422
    )Net income (loss)
    
    
    32,503
    
    
    
    (70,326
    )
    
    
    60,084
    
    
    
    (28,716
    )Convertible preferred stock dividends
    
    
    11,838
    
    
    
    10,830
    
    
    
    23,415
    
    
    
    21,421Net income (loss) after preferred dividends
    
    $
    20,665
    
    
    $
    (81,156
    )
    
    $
    36,669
    
    
    $
    (50,137
    )Earnings (loss) per shareDistributed
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Undistributed
    
    
    0.20
    
    
    
    (1.40
    )
    
    
    0.35
    
    
    
    (0.87
    )Total Basic
    
    $
    0.20
    
    
    $
    (1.40
    )
    
    $
    0.35
    
    
    $
    (0.87
    )Total Diluted
    
    $
    0.20
    
    
    $
    (1.40
    )
    
    $
    0.35
    
    
    $
    (0.87
    )Shares used to compute earnings (loss) per shareBasic
    
    
    58,295
    
    
    
    57,924
    
    
    
    58,221
    
    
    
    57,857Diluted
    
    
    59,045
    
    
    
    57,924
    
    
    
    58,981
    
    
    
    57,857
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METRIS COMPANIES INC. AND SUBSIDIARIES
 
 (In thousands)
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,716
    )
    
    
    (28,716
    )Convertible preferred stock dividends
    
    
    57
    
    
    
    
    
    
    
    21,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,421
    )
    
    
    Issuance of common stock under
employee benefit plans
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    1
    
    
    
    2,331
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,332Deferred compensation obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )Restricted stock forfeitures
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23Balance at June 30, 2004(Unaudited)
    
    
    1,321
    
    
    
    57,957
    
    
    
    492,149
    
    
    
    650
    
    
    
    231,896
    
    
    
    
    
    
    
    (58,308
    )
    
    
    216,359
    
    
    
    882,746Balance at December 31, 2004
    
    
    1,381
    
    
    
    58,127
    
    
    $
    514,545
    
    
    $
    652
    
    
    $
    233,989
    
    
    $
    
    
    
    $
    (58,308
    )
    
    $
    256,424
    
    
    $
    947,302Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,084
    
    
    
    60,084Convertible preferred stock dividends
    
    
    63
    
    
    
    
    
    
    
    23,415
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,415
    )
    
    
    Issuance of common stock under
employee benefit and
compensation plans
    
    
    
    
    
    
    281
    
    
    
    
    
    
    
    3
    
    
    
    2,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,714Issuance of restricted stock
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    468
    
    
    
    (468
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64Balance at June 30, 2005(Unaudited)
    
    
    1,444
    
    
    
    58,446
    
    
    $
    537,960
    
    
    $
    655
    
    
    $
    237,168
    
    
    $
    (404
    )
    
    $
    (58,308
    )
    
    $
    293,093
    
    
    $
    1,010,164
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METRIS COMPANIES INC. AND SUBSIDIARIES
 
 (In thousands) (Unaudited)
 Six Months EndedJune 30,2005
    
    2004Operating ActivitiesNet income (loss)
    
    $
    60,084
    
    
    $
    (28,716
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation, amortization and accretion
    
    
    (105,557
    )
    
    
    (100,583
    )Benefit for loan losses
    
    
    (5,551
    )
    
    
    (6,583
    )Loss from credit card securitizations
    
    
    64,833
    
    
    
    141,267Gain on sale of membership and warranty business
    
    
    (1,800
    )
    
    
    Market loss on derivative financial instruments
    
    
    1,578
    
    
    
    7,572Changes in operating assets and liabilities, net:Liquidity reserve deposit
    
    
    9,702
    
    
    
    5,295Fair value of retained interests in loans securitized
    
    
    (20,808
    )
    
    
    (68,683
    )Spread accounts receivable
    
    
    38,544
    
    
    
    163,728Other receivables due from credit card securitizations, net
    
    
    1,174
    
    
    
    4,941Accounts payable
    
    
    (3,171
    )
    
    
    1,800Accrued expenses and other liabilities
    
    
    17,093
    
    
    
    11,844Other
    
    
    19,620
    
    
    
    17,081Net cash provided by operating activities
    
    
    75,741
    
    
    
    148,963Investing ActivitiesProceeds from sales of available for sale securities
    
    
    1,266,326
    
    
    
    1,206,831Purchases of available for sale securities
    
    
    (1,069,908
    )
    
    
    (1,393,563
    )Net loans collected
    
    
    610,234
    
    
    
    408,127Net repayments of securitized loans
    
    
    (497,402
    )
    
    
    (420,000
    )Net (additions to) disposals of property and equipment
    
    
    (3,374
    )
    
    
    2,072Net cash provided by (used in) investing activities
    
    
    305,876
    
    
    
    (196,533
    )Financing ActivitiesProceeds from issuance of debt
    
    
    
    
    
    
    283,974Repayment of debt
    
    
    (295,883
    )
    
    
    (202,724
    )Proceeds from issuance of common stock
    
    
    513
    
    
    
    2,332Net cash (used in) provided by financing activities
    
    
    (295,370
    )
    
    
    83,582Net increase in cash and cash equivalents
    
    
    86,247
    
    
    
    36,012Cash and cash equivalents at beginning of period
    
    
    90,718
    
    
    
    178,485Cash and cash equivalents at end of period
    
    $
    176,965
    
    
    $
    214,497Supplemental disclosures and cash flow informationCash paid (received) during the period for:Interest
    
    $
    19,704
    
    
    $
    23,183Income taxes
    
    
    15,803
    
    
    
    (35,820
    )
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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
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss)
    
    $
    32,503
    
    
    $
    (70,326
    )
    
    $
    60,084
    
    
    $
    (28,716
    )Convertible preferred stock dividends
    
    
    11,838
    
    
    
    10,830
    
    
    
    23,415
    
    
    
    21,421Net income (loss) after preferred dividends
    
    $
    20,665
    
    
    $
    (81,156
    )
    
    $
    36,669
    
    
    $
    (50,137
    )Convertible preferred stock dividends
    
    $
    11,838
    
    
    $
    10,830
    
    
    $
    23,415
    
    
    $
    21,421Weighted average preferred shares
    
    
    1,412
    
    
    
    1,292
    
    
    
    1,397
    
    
    
    1,278Distributed earnings per share  Preferred
    
    $
    8.38
    
    
    $
    8.38
    
    
    $
    16.76
    
    
    $
    16.76Undistributed income (loss)
    
    $
    20,665
    
    
    $
    (81,156
    )
    
    $
    36,669
    
    
    $
    (50,137
    )Preferred ownership on a converted basis
    
    
    44
    %
    
    
    44
    %
    
    
    44
    %
    
    
    44
    %Preferred stockholders interest in undistributed income (1)
    
    $
    9,093
    
    
    $
    
    
    
    $
    16,134
    
    
    $
    Weighted average preferred shares
    
    
    1,412
    
    
    
    1,292
    
    
    
    1,397
    
    
    
    1,278Undistributed earnings per share  Preferred
    
    $
    6.44
    
    
    $
    
    
    
    $
    11.55
    
    
    $
    Undistributed income (loss)
    
    $
    20,665
    
    
    $
    (81,156
    )
    
    $
    36,669
    
    
    $
    (50,137
    )Common ownership
    
    
    56
    %
    
    
    56
    %
    
    
    56
    %
    
    
    56
    %Common stockholders interest in undistributed income (loss)(1)
    
    $
    11,572
    
    
    $
    (81,156
    )
    
    $
    20,535
    
    
    $
    (50,137
    )Weighted average common shares outstanding  Basic
    
    
    58,295
    
    
    
    57,924
    
    
    
    58,221
    
    
    
    57,857Common share equivalents
    
    
    750
    
    
    
    
    
    
    
    760
    
    
    
    Shares used to compute earnings per common share  Diluted
    
    
    59,045
    
    
    
    57,924
    
    
    
    58,981
    
    
    
    57,857Total basic earnings (loss) per share  Common
    
    
    0.20
    
    
    
    (1.40
    )
    
    
    0.35
    
    
    
    (0.87
    )Total diluted earnings (loss) per share  Common
    
    
    0.20
    
    
    
    (1.40
    )
    
    
    0.35
    
    
    
    (0.87
    )
 
 (1)
    
    Preferred stockholders do not participate in any undistributed losses with common stockholders 9




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NOTE 3
 STOCK-BASED COMPENSATION PLANS
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands except per share data)
    
    2005
    
    2004
    
    2005
    
    2004Net income (loss)
    
    $
    32,503
    
    
    $
    (70,326
    )
    
    
    60,084
    
    
    $
    (28,716
    )Add:
Stockbased employee compensation
expense included in reported net income (loss),
net of related tax effects
    
    
    2,057
    
    
    
    293
    
    
    
    3,012
    
    
    
    304Deduct: Annual stockbased employee
compensation expense (benefit) determined
based on the fair value for all awards, net of
related tax effects
    
    
    608
    
    
    
    (3,417
    )
    
    
    1,737
    
    
    
    (4,883
    )Pro forma net income (loss)
    
    $
    33,952
    
    
    $
    (66,616
    )
    
    $
    61,359
    
    
    $
    (23,529
    )Earnings (loss) per share:Basicas reported
    
    $
    0.20
    
    
    $
    (1.40
    )
    
    $
    0.35
    
    
    $
    (0.87
    )Basicpro forma
    
    $
    0.21
    
    
    $
    (1.34
    )
    
    $
    0.36
    
    
    $
    (0.78
    )Dilutedas reported
    
    $
    0.20
    
    
    $
    (1.40
    )
    
    $
    0.35
    
    
    $
    (0.87
    )Dilutedpro forma
    
    $
    0.21
    
    
    $
    (1.34
    )
    
    $
    0.36
    
    
    $
    (0.78
    )Weighted-average assumptions in option
valuation:Riskfree interest rates
    
    
    3.7
    %
    
    
    3.2
    %
    
    
    3.7
    %
    
    
    3.2
    %Stock volatility factor
    
    
    93.7
    %
    
    
    129.1
    %
    
    
    93.7
    %
    
    
    129.1
    %Expected life of options (in years)
    
    
    2.7
    
    
    
    2.7
    
    
    
    2.7
    
    
    
    2.7
  10




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##### Table of Contents



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 ofJune 30,
    
    December 31,(In thousands)
    
    2005
    
    2004Debt SecuritiesLegal Final Maturity Date
Less than 1 year
    
    $
    
    
    
    $
    10,0001 year  5 years
    
    
    
    
    
    
    10,0005 years  10 years
    
    
    
    
    
    
    Over 10 years
    
    
    60,153
    
    
    
    24,420Total Debt Securities
    
    
    60,153
    
    
    
    44,420Equity Securities
    
    
    49,838
    
    
    
    261,989Total Available for Sale Securities
    
    $
    109,991
    
    
    $
    306,409
  11




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##### Table of Contents



NOTE 5  ALLOWANCE FOR LOAN LOSSES
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Balance at beginning of period
    
    $
    9,830
    
    
    $
    18,945
    
    
    $
    12,409
    
    
    $
    45,492Allowance related to assets re-acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,945Benefit for loan losses
    
    
    (4,603
    )
    
    
    (491
    )
    
    
    (5,551
    )
    
    
    (6,583
    )Principal receivables charged-off
    
    
    (2,472
    )
    
    
    (4,250
    )
    
    
    (5,283
    )
    
    
    (26,921
    )Recoveries
    
    
    996
    
    
    
    1,171
    
    
    
    2,176
    
    
    
    1,442Net principal receivables charged-off
    
    
    (1,476
    )
    
    
    (3,079
    )
    
    
    (3,107
    )
    
    
    (25,479
    )Balance at end of period
    
    $
    3,751
    
    
    $
    15,375
    
    
    $
    3,751
    
    
    $
    15,375
  NOTE 6
 RETAINED INTERESTS IN LOANS SECURITIZED
  June 30,
    
    December, 312005
    
    2004Contractual retained interests
    
    $
    478,440
    
    
    $
    537,945Excess transferors interest
    
    
    153,954
    
    
    
    105,237Interest-only strip receivable
    
    
    102,105
    
    
    
    82,672Spread accounts receivable
    
    
    34,685
    
    
    
    58,281Retained interests in loans securitized
    
    $
    769,184
    
    
    $
    784,135
 12




---



##### Table of Contents



June 30,
    
    December, 312005
    
    2004Monthly principal payment rate
    
    
    6.5
    %
    
    
    5.9
    %Annual Gross yield (1)
    
    
    26.3
    %
    
    
    25.9
    %Annual interest expense and servicing fees
    
    
    5.5
    %
    
    
    5.0
    %Annual gross principal default rate
    
    
    17.4
    %
    
    
    18.4
    %Discount rate:Contractual retained interests
    
    
    15.0
    %
    
    
    16.0
    %Excess transferors interest
    
    
    15.0
    %
    
    
    16.0
    %Interest-only strip receivable
    
    
    30.0
    %
    
    
    30.0
    %Spread accounts receivable
    
    
    15.0
    %
    
    
    16.0
    %Weighted average months to maturity
    
    
    17.9
    
    
    
    20.1Weighted average enhancement level (2)
    
    
    11.4
    %
    
    
    12.1
    %Gross receivables held in the Metris Master Trust, net of discount (3)
    
    
    93.5
    %
    
    
    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 plus the
off-balance sheet receivables 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
    
    $
    16.3
    
    
    $
    32.1Monthly principal payment rate
    
    
    4.5
    
    
    
    9.3Annual gross yield
    
    
    84.4
    
    
    
    177.7Annual interest expense and servicing fees
    
    
    28.4
    
    
    
    55.7Annual gross principal default rate
    
    
    56.2
    
    
    
    107.5
  NOTE 7
 CONVERTIBLE PREFERRED STOCK
   13




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##### Table of Contents



NOTE 8
 SUBSEQUENT EVENTS
     NOTE 9
 SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS
  14




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##### Table of Contents



METRIS COMPANIES INC.
 Supplemental Consolidating Balance Sheets
June 30, 2005  (In thousands) (Unaudited)
 Metris
    
    Guarantor
    
    Non-GuarantorCompanies Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssetsCash and due from banks
    
    $
    (2,282
    )
    
    $
    (3
    )
    
    $
    25,772
    
    
    $
    
    
    
    $
    23,487Federal funds sold
    
    
    
    
    
    
    
    
    
    
    27,395
    
    
    
    
    
    
    
    27,395Short-term investments
    
    
    1,460
    
    
    
    
    
    
    
    124,623
    
    
    
    
    
    
    
    126,083Cash and cash equivalents
    
    
    (822
    )
    
    
    (3
    )
    
    
    177,790
    
    
    
    
    
    
    
    176,965Available for sale securities
    
    
    61,153
    
    
    
    
    
    
    
    48,838
    
    
    
    
    
    
    
    109,991Liquidity reserve deposit
    
    
    
    
    
    
    
    
    
    
    70,044
    
    
    
    
    
    
    
    70,044Net credit card loans
    
    
    592
    
    
    
    
    
    
    
    2,162
    
    
    
    
    
    
    
    2,754Retained interests in loans
securitized
    
    
    1,362
    
    
    
    
    
    
    
    767,822
    
    
    
    
    
    
    
    769,184Property and equipment, net
    
    
    
    
    
    
    22,936
    
    
    
    
    
    
    
    
    
    
    
    22,936Other receivables due from
credit card
securitizations, net
    
    
    3
    
    
    
    
    
    
    
    66,844
    
    
    
    
    
    
    
    66,847Other assets
    
    
    18,050
    
    
    
    26,144
    
    
    
    33,058
    
    
    
    (29,907
    )
    
    
    47,345Investments in subsidiaries
    
    
    1,225,908
    
    
    
    1,049,685
    
    
    
    802
    
    
    
    (2,276,395
    )
    
    
    Total assets
    
    $
    1,306,246
    
    
    $
    1,098,762
    
    
    $
    1,167,360
    
    
    $
    (2,306,302
    )
    
    $
    1,266,066LiabilitiesDebt
    
    $
    286,517
    
    
    $
    (211,366
    )
    
    $
    46,475
    
    
    $
    (43,000
    )
    
    $
    78,626Accounts payable
    
    
    546
    
    
    
    26,162
    
    
    
    22,306
    
    
    
    (14,566
    )
    
    
    34,448Accrued expenses and other
liabilities
    
    
    9,019
    
    
    
    14,176
    
    
    
    88,954
    
    
    
    30,679
    
    
    
    142,828Total liabilities
    
    
    296,082
    
    
    
    (171,028
    )
    
    
    157,735
    
    
    
    (26,887
    )
    
    
    255,902Total stockholders equity
    
    
    1,010,164
    
    
    
    1,269,790
    
    
    
    1,009,625
    
    
    
    (2,279,415
    )
    
    
    1,010,164Total liabilities and
stockholders equity
    
    $
    1,306,246
    
    
    $
    1,098,762
    
    
    $
    1,167,360
    
    
    $
    (2,306,302
    )
    
    $
    1,266,066
 15




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##### Table of Contents



METRIS COMPANIES INC.
 Supplemental Consolidating Balance Sheets
December 31, 2004  (In thousands)
 Metris
    
    Guarantor
    
    Non-GuarantorCompanies Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssetsCash and due from banks
    
    $
    (1,102
    )
    
    $
    (178
    )
    
    $
    26,478
    
    
    $
    
    
    
    $
    25,198Federal funds sold
    
    
    
    
    
    
    
    
    
    
    22,450
    
    
    
    
    
    
    
    22,450Short-term investments
    
    
    6,065
    
    
    
    
    
    
    
    37,005
    
    
    
    
    
    
    
    43,070Cash and cash equivalents
    
    
    4,963
    
    
    
    (178
    )
    
    
    85,933
    
    
    
    
    
    
    
    90,718Available for sale securities
    
    
    50,000
    
    
    
    
    
    
    
    256,409
    
    
    
    
    
    
    
    306,409Liquidity reserve deposit
    
    
    
    
    
    
    
    
    
    
    79,746
    
    
    
    
    
    
    
    79,746Net credit card loans
    
    
    99
    
    
    
    
    
    
    
    55,722
    
    
    
    
    
    
    
    55,821Retained interests in loans
securitized
    
    
    8,686
    
    
    
    
    
    
    
    775,449
    
    
    
    
    
    
    
    784,135Property and equipment, net
    
    
    
    
    
    
    24,135
    
    
    
    
    
    
    
    
    
    
    
    24,135Other receivables due from
credit card
securitizations, net
    
    
    4
    
    
    
    
    
    
    
    68,017
    
    
    
    
    
    
    
    68,021Other assets
    
    
    34,117
    
    
    
    29,541
    
    
    
    54,830
    
    
    
    (45,994
    )
    
    
    72,494Investments in subsidiaries
    
    
    1,302,122
    
    
    
    1,110,022
    
    
    
    782
    
    
    
    (2,412,926
    )
    
    
    Total assets
    
    $
    1,399,991
    
    
    $
    1,163,520
    
    
    $
    1,376,888
    
    
    $
    (2,458,920
    )
    
    $
    1,481,479LiabilitiesDebt
    
    $
    462,282
    
    
    $
    (213,993
    )
    
    $
    168,335
    
    
    $
    (43,000
    )
    
    $
    373,624Accounts payable
    
    
    1,598
    
    
    
    21,761
    
    
    
    28,493
    
    
    
    (14,233
    )
    
    
    37,619Accrued expenses and other
liabilities
    
    
    (11,191
    )
    
    
    14,743
    
    
    
    104,285
    
    
    
    15,097
    
    
    
    122,934Total liabilities
    
    
    452,689
    
    
    
    (177,489
    )
    
    
    301,113
    
    
    
    (42,136
    )
    
    
    534,177Total stockholders equity
    
    
    947,302
    
    
    
    1,341,009
    
    
    
    1,075,775
    
    
    
    (2,416,784
    )
    
    
    947,302Total liabilities and
stockholders equity
    
    $
    1,399,991
    
    
    $
    1,163,520
    
    
    $
    1,376,888
    
    
    $
    (2,458,920
    )
    
    $
    1,481,479
 16




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##### Table of Contents



METRIS COMPANIES INC.
 Supplemental Consolidating Statements of Income
Three Months Ended June 30, 2005  (In thousands) (Unaudited)
 Metris
    
    Guarantor
    
    Non-GuarantorCompanies Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenuesSecuritization income
    
    $
    3,003
    
    
    $
    
    
    
    $
    115,658
    
    
    $
    23,980
    
    
    $
    142,641Servicing income on securitized
receivables
    
    
    (64
    )
    
    
    
    
    
    
    28,337
    
    
    
    
    
    
    
    28,273Credit card loan and other interest
income
    
    
    225
    
    
    
    
    
    
    
    2,986
    
    
    
    
    
    
    
    3,211Credit card loan fees, interchange and
other income
    
    
    (125
    )
    
    
    28,569
    
    
    
    24,715
    
    
    
    (51,239
    )
    
    
    1,920Enhancement services income
    
    
    
    
    
    
    15
    
    
    
    2,958
    
    
    
    (12
    )
    
    
    2,961Intercompany allocations
    
    
    67
    
    
    
    37,599
    
    
    
    876
    
    
    
    (38,542
    )
    
    
    Total revenues
    
    
    3,106
    
    
    
    66,183
    
    
    
    175,530
    
    
    
    (65,813
    )
    
    
    179,006ExpensesInterest
    
    
    6,490
    
    
    
    (2,043
    )
    
    
    73
    
    
    
    
    
    
    
    4,520Benefit for loan losses
    
    
    (290
    )
    
    
    
    
    
    
    (4,313
    )
    
    
    
    
    
    
    (4,603
    )Marketing
    
    
    
    
    
    
    30,891
    
    
    
    28,649
    
    
    
    (25,616
    )
    
    
    33,924Employee compensation
    
    
    
    
    
    
    37,346
    
    
    
    740
    
    
    
    
    
    
    
    38,086Data processing services and
communications
    
    
    79
    
    
    
    (10,143
    )
    
    
    24,700
    
    
    
    (2,804
    )
    
    
    11,832Credit protection claims
    
    
    
    
    
    
    
    
    
    
    4,030
    
    
    
    
    
    
    
    4,030Occupancy and equipment
    
    
    
    
    
    
    4,761
    
    
    
    
    
    
    
    
    
    
    
    4,761Other
    
    
    18,970
    
    
    
    13,010
    
    
    
    4,895
    
    
    
    (427
    )
    
    
    36,448Intercompany allocations
    
    
    58
    
    
    
    10,755
    
    
    
    27,729
    
    
    
    (38,542
    )
    
    
    Total expenses
    
    
    25,307
    
    
    
    84,577
    
    
    
    86,503
    
    
    
    (67,389
    )
    
    
    128,998(Loss) income before income taxes
    
    
    (22,201
    )
    
    
    (18,394
    )
    
    
    89,027
    
    
    
    1,576
    
    
    
    50,008Income tax (benefit) expense
    
    
    (7,764
    )
    
    
    (7,372
    )
    
    
    32,092
    
    
    
    549
    
    
    
    17,505Equity in income of subsidiaries
    
    
    46,940
    
    
    
    56,935
    
    
    
    
    
    
    
    (103,875
    )
    
    
    Net income
    
    $
    32,503
    
    
    $
    45,913
    
    
    $
    56,935
    
    
    $
    (102,848
    )
    
    $
    32,503
 17




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##### Table of Contents



METRIS COMPANIES INC.
 Supplemental Consolidating Statements of Income
Three Months Ended June 30, 2004  (In thousands) (Unaudited)
 Metris
    
    Guarantor
    
    Non-GuarantorCompanies Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenuesSecuritization expense
    
    $
    (1,036
    )
    
    $
    
    
    
    $
    (24,012
    )
    
    $
    705
    
    
    $
    (24,343
    )Servicing income on securitized
receivables
    
    
    
    
    
    
    
    
    
    
    33,847
    
    
    
    
    
    
    
    33,847Credit card loan and other interest
income
    
    
    284
    
    
    
    
    
    
    
    4,726
    
    
    
    
    
    
    
    5,010Credit card loan fees, interchange and
other income
    
    
    1,222
    
    
    
    19,252
    
    
    
    4,048
    
    
    
    (19,258
    )
    
    
    5,264Enhancement services income
    
    
    
    
    
    
    27
    
    
    
    6,955
    
    
    
    (6
    )
    
    
    6,976Intercompany allocations
    
    
    (166
    )
    
    
    37,915
    
    
    
    643
    
    
    
    (38,392
    )
    
    
    Total revenues
    
    
    304
    
    
    
    57,194
    
    
    
    26,207
    
    
    
    (56,951
    )
    
    
    26,754ExpensesInterest
    
    
    18,606
    
    
    
    (2,983
    )
    
    
    3,091
    
    
    
    
    
    
    
    18,714Provision (benefit) for loan losses
    
    
    29
    
    
    
    (2
    )
    
    
    (518
    )
    
    
    
    
    
    
    (491
    )Marketing
    
    
    
    
    
    
    12,951
    
    
    
    19,061
    
    
    
    (16,286
    )
    
    
    15,726Employee compensation
    
    
    
    
    
    
    36,721
    
    
    
    (998
    )
    
    
    
    
    
    
    35,723Data processing services and
communications
    
    
    
    
    
    
    (12,705
    )
    
    
    29,470
    
    
    
    (2,988
    )
    
    
    13,777Credit protection claims
    
    
    
    
    
    
    
    
    
    
    5,036
    
    
    
    
    
    
    
    5,036Occupancy and equipment
    
    
    
    
    
    
    
    
    
    
    5,984
    
    
    
    
    
    
    
    5,984Other
    
    
    4,856
    
    
    
    22,206
    
    
    
    1,988
    
    
    
    (315
    )
    
    
    28,735Intercompany allocations
    
    
    37
    
    
    
    9,058
    
    
    
    29,297
    
    
    
    (38,392
    )
    
    
    Total expenses
    
    
    23,528
    
    
    
    65,246
    
    
    
    92,411
    
    
    
    (57,981
    )
    
    
    123,204Loss before income taxes
    
    
    (23,224
    )
    
    
    (8,052
    )
    
    
    (66,204
    )
    
    
    1,030
    
    
    
    (96,450
    )Income tax expense (benefit)
    
    
    377
    
    
    
    (14,055
    )
    
    
    (12,213
    )
    
    
    (233
    )
    
    
    (26,124
    )Equity in loss of subsidiaries
    
    
    (46,725
    )
    
    
    (53,991
    )
    
    
    
    
    
    
    100,716
    
    
    
    Net loss
    
    $
    (70,326
    )
    
    $
    (47,988
    )
    
    $
    (53,991
    )
    
    $
    101,979
    
    
    $
    (70,326
    )
 18




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##### Table of Contents



METRIS COMPANIES INC.
 Supplemental Consolidating Statements of Income
Six Months Ended June 30, 2005  (In thousands) (Unaudited)
 Metris
    
    Guarantor
    
    Non-GuarantorCompanies Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenuesSecuritization income
    
    $
    5,958
    
    
    $
    
    
    
    $
    196,984
    
    
    $
    47,755
    
    
    $
    250,697Servicing income on securitized
receivables
    
    
    (124
    )
    
    
    
    
    
    
    57,817
    
    
    
    
    
    
    
    57,693Credit card loan and other interest
income
    
    
    574
    
    
    
    
    
    
    
    7,585
    
    
    
    
    
    
    
    8,159Credit card loan fees, interchange and
other income
    
    
    (12
    )
    
    
    56,998
    
    
    
    51,572
    
    
    
    (103,858
    )
    
    
    4,700Enhancement services income
    
    
    
    
    
    
    86
    
    
    
    6,371
    
    
    
    (31
    )
    
    
    6,426Gain on sale of membership and
warranty business
    
    
    
    
    
    
    
    
    
    
    1,800
    
    
    
    
    
    
    
    1,800Intercompany allocations
    
    
    143
    
    
    
    74,583
    
    
    
    2,123
    
    
    
    (76,849
    )
    
    
    Total revenues
    
    
    6,539
    
    
    
    131,667
    
    
    
    324,252
    
    
    
    (132,983
    )
    
    
    329,475ExpensesInterest
    
    
    19,018
    
    
    
    (4,141
    )
    
    
    1,024
    
    
    
    
    
    
    
    15,901Benefit for loan losses
    
    
    (228
    )
    
    
    
    
    
    
    (5,323
    )
    
    
    
    
    
    
    (5,551
    )Marketing
    
    
    
    
    
    
    47,945
    
    
    
    56,113
    
    
    
    (50,987
    )
    
    
    53,071Employee compensation
    
    
    
    
    
    
    72,617
    
    
    
    1,978
    
    
    
    
    
    
    
    74,595Data processing services and
communications
    
    
    90
    
    
    
    (21,355
    )
    
    
    50,782
    
    
    
    (5,685
    )
    
    
    23,832Credit protection claims
    
    
    
    
    
    
    
    
    
    
    9,443
    
    
    
    
    
    
    
    9,443Occupancy and equipment
    
    
    
    
    
    
    9,653
    
    
    
    1
    
    
    
    
    
    
    
    9,654Other
    
    
    20,909
    
    
    
    25,148
    
    
    
    10,905
    
    
    
    (755
    )
    
    
    56,207Intercompany allocations
    
    
    98
    
    
    
    21,533
    
    
    
    55,218
    
    
    
    (76,849
    )
    
    
    Total expenses
    
    
    39,887
    
    
    
    151,400
    
    
    
    180,141
    
    
    
    (134,276
    )
    
    
    237,152(Loss) income before income taxes
    
    
    (33,348
    )
    
    
    (19,733
    )
    
    
    144,111
    
    
    
    1,293
    
    
    
    92,323Income tax (benefit) expense
    
    
    (11,645
    )
    
    
    (8,850
    )
    
    
    52,282
    
    
    
    452
    
    
    
    32,239Equity in income of subsidiaries
    
    
    81,787
    
    
    
    91,829
    
    
    
    
    
    
    
    (173,616
    )
    
    
    Net income
    
    $
    60,084
    
    
    $
    80,946
    
    
    $
    91,829
    
    
    $
    (172,775
    )
    
    $
    60,084
 19




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METRIS COMPANIES INC.
 Supplemental Consolidating Statements of Income
Six Months Ended June 30, 2004  (In thousands) (Unaudited)
 Metris
    
    Guarantor
    
    Non-GuarantorCompanies Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenuesSecuritization (expense) income
    
    $
    (1,079
    )
    
    $
    
    
    
    $
    94,338
    
    
    $
    1,383
    
    
    $
    94,642Servicing income on securitized
receivables
    
    
    
    
    
    
    
    
    
    
    70,084
    
    
    
    
    
    
    
    70,084Credit card loan and other interest
income
    
    
    407
    
    
    
    
    
    
    
    9,709
    
    
    
    
    
    
    
    10,116Credit card loan fees, interchange and
other income
    
    
    2,449
    
    
    
    34,115
    
    
    
    13,165
    
    
    
    (33,649
    )
    
    
    16,080Enhancement services income
    
    
    
    
    
    
    141
    
    
    
    14,333
    
    
    
    (18
    )
    
    
    14,456Intercompany allocations
    
    
    149
    
    
    
    78,810
    
    
    
    1,395
    
    
    
    (80,354
    )
    
    
    Total revenues
    
    
    1,926
    
    
    
    113,066
    
    
    
    203,024
    
    
    
    (112,638
    )
    
    
    205,378ExpensesInterest
    
    
    32,561
    
    
    
    (5,561
    )
    
    
    5,645
    
    
    
    
    
    
    
    32,645Benefit for loan losses
    
    
    (1,288
    )
    
    
    (1
    )
    
    
    (5,294
    )
    
    
    
    
    
    
    (6,583
    )Marketing
    
    
    
    
    
    
    24,262
    
    
    
    34,873
    
    
    
    (27,477
    )
    
    
    31,658Employee compensation
    
    
    
    
    
    
    75,763
    
    
    
    (1,095
    )
    
    
    
    
    
    
    74,668Data processing services and
communications
    
    
    5
    
    
    
    (28,443
    )
    
    
    64,897
    
    
    
    (6,210
    )
    
    
    30,249Credit protection claims
    
    
    
    
    
    
    
    
    
    
    11,384
    
    
    
    
    
    
    
    11,384Occupancy and equipment
    
    
    
    
    
    
    
    
    
    
    12,385
    
    
    
    
    
    
    
    12,385Other
    
    
    5,368
    
    
    
    44,076
    
    
    
    2,684
    
    
    
    (1,018
    )
    
    
    51,110Intercompany allocations
    
    
    68
    
    
    
    20,471
    
    
    
    59,815
    
    
    
    (80,354
    )
    
    
    Total expenses
    
    
    36,714
    
    
    
    130,567
    
    
    
    185,294
    
    
    
    (115,059
    )
    
    
    237,516(Loss) income before income taxes
    
    
    (34,788
    )
    
    
    (17,501
    )
    
    
    17,730
    
    
    
    2,421
    
    
    
    (32,138
    )Income tax (benefit) expense
    
    
    (3,705
    )
    
    
    (18,912
    )
    
    
    18,937
    
    
    
    258
    
    
    
    (3,422
    )Equity in income (loss) of subsidiaries
    
    
    2,367
    
    
    
    (1,207
    )
    
    
    
    
    
    
    (1,160
    )
    
    
    Net (loss) income
    
    $
    (28,716
    )
    
    $
    204
    
    
    $
    (1,207
    )
    
    $
    1,003
    
    
    $
    (28,716
    )
 20




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METRIS COMPANIES INC.
 Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2005  (In thousands) (Unaudited)
 Metris
    
    Guarantor
    
    Non-GuarantorCompanies Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating Activities:Net cash provided by operating
activities
    
    $
    96,955
    
    
    $
    921
    
    
    $
    59,649
    
    
    $
    (81,784
    )
    
    $
    75,741Investing Activities:Proceeds from sales of available for
sale securities
    
    
    362,800
    
    
    
    
    
    
    
    903,526
    
    
    
    
    
    
    
    1,266,326Purchases of available for sale
securities
    
    
    (373,953
    )
    
    
    
    
    
    
    (695,955
    )
    
    
    
    
    
    
    (1,069,908
    )Net loans collected
    
    
    8,336
    
    
    
    
    
    
    
    601,898
    
    
    
    
    
    
    
    610,234Net repayments of securitized loans
    
    
    
    
    
    
    
    
    
    
    (497,402
    )
    
    
    
    
    
    
    (497,402
    )Net additions to property and equipment
    
    
    
    
    
    
    (3,374
    )
    
    
    
    
    
    
    
    
    
    
    (3,374
    )Investment in subsidiaries
    
    
    76,214
    
    
    
    60,337
    
    
    
    (20
    )
    
    
    (136,531
    )
    
    
    Net cash provided by investing
activities
    
    
    73,397
    
    
    
    56,963
    
    
    
    312,047
    
    
    
    (136,531
    )
    
    
    305,876Financing Activities:Net (decrease) increase in debt
    
    
    (176,650
    )
    
    
    2,627
    
    
    
    (121,860
    )
    
    
    
    
    
    
    (295,883
    )Proceeds from issuance of common stock
    
    
    513
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    513Capital contributions
    
    
    
    
    
    
    (60,336
    )
    
    
    (157,979
    )
    
    
    218,315
    
    
    
    Net cash used in financing
activities
    
    
    (176,137
    )
    
    
    (57,709
    )
    
    
    (279,839
    )
    
    
    218,315
    
    
    
    (295,370
    )Net (decrease) increase in cash and
cash equivalents
    
    
    (5,785
    )
    
    
    175
    
    
    
    91,857
    
    
    
    
    
    
    
    86,247Cash and cash equivalents at beginning
of period
    
    
    4,963
    
    
    
    (178
    )
    
    
    85,933
    
    
    
    
    
    
    
    90,718Cash and cash equivalents at end
of period
    
    $
    (822
    )
    
    $
    (3
    )
    
    $
    177,790
    
    
    $
    
    
    
    $
    176,965
 21




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METRIS COMPANIES INC.
 Supplemental Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2004  (In thousands) (Unaudited)
 Metris
    
    Guarantor
    
    Non-GuarantorCompanies Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating Activities:Net cash (used in) provided by operating
activities
    
    $
    (53,268
    )
    
    $
    (423,868
    )
    
    $
    616,270
    
    
    $
    9,829
    
    
    $
    148,963Investing Activities:Proceeds from sales of available for
sale securities
    
    
    126,027
    
    
    
    
    
    
    
    1,080,804
    
    
    
    
    
    
    
    1,206,831Purchases of available for sale
securities
    
    
    (186,030
    )
    
    
    
    
    
    
    (1,207,533
    )
    
    
    
    
    
    
    (1,393,563
    )Net loans collected
    
    
    9,446
    
    
    
    
    
    
    
    394,047
    
    
    
    4,634
    
    
    
    408,127Net repayments of securitized loans
    
    
    
    
    
    
    
    
    
    
    (420,000
    )
    
    
    
    
    
    
    (420,000
    )Net disposals of property and equipment
    
    
    
    
    
    
    2,068
    
    
    
    4
    
    
    
    
    
    
    
    2,072Investment in subsidiaries
    
    
    36,897
    
    
    
    410,250
    
    
    
    (423,255
    )
    
    
    (23,892
    )
    
    
    Net cash (used in) provided by investing
activities
    
    
    (13,660
    )
    
    
    412,318
    
    
    
    (575,933
    )
    
    
    (19,258
    )
    
    
    (196,533
    )Financing Activities:Net increase in debt
    
    
    81,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,250Proceeds from issuance of common stock
    
    
    2,332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,332Capital contributions
    
    
    
    
    
    
    11,006
    
    
    
    (20,435
    )
    
    
    9,429
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    83,582
    
    
    
    11,006
    
    
    
    (20,435
    )
    
    
    9,429
    
    
    
    83,582Net increase (decrease) in cash and
cash equivalents
    
    
    16,654
    
    
    
    (544
    )
    
    
    19,902
    
    
    
    
    
    
    
    36,012Cash and cash equivalents at beginning
of period
    
    
    (1,081
    )
    
    
    3,034
    
    
    
    176,532
    
    
    
    
    
    
    
    178,485Cash and cash equivalents at end
of period
    
    $
    15,573
    
    
    $
    2,490
    
    
    $
    196,434
    
    
    $
    
    
    
    $
    214,497
 22




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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
  ® ®
  Quantitative and Qualitative Disclosures about Market Risk
 23




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24




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Critical Accounting Estimates
       25




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Results of Operations
 Three Months Ended June 30, 2005 and 2004
   Table 1: Analysis of Securitization Income (Expense)  (In thousands)
 Three Months EndedJune 30,2005
    
    2004Loss on new securitizations of receivables to the
Metris Master Trust:Defeasance of maturing ABS series into conduit
    
    $
    
    
    
    $
    (78,008
    )(2)New term ABS transactions
    
    
    (13,046
    ) (1)
    
    
    (12,632
    ) (3)(13,046
    )
    
    
    (90,640
    )Loss on replenishment of receivables to the Metris
Master Trust
    
    
    (11,129
    )
    
    
    (25,454
    )Discount accretion
    
    
    60,503
    
    
    
    61,570Interest-only revenue:Gross yield(4)
    
    
    390,961
    
    
    
    441,130Principal defaults
    
    
    (219,105
    )
    
    
    (324,723
    )Interest expense and servicing fees
    
    
    (75,353
    )
    
    
    (61,270
    )96,503
    
    
    
    55,137Change in fair value of retained interests in loans securitized
    
    
    15,696
    
    
    
    20,718Transaction and other costs
    
    
    (5,886
    )
    
    
    (45,674
    )Securitization income (expense)
    
    $
    142,641
    
    
    $
    (24,343
    )
 
 (1)
    
    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 assumed excess spread discounted at 30%.(2)
    
    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 assumed excess spread discounted at 30%.(3)
    
    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 assumed excess spread discounted at 30%.(4)
    
    Includes cash flows from finance charges, late, overlimit, debt waiver and cash advance fees, bad debt recoveries
and interchange income. 26




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27




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Table 2: Other Expenses  (in thousands)
 Three Months EndedJune 30,2005
    
    2004MasterCard® / Visa® assessment and fees
    
    $
    2,051
    
    
    $
    1,547Credit card fraud losses
    
    
    455
    
    
    
    433Legal fees
    
    
    2,058
    
    
    
    1,929Collection and risk management
    
    
    2,889
    
    
    
    3,173Other professional fees
    
    
    4,550
    
    
    
    4,006Purchased portfolio premium amortization
    
    
    1,458
    
    
    
    2,105Asset impairment, lease write-offs and severance
    
    
    (11
    )
    
    
    1,791Debt prepayment expenses
    
    
    18,252
    
    
    
    4,879General and administrative expenses and other
    
    
    4,746
    
    
    
    8,872Total other expenses
    
    $
    36,448
    
    
    $
    28,735
   Six Months Ended June 30, 2005 and 2004
   28




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Table 3: Analysis of Securitization Income
 (in thousands)
 Six Months EndedJune 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
    )(4)Amortizing term series financing
    
    
    
    
    
    
    (1,246
    )(5)New term ABS transactions
    
    
    (13,046
    )(2)
    
    
    (12,632
    )(6)Issuance of BB bonds
    
    
    5,364
    (3)
    
    
    (42,207
    )
    
    
    (91,886
    )Loss on replenishment of receivables to the Metris
Master Trust
    
    
    (22,626
    )
    
    
    (49,381
    )Discount accretion
    
    
    121,832
    
    
    
    121,540Interest-only revenue:Gross yield(7)
    
    
    805,366
    
    
    
    927,921Principal defaults
    
    
    (468,676
    )
    
    
    (672,813
    )Interest expense and servicing fees
    
    
    (151,302
    )
    
    
    (125,039
    )185,388
    
    
    
    130,069Change in fair value of retained interests in loans securitized
    
    
    20,808
    
    
    
    68,683Transaction and other costs
    
    
    (12,498
    )
    
    
    (84,383
    )Securitization income
    
    $
    250,697
    
    
    $
    94,642
 
 (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 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 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 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 assumed excess spread discounted at 30%.(5)
    
    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%.(6)
    
    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%.(7)
    
    Includes cash flows from finance charges, late, overlimit, debt
waiver and cash advance fees, bad debt recoveries and interchange income.   29




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30




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Table 4: Other Expenses
 (in thousands)
 Six Months EndedJune 30,2005
    
    2004MasterCard® / Visa® assessment and fees
    
    $
    3,728
    
    
    $
    3,356Credit card fraud losses
    
    
    988
    
    
    
    943Legal fees
    
    
    2,919
    
    
    
    2,148Collection and risk management
    
    
    5,980
    
    
    
    7,267Other professional fees
    
    
    9,131
    
    
    
    9,408Purchased portfolio premium amortization
    
    
    3,167
    
    
    
    4,502Asset impairment, lease write-offs and severance
    
    
    24
    
    
    
    3,252Debt prepayment expenses
    
    
    20,241
    
    
    
    4,879General and administrative expenses and other
    
    
    10,029
    
    
    
    15,355Total other expenses
    
    $
    56,207
    
    
    $
    51,110
    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,
 31




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##### Table of Contents



Table 5: Retained interest in loans securitized  (in thousands)
 June 30,
    
    December 31,2005
    
    2004Contractual retained interests
    
    $
    478,440
    
    
    $
    537,945Excess transferors interest
    
    
    153,954
    
    
    
    105,237Interest-only strip receivable
    
    
    102,105
    
    
    
    82,672Spread accounts receivable
    
    
    34,685
    
    
    
    58,281Retained interests in loans securitized
    
    $
    769,184
    
    
    $
    784,135
    Off-Balance Sheet Arrangements Managements Discussion and Analysis of Financial Condition and Results of Operations
 Critical Accounting Estimates
 32




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Table 6: Significant assumptions used for estimating the fair value of retained interests
 June 30,
    
    December 31,2005
    
    2004Monthly principal payment rate
    
    
    6.5
    %
    
    
    5.9
    %Gross yield (1)
    
    
    26.3
    %
    
    
    25.9
    %Annual interest expense and servicing fees
    
    
    5.5
    %
    
    
    5.0
    %Annual gross principal default rate
    
    
    17.4
    %
    
    
    18.4
    %Discount rate:Contractual retained interests
    
    
    15.0
    %
    
    
    16.0
    %Excess transferors interest
    
    
    15.0
    %
    
    
    16.0
    %Interest-only strip receivable
    
    
    30.0
    %
    
    
    30.0
    %Spread accounts receivable
    
    
    15.0
    %
    
    
    16.0
    %Weighted average months to maturity
    
    
    17.9
    
    
    
    20.1Weighted average enhancement level (2)
    
    
    11.4
    %
    
    
    12.1
    %Gross receivables held in the Metris Master Trust, net of discount(3)
    
    
    93.5
    %
    
    
    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 plus the
off-balance sheet receivables to gross receivables in the Metris Master Trust plus the
gross spread accounts receivable.  Credit card receivables
    33




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##### Table of Contents

\

Table 7: Loan Delinquency  (Dollars in thousands)
 June 30,
    
    % of
    
    December 31,
    
    % of
    
    June 30,
    
    % of2005
    
    Total
    
    2004
    
    Total
    
    2004
    
    TotalLoans outstanding
    
    $
    6,505
    
    
    
    100
    %
    
    $
    68,230
    
    
    
    100
    %
    
    $
    72,491
    
    
    
    100
    %Loans contractually delinquent:30 to 59 days
    
    
    196
    
    
    
    3.0
    %
    
    
    1,750
    
    
    
    2.6
    %
    
    
    2,448
    
    
    
    3.4
    %60 to 89 days
    
    
    237
    
    
    
    3.7
    %
    
    
    1,722
    
    
    
    2.5
    %
    
    
    2,007
    
    
    
    2.8
    %90 or more days
    
    
    2,849
    
    
    
    43.8
    %
    
    
    4,309
    
    
    
    6.3
    %
    
    
    4,866
    
    
    
    6.7
    %Total
    
    $
    3,282
    
    
    
    50.5
    %
    
    $
    7,781
    
    
    
    11.4
    %
    
    $
    9,321
    
    
    
    12.9
    %
  Table 8: Net Charge-offs  (Dollars in thousands)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Average credit card loans
    
    $
    25,529
    
    
    $
    80,779
    
    
    $
    45,439
    
    
    $
    103,868Net charge-offs
    
    
    1,476
    
    
    
    3,080
    
    
    
    3,108
    
    
    
    15,245Net charge-off ratio (annualized)
    
    
    23.2
    %
    
    
    15.3
    %
    
    
    13.8
    %
    
    
    29.4
    %
 Balance Sheet Analysis
 Cash and Cash Equivalents Available for Sale Securities
  Net Credit Card Loans
  Other Assets
  Debt
  34




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Accrued Expenses and Other Liabilities
  Off-Balance Sheet Arrangements
      35




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Table 9: Cash Restricted from Release  (in thousands)
 June 30,
    
    December 31,2005
    
    2004Cash restricted due to performance
    
    $
    
    
    
    $
    36,367Cash restricted due to corporate debt ratings
    
    
    13,187
    
    
    
    13,187Cash restricted due to other non-performance
based factors
    
    
    35,593
    
    
    
    37,770Total cash restricted
    
    $
    48,780
    
    
    $
    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
    %
   Table 11: Weighted Average Annualized Yields, Defaults, Costs and Excess Spreads  (In thousands)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Gross yield (1)
    
    
    27.99
    %
    
    
    26.75
    %
    
    
    28.36
    %
    
    
    27.12
    %Annual principal defaults
    
    
    15.54
    %
    
    
    19.24
    %
    
    
    16.31
    %
    
    
    19.25
    %Net portfolio yield
    
    
    12.45
    %
    
    
    7.51
    %
    
    
    12.05
    %
    
    
    7.87
    %Annual interest expense and servicing fees
    
    
    5.62
    %
    
    
    3.68
    %
    
    
    5.40
    %
    
    
    3.65
    %Net excess spread
    
    
    6.83
    %
    
    
    3.83
    %
    
    
    6.65
    %
    
    
    4.22
    %
 
 (1)
    
    Includes cash flows from finance charges, late, overlimit, debt
waiver and cash advance fees, bad debt recoveries and interchange income. 36




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##### Table of Contents



Table 12: Principal Receivables  (Dollars in thousands)
 June 30,
    
    December 31,
    
    June 30,2005
    
    2004
    
    2004Principal receivables
    
    $
    5,586,973
    
    
    $
    6,117,669
    
    
    $
    6,580,6592-cycle plus delinquent
principal receivables
    
    $
    359,644
    
    
    $
    470,442
    
    
    $
    519,084Principal delinquency ratio
    
    
    6.4
    %
    
    
    7.7
    %
    
    
    7.9
    %
 Liquidity,
Funding and Capital Resources Critical Accounting Estimates
 Liquidity, Funding and Capital Resources
  Table 13: Liquidity, Funding and Capital Resources  (In thousands)
 June 30, 2005
    
    
    
    
    
    
    
    
    
    December 31, 2004MCI and non-bank
    
    
    
    
    
    
    
    
    
    MCI and non-bankDMCCB
    
    subsidiaries
    
    Consolidated
    
    DMCCB
    
    subsidiaries
    
    ConsolidatedCash and due from banks
    
    $
    24,537
    
    
    $
    (1,050
    )
    
    $
    23,487
    
    
    $
    25,340
    
    
    $
    (142
    )
    
    $
    25,198Federal funds sold
    
    
    27,395
    
    
    
    
    
    
    
    27,395
    
    
    
    22,450
    
    
    
    
    
    
    
    22,450Short-term investments
    
    
    22,729
    
    
    
    103,354
    
    
    
    126,083
    
    
    
    12,599
    
    
    
    30,471
    
    
    
    43,070Available for sale securities
    
    
    18,835
    
    
    
    91,156
    
    
    
    109,991
    
    
    
    107,138
    
    
    
    199,271
    
    
    
    306,409Total liquid assets
    
    $
    93,496
    
    
    $
    193,460
    
    
    $
    286,956
    
    
    $
    167,527
    
    
    $
    229,600
    
    
    $
    397,127
  37




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##### Table of Contents



Table 14: Outstanding On- and Off-Balance Sheet Funding  (In thousands)
 June 30, 2005
    
    December 31, 2004Outstanding
    
    Unused Capacity
    
    Outstanding
    
    Unused CapacityOn-balance sheet funding10.125%
senior notes  July 2006(1)
    
    
    78,626
    
    
    
    N/A
    
    
    
    148,624
    
    
    
    N/ATerm loan
 May 2007
    
    
    
    
    
    
    N/A
    
    
    
    225,000
    
    
    
    N/ASubtotal
    
    
    78,626
    
    
    
    N/A
    
    
    
    373,624
    
    
    
    N/AOff-balance sheet fundingMetris Master Trust:Term asset-backed securitizations
with various maturities through
February 2009
    
    
    4,647,150
    
    
    
    N/A
    
    
    
    4,950,000
    
    
    
    N/AConduits
 maturing April 2006
    
    
    170,000
    
    
    
    830,000
    
    
    
    360,000
    
    
    
    840,000Subtotal
    
    
    4,817,150
    
    
    
    830,000
    
    
    
    5,310,000
    
    
    
    840,000Total
    
    $
    4,895,776
    
    
    $
    830,000
    
    
    $
    5,683,624
    
    
    $
    840,000
 
 (1)
    
    On July 15, 2005 the Company made an optional prepayment of $30.0 million on
its 10.125% senior notes due July 2006. On July 13, 2005 the Company announced its
intention to prepay the remaining $49.1 million outstanding on those Senior Notes. This
prepayment is expected to be made on August 15, 2005, after which time all of the
Companys corporate debt will be eliminated.  Table 15: Outstanding Asset-Backed Securitizations
 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
    38




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##### Table of Contents



Table 16: Contractual Cash Obligations  (In thousands)
 Operating leases
    
    $
    7,730Deposits
    
    
    2,605Contractual purchase obligations
    
    
    48,984Total
    
    $
    59,319
   Business Overview
   39




---



##### Table of Contents



Moodys
    
    S & P
    
    FitchMetris Companies Inc.Senior unsecured debt
    
    B3
    
    B-
    
    
    B-Direct Merchants BankLong-term deposits
    
    Ba3
    
    BB-
    
    
    B
 Capital Adequacy
   
    
    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 $31.5 million at June 30, 2005.
    
    The Bank must comply with the terms of the LRDA and the CALMA.
    
    MCI must comply with the CALMA.
   40




---



##### Table of Contents



Selected Operating Data  Managed Basis
 .
  Table 17: Managed Loan Portfolio  (Dollars and accounts in thousands)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Account originations:Partner
    
    
    38
    
    
    
    15
    
    
    
    72
    
    
    
    24Non-partner
    
    
    127
    
    
    
    81
    
    
    
    256
    
    
    
    130Total account originations
    
    
    165
    
    
    
    96
    
    
    
    328
    
    
    
    154Gross active accounts:Historical vintages (1)
    
    
    1,452
    
    
    
    1,947
    
    
    
    1,452
    
    
    
    1,947New vintages (1)
    
    
    708
    
    
    
    292
    
    
    
    708
    
    
    
    2922,160
    
    
    
    2,239
    
    
    
    2,160
    
    
    
    2,239Period-end loans:Historical vintages (1)
    
    $
    4,887,827
    
    
    $
    6,596,605
    
    
    $
    4,887,827
    
    
    $
    6,596,605New vintages (1)
    
    
    1,046,209
    
    
    
    486,550
    
    
    
    1,046,209
    
    
    
    486,550$
    5,934,036
    
    
    $
    7,083,155
    
    
    $
    5,934,036
    
    
    $
    7,083,155
 
 (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. June 30,
    
    % of
    
    December 31,
    
    % of
    
    June 30,
    
    % of2005
    
    Total
    
    2004
    
    Total
    
    2004
    
    TotalPeriod-end balances:Credit card loans
    
    $
    6,505
    
    
    
    
    
    
    $
    68,230
    
    
    
    
    
    
    $
    72,491Receivables held by the Metris Master Trust
    
    
    5,927,531
    
    
    
    
    
    
    
    6,511,990
    
    
    
    
    
    
    
    7,010,664Managed
    
    $
    5,934,036
    
    
    
    
    
    
    $
    6,580,220
    
    
    
    
    
    
    $
    7,083,155Loans contractually delinquent:Credit card loans
    
    
    3,283
    
    
    
    50.5
    %
    
    
    7,781
    
    
    
    11.4
    %
    
    
    9,321
    
    
    
    12.9
    %Receivables held by the Metris Master Trust
    
    
    453,146
    
    
    
    7.6
    %
    
    
    593,819
    
    
    
    9.1
    %
    
    
    658,650
    
    
    
    9.4
    %Managed
    
    $
    456,429
    
    
    
    7.7
    %
    
    $
    601,600
    
    
    
    9.1
    %
    
    $
    667,971
    
    
    
    9.4
    %
 41




---



##### Table of Contents



Table 17: Managed Loan Portfolio (continued)  (Dollars in thousands)
 Three Months Ended
    
    Six Months EndedJune 30,
    

June 30,%
    
    
    
    
    
    
    
    
    
    
    
    
    
    %2005
    
    of Total
    
    2004
    
    
    
    
    
    2005
    
    of Total
    
    2004Average balances:Credit card loans
    
    $
    25,529
    
    
    
    
    
    
    $
    80,779
    
    
    
    
    
    
    $
    45,439
    
    
    
    
    
    
    $
    103,868Receivables held by the Metris Master Trust
    
    
    6,021,409
    
    
    
    
    
    
    
    7,258,288
    
    
    
    
    
    
    
    6,183,109
    
    
    
    
    
    
    
    7,522,820Managed
    
    $
    6,046,938
    
    
    
    
    
    
    $
    7,339,067
    
    
    
    
    
    
    $
    6,228,548
    
    
    
    
    
    
    $
    7,626,688Net charge-offs:Credit card loans
    
    $
    1,476
    
    
    
    23.2
    %
    
    $
    3,080
    
    
    
    15.3
    %
    
    $
    3,108
    
    
    
    13.8
    %
    
    $
    15,245
    
    
    
    29.5
    %Receivables held by the Metris Master Trust
    
    
    202,226
    
    
    
    13.5
    %
    
    
    307,563
    
    
    
    17.0
    %
    
    
    429,817
    
    
    
    14.0
    %
    
    
    635,170
    
    
    
    17.0
    %Managed
    
    $
    203,702
    
    
    
    13.5
    %
    
    $
    310,643
    
    
    
    17.0
    %
    
    $
    432,925
    
    
    
    14.0
    %
    
    $
    650,415
    
    
    
    17.2
    %
     42




---



##### Table of Contents



Table 18: Equity Ratios  (Dollar and share counts in thousands, except per share amounts)
 June 30,
    
    December 31,
    
    June 30,2005
    
    2004
    
    2004Equity to managed assets:Total equity
    
    $
    1,010,164
    
    
    $
    947,302
    
    
    $
    882,746Total managed assets
    
    $
    6,083,216
    
    
    $
    6,791,478
    
    
    $
    7,290,591Ratio of equity to managed
assets
    
    
    16.6
    %
    
    
    13.9
    %
    
    
    12.1
    %Common stockholder book value:Common stockholders equity
    
    $
    472,204
    
    
    $
    432,757
    
    
    $
    390,597Common shares outstanding
    
    
    58,446
    
    
    
    58,127
    
    
    
    57,957Common stockholders book value
    
    $
    8.08
    
    
    $
    7.45
    
    
    $
    6.74Total stockholders equity
    
    $
    1,010,164
    
    
    $
    947,302
    
    
    $
    882,746Preferred securities on a converted
basis
    
    
    45,054
    
    
    
    45,054
    
    
    
    45,054Diluted shares outstanding
    
    
    103,499
    
    
    
    103,181
    
    
    
    103,011Total book value per share
    
    $
    9.76
    
    
    $
    9.18
    
    
    $
    8.57
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      43




---



##### Table of Contents



ITEM 4 CONTROLS AND PROCEDURES
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
      
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  44




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    The Company held its annual meeting of stockholders on May 11, 2005 and the following
matters were voted on at that meeting.
 (b)
    
    The directors listed below were elected at that meeting.
 (1)
    
    The holders of our Common Stock elected seven directors for a one-year term:
 Leo R. Breitman
    
    Edward B. SpenoJohn A. Cleary
    
    Frank D. TrestmanJerome J. Jenko
    
    David D. WesselinkDonald J. Sanders
 (2)
    
    The holders of our Series C Preferred Stock elected four directors for a one-year term:
 C. Hunter Boll
    
    David V. HarkinsThomas M. Hagerty
    
    Thomas H. Lee
 (c)
    
    Matters Voted Upon:
 (1) The election of the following directors who will serve until their successors are elected
and qualified, or their earlier death or resignation:
 BrokerDirector
    
    For
    
    Against
    
    Withheld
    
    Abstentions
    
    Non-VoteLeo R. Breitman
    
    
    48,082,939
    
    
    None
    
    
    5,201,716
    
    
    None
    
    NoneJohn A. Cleary
    
    
    47,969,940
    
    
    None
    
    
    5,314,715
    
    
    None
    
    NoneJerome J. Jenko
    
    
    47,980,009
    
    
    None
    
    
    5,304,646
    
    
    None
    
    NoneDonald J. Sanders
    
    
    48,084,501
    
    
    None
    
    
    5,200,154
    
    
    None
    
    NoneEdward B. Speno
    
    
    47,980,897
    
    
    None
    
    
    5,303,758
    
    
    None
    
    NoneFrank D. Trestman
    
    
    47,756,136
    
    
    None
    
    
    5,528,519
    
    
    None
    
    NoneDavid D. Wesselink
    
    
    47,205,826
    
    
    None
    
    
    6,078,829
    
    
    None
    
    NoneC. Hunter Boll
    
    
    44,184,008
    
    
    None
    
    None
    
    None
    
    NoneThomas M. Hagerty
    
    
    44,184,008
    
    
    None
    
    None
    
    None
    
    NoneDavid V. Harkins
    
    
    44,184,008
    
    
    None
    
    None
    
    None
    
    NoneThomas H. Lee
    
    
    44,184,008
    
    
    None
    
    None
    
    None
    
    None
 (2) The approval of an amendment to the Metris Companies Inc. Amended and Restated
Long-Term Incentive and Stock Option Plan:
 BrokerFor
    
    Against
    
    Withheld
    
    Abstentions
    
    Non-Vote71,318,938
    
    
    9,335,367
    
    
    None
    
    
    1,034,278
    
    
    None
 (3) Ratification of the selection of KPMG LLP as independent registered public
accounting firm of the Company for the fiscal year ending December 31, 2005:
 BrokerFor
    
    Against
    
    Withheld
    
    Abstentions
    
    Non-Vote96,400,238
    
    
    977,502
    
    
    None
    
    
    90,922
    
    
    None
 45




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
 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)).
 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)).
 4.5
    
    Indenture, dated as of July 13, 1999, by and among MCI, Metris
Direct, Inc. and The Bank of New York, including Form of 10.125% Senior Notes due
2006 and Form of Guarantee (incorporated by reference to Exhibit 4.1 to MCIs
Registration Statement on Form S-4 (File No. 333-86695)).
 (a)
    
    First Supplemental Indenture, dated as of February 28, 2000,
among MCI, the Guarantors named therein and The Bank of New York, (incorporated
by reference to Exhibit 4.1 to MCIs Quarterly Report on Form 10-Q for the
period ended June 30, 2000 (File No. 1-12351)).
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(b)
    
    Second Supplemental Indenture, dated as of February 2, 2001,
among MCI, the Guarantors named therein and The Bank of New York (incorporated
by reference to Exhibit 4.7(b) to MCIs Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 1-12351)).(c)
    
    Agreement of Resignation, Appointment and Acceptance, dated as
of February 20, 2002, among MCI, The Bank of New York, as Prior Trustee, and US
Bank National Association, as Successor Trustee (incorporated by reference to
Exhibit 4.7(c) to MCIs Annual Report on Form 10-K for the year ended December
31, 2002 (File No. 1-12351)).
 4.6
    
    Exchange and Registration Rights Agreement, dated as of July 13,
1999, by and among MCI, Bear, Stearns & Co. Inc., Chase Securities Inc., Salomon
Smith Barney Inc. and Barclays Capital Inc., relating to the new notes
(incorporated by reference to Exhibit 4.2 to MCIs Registration Statement on Form
S-4 (File No. 333-86695)).
 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)).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.
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SIGNATURES
  METRIS COMPANIES INC.
(Registrant)Date: August 9, 2005
    By:
    /s/ William A. HoulihanWilliam A. HoulihanExecutive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized
Officer of Registrant) 48