Metris Unscathed by Cendant Effect

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Changes in accounting rules the Securities & Exchange Commission made after its investigation of irregularities at Cendant Corp. have not adversely affected the operating performance of fee-based services provider Metris, St. Louis Park, MN; but speculation of a more negative outcome has hurt its stock price.


As a result of Cendant, Parsippany, NJ, declaring revenues before recognizing expenses for its membership services, the SEC now stipulates that revenue for all fee-based services cannot be recognized until the expiration of a refund period. Metris, which sells such services as warranty, debt-waiver and lost card protection, reworked its revenue and expenses under the new guidelines and came out $68,000 ahead.


Despite the claims of CEO Ronald Zebeck and confirmation by accounting firm KPMG Peat Marwick of Metris' adherence to generally accepted accounting principles, Wall Street analysts responded to the SEC announcement in late September by downgrading ratings of Metris. The stock price dropped 17 points in one day and fell to a 52-week low of 15 1/2 in early October before making a comeback. The stock closed at 31 on Nov. 2.


As a result, four firms have filed class-action lawsuits on behalf of shareholders saying Metris issued false statements of its performance. As of Oct. 30, Zebeck said none had been served and he described them as "immaterial, trivial and false."


The SEC announcement came in the same week that Metris was completing its spinoff of the last 17 percent of the company owned by Fingerhut Companies Inc. by issuing new shares.


"Fifteen million shares were dumped on people that may not have understood Metris, but certainly understood Cendant and overreacted," Zebeck said. "It's just bad timing and we'll get through that. Cendant wasn't an accounting issue, it was making things up. Calling this a Cendant-related issue tainted us, but our results will speak for themselves."


Most of the analyst downgrades have now been revised. In addition, Metris reported record third-quarter results with net income up 61 percent to 85 cents per share and revenue from fee-based services up 64 percent.


The SEC also had been contemplating a change in the accounting of direct response advertising costs, which would have had far reaching effects for mail-order companies. It had proposed to require that such costs be expensed as incurred rather than the current practice of deferring costs to match revenue, but decided not to make any changes.
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